39 The Stock Market Collapse

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39 The Stock Market Collapse

Bill Fairman (00:04):

Hi everyone. It’s the Bill and Wendy show with Jonathan Davis and Bill Fairman. Wendy’s not going to be able to make it with us today. She’s off with more stuff on her plate. We talk about that a lot. Wendy has a lot of talents, so I want to start off with if you’re an accredited investor and you were thinking about getting into the alternative investing space, you can go to our website, CarolinaHardMoney.com go to the investor tab, click it on and then there’s a form there that you can fill out to basically prove that you’re an accredited investor and then you can schedule a time to talk with us about specifically the recent fall in the stock market and that’s what our talk is going to be about today is what’s going on and how that’s going to affect our business specifically. Now I want to start off.

Bill Fairman (01:05):

By saying last year we had changed our business model specifically for worst case scenario. We want it to be as vanilla as we could be, right?

Jonathan Davis (01:18):

Aren’t you glad we’re not holding onto a lot of developments right now?

Bill Fairman (01:21):

Yeah, absolutely. So for those who aren’t in our fund, we are specifically targeting affordable housing. That’s in multifamily as well as single family. We wanted to get our loan amounts down to $150,000 a piece. Essentially our average loan size that’s on the single family side of things. Yeah, and we accomplished that in 2019 our average was 158 yes. Now as a lender it’s more work, but you know as a lender I’d rather have five $100,000 loans than one $500,000.

Jonathan Davis (02:06):

Yeah, I mean, just as much as you want. No variants in what you do in as far as a certain asset class, you also wanted a geography. You want diversification everywhere. Sure. Across the board and it’s hard to have diversification if you’re doing four loans a year.

Bill Fairman (02:24):

Yeah. It’s, again, it’s, it’s a lot less work to do the bigger loan amount, but at the same time your percentage of each loan is too high. And if you have one of the $100,000 loans go South, you still have four making up for it. Yeah. Doesn’t mean you’re losing money with the one that’s going under, but you’re certainly not getting an income on it until you figure out the disposition. Yeah. With the $500,000 loan, all that 500 is kind of stagnant until we figure out the disposition and get that money working again. Right?

Jonathan Davis (03:00):

Yeah. Yeah. In this scenario of diversification, you just make less money. In the scenario of not diversification, you lose money, you lose opportunity, right. There’s a lot more potential loss,

Bill Fairman (03:11):

And I keep saying this all the time and just keep beating that dead horse. In any economy, you have to have two things. Food and shelter and fordable housing is, is the way to go.

Jonathan Davis (03:27):

I would have to argue. There’s three things. Alcohol, those sells never go down.

Bill Fairman (03:34):

Well, this is true and don’t use it as a disinfectant. Remember, you need 60% alcohol content according to the CDC and what was it? Tito’s vodka only has 40% yeah. Drink it. And it was really funny how they injected themselves in the Coronas situation by tweeting out that don’t use our vodka to clean your hands. It’s not going to work. Drink it instead. So that said, how do you think what’s going on now is going to impact us?

Jonathan Davis (04:09):

I mean I think there’s several ways that it can impact us and it directly and indirectly. I mean you, you already see and I guess to clarify what we’re talking about, what’s going on.

Bill Fairman (04:20):

Yeah. Coronavirus and the stock market is dropping like a rock this morning. And of course we’re trying to do, we’re not going to be doing this real time cause we’re not live streaming this. But this morning on the way in the Dow was at like 22 and there was already a 1200point futures drop from the twenties yeah. So we’ll, we’ll see. Yeah. Yeah. But I mean when you’re taught, that money has to go somewhere, right? People are selling, what are they doing it?

Jonathan Davis (04:47):

Yeah, they’re selling. I mean take your, your losses, but now you’ve got to do something. So you hear a lot of chatter about people wanting to move that money into alternative assets, alternative investing. Sure. Which is, which is a great thing from our perspective. What makes it appealing I think is, it’s going to infuse current fund models and it’s going to spark new fund creations. Sure. Like that’s, I mean the fund model I think is going to explode. I mean it’s already been exploding for the last few years, but it’s going to continue to explode. We’re going to have a lot more private money into space, which then ask the question, if you’re pushing more of that in what’s being pushed out and given the short term risks that are associated with what’s going on right now, I wonder what’s going to happen with institutional capital. Are they going to back off their bullish approach to the short term investing? Sure. Or what’s going to happen there?

Bill Fairman (05:51):

It’s hard to say. I think they’re going to generally pull back from the little more risky. Whywe call it risky? Is because we’re talking about, long term projects,

Jonathan Davis (06:04):

right? Yeah. Stuff where the markets can change and you can’t do anything about them or assets that it requires. Speculation like land. Yeah. Yeah.

Bill Fairman (06:12):

Horizontal buildups that there’s a long period from the time you start the project that you finished the project and all kinds of things can can change in their long term. You don’t want to really be locked into any kind of long term contracts, right. Unless on the receiving end of higher returns. So

Jonathan Davis (06:36):

it’s just, it’s risk adjusted returns. You have to make sure that it’s all risk adjusted.

Bill Fairman (06:40):

Well the, here’s what’s happening in the treasury bond market too. You have people that are going into cash, so they’re, they’re selling their stocks. If they go into treasuries, I mean the yield this morning was 0.6 some odd percent, 10 year, 10 year treasury. So there’s, you’re locking your money up for 10 years to make less than a percent.

Jonathan Davis (07:06):

Which given short term issues that are happening right now, you will have people who what seek that longterm safety.

Bill Fairman (07:14):

But that’s, that’s 10 years, 10 years. Yes. Now I imagine that it’s fewer, to me I think it’s fewer US people are putting money in the treasury and I think it’s more European money going into treasuries because their central banks are negative interest rates. So, why would you put your money into something that you’re basically paying them to store it? Yeah. Or you can put it in US treasuries and at least make something. Yeah. And you know we are the flight to safety from all over the world and so I think a lot of that is being pushed by foreign investment coming in because they can’t, there is no safety where they are. Yeah. That said interest rates are going down because that’s, that’s the way it works. When the yields go down, you know, the interest rates kind of follow suit. The 30 year mortgage rate is keyed off of the 10 year treasury. So we’re having a huge refi boom going on right now in the short term for our business. Yeah. Our appraisals are going to take longer.

Jonathan Davis (08:31):

I mean third party vendors are sure you’re going to appraisals, insurance quotes. I mean all those things that are earned in flux with your third party vendors are going to take a lot longer.

Bill Fairman (08:43):

Absolutely. The one thing I want to caution all you mortgage people out there, your realtors are your bread and butter. Just because you have this refi boom. Don’t forget about your realtor because your realtors are your longterm projects. The refis or short term, they’re always going to be up and down and if you refi too many people at 3% I doubt the rates are gonna be lower anytime. Here’s another thing that might happen too, my people may keep their homes longer because they can’t get a better rate. Oh yeah, for sure. And it’s a psychological thing too. You know, home, home prices will adjust as rates go down, home prices will actually start to rise a little bit. Because now it’s more affordable. Yeah. That said, from our perspective in our business, I’m not really concerned with people not buying them or people renting homes. Cause we’re in both sides of it. We, we make loans for people that are fixing up properties either to sell or to rent out and they’re all in the affordable housing market. Right? Correct. So if you’re in an industry that is slowing down, you know, travel industry or shipping, because let’s face it, you’ve had these shutdowns in China and inventory is low, so less stuff is available. So they’re going to be certain industries that they’re going to have layoffs in it and they’re not buying, they’re going to be refinancing before they get their pink slip. But we still have inventory shortages. We have way more households than we have, houses. So I still think supply and demand are going to be in pretty even shape. Actually. You know, supply is going to be less than demand. So I don’t, I don’t see that shaking. I do see that the luxury market is going to start flattening out for sure. I mean it already has in some markets,

Jonathan Davis (10:43):

I experienced it in Charlotte a little bit as well. So yeah, we get, you know, all the, I mean we use the negative, but all the things that are happening that are maybe less positive than we’d like them to be. Where are the opportunities right now? For not only just for funds like ours, but also for individual investors. Where are those? Where do those opportunities lie in a climate like this?

Bill Fairman (11:12):

Well, they certainly aren’t in the stock market, right? As that being said, the conventional wisdom says that, you know, we’ve lost 20% from the most recent highs in the stock market. So stocks are at a bargain, right? When everyone else is selling. The problem is when you, when you reach a certain age or you have a certain part of your retirement portfolio, you want to put it towards, you know, the least risk possible. And when you get to a certain age, you want to start cutting back from the volatility of the stock market and go into something that’s not going to have that kind of volatility. That’s why a lot of people will buy a rental homes, the turnkey rental homes, they’ll get into funds that own property or they’ll get into funds like ours that make loans that are really debt funds. Yeah. Because there’s less volatility in those areas and you can still grow in them. Yeah. Most of them will continue to allow growth and then be able to switch, turn that switch and start getting income from when you’re ready to receive income from. If you’re in the heavy in the stock market, you’re, you know, five years from retirement and you’ve just lost 20% of your portfolio and now you’re thinking, well it might be seven to 10 years before I retire now cause I was almost there and now I’ve lost this and now I’ve got to make it back up again. Really bolsters well for the stock market. Retirement plan. And I’m not saying real estate is for everyone, but it is, in my opinion, it’s, it’s much more, I call it [inaudible]. It’s much more conservative. Most people don’t feel that way because they don’t, most people speculate in the real estate business, in the real estate space, they don’t, they don’t look for cash flow. They’re looking for appreciation. Okay. Yeah. And they’re looking for appreciation. And in funds they’re looking for appreciation and properties.

Bill Fairman (13:15):

Most real estate investments, are cash flow. It’s not about appreciation. If you get appreciation icing on the cake. Now those are for funds, that own property. And that said, you can force appreciation on a property. Once you’ve got stabilized and you forced your appreciation, it’s not going anywhere else. Not very quickly. Yeah. It’s all going to be about the cash flow. And that’s what you want. If you’re not chasing high yields, you just want to, you want your money to make money. Yeah. Right. Yeah, exactly. And in the real estate space, your money is back by actual solid assets. The stock market is based on the ability for a business to make a profit.

Jonathan Davis (14:09):

Which we know most of them aren’t. Yeah. Or not most. That’s it. Well, that’s not correct. 30% to 40% they are not.

Bill Fairman (14:18):

The solid stocks are the ones that are, we call them large cap. So these are the, they have large capitalizations and I don’t have it broken down right in front of me, but the large cap stocks are the ones going to have the least appreciation, or growth in their value. And a lot of them are take a lot to get into because their prices are pretty high. Yeah. But there are always also going to be the least affected in a downturn. Yeah. And at the same you’re not getting much of a return on the equity side. Now if you’re going to get into a large cap stock, get one that pays dividends. Okay. So you’re going to get some appreciation, not much, but at least you can get some income on and they have plenty of money. They can weather most stores. Sure. Again, you’re just not going to get much improvement in the, in the price. Yeah. Over the long haul. Your small cap stocks are going to be the ones that are the most volatile, they have the most upside, but most of them aren’t. Making a profit. Yet a lot of the companies that came on this year with their IBOs, they’re losing money. They’re just doing it based on transactions and their possible upside.

Jonathan Davis (15:34):

Well, you know the statistic is that a little over 30% of all current companies that are publicly traded, their income does not outpace their interest payments. Not anything, not any other expense, just their interest payments. And when you think about it, that’s a, that’s a scary number. Yeah.

Bill Fairman (15:54):

Most people aren’t going to have their retirement invested in those types of companies. Anyway. That’s for your, we’ll call it Las Vegas money, casino money. Right. That’s for your, your play money.

Jonathan Davis (16:05):

Well and like the, when I think of the opportunities right now I think of, I can’t help but think of, you know, for, for us in, in, in the fund model and, and for our investors, that opportunity lies with everyone panicking and stopping production of loans or loan sales because they don’t know what’s going to happen. So they want to hold on to what they have right now is an opportunity to sell loans at a premium. Sure. So if you are holding onto loans and you were thinking about selling them now, might be a good time to do so.

Bill Fairman (16:45):

Yeah. Or hang onto it

Jonathan Davis (16:47):

Or hang on. I mean there’s an argument for both sides you can get a premium for, but you know, then it’s that then you’re now you have to get your money work again.

Bill Fairman (16:56):

Yeah. Yeah. So in short, which is not because we’ve been rambling when you’re in the real estate space and especially with what we did with changing our model, we made our model to where it’s worst case scenario. We’re staying in the affordable housing side because what’s the worst case scenario in a lending fund you have to foreclose on a piece of piece of property.

Jonathan Davis (17:24):

Yeah. And then they filed bankruptcy. But yeah,

Bill Fairman (17:27):

Either way. Yeah. If you end up owning them. Yeah. As a lender, and again, worst case scenario, you can’t sell them, then at least you can rent them out for what your expected return is or very close to it. I mean, yes, you’re right. You can’t do that with a luxury home. You just can’t, you can’t deal with rent, can’t do a luxury home, you can’t do it with land. You can’t do it with a half constructed property. You, you know it’s right. So from our perspective, we’re, we’re sticking with our bread and butter. It’s going to be existing properties. Yes. And what I mean by properties, existing structures aren’t going to take a ton of work to finish them up. Fixed to rent, fixed to flip, right. That all in that price point. And then anywhere from what we call this C plus class multifamily properties up to the B plus class.

Bill Fairman (18:23):

And yeah, you know, we do what’s called participations in those. So we’re not blending on the entire thing. We have other funds that come in and we all, we share the risk just like we do when we want our lower loan amounts and our single family, we’re sharing the risk with other funds with the larger stuff too. But they’re all going to be properties that can easily be rented out quickly if we ended up having to take them back. And this is not the time to speculate on, not even speculate, but if you’re trying to buy up land for subdivisions, no, maybe give it a a few months or so. Just see, again, it’s not, you’re not never going to do it, but you want to see what’s happening. The unknown is what, what’s going on and you want to stick with your bread and butter.

Bill Fairman (19:07):

So we’ve bored you enough with the wall streets, and I like to call it the antelope herd. If you ever watch somebody flying over a herd of antelope in a helicopter, one of them takes a shine off this way and they all follow, right? That’s kind of what’s happening right now. Everybody’s panicking.

Jonathan Davis (19:30):

Oh, that’s the psychology of most. Most humans is, you know, follow the herd. And if everyone panics in sells low or sells high, you know, they’re just following suit. So it’s,

Bill Fairman (19:44):

and again, keep in mind, this is also an opportunity. A lot of the borrowers we deal with, they have cash set aside just for this. So if prices do drop, people have to sell because they were over leveraged then they’re going to be able to buy it at a discount. Yup. Again, are they going to use all their money to do that?

Bill Fairman (20:05):

No. They’re going to leverage someone else’s to buy those assets at a lower price. So sometimes it’s good to see a little, a little bump, right? Absolutely. All right. If you want to find out more about our fund, go to CarolinaHardMoney.com. Go to the investor tab and fill out the form and we’ll give you, actually we’ll set you up as a, on a schedule to have a talk. Okay. Did you want to, don’t them to like us or, yeah, please like us please. I like you. So yeah, don’t forget the share, to subscribe, to like, to do the thumbs up. All that kind of stuff and hope to talk to you soon.

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