59 The New Investor and Hard Money
Bill Fairman (00:03):
Hello everyone. Thank you for joining us live. Bill Fairman, Carolina Capital Management. I am flying solo by the way. So first of all, don’t forget to share, like, subscribe. Our website is CarolinaHardMoney.com for any information. This hat right here represents Jonathan. He’s currently absent. He’s in the building somewhere. And Wendy is on a podcast as we speak with another group. As you can tell with what’s going on and I’m sure most everybody is like this as well. We’re just about zoom called out. We want to hug and shake hands and see people in person for a change, but it’s slowly coming back. I can’t wait frankly. The one thing I do like about this is I’m not a very patient driver and I haven’t had a whole lot of traffic to deal with in the last month. So there’s a bonus there.
Bill Fairman (01:24):
What I want to concentrate on in the next few minutes is really the new investor. This is a difficult time for a new investor to either buy and hold single families or fix and flip single families. Now from let’s say 2009 up through probably a couple of years ago. And I’m going to be blunt, any moron could have made money in that market because prices were so low. We had tons of inventory. It was just low hanging fruit and you’re in a market where the values were continuing to increase. Heck, we had, I remember doing a loan in a really up and coming section of Charlotte. Where the guy actually took a large deposit on a new build and it was essentially a new build. The only thing he had left from the original house was a piece of the foundation. But just before he was completed, someone gave him a large deposit, but they wanted some major changes from a library to a bedroom. And you can’t have a bedroom without a closet. So he had to take that library and a closet and make it, you know, one more bedroom. And then the person backed out. Now he got to keep that deposit. But it really just barely covered what he had put into the change into this property.
Bill Fairman (03:08):
But three weeks later he ended up getting a contract and making like 75,000 more than he was gonna make from the person that he was gonna sell the house to. So that kind of thing can happen in a market that is on the upswing and it’s easy to make money that way. It’s more difficult to be a successful investor when you don’t know what the values are going to be. Or if you’re in a declining market. Things recently within that say with the last couple of years have been a little tougher because there’s a lot more competition. You had, you know, the DIY channel, you had a HGTV and it made everyone think they could do this and that. And besides that, you had all the gurus out there teaching classes, telling them that you didn’t have to have any money.
Bill Fairman (04:07):
This is a way to, you know, get out of your nine to five job, which it is. And I agree, but you still need to have training. You need to have good mentors. Right now is not a great time to try and get a loan with a hard money lender or seasoned private investors either. If you’re new. Because you’re risky because you haven’t been through the bumps and the bruises. I can tell you right now we’re lending but we’re being picky and we’re being choosy and we’re not doing loans with inexperienced borrowers. We’re just not going to do that. The risk is too high at this point to do that. It doesn’t mean you can’t, if you’re new. Do a deal if it’s the right deal, money will follow. The difference is when you’re new, you need help.
Bill Fairman (05:06):
You need mentors, you need seasoned real estate investors that can help you along. And I had a conversation with Scott about this and we talk about this all the time anyway. Your hard money lender or your seasoned private lender is really the Canary in the coal mine when it comes to lending or doing a project in particular. If that lender doesn’t want to do that deal, there’s probably a good reason for it. And that reason would be it’s not a good deal or the risk is too high or too many things have to go perfectly in order for this thing to come out successfully. And if, number one, if you’re a seasoned investor, you may want to take that chance, but most seasoned investors won’t take those chances either. So my point here is if the lender doesn’t want to do that deal, it’s not a deal you want to be doing either. Now, how can you overcome the fact that you’re new and that most hard money lenders that are brick and mortar lenders aren’t going to lend to you right now because you’re inexperienced? And this is not just us. These are lenders all over the country. They’re all doing the same thing. They all have the same basic guidelines. They’re saying you have to have proof that you’ve done so many deals in the last year or we’re not doing business with you.
Bill Fairman (06:36):
What you need to do is find a good seasoned private investor. And you can do that. You still have plenty of REIA groups that are meeting networking groups. I would say probably family and friends is not the way to go if you’re just starting out right now because unless your family and friends are seasoned investors, it’s just the blind leading the blind right now.
Bill Fairman (07:05):
When you’re with a seasoned investor that’s willing to put money in, if you do have a good deal, you’re more than likely going to have to give up some equity. It’s going to cost you a little more in the long run, but that’s okay because you’re earning while you’re learning. Is what we like to say. Is you’re getting paid to actually learn how to make money doing this and make sure that you’re paying attention to all the different webinars on how to raise private capital. There are plenty of them that are out there. There are people that will charge you money to teach you how to do that. But there’s also plenty of people that will give you the basics for free. And I’m not saying paying money to learn how to do this is a bad thing because like anything else, you need to invest in yourself.
Bill Fairman (07:58):
And Wendy and I are in several masterminds. I love masterminds. This is where we learn these things. And you know, it costs us money, but we don’t look at it as an expense. We look at it as an investment in how we’re going to get better. Okay. It’s an investment in your business. It’s an investment in you. You always need to continue to try and better yourself. So I know a trick Wendy always used to teach is that if you’re someone who has money to lend and you want to lend it, then wear a shirt when you’re out in these groups. Of course you can’t do that until people start meeting in person again. But it was a good idea at the time. You have a shirt printed that said, “Need money. I buy houses, need money”. Or if you’re a lender and you have money, “Have money, wants a land”.
Bill Fairman (09:09):
And that works out pretty well. Again, it’s hard to do it in a zoom meeting. And it’s true. You can’t just buy deals. I live at, that you have to buy great deals, not good deals. And you can get them, they’re out there. Just don’t try to jump in because you think it’s a great, it’s a good deal now because you don’t know it’s a good deal now. We had a really good conversation earlier in the week about how do you know whether it’s a good deal or not. And part of that is you don’t have a crystal ball. You don’t know what’s going on in the market right now because there’s so many undetermined things that are happening. So if you’re sticking with single family for the purpose of fixing and flipping, you need to understand your market. It’s going to take a little bit for, I think prices to go down.
Bill Fairman (10:13):
We do have some things that are in our favor. Is that there was already an inventory issue before all of this started. What that also does is it makes, if there’s going to be a valued decrease, it’s going to slow that down because when you have appraisals done, what is an appraisal? And appraisal is typically three closed sales within the last 12 months. Is that giving you an indication of what’s going to happen in the future? No, this is trailing information. This is what has happened in the past 12 months. So while it’s a good indication of what it’s worth now, how do you know what it’s going to be six months from now? Different sectors are going to be down at different levels. I think you’re what you’re going to see in the luxury market, they’re going to take a fairly decent hit because it’s very difficult to get jumbo loans right now.
Bill Fairman (11:29):
And a jumbo lender is going to be, they’re going to require, you know, 20%, 30%, sometimes 40% down. I know I read where a particular jumbo lender was only doing 50% loan to value. Now if you’re in a luxury market and jumbo is above whatever the FHA limit is, and it depends on the area, but I mean if you’re talking $500,000 loan or $600,000 loan or purchase price and you have to come up with 300, that’s a lot of money. So what that means is it’s those homes are going to be on the market longer, which means people are going to discount them more so they can get, so they can sell them. Which means prices are gonna go down. Your bread and butter markets your, in our area, it’s, I’d say after repair value is 300 or less.
Bill Fairman (12:29):
Those values are probably, and again, I don’t have a crystal ball, but I don’t see them going down more than 10%. Even during 2008 when things were really bad, we never lost more than 25% of the value at the worst in 2008. And in the Charlotte market. Our market here is just a lot more stable. We have good diversity and employment. We have a good diversity and employee skills. So I don’t see the values dropping as well. We have a lot of people still moving into this area cause we’re relatively inexpensive compared to other MSAs. You know, our taxes are fairly low compared to other places. Cost of living is a little bit less and let’s face it, the climate here is pretty decent. We still get our four seasons but we don’t have, it’s not real harsh except for summer. It gets a little humid. But Hey, so does Florida people like in there too.
Bill Fairman (13:51):
So if you’re doing buy and hold properties, as long as your numbers make sense and frankly I would stress test them if your expenses and your rent and your vacancies can hold up. I would do a test with that Excel spreadsheet and I would stress it for I’m not going to get 10% of the revenue I thought I was going to get, then I’d stress it for 15% of the revenue. I would then stress it again for 20% of the revenue and see how much you can take. Because let’s face it, they have a moratorium on evictions, they have a moratorium on foreclosures and you’re going to be the one responsible for making the payments on this to your mortgage company as well. If you’re buying it with cash you know, you still have expenses you have to pay.
Bill Fairman (14:52):
But I would stress these, you’re not concerned with the value of the property as much decreasing over time with a single family rental. And it’s because you’re doing it for cash flow. You’re not doing it to try and force appreciation on it and sell it, you know, at a higher price. Okay. You’re doing this for the cash flow. One thing David Phelps always said, and I like to repeat this, the home doesn’t care what it’s worth. If it’s worth a lot, if it goes up in value, what I mean is substantially, if you’re in an up market and you have rental properties that are going up in value you have lazy money in there. You need to either refinance those cash amount and utilize that money for another investment or think about selling those and buying a couple more investment properties with the one house you sold and scale that way.
Bill Fairman (15:57):
But you’re in a declining market when the value goes down, but the rent that you get from it is typically going to remain the same or go up. So it’s a different way. You want to look at these. Sorry, about the break. I forgot to take my phone off. So back to my original premise. It’s going to be a tough market for newbies. You need to get a mentor and you need to work with private lenders that are willing to help. And also you’re going to have to probably give up a little bit of equity in it. I’m not saying it now is not the time to invest in yourself. It is. And there’s always money to be made in it. It’s just, it’s going to be a little bit more difficult for you currently. But that’s all right. These markets always come back.
Bill Fairman (16:50):
There’s plenty of opportunity for you to get in and learn. And there’s plenty of money out there. I have a guest coming up in our own or one o’clock show who raised $5 million in a month, and it was this past month for a project. So there is plenty of money out there that wants to get into good deals, and if you have a good deal the money will follow. So I’ve rambled on enough. Please make sure that you join us for our one o’clock show. Don’t forget to subscribe and share, and if you have any questions for us if you have you want to get more information, then please you can contact us at CarolinaHardMoney.com. Thank you so much. We’ll see you guys in probably about 15 minutes or so, take care.