78 What is the Status of Carolina Capital?
What is the Status of Carolina Capital?
Bill Fairman, Wendy Sweet, and Jonathan Davis talks about the current and future status of Carolina Capital Management with regards to investments, interest rates paid, quality and diversity of products, projects, average loan size, performance, delinquencies, and defaults. They basically give an overview of the current status outlook of the organization.
Bill Fairman (00:02):
Hi everyone! It’s Bill with Carolina Hard Money, Carolina Capital Management and our special guests today coming live from the other side of this table.
Jonathan Davis (00:14):
I like how my last name’s Davies.
Wendy Sweet (00:19):
Bill Fairman (00:19):
Wendy Sweet. Jonathan Davies.
Jonathan Davis (00:19):
Now no one knows who I am.
Bill Fairman (00:22):
Wendy Sweet (00:27):
There’s no E in there, right?
Jonathan Davis (00:27):
Bill Fairman (00:28):
So don’t forget to subscribe, share and like. Our website also is CarolinaHardMoney.com
Wendy Sweet (00:37):
He says with such excitement.
Bill Fairman (00:42):
We do, so in the next few shows, Wendy will be doing the opening.
Wendy Sweet (00:47):
Bill Fairman (00:50):
If you’re a borrower, cause we do bridge loans, short term bridge loans for commercial and residential properties. Click the borrower tab if you’re interested in passive returns and would rather invest in notes by notes or in a fund, click the investor tenant. So our.
Wendy Sweet (01:10):
I think you just dinged.
Bill Fairman (01:11):
show today, we had some special guests and they had an emergency
Wendy Sweet (01:17):
They claim they did. I think they’re just checking, just kidding.
Jonathan Davis (01:22):
They heard bill was going to be on it and they just.
Wendy Sweet (01:24):
They heard his big words, they got afraid of all of that.
Jonathan Davis (01:28):
They were not amenable to being on the show because using such
Bill Fairman (01:32):
So instead of just posting a recording of a previous show,
Wendy Sweet (01:35):
We’re going to make up some more questions. Actually we have a lot of questions
Bill Fairman (01:40):
[inaudible] questions sent to us.
Wendy Sweet (01:41):
We actually came up with a hundred in house with just our employees, our team. We all just started throwing out questions that we’d been asked and then we’d sent out a survey monkey and got a great response off of that too. So we might resend that out again and give you another opportunity to add some more to it. So we’re actually gonna hit some of the questions that came through the survey monkey and I’ve kind of noticed when you’re in front of me.
Jonathan Davis (02:10):
And also, yeah, feel free. If you all think of a question, one question answered, throw it in the text and we will do our best to answer it.
Bill Fairman (02:18):
Yes. So you can text those in the chat box.
Wendy Sweet (02:20):
Yes, this is what’s called thinking on your feet when you’re kind of given notice at the last minute that things have changed.
Jonathan Davis (02:29):
The best thing to do is ask Bill what things mean. We’ll do a whole episode, I think down to the last one.
Bill Fairman (02:38):
[inaudible] stand for?
Wendy Sweet (02:38):
I stumped him.
Wendy Sweet (02:39):
Yeah, don’t laugh. We’ll have an episode called a ‘stump Bill.
Bill Fairman (02:46):
Listen, if I don’t know it, I can make it sound like I do.
Jonathan Davis (02:49):
Yeah, that’s the key, right?
Jonathan Davis (02:52):
Yes. Please send us your money and Bill will sound like he knows what he’s saying.
Bill Fairman (02:57):
Great, So what’s our–
Wendy Sweet (02:58):
First question, let’s say
Bill Fairman (03:00):
What’s our third question for the day?
Wendy Sweet (03:02):
Let’s continue to talk about, let’s say, there was somebody that asked– Oh, I like this question. It says, “What is the current and future status slash outlook of Carolina Capital Management regarding investments, interest rates, paid quality and diversity of products, projects, average loan size, performance, delinquencies, and defaults?” I think that’s just a great open question. I don’t think we can talk rates like what we’re paying right now. That would have to be a private conversation. But
Bill Fairman (03:42):
Yeah, that’s the
Jonathan Davis (03:42):
on the lending side we can talk about.
Bill Fairman (03:45):
listen, if you’re a lender and you’re buying individual notes, you’re getting whatever the note rate is. And you’ll know that in advance and our earn, our note rates run from a 9.99 to what? 12?
Jonathan Davis (04:01):
Wendy Sweet (04:02):
Yeah. We’ve got some, a little bit over that, but not many.
Bill Fairman (04:04):
Each note that’s available is going to have a different interest rate on it that said none of us have a crystal ball, okay? I am very optimistic about
Wendy Sweet (04:17):
And he’s a Debbie downer, so that’s really good!
Bill Fairman (04:19):
I’m very optimistic about the single family space.
Wendy Sweet (04:23):
Yeah. I’m thrilled about where we are right now,
Speaker 1 (04:25):
In the affordable side of single family and let me give you a quick rundown on the why that is. Affordable housing and in our area specifically, it’s really anything under 350,000. Why is that a great space to be in? Well as a lender you’re always looking at and I keep going over this, “How quickly can I get this property sold if we ended up having to take it back?” And so in order to do that, you want the properties that are the most liquid, the ones that most people want, the biggest piece of the bank and in affordable housing, you have investors that would be interested. You have first time home buyers that are going to be interested and then you have empty nesters that are downsizing, that would be interested. So you have, you have many more options available to sell these properties quicker or the quickest, that said, and again, we don’t have a crystal ball, but it looks like we have a lot of people that are trying to move out of the larger Metro areas, New York, LA, San Francisco. They’re trying to move out of those crowded spaces and into more suburban areas. We have a friend in New Jersey who got 12 houses that he picked up that were all in the affordable range, they’re all 300,000 or less, you know, just outside of New York city and he bought 12 houses and had 10 under contract within one week, one week because he exited out of the bigger cities. So it’s not just, you know, here in the Carolinas, in the Southeast that this is going on, this is just anywhere outside of the major Metro areas. You have people that were crowded into apartments. Let’s let’s assume a family of four, both husband and wife work and now they have kids that have to be homeschooled. So those apartments are a lot smaller now. They need space. So it doesn’t necessarily have to be space inside but if they had a nice, you know, fenced in backyard to play in, that’s given them extra space. And if you’re living in a crowded apartment and, you know, Manhattan, you’re not going to just tell your kids to go out and play. You’re going to go out to the park with them. You can do that in your own house, if they’re playing in the backyard.
Jonathan Davis (07:14):
It’s important that you have a fenced in backyard, put your kids in play in a working lock on your back door.
Wendy Sweet (07:20):
Yeah, stay outside, that’s exactly right! So it says a man who has his third young one on the way and the next couple of weeks, but you’ve got two little ones at home that
Bill Fairman (07:36):
But it’s about purchase money, it’s also about rental properties. There’s still plenty of people that can’t, or do not desire owning a house. They’d still, still rather rent.
Wendy Sweet (07:45):
Sure, they wanna be in one.
Bill Fairman (07:45):
But they still want to be in a single family.
Jonathan Davis (07:48):
Bill Fairman (07:48):
And they want to be in the more in the suburbs. So for that reason, I’m very optimistic about the single family space, whether it be long term rentals or fix and flip, even wholesale is going to pick up.
Wendy Sweet (08:03):
Right, which is the direction we took in January of 2019. We changed everything.
Bill Fairman (08:09):
So as far as diversity goes, you’re going to get diversity, geographically, property types and the large amount of properties that you would have in the fund. We are going to stick into the single family for the most part.
Wendy Sweet (08:30):
Bill Fairman (08:30):
Probably 10 to 15% of the portfolio is going to have multiple tenant commercial properties in it and we’ll say multifamily, self storage, warehouse itself that can be broken down into several units, mobile home parks. We want to try and stay in residential, but you know, self is very, um.
Wendy Sweet (08:56):
Bill Fairman (08:58):
resilient when it comes to down markets.
Wendy Sweet (09:01):
Down market and up market. It does well in both.
Bill Fairman (09:05):
But your diversity comes when we have a, you know, 105 loans in the portfolio versus just a couple.
Jonathan Davis (09:13):
Yeah. We have, well over 150, actually but I mean, it’s the, you hit it. It’s diversity. It’s not only is it geographic diversity? I mean, I can lend to the same borrower in 48 different States. That’s not really diversification.
Wendy Sweet (09:28):
Jonathan Davis (09:28):
That part where it goes like great that you’re in different markets, that’s fantastic. But we, you know, we have thresholds that we can, you know, we only lend X amount to a particular borrower. So even though we have geographic diversity, we also have borrower diversity as well. So that further mitigates risks that, you know, if, if we do land on multiple projects to a borrower and he goes down, we still have 145 other projects that are going on where I only had five of them.
Wendy Sweet (10:00):
Right, and the diversity too. Let’s not think that we’re nationwide or going anywhere to lend money. We’re very cautious with the areas that we’re lending in than in the Carolinas and the States that touch the Carolinas. We also include Alabama, some in Mississippi. I think we’ve got some loans coming up in the Indiana Indiana area.
Jonathan Davis (10:27):
Kentucky and Indiana.
Wendy Sweet (10:27):
Jonathan Davis (10:28):
Mostly. I mean, we’re more centralized around the Southeast with a heavy concentration in North and South Carolina, Georgia, and Virginia. That’s really, you know, those four States make up the bulk of that work.
Wendy Sweet (10:40):
Absolutely, absolutely. But the thing is we want to make sure that, you know, that we have boots on the ground in any of those areas. We have friends that we, have close relationships that do business in those areas that well, that can as well, that can be our eyes and ears and help us gauge that more.
Bill Fairman (11:00):
Yeah, and while we’re on diversity or loan size rather, um, our average loan size for 2019 for single families was 158,000. So that gives you a bang for your buck. It was up there close to 300 prior to that. On our commercial side, we were in the 800,000 range, right?
Jonathan Davis (11:22):
Bill Fairman (11:22):
That meant 800,000
Jonathan Davis (11:24):
Low eight hundreds on the average show commercials sites.
Bill Fairman (11:27):
Now It doesn’t mean we didn’t participate in projects that were larger. We like to stay in projects that are 3 million or less. Are we taking on that whole loan? No. One of the things that we look forward to doing, because we can participate with other funds where we only have a much smaller portion of the loan.
Wendy Sweet (11:50):
Bill Fairman (11:50):
And we’re, we’re still in a shared first position so we had just as many rights and a lot of times we’re still keeping the servicing as well.
Jonathan Davis (12:03):
Surely we can, in most cases we [Inaudible]
Bill Fairman (12:06):
So what that does is it diversifies our risk on the larger projects at the same time giving us opportunity to get into the larger products?
Jonathan Davis (12:17):
Oh yeah. I mean, it’s the same model. Like, you know, the credit unions take, you know, you want todo larger projects, but you don’t want to take on all the risk and you don’t want one borrower or borrowers to saturate your portfolio. So you split it up with, with other funds or other people that, you know, like, and trust me a business relationships with.
Wendy Sweet (12:38):
Bill Fairman (12:38):
And as far as delinquencies and defaults, our average default rate since we’ve been in business has been around 2%.
Jonathan Davis (12:46):
I think it’s a little less than 2%.
Bill Fairman (12:49):
It might be a one and a half somewhere in there, so that’s pretty low. Anyway, delinquencies, I was pleasantly surprised even with the shutdown going on, we only had to modify them at eight loans, right?
Jonathan Davis (13:04):
We didn’t even modify them. It was just a temporary deferment.
Bill Fairman (13:08):
Jonathan Davis (13:08):
Wendy Sweet (13:09):
And was it that many?
Jonathan Davis (13:11):
Wendy Sweet (13:11):
Yeah, I’ve been thinking about that.
Bill Fairman (13:13):
And again, that was out of a hundred and.
Wendy Sweet (13:17):
Jonathan Davis (13:21):
We’re right at 150 loans.
Bill Fairman (13:23):
Yeah, okay. That’s not bad.
Jonathan Davis (13:26):
No, no, it’s not. That’s not bad in, and of those, I believe all of them are either worked out, caught up. Except for one, and I think they’re still.
Wendy Sweet (13:39):
and we’re still negotiating.
Jonathan Davis (13:39):
We’re still working on that one. So, I mean, you know, four out of the five, you know, 80% is taken care of.
Wendy Sweet (13:44):
Yeah, that’s awesome.
Bill Fairman (13:46):
With that said that delinquencies and the defaults all go back to our original upfront underwriting. We’re very conservative. We require income and bank statements, so we require assets as well. Experience and then worst case, if we do have to take them back their, properties that we know we’re going to [Inaudible]
Wendy Sweet (14:06):
Jonathan Davis (14:06):
And then in the prior show we talked about, you know, why do we get bank statements? Why do we get all these things? Like who saw, like, we don’t have a crystal ball who saw COVID-19, the pandemic happening? Who, who saw all the crap? You know, some people claim they did, maybe they did. I don’t know. But we don’t know these things so the best way to protect you, the borrower, us, the lender and then whoever the investors are is to get all these things up front. So we all can see and know what the plan is, if the worst happens
Wendy Sweet (14:37):
Right, right. And really the, almost the worst did happen with this big, uh, virus that hit, um, we, we were, uh, we were very, very fortunate to have been prepared for something like this. You know, we knew there was a correction coming, but we didn’t know it would be this,
Jonathan Davis (14:59):
No, you know, we were preparing for a correction. We didn’t know when or how, but you know, yeah. This was surprised us, but at least, you know, we took measures in place. We had measures in place to, um, to protect ourselves, our investors and our borrowers.
Wendy Sweet (15:14):
Yeah, and we can thank the masterminds that were involved with freedom. Founders was a, uh, a big part of, um, keeping us on top of our game, keeping us focused on, Hey, you know, what’s the worst thing that could happen and making sure that we were thinking, you know, it’s one of the great things they do is they look far into the future and so we’re just thinking what can happen and how to fix it.
Bill Fairman (15:39):
And regarding future outlook, the pandemic really accelerated, um, the buying and the.
Wendy Sweet (15:47):
What was gonna happen anyway?
Bill Fairman (15:49):
Well, yeah, but I’m talking about on the single family side of things, it really accelerated the need for single family housing. And we were already in, excuse me, in certain segments, especially the affordable side of things and there was already a shortage at that time. Now there’s going to be a lot of people that are going to have to change careers or are not being employed and the government has shoveled a bunch of money out there and a lot of it’s going to stop soon. So I do anticipate you’re going to have some closures coming. I think you’re going to see in most cases, less foreclosures than we did say in 2008, because there, they would rather, well, number one, they would rather sell the note off at a discount then it goes through the foreclosure process.
Wendy Sweet (16:37):
The banks would, they learned the same thing we did.
Bill Fairman (16:38):
And then at the same time, the underwriting since 2008 has been so difficult and there’s plenty of equity in the properties and I don’t see, except for in certain sectors, luxury properties, for example, I don’t see bad
Wendy Sweet (16:54):
Which we’re not involved in.
Bill Fairman (16:57):
The value’s going down. So I don’t I do not see a bunch of people being underwater in their house. I see opportunity for them to do maybe short sales or subject to type of sales. I think most people, and again, it depends on where you are.
Jonathan Davis (17:16):
What was the national average on the equity in the home? Wasn’t it like 70%?
Bill Fairman (17:21):
Yeah, It’s not bad.
Jonathan Davis (17:22):
It’s well, over 50%. Yeah.
Bill Fairman (17:24):
So we’re not in a position where you’re going to say a bunch of underwater houses and what not. There’s going to be plenty of opportunity for other investment types in there as well so I’m very optimistic going forward.
Wendy Sweet (17:36):
Yeah, and you know, having more foreclosures on the market is good for our borrowers, right?
Jonathan Davis (17:43):
Yeah, I was laughing cause you know, Bill, I’m very optimistic.
Bill Fairman (17:47):
I’m really happy.
Wendy Sweet (17:51):
Debbie downer strikes again!
Bill Fairman (17:52):
Please, calm down.
Wendy Sweet (17:52):
We’ll leave the light on for you.
Bill Fairman (18:01):
The next question, which one do you want to tackle next?
Wendy Sweet (18:02):
Um, how about this one that says “Under what circumstances would you be willing to provide a hundred percent financing where the borrower comes to the closing with no cash out of pocket?” zero. Stated differently “How attractive must a deal be in order to mitigate borrower skin in the game 40% as is LTV, this would be a fixer flip or more likely a transactional funding instead of wholesaling or funding for a–, I don’t know where the other part of the question would be.
Jonathan Davis (18:42):
Well, so the LTV matters, but what your, what that question,
Wendy Sweet (18:51):
which is loan to value. [Inaudible]
Jonathan Davis (18:53):
But what that question I think is really asking is how low does the loan to value have to be for the lender to feel comfortable to just own it? And that’s not what we’re in. Like that’s not what we do. Like we don’t want to own property. That we want with the best way to say it is when interests are aligned, we want the borrower’s interest aligned with our interest and the borrowers should want our interests align with theirs. And the best way to do that is for us to put money in and them to put money in. And then we know that our, our interests are aligned. We both want the success of this project and the borrower doesn’t want it to fail because now they don’t want to lose their money. And we don’t want it to fail because we don’t want to lose our money.
Wendy Sweet (19:41):
That’s right. Somebody who wants no money out of pocket is somebody who has no money to pull out a pocket.
Jonathan Davis (19:47):
Wendy Sweet (19:47):
And if that’s the case, you’re sitting in a position where maybe you shouldn’t be investing right now.
Jonathan Davis (19:54):
Yeah, I mean, most people who don’t have the money to get started on that. There’s a lot of what, you can wholesale. If you’re willing to put in the work, you can, you know, you can JV with somebody like if you have experience, but you don’t have the capital JV, somebody has the capital.
Wendy Sweet (20:09):
That’s right. Yeah. I tell people that all the time.
Bill Fairman (20:11):
I was going to mention that the, a private lender and is willing to JV with you. Are you going to make as much of the profit as you would have? You’re borrowing it. No.
Jonathan Davis (20:19):
Bill Fairman (20:20):
But you have to start somewhere.
Wendy Sweet (20:21):
and build that relationship.
Jonathan Davis (20:23):
And here’s the thing, as a borrower, what I would be concerned about is if a lender is willing to give me a hundred percent financing for everything, and it’s the low LTV, what’s that lenders [Inaudible] to not take the property back? So let’s say you get into a maturity to fault, like you’ve made all your payments, but technically, you know, to not pay the loan back at maturity is a break of covenant and now the lender can take that property back. In that situation we’re going to work with you, we’re going to extend you out or whatever the case may be, because we want you to succeed. We don’t want the property, but if the lender has all their money wrapped up in that property, will they extend you out? Will they just take the property back? Like, that’s, I mean, that’s a question that I would ask.
Wendy Sweet (21:12):
What motivation would they have? Absolutely. So we’ve got a question up here. It says, “Commercial LTV,
Jonathan Davis (21:20):
most of your right, Can we show that person’s name?
Wendy Sweet (21:23):
Jonathan Davis (21:24):
Jonathan Davis (21:26):
“Most of your loans go to flippers or buy and holders?” Yes. I would say that.
Wendy Sweet (21:31):
Can’t get it now.
Jonathan Davis (21:33):
Yeah, most of our loans do go to flippers and buying. So flippers make up, I don’t know, on the residential side, probably 70% of what we do, 75?
Speaker 2 (21:48):
Wendy Sweet (21:49):
Yeah, That’s very, very accurate. Maybe even higher, a little bit.
Jonathan Davis (21:53):
Yeah. Yeah. So, buy and holders. So when, when we do buy and hold loans, there’s, there’s two different ways to do that. There is fixed to rent and then there is just a rental loan. Now the long term rental loans, we’re working on to get that back. A lot of people are working on that right now. That’s not something that’s, uh, there’s a lot of out there. But the buy to, or the fixed her rent, we do that as well.
Wendy Sweet (22:19):
And I’ve got a lot of people calling for those, you know, fixed to rent loans and the first thing I tell them is, ‘Hey, we’re happy to do this loan for you, but you need to understand it may be longer than the six month term that you’re getting from us.
Jonathan Davis (22:36):
Wendy Sweet (22:36):
To get this loan refinance, because those are the loans that have kind of dropped out of existence for awhile.
Jonathan Davis (22:45):
Wendy Sweet (22:46):
They’re coming back, they’re coming back though. That that’s important.
Jonathan Davis (22:49):
You can take that question down now.
Bill Fairman (22:53):
There was another question about the commercial TV, in rate .It’s going to depend on the risk and the type of commercial properties. Typically commercial is going to be anywhere from 60 to 65% max LTV. And again, rates is going to depend on the property type.
Jonathan Davis (23:13):
Now, if you’re talking to repositioning, that’s, you know, on a bridge, you can go up to 75 if you’re just getting a bri– not necessarily with us, but as a whole on the bridge lending, there are many bridge lenders that will go up to 75%.
Bill Fairman (23:28):
No, sorry. I was speaking specific to us.
Wendy Sweet (23:33):
Yeah, and that’s kind of crazy to go up behind.
Bill Fairman (23:36):
Hope that answers our question.
Wendy Sweet (23:36):
So, you know, how attractive does the deal need to be to get that money down? I mean, we kind of skimmed across that. So how attractive does it need to be?
Jonathan Davis (23:47):
Well, we need to know that the borrower is going to make money. I mean, again, our interests have to be aligned. If you, if you’re doing a deal and you stand to make a 5% return, that’s probably not a big motivating factor. So yeah, it needs to, it needs to be more attractive than that. Like we have to know that the bar was going to make money. So what’s, you know, what does that number? Usually it’s, you know, 15% or higher than that, but the bar was going to walk away with.
Wendy Sweet (24:16):
Jonathan Davis (24:18):
Yeah, I mean, assuming all market conditions stay the same as, you know, when we closed.
Wendy Sweet (24:22):
Well, and I think that’s a thing too, that we probably should talk a little bit about is, you know, people are going over really, you know, we lend at 65% loan to value right now and I think that a lot of people are going even greater than that amount. Not only just up to 70, but to 75 and in some cases 80, because they say they can’t find deals. And that’s really not the case anymore. They’re not looking hard enough, which is what the real problem is. But when you really go over that, um, that threshold, you are taking a huge, huge chance that you’re going to walk away with no money out of that deal.
Jonathan Davis (25:04):
Yeah. I mean, that, it’s important that, like I said, interests are aligned like everyone is successful. Like if a loan is too far swayed into the benefit of the lender, it’s probably not a great loan. It’s too far swayed in the benefit of the borrower. It’s probably not a great loan. It needs to benefit both sides.
Wendy Sweet (25:24):
Yeah. That’s for sure. Okay. So let’s look at another one. Oh, I like this one. I think this is real technical, like, so it says “Where on the risk scale, would you personally put hard money lending? If zero is a government bond and 10 is a highly speculative investment where in relation to the stock market, do you write hard money, lending risks?
Jonathan Davis (25:52):
My first indication would, first question would be like, what government? [Inaudible]
Wendy Sweet (26:00):
Good question, good question.
Bill Fairman (26:04):
[Inaudible] If you’re comparing it to the stock market, let me say this. When you’re investing in a stock, where is the value in that stock? It’s do you have hard assets behind the stock or can it wipe you out completely?
Wendy Sweet (26:28):
Meaning, does it own real estate?
Bill Fairman (26:30):
Well, when you’re investing in a stock market or you’re investing in companies, you’re investing in the performance of a corporation.
Bill Fairman (26:38):
Right. People that run it.
Wendy Sweet (26:38):
The vast majority of companies don’t own any real estate assets. Now they may own plenty of equipment. But the vast majority of them, they don’t, they don’t own property.
Jonathan Davis (26:55):
Yes, accounts receivable.
Bill Fairman (26:56):
Because it’s better on their books to lease them. It’s not a debt, it’s not a, what do you call it? I don’t want to say a debt.
Jonathan Davis (27:06):
Bill Fairman (27:07):
It’s not a liability on their book and that keeps their asset prices higher, right? Makes the valuation of the company higher when they don’t
Wendy Sweet (27:16):
Appear higher, appear higher
Bill Fairman (27:19):
They’re higher on paper because they are but they don’t have that dragging them down so they don’t own property. They just lease it. Then it becomes an expense.
Jonathan Davis (27:29):
And I want to clarify when they say 10 is a highly speculative investment stocks or speculative investments, and just putting that out there.
Wendy Sweet (27:40):
Yeah, that’s for sure!
Wendy Sweet (27:40):
So you’ve got history from blue chips.
Bill Fairman (27:44):
What I was gonna say is you have your large cap, your mid, mid cap, and your, your small cap companies, your large cap companies, you know, they’re global companies, they’re utilities or stuff that used to be utilities. I mean, you got a lot of tech companies now that are large cap, but they run most of the world now. That being said, they typically do not have a lot of growth potential, but they pay dividends and they’re less likely to be affected severely in an economic downturn. Your mid-caps doctor are kinda trying to be large gap, but they’re less risky than small cap. Small cap, they’re going to get pounded in a downturn, but they have an upside of growth. So if you’re looking for income, you’re going to be looking for stocks that pay a dividend but the dividends are anywhere from three to 6%, okay? The likelihood of those companies going under it’s pretty low. Okay, I get that. But when you’re in real estate, you can deal with a smaller market company and still have great protection because the funds own assets, they own solid assets.
Jonathan Davis (29:07):
Tangible assets that you can go up and touch.
Bill Fairman (29:09):
And, you know, there’s only so much land and God.
Wendy Sweet (29:16):
God’s no making any more.
Bill Fairman (29:16):
God does make new land
Wendy Sweet (29:19):
Bulkiness is stuffed.
Bill Fairman (29:19):
The problem is it takes a really long time for it to become habitable.
Wendy Sweet (29:23):
Bill Fairman (29:26):
It’s a commodity that there’s only so much up, right? And for me, I would rather be in, and this is, you know, everybody’s got their own opinion, but for me, I would rather have my investment backed by a solid asset. Now, the difference between investing in gold and silver, and those are solid assets, you can actually use it. If everything really goes South, you can use it as a money.
Jonathan Davis (29:57):
But if everything is [Inaudible]
Bill Fairman (29:59):
You’re having to use your gold and silver to make the payments [Inaudible]
Jonathan Davis (30:05):
100% that they goes that chickens are worth way more than gold.
Wendy Sweet (30:07):
And I got lots of chickens, I’m good.
Bill Fairman (30:09):
And I use the golden analogy where gold is fine, it goes up and down in value. But frankly the only thing gold does is if you buy it and you call it a hedge, but it only, it’s only a value. If it, if you sell it for more than you paid for it, right? A house, for example, a rental property or any kind of house you, the values in a home can go up and down just like that, right? But at the value of the home goes down, you can always convert it into a rental and it’s like, gold that pays you a dividend.
Wendy Sweet (30:51):
Right, so we’re, if we’re looking at this scale where, you know, what would we think that hard money would fall if the government bond, which pays, you know, almost negative zero?
Bill Fairman (31:03):
So I’m going to say, it’s going to be more in the four range because you still have the risk of a hard money. Loans are typically loans that have some sort of distressed property involved, which means you’re fixing it up and there’s construction aspect to it that is more risky than financing a single family residence that’s ready to move into.
Jonathan Davis (31:27):
I would say it’s really probably a two and this and this. And the difference would be if you’re doing it yourself, if you’re lending yourself and you’re lending on one asset at a time, it’s probably a four. If you are putting your money into a fund, that’s diversified across hundreds or even thousands of assets, it’s a two. Now you are investing in something that, you know, if we track the stock market, it goes like this. If you track short term lending on 12 month loans or six month loans in a fund, it goes like this, you know? So what are you after? So when I look at something that looks like that, it’s a low risk.
Bill Fairman (32:08):
Well, and that’s why I gave it a four you’re lending it yourself, just as hard, many lending. It didn’t specify that you’re in a fund.
Wendy Sweet (32:16):
But I liked the fact that you brought up a fund, because again, you’ve got that herd, safety.
Bill Fairman (32:21):
You’re able to minimize your risk even more. If you’re in a, in a fund, if you’re doing the hard money lending on your own, not only do you have the activity that you have to account for it, cause it’s not a passive investment but at the same time you still have the asset.
Wendy Sweet (32:40):
Just like a mutual fund tends to be more of, have more of a safety net than if you were going a stock after stock.
Bill Fairman (32:49):
Let’s put it this way. When you have a hard asset backing your investment, you’re much less likely to lose principle than you are when your asset is, or your investment is just backed by the performance of somebody running a business, you have no control over it.
Jonathan Davis (33:07):
Yeah, you hit it. I mean, it’s an asset that is a asset that you can sell or you can convert into a cashflow. So, I mean, I think when you look at that, especially if you look at it, the funds, I mean, I like it better than, than a government bond, for sure! I mean, the, the yields are a lot higher and you have a, you know, a hard, like you said, a hard tangible asset that you can go see and touch. It’s a pretty low, as far as my personal opinion, it’s a low risk.
Wendy Sweet (33:40):
Yeah, much lower risk. That’s awesome! Okay, so let’s see what else we got going out on here. Okay. This one is, a scary one and important, very important. “Would you or any other hard money lender, you know, provide funding for a second mortgage to acquire a subject property with a first– already has a first, if so, what would the deal metrics LTV, exit plan loan to cost need to be for approval?” That’s a big one.
Jonathan Davis (34:14):
That’s a good question. There’s a lot packaged up in that question.
Wendy Sweet (34:16):
It sure is, first of all, just hit the second mortgage part.
Jonathan Davis (34:19):
Would do a second mortgage? I guess. I mean can we? yes. Would we? probably no.
Wendy Sweet (34:28):
Unless we were in first position.
Jonathan Davis (34:30):
Yeah, unless we hold the first lien position and you know.
Wendy Sweet (34:32):
Why do we care about that?
Jonathan Davis (34:35):
Well, if you watched our last episode, I mean, you can, you know, first lien position is the control. Let’s talk hypothetical. So we would live in a second lien position that we weren’t in control of the first,
Wendy Sweet (34:51):
If we know the first.
Jonathan Davis (34:52):
If we know the first and we have ability to talk with them, um, our, our CLTV, which has combined loan to value would have to be at a threshold that was, palatable does, which is probably under 70%. We want to leave at least 30% equity. So if your first lien is at 70% or higher, we’re not going to do it. Um, if, if we have that equity, we could potentially do it that the rates going to be higher that it’s a higher risk. What I see typically, what do you, what do you see in typical second lien rates?
Wendy Sweet (35:28):
Well I’m saying, secondly, they’re in the teens, you know, they’re definitely in the teens, 13, 14, 15% sometimes than that. You know, it needs to be up there. It’s a scarier position to be in.
Wendy Sweet (35:45):
Well it’s more risk means that there has to be some compensation that entices the lender to take on that risk.
Wendy Sweet (35:53):
And the rates really coincide with the combined loan to value.
Jonathan Davis (35:57):
Wendy Sweet (35:57):
If it’s over 70%, that those teens are going to get higher and higher.
Speaker 3 (36:04):
Yeah, I mean if your combined loan to value is under 50%. Okay. You know, there’s 50% equity.
Wendy Sweet (36:09):
Absolutely, that’s a good safe place to be!
Wendy Sweet (36:12):
It could be, yeah. It could be. You know, was a LTC loan to cost on that. I mean, so if it’s a rehab or it’s probably the loan to cost, doesn’t really matter too much on the second.
Wendy Sweet (36:31):
Why do people care about loan to cost? Talk a little bit about that. Why it’s even a little bit important?
Jonathan Davis (36:37):
Well, so usually you’re going to see it more on new construction and you just want to control the costs that the lender is in ad. So if we, if let’s say someone brings up a lot and the law is worth a hundred thousand dollars and they already own the lot, and they need a hundred thousand dollars to build a house. If in the house, when it’s done is worth, I don’t know, 300,000 that loan to cost, is pretty low. Even if we lend them the a hundred thousand for the, you know, we’re at what, like we’re at 50% loan to cost, so that’s okay. So the lender wants to make sure that they’re not putting all the money into the project to make sure it happens. Again, we go to this aligned interest. We want to make sure that the borrower is putting money in, on the costs, usually on the front end, um, to mitigate risk for the lender so that as we move along the project, you know, interests are aligned because usually when you first get into that project, your LTV is the highest it’s going to be. And then as you work on the property, the LTV begins to lower and lower and lower and lower.
Wendy Sweet (37:55):
Because the property’s becoming more and more valuable as it gets finished.
Jonathan Davis (37:58):
So we want that loan to cost to be lower. So that at the beginning, we’re not all the money in.
Wendy Sweet (38:07):
Jonathan Davis (38:09):
So that’s and I guess that’s the simplest way I can.
Speaker 2 (38:13):
Well, and that was a good one. That was a good one.
Bill Fairman (38:15):
And we have another question, um, which in our opinion is better; heloc or cash out refi.
Jonathan Davis (38:23):
Wendy Sweet (38:24):
Jonathan Davis (38:24):
Yeah what do you wanna do?
Bill Fairman (38:26):
I’m giving you the attorney answer, It depends and it does. Here’s the difference heloc. You can go ahead and get approved. And if you don’t need the money, you’re not paying payments for it. Right. You only pay it when you draw out of it. I cash out refi. You can get the cash, but you’re making higher payments because you increased your loan or if it was free and clear to begin with, now you have payments. That said, you can have a heloc in place for several years. and then all of a sudden, the bank decides they don’t want you to have a heloc anymore and they freeze your account and use it again. So if you get all the money out at once, then you already have it. Now, the great thing about a cash out refi, there’s no tax consequences for that. Now, a heloc, there’s a little iffyness in there, whether they call it in covered up.
Jonathan Davis (39:32):
I choose to say no.
Bill Fairman (39:32):
So it depends on your CPA and if you’re getting audited and how nice you are to the IRS agent.
Jonathan Davis (39:40):
And so know which is better, it just depends on the situation that you’re in. If your house is worth more now and and you still are paying PMI and you can refinance it, get rid of the PMI and you can lower your payment and that’s important to you then now obviously cash out refinance, or just a rate and term refinance, if you want money to improve the value of your home s that eventually that you can refinance it, or you want to leverage your home’s value or equity that you have to do other things like maybe invest in notes and you pay your heloc at 4% and the notes paying you 10%, you know, when you arbitrage the six, you know, that might be a better route.
Wendy Sweet (40:25):
Right, I like having a heloc, personally, because even though that money is available to me, it’s not showing up on my credit as being money that I’ve dipped into. So it helps my credit score a little bit that I have that availability that I’m not using. So now when I use it, it’s going to change things.
Bill Fairman (40:51):
And at the same time he locks or generally a set up as a revolving line of credit, which means.
Wendy Sweet (41:01):
A little more expensive, right?
Bill Fairman (41:02):
When you’re paying the interest is different. And at the same time, it’s always going to be an adjustable. And if you, as low as rates are now, if you.
Wendy Sweet (41:14):
Means lock it in.
Bill Fairman (41:14):
You can get interest rates in the low threes, maybe hide a twos. If you’re at a 15 year term, lock that baby in and take the money and invest it into something that’s going to pay you a lot more.
Wendy Sweet (41:31):
You know, that I told you in the earlier show that I was talking to US bank, they are actually doing investor loans right now in the 2.8% range. I haven’t seen that. I don’t think I’ve seen it ever.
Jonathan Davis (41:46):
In about 25% vacancy.
Wendy Sweet (41:51):
Then there’s that
Jonathan Davis (41:51):
I’ll give you a 12% with a 15% vacancy, see if you can qualify.
Jonathan Davis (41:57):
That’s a pretty, pretty incredible.
Wendy Sweet (41:59):
Jonathan Davis (41:59):
Wondered if you or someone could do a hundred percent LTV of property after repairs at 60% of home value. So 30, 30K by 30K pair, a hundred K um, you know, people would, I mean, if you want to do something like that, but again, why wouldn’t you want your own money in there? Again, you know, I guess most people require between 10 and 20% of the purchase price down and you know, from the lender’s perspective, if you say, ‘Hey, I just want a hundred percent financing. I don’t, I don’t want to put my money in it then, you know, why is it a good deal? If you won’t put your money in it, why is it good? Why should we put our money in it? A hundred percent financing? It’s hard to find anywhere. I mean, you can find it with private lenders, like, you know, or people that you know, are friends, family, et cetera. You might find it with some hard money lenders, but I think the vast majority take the stance of aligned interest. And if it’s a good deal, then you should want to put your money into it as well.
Bill Fairman (43:04):
All that said I’ve been in the mortgage business a long, long time.
Wendy Sweet (43:07):
Because he’s old and he’s hungry.
Bill Fairman (43:09):
Yes. And the consumer mortgages out of all of them, the VA loan is the highest performing loan that’s out there. That’s it for a couple of reasons.
Wendy Sweet (43:23):
It has been for a long time.
Bill Fairman (43:24):
One of them is the fact that veterans tend to be a little bit more disciplined than the general population. And at the same time, they underwrite the income differently than any other loan. When you do a debt to income ratio, um, it’s the same debt to income ratio whether you have a family of two or a family of six with a VA loan, you have to set aside a certain amount of money for every member of the household. They’re a little tighter on the income part of it. So a hundred percent financing doesn’t bother me as much. I don’t, I don’t think you necessarily have to have so much skin in the game. The reason that we do it is that because we’re looking for more cushion, uh, because, uh, you know, we had the COVID thing happened. We used to do 100% financing. You still had to bring money, so you still had skin in the game.
Wendy Sweet (44:24):
You still had to bring the closing costs.
Bill Fairman (44:24):
You were bringing your closing costs and fees, but now we require it because we want to make sure that we have a little bit more cushion in each one of these deals, because we really don’t have a crystal ball. And we’re not sure exactly where values are going to be, where we’re optimistic about where they’re going to be, but we have no idea. We’d rather be.
Wendy Sweet (44:44):
Bill Fairman (44:44):
More on the conservative side than otherwise. Yeah. Hope that helps.
Bill Fairman (44:50):
But there’s plenty of private lenders that would do that
Jonathan Davis (44:53):
[Inaudible] It’s like, you know, if you’re lone sizes, you know, under 200,000, you know, you’re complaining that you would have to bring 20% or 10 or 20, or not 20% of 20,000 down or, or $10,000 down. I mean, the confidence of the lenders starts to go down cause I mean, when we’re, when we’re talking hundreds of thousands of dollars, 10 or 20 is usually not a big number. And you know, if, even if you don’t have the money, that’s not a big deal, but if you can’t find a way to get the money, then it becomes a question of how reliable can this borrower be? You know, if you told me today, Jonathan go find $10,000 for this, I can go find $10,000 now that’s, you know, not to say that I would necessarily have it in my account, but I can, I can talk to somebody. If it’s a good deal, I can get somebody to work with me on a JV or something for $10,000.
Wendy Sweet (45:53):
And if you can’t do that, then you’re in trouble.
Bill Fairman (45:55):
Yeah. That’s because we’re,
Wendy Sweet (45:56):
We’re out of time.
Bill Fairman (45:57):
We have network stuff that we do. We do a lot of networking, so we know people, if you’re new to the business, sure. It’s going to be a little harder to define that kind of stuff.
Wendy Sweet (46:11):
Bill Fairman (46:11):
That the end of that question, I had something really smart to say but we’re going to wait until next week because I’ve forgotten it because I’m not that smart. Alright. Thank you so much for joining us. I hope we answered some burning questions for you and don’t forget to like share and subscribe. If you want any information on being or becoming a borrower with Carolina Hard Money, go to CarolinaHardMoney.com, click on the borrower tab. If you’re looking for passive returns through notes and lending go to the same website, CarolinaHardMoney.com and click on the investor tab
Wendy Sweet (46:50):
And check out our website for ugly that I asked the Ugly Question Sessions. We’re going to have a lot of these on the website for you to learn what you need to learn about the borrowing and lending, right?
Bill Fairman (47:03):
Wendy Sweet (47:04):
Bill Fairman (47:05):
Have a great week everyone, we’ll see you next Thursday!