Frequently Asked Questions with Bill Fairman #15
Bill Fairman (00:04):
Hi everyone. Thank you so much for joining our show. Remember you need to share, like and we have other videos somewhere around the screen that has other content in it as well. Bill Fairman, Carolina Capital Management. Typically Wendy is with me but she’s off on a mission trip and I am going to go over some of the more frequently asked questions that we get and this is general real estate questions as well. So the first one is, you know, what is a hard money loan or a lot of people call it private capital or private private loans and why do you need that? Well, the reason you’re going to use hard money or private capital is these loans are non-bank referred to as non-conventional loans because banks are in a really tight box as it were. And in most cases the loans that you’re getting are the homes that you’re going to be utilizing these loans are on are going to be distressed in some way or you, there’s a need for speed.
Bill Fairman (01:17):
Banks are not fast. They have to take their time because they’re, they’re in a box, they have to check off all the boxes and a hard money or a private lender. Private capital loan is going to have a couple of things that are typical for them. One of them is they’re going to be a higher interest rate and typically your origination fee or the points is going to be higher as well. Generally they run 3% to 4% for the origination fees, and then interest rates typically run anywhere from 9% to 12%. Now keep in mind these loans are going to be interest only. So while you talk about the higher interest rates, it helps you from an interest only perspective. It keeps your payments down and they’re all based on 12 months. So they’re annualized loans. So if you only keep the loan for six months and you had a 12% interest, only paying six payments, which means your actual interest that you pay is only 6% so don’t let the interest rates scare you.
Bill Fairman (02:27):
It’s, the points is where most of the lenders are making their money, not necessarily the, the interest rate. So why did they charge more? Whether they’re a higher risk loan, you’re buying a distressed property. These loans are not for homeowners. These loans are for business people, business purposes only, investors only. And you’re not going to find private capital, to give you a loan. That doesn’t mean you can’t get owner financing. And there are some programs out there now where hedge funds are, are making loans to people that are having a hard time qualifying for a loan. And you’re still gonna run into the same issue there. They’re only gonna lend so much money. Typically, you’re going to have to put 20% down or more on those. But for the most part, all these loans are going to be investor loans. Okay. So the next question that we have is, Why should I utilize the hard money or private capital?
Bill Fairman (03:26):
Well, as I said in my earlier definition of hard money is that speed has a lot to do with them. Banks take so much longer to close a loan. And especially in this environment we have now. Yeah. Speed is of the essence. A lot of people are paying cash. There’s, big fights for the, for the right deal. If you can get the right deal, you’re going to have more than one suitor for that deal and if you can come in a hard money lender, it’s basically the same as cash. Hard money lenders, private lenders, they can close and Oh, a week to 10 days where it’s going to take, you know, 30 to 45 days for a conventional lender. The other thing is the house or the property. It could be a commercial loan too. It could be a commercial property, but they’re going to be distressed somehow.
Bill Fairman (04:15):
It’s either going to be distressed for the income that it’s producing. It might may need work. And what you’re able to do with this private capital hard money loans, you’re able to acquire the property, get the money to fix it up all in one loan. Whereas a bank once the home or the building and move in condition before they’re going to lend on it. Now there are loans that you can get conventionally that are going to be a construction loan and then they can convert to a long term loan, but frankly you’re not, you’re still not going to have the speed. The speed is still going to be the issue. You can still get a hard money loan or a private loan, acquire it, get it fixed up, and then you can always refinance it to a conventional loan. In that case, if you’re putting money out of your pocket, you’re able to do a rate and term refinance without any issues.
Bill Fairman (05:06):
That’s why you would use it. Speed and then the distress properties that you’re getting for a really good deal, but it’s hard to get those financed. Okay. The next question is, In real estate investing, is owning a rental property worth the headache? If your cash flowing the answer is yes. If you’re not, the answer is no, but you don’t know unless you’re run the numbers properly. If you’re in the deal for appreciation, don’t even do it because there’s an old saying, we like to say you’re an investor or you’re a speculator. There is no guarantee that a house is going to go up in value at least on a straight line over time. Let’s say for in 20 years. Yes, home is going to go up in value over time, but if you’re looking for a short term, five to 10 years, there is no guarantee that it’s going to be worth more than when you’re buying a rental property.
Bill Fairman (06:09):
You’re doing it for the cash flow only. There’s an old saying that the home does not care what it’s worth or the building does not care what it’s worth. If it’s cash flowing, you could buy a place for 200,000 and it’s cash flowing. It’s making money for you and paying the bills and paying the maintenance and you’re getting extra money for it. That’s cash flowing. If for some reason you have a crashing the economy, the values, the sales prices of properties start to go down, do you think the rent is going to follow suit? No. During the most recent crash rents went up. Why is that? Because there was more demand. There was people losing their homes. They needed more, more places to live. Same thing with any type of commercial properties that you’re renting. Rents do not go down typically, and now there are going to be times when competition comes in, but you also have to, keep up with the competition on the commercials stuff, especially if you’re getting into retail, part of a small retail shopping center on a main road is to attract customers into the building.
Bill Fairman (07:29):
If you own a building that has, you know, five or six little retail shops in there coffee shop, maybe a health club, whatever, you’re going to have to do a face lift on those things about every 10 years. Otherwise it’s not attractive for people to come off the street and you need that office buildings, not so much self storage. They don’t have to be pretty, they just need to be clean and functional, right? So you don’t have to put as much maintenance into those, but you’re always doing it for the cash flow. You’re not doing it for appreciation. So another question that we have is, What are some rookie mistakes that people make on their first investment deal? Well, there’s a lot of them that could happen, but here’s a couple of the, main, number one, you pay too much for the house.
Bill Fairman (08:20):
There’s an old saying that you make your money on the buy and that’s true. You need to back your way into the price. You know, knowing what the house will be worth when it’s fixed up is very important. It’s going to help you decide how much you want to pay for it in the beginning. What it will rent for, is very important. Yeah, you need to know those numbers before you get into these things. The next one is understanding what the rehab costs are going to be. Those things are always changing. One thing you don’t know is what’s inside the walls and you can have it inspected all you want, but you know, no one has x-ray vision. So if you decide that you need to open it up and move some walls, there may be some things back there that you’re not aware of.
Bill Fairman (09:08):
So always put aside reserves to overcome, you know, any unexpected events. And when you’re in real estate, I can guarantee you there’s going to be unexpected events. It always, planned for it when it doesn’t happen, that’s icing on the cake. But some of the ways you can overcome that is you know, your Lowe’s, your home Depot, they all have software where you want to remodel a kitchen. You just plug that software in there and it’ll give you a good ballpark figure on what it’s going to cost. And then they can add labor and stuff in there for you as well. And it’s all, it’s all free on their websites. So that’s something to think about. Labor materials. So here’s a good question. What is the saddest thing you’ve ever seen in a vacant home? I think Wendy was hitting on this in an earlier video as well.
Bill Fairman (10:07):
You know, family photos, school awards, stuff were, you know, these are things that the previous family had that should have been important to them. But for some reason, you know, they left it behind because they had to leave quickly or you don’t know what the, what the circumstances were. But you know, they hung onto him for a reason and you know, to have that still in there, you know, you’re really concerned about them. Where are they now? Hope they landed on their feet. The weirdest thing that I think I’ve seen was, uh, Carlton sheets, unopened real estate investing training program in a house. Yeah. We have a friend that is an, an educator and a mentor and he sells courses. And one of the things he always said was those unopened courses are not self-help courses. They’re shelf help courses. If you’re going to buy a course, the least you can do is open it up and utilize it cause you’re never going to succeed if you don’t try. Right. Same thing with negotiating the, the answer is always no unless you ask. Right. So what are the no-nos of real estate investing? Never force a deal.
Bill Fairman (11:30):
Good deals come along every day. If the numbers aren’t working, don’t try to make them work. Just, just move on. Find another one. It shouldn’t be an emotional decision. It should be all about the numbers. Yeah. Buying a home that you’re going to live in is an emotional decision, buying a home to make money on is a business decision. And don’t think of it any other way. I know HGTV has a great way of making things emotional or they do that because they need ratings. If you ever noticed every one of these, you know, fix and flip shows they have on HDTV, there’s always a dilemma that they have to overcome. And then they always get emotional. Well, and it always works out in the end, right? So don’t look at those and think, that’s real life. By the way, those homes don’t get finished in the weekend.
Bill Fairman (12:32):
Always make sure the deal is a win win for everyone. We do that in our business as well. There’s plenty of loans we can make that we can make money on, but they’re not good for the borrower. At the same time, if they’re not good for the borrower, they’re probably not good for our investors either because it’s not good for the borrower, there’s a chance that will end up having to take that property back. Because too many things can go wrong when the margins are too tight. You know, why would you go through that? Right? It’s, it’s a number one, it’s not ethical. If you think it’s a bad deal for the borrower, you wouldn’t want to go through that. And at the same time, you don’t want your investors to get in that position either. Always be transparent when you’re dealing with someone that you’re trying to buy a house from or negotiating with, or your subcontractors.
Bill Fairman (13:25):
It’s every party that’s involved. Be open and honest with them. There’s no need to hide anything. If you know each other’s pain points, things can be worked out. Now, one of the things I love about in the real estate business, especially if you understand notes, they have so many different strategies in buying and selling and renting and, real estate is if you understand financing, there’s so many open exit strategies that you can have if you understand that, but you’re, you’re not going to be able to work any of those out unless you have conversations. Listen, find out what it is that each party is trying to get out of this and try and make it a win win for, for everybody involved. Here’s another good one. What would make you walk away from a deal? Well, there’s probably a few of them, but if the numbers don’t work, you know, walk away.
Bill Fairman (14:23):
Like I said before, it’s a, there’s always a good deal coming along down the road. Don’t, don’t press it. You walk away from anything that makes, looks like there’s fraud or dishonesty involved, walk away. Those are not people you want to deal with because if they’re going to, if they’re going to lie on the front end, it’s going to be a long road down the street as it were. I’ve seen really good deals come across my desk, but again, it wasn’t a win for both parties. So, um, you know, we’ve passed on those. I’ve had people that try to, for example, they, they get the deal from a wholesaler and then they want us to go around them and not pay their commission. And that’s not ethical either. And if they’re going to do that to the wholesaler, what makes you think they’re not going to get to do the same thing to you at some point?
Bill Fairman (15:18):
So always make sure that you’re doing it ethically and morally. Is rental property investing the most efficient way to build wealth? Why or why not? Well, that’s a great question for a lender. I do feel that, owning a rental property over time is the best way to build wealth or one of the best ways. It’s not the best way. It just depends on where you are. And what your, your pain thresholds are as well. There’s different ways to do the same thing, which is build longterm passive income over time. We always say you don’t want to own a property, a rental property. You want to own 10, cause you’re always gonna have one or two stinkers in the group and you need the other eight or nine to overcome that and still make money. And then you’re, you know, you’re always, market’s change,
Bill Fairman (16:20):
Portfolio change. So you’re always looking to take the stinkers, move them along, and then, find a new one to take their place. But as a lender, I go by the school of it’s, it’s much better to control the asset without being responsible for the asset. Now you give up some tax breaks when you don’t own the property, but at the same time, you don’t have to deal with the tenants and toilets and trash. You’re not responsible for maintenance and insurance and that type of thing. If something breaks, it’s a, that’s their issue. Again, you’re controlling the asset because you have the lien on the asset and you’re getting passive income because you’re making interest on your money, without having to own the property itself. Now that said, like I said with the taxes, there was no tax benefits for interest income. Well, I would like to say that you want to lend out of a tax deferred or tax exempt account, like an IRA.
Bill Fairman (17:24):
The tax exempt would be the Roth IRA and you want to buy real estate with cash. That way you’re able to take advantage of the taxes with the cash and then not paying any taxes or deferring taxes on your lending side, uh, through a self directed retirement account. Are Zillow estimates accurate? If so, why not? Or if not, why not? Well, they’re using algorithms and frankly, no, they’re not as accurate as a regular appraisal. But I can tell you that, yeah, you can get a good ballpark idea of what a property will be worth. Is it going to be exact? No. Um, it’s not. But if you’re looking at Zillow is one of these things where it’s a spoke in the wheel. If you’re looking at it and you like the numbers based on Zillow comps, I’m not looking at the [inaudible] estimate, I’m looking at other homes in the area and the comps that they show you.
Bill Fairman (18:29):
Again, it’s going to give you an idea of what it’s worth and then you’re going to kind of focused down on it with a, an individual appraisal. Uh, we require a full appraisal because we’re doing construction on it and it’s, and we’re lending based on the after repair value. So we want is accurate of a value as possible. Now again, markets change while things are under construction. Those are things that are outside of your control, but in time you make the decision you’re using, the best analysis that you can. So when we order an appraisal, if there’s construction involved, we’re ordering a subject to, completion, appraisal, and an as is value. We want to know what it’s worth when we acquire it. We want to know what it’s going to be worth when the work is completed. Um, you’re not going to get any of that through a Zillow, but it’s a good tool to start the process. Okay. Would you buy a property located half a mile from a maximum security prison?
Bill Fairman (19:35):
It’s funny. And what other places or businesses would you try to avoid? Well, there’s nothing wrong with being near a prison. If you have a rental property, you’re not living there. And you know, most people, Oh, I wouldn’t say most people, but a lot of people wouldn’t want to rent there either. But there’s nothing wrong with putting a short term rental in that spot. Those people are only there temporarily anyway. So you do a corporate rental where somebody maybe there a month at a time or vacation and one column vacation rentals or short term rentals. No one’s vacationing there. Here’s one thing about short term rentals. There’s always people getting married and there’s always people passing away. So no matter what town you’re in, you’re going to have relatives that are visiting for whatever reason. And it didn’t matter how small it is or how close it is again to a prison, there are only going to be there a short period of time and it’s a, it’s a good way to take advantage of a property that you’re probably going to get at a pretty decent price.
Bill Fairman (20:42):
I have, back in the day I ordered an appraisal from a property and in the notes it said external obsolescence due to hog parlor and it’s associated odors. Right when I read that I just cracked up. So there was a hog farm and it wasn’t the farm, it was the processing plant. Right across the street from the house. And yes, they were associated odors. No, you wouldn’t want to buy a house, anywhere near that. So you know, you want to avoid smell issues. You got chicken farms, landfills, that type of thing as well. You don’t want to buy a property to sell a fix and flip if it’s close to, you know, the major power line easements that have the big giant lines that are going through sewer plants, railroad tracks. And obviously you want to stay away from high crime areas. Some people have an issue with cemeteries that depends on you.
Bill Fairman (21:51):
However, what you want to do is anytime you’re buying a property to rent or to fix up and sell, you want to make sure it’s going to be a property that the vast majority of people are going to want to live in. Okay? So, Are properties in extremely rural areas worth investing in. Again, I’ll give you the attorney answer. It all depends. When you’re buying properties in rural areas, and again, you’re looking at this from a lender’s perspective, we always look at every property that if we end up having to take it back, how quickly can we sell it in our many back and get it reinvested? I don’t care if I can take a property and sell it at a profit. I have to look at the income I’m not making while I’m fixing it up or going through the foreclosure process, paying a realtor to list it, paying maintenance people to fix it back up or make it right, paying someone to cut the grass.
Bill Fairman (22:52):
And then the time, I’m not making money while this thing is up for sale. I may make money on the sale, but is it going to cover the loss of income than I would have had if I had just had the cash working and being pay. So that said, you’re going to have fewer people willing to buy a home in an extremely rural area. You don’t have the same kind of population. You don’t have the same kind of job centers there. They’re gonna. There’s gonna be fewer people that want to live out that far. So you have to really be careful there. They are good rental areas for, for people that are living there now we have a friend Glenn Stromberg who was in double-wide mobile homes on land. Those are, those are great places for double wides on land. They are still considered real estate [inaudible] at a much lower price and you have a lot more square footage to work with and they’re not going to be in bad neighborhoods because you know they’re extremely rural.
Bill Fairman (23:55):
There aren’t a neighbor and they’re easier to sell with owner financing. If you do want to sell them, they’re going to be harder for the bank. But, you can do seller financing on these things yourself and you can get a pretty good down payment and then owner finance the deals because it’s going to be a lot easier for you to finance it than it would be for the bank. And those people are typically not going to default if they put, you know, 10 to $20,000 down. Okay. As a landlord, besides reducing the rent, what are some interesting ways to encourage your tenants to renew their lease? Well, you don’t want to reduce your rent, number one. Frankly, there’s plenty of people out there looking for places to live. You can always upgrade the house to make it more attractive to the tenant. I’d rather do that because not only are you keeping the rents in place or maybe even upping them slightly, you’re improving the property to make it worth more.
Bill Fairman (25:02):
And then all the work that you’re doing is tax deductible anyway. Your, your rent should increase every year by a certain percentage. It shouldn’t be. I mean, it doesn’t have to be a lot, but it should go up. I mean cost of everything’s, you know, everything goes up. So it’s nice to have a longterm tenant. One of the things I want to caution you on with a longterm tenant, you still need to inspect the property there. Here’s one of the things you don’t want to step into because it’s already been stepped in. I’ll give you an example, and I’m not going to say who it was, but longterm tenant 14 years, never complained about a thing and at the same time didn’t do yearly inspections. Really go in and see if there was any needs for the house. But again, never complained, always paid on time when they moved out in the house, had to be gutted because while they never complained, there was, you know, leaks up under the pan where the tub was, the bathroom floor was rotted out, had to be completely replaced, a plumbing had to be replace the electrical, had to be redone 14 years with no maintenance, you know, other than roof and hvac, which is normal stuff.
Bill Fairman (26:20):
But you have to, even if you have a longterm tenant, a good strategy is to say we have a maintenance guy that’s going to come in every 90 days and replace the faint filters and that way when they come in, you know, so the filters are free in the Hvac system. That way they can come in and have a look around, make sure that there’s no issues. What advice would you give to someone interested in real estate? Is it easy as people will make it have to be? No, it’s not. It’s work. Those people that tell you that investing in real estate is easy and you don’t have to use any money. They’re lying to you. Now you can use other people’s money. Yes, there’s ways of doing it, but it’s still going to cost you time and money. The easiest way to invest in real estate with the least amount of effort is to do it through funds.
Bill Fairman (27:18):
And if you’re an accredited investor, and that means you have to have $1 million in net worth, not counting your primary residence, or if you’re a single person, you have to make at least 200,000 a year and expect to continue to make 200,000 a year. If you’re a family, it’s 300,000 a year if you can invest. Yeah. As an accredited investor in funds that are investing in certain things. For example, we have a fund that does lending. There’s other funds that buy and hold property. Those are the ways to do it easy. Cause all you’re doing is, signing some documents, putting your money into the fund, you’re collecting a check every month or a quarter, depending on the fund, or you’re taking your earnings and you’re growing it over time by re-investing at the end of every quarter. So those are the, the ways that it made it really is easy.
Bill Fairman (28:17):
But like I was saying earlier, it’s life is not HGTV. It’s not always a win. There’s a, you know, there’s a lot of work. If you’re fixing and flipping a house, you’re putting in more hours and you’re taking more risk than anybody involved in the transaction and there’s always going to be some sort of an obstacle in place. So, you know, if you set your expectations where you’re, you’re assuming it’s going to take a little bit more money than you thought, it’s going to take a little bit more time than you thought. There are going to be some unexpected issues that come up along the way and then you’re probably going to end up selling it for a little bit less than you expected, then you’re never going to be this satisfied. You’re going to see that coming. And it doesn’t mean, you know, real estate is not a good business to be in because I’m in it and I love it.
Bill Fairman (29:12):
One of the reasons I love it cause it’s constantly challenging you, it evolves over time and it’s, you know, it’s not static. It’s constantly changing and you will lose some money on some deals, but you’re going to make more money over time, than lose money. That’s not, not a lot different from the stock market except for you know that you can control that. That’s not market seems to be played by a lot of people that obviously have a, I don’t want to say a head start, but they have an advantage over you, the general public and it’s not market are, they’re always getting into it as the markets are peaking instead of getting in on the ground floor when you’re going to get most gain from it. So listen, that’s a just a few questions. Thank you so much for joining us and don’t forget to like share, our website is CarolinaHardMoney.com. I’m sure we get some videos up here or over here or down here that has additional content. Have a wonderful day. Thank you so much.
Bill Fairman (30:30):
Thank you so much for joining us again. Really had an awesome time. I know Wendy did as well. So if you like with you heard and you want to see more, what do we do? You can hit one of these. I feel like the hippy dippy weather girl, because we’ve got a green screen going on so we could have a cold front moving in from Virginia or right. Oh, come on. That’s funny. I don’t care who you are, so you can pick any of these other shows. We have some here. We have some here. We have some here. Just pick one. Test it out. Right. Also subscribe like, and our website is easy.
Bill Fairman (31:13):
That’d be w. w. w. w.w.
Bill Fairman (31:18): that’s a lot of W’s. CarolinaHardMoney.com Tell all your friends!