243 Hot Topics In Real Estate: Small Dollar Lending, Investing With Family & Friends, Raising Capital

https://youtu.be/peAAjhtlKxA

 

Bill Fairman

00:00:02

Greetings. Hope everyone is doing well. We are actually live with this show. Maybe you didn't know this, but last week's was not live. It was prerecorded because we were all out of town. So we're going to talk about several things today, being a small dollar lender, investing with family and friends, and raising capital. And we'll get to some examples right after this. Hi everyone. Welcome to the Real Estate Investors, Show Hard Money for real estate investors. We are Carolina Capital Management. We are lenders in the southeast for real estate professionals. If you have a project you'd like us to take a look at, go to carolina hard money.com and click on the apply now tab. If you are a passive investor looking for passive returns, then click on the accredited investor tab. Don't forget to like, share, subscribe. Hit the bell. And don't forget about Wednesdays with Wendy.

 

Bill Fairman

00:01:35

I think this one is so short now that we should just play that twice Next time. Not now. Next time. Yeah. That's funny. So Wendy devotes 30 minutes per person each Wednesday. Talk about anything real estate, there's the link, it will be over in the chat, which on the right side of the page or underneath, depending on the platform that you're viewing us from. And in case you were wondering, yeah, somewhere in the same shirt that's been on this show three times in a row. I don't think anyone was wondering that, however, but way of telling yourself it's very, I'm being very self-conscious about it. Yes, it's been watched. It's a nice shirt. Yeah, you can see the crease. Thank you. Yeah. Anyhow, let's do some breaking news. You man. No.

 

Bill Fairman

00:02:41

So today, very important. CPI numbers came out and that stands for consumer price index. This is the third quarter reading and this determines people that are on fixed income social security on how much they will get raised for next year. Yeah. And it came in at eight point, excuse me, 8.2%. So we have inflation of 8.2% year over a year. The core number for month to month was 0.4%. So it is higher this month than it was last month. You pull out energy and food, which as we all know, that is really the most expensive and the most important.

 

Jonathan Davis

00:03:28

So that is the core.

 

Bill Fairman

00:03:29

It's still 6.2%. I mean that's, that's pretty high. Yeah. So that means everything is going up. So guess what? The stock market didn't really appreciate that this morning and I haven't looked at it before we came on the air today, but we were below 2,900 on the Dow, you know, before I came to work. Yeah. On the, on the future's market. So those folks that were hoping for the Fed to maybe postpone or maybe do a 50 basis points raise in the interest rate, Nope. Be prepared for another 75 basis points. Oh

 

Jonathan Davis

00:04:10

Yeah.

 

Bill Fairman

00:04:10

That's all I can say.

 

Jonathan Davis

00:04:11

It's coming. And yeah, I mean they have stood by, you know, bringing inflation down and as you know, these numbers continue to, to set where they are. If they do what they say they're gonna do, it's, it's gonna be 75 or even, you know, one full, you know, percentage.

 

Bill Fairman

00:04:29

Well, they were too slow to act because they said it was transitory. The rest of us knew it wasn't.

 

Jonathan Davis

00:04:34

Oh gosh. Yeah.

 

Bill Fairman

00:04:36

And then on top of that, you've got our, not just our government, but governments around the world are counteracting what the fed's trying to do. Every time they try to slow stuff down, the government gives out more money and more money. They give out more. It's stimulates activity. And you can't lower inflation if you have an activity being, I mean the whole point of raising rates is to have what we call demand destruction.

 

Jonathan Davis

00:05:09

Yeah. You want, I mean, right now they want to, you know, lower the demand for houses and also, you know, and raise the, you know, unemployment. Yeah. I mean that's, that's the goal.

 

Bill Fairman

00:05:22

Well the, the target is housing and why do they target housing? Number one, it's one of the largest expenses, but all the other products that are connected to housing, furniture, H V A C, all that stuff. Yeah. Building materials. There's a lot of things that are attached to housing that if, if you slow down housing, you're gonna slow down a large chunk of the overall economy. Correct. Yep. That said, I don't want anybody to freak out people. Were still fixing and flipping homes and making a profit when home. We, we still hadn't figured out if we were at a bottom yet after 2008 crash.

 

Jonathan Davis

00:06:11

Yeah. I mean like, like we were talking about with a, a room full of real estate investors last week. I mean, or real estate lenders rather. We're really excited. We're excited for our partners and ourselves and our clients because opportunities will now be more readily available.

 

Bill Fairman

00:06:33

Yeah. And as a selfish note, businesses like ours and we're, we're talking to other private lenders, hard, hard money and private lenders that are balance sheet lenders like us, we are all going to capitalize on this because the short-term lenders that got in bed with the institutional financing people who are pulling back because interest rates are going up and getting nervous. Yeah. That's not affecting us. Cuz we hold our own loans. Yeah. It's really affecting them. We, we had some information that there are some people in our area that are gonna have to start laying off a bunch of their, their folks because they can't get the capital anymore.

 

Jonathan Davis

00:07:19

Yeah. I mean it's what we've been talking about for a long time. Scaling responsibly and you know, not building a machine that you have to feed and when market shift there's nothing left to feed it. Right.

 

Bill Fairman

00:07:31

And I got one more breaking news before you get to some Okay. Multifamily stuff today.

 

Jonathan Davis

00:07:38

Oh, look at that

 

Bill Fairman

00:07:39

Is our man, Scott's birthday. Happy birthday Scott Fatten

 

Jonathan Davis

00:07:45

Since, since he

 

Bill Fairman

00:07:46

Wonderful smile

 

Jonathan Davis

00:07:47

Since he runs the, the video we had to print something off to stay incognito. It's funny. Happy birthday. So yeah, well wanna talk a little bit about multifamily. So real page has been keeping track of absorption or you know, you know, how much, how many units are being rented by the quarter. And they've been doing this for about 30 years and this third quarter of marks the first quarter ever in that 30 years where there was a negative absorption rate. What does that mean? It means that there's just less people in the third quarter renting apartments and getting those apartments. And so typically why is that? Why is that anomaly typically third quarter is very strong. Everyone that's, that's a strong lease up period. Fourth quarter is usually the, the, the, the, the ti you know, where it trails down. So this is quite an anomaly. We'll, we'll keep track of it. That being said, you know, vacancy is still 4.4% nationally. So it's, you know, vacancy's really low. It's just, we've had such a run up to this point that,

 

Bill Fairman

00:09:07

And that's what I was gonna ask are, are we getting to a point where there's over saturation in we're

 

Jonathan Davis

00:09:13

We're building, we're a building towards that. Yes. That will con I think that's a trend that we will continue to see for the next few quarters.

 

Bill Fairman

00:09:21

And if you think about it too, we have an oversaturation of a class Yeah. Properties too. So, so these are the brand new luxury type apartments. That's what's been being built over and over again. And as the economy slows down and people start spending less money Yeah. They're going to start going towards those B and and C class properties. Yeah. Cause they can't afford that rent.

 

Jonathan Davis

00:09:50

Now the other side of that is we're seeing, you know, rents kind of where they're, they're around 20% year over year of last year. Now we're running in the nines, which is still an increase. It's just, it, you know, it seems to have plateaued and, and coming down now everywhere except Florida. And that is due to, you know, most recently the, the hurricane there. Sure. There are several instances I was, you know, of people renting two bedroom, one bath houses for $5,000 a month. Wow. I think it's, it's, it's crazy. During one, they

 

Bill Fairman

01:10:27

Weren't damaged by

 

Jonathan Davis

01:10:28

The hurricane. Yeah. Because it's because people are scrambling to find shelter and Yeah. So everywhere, unfortunately

 

Bill Fairman

01:10:35

A lot of parts of the Florida that got hit are second home. We call 'em snowbird homes. So I, about half the population that's in those areas that were hit are only there in the winter.

 

Jonathan Davis

01:10:50

Yeah.

 

Bill Fairman

01:10:51

So it's not like it's their primary residence. I don't think it's gonna be as bad as it could have been in other areas because you know, the housing that was there was in most cases wouldn't occupy it anyway. Yeah. And as much as we like to get into the warm weather in the winter, you, you may have to stay home this winter until you Sure. Get your place fixed up. But if your place was not damaged, then you can still rent it out to others who need a place. Not to mention all the contractors and stuff that are coming in the area. Sure. They're gonna need the place to live Always. Yeah. While they're working down there. I know when, that's where Wendy is right now, she carried a, I think they have like a 32 foot travel trailer and she had to park it at a campground that's an hour away from Englewood. Oh wow. Because you, there was no places available any closer.

 

Jonathan Davis

01:11:46

Well let's jump into, I know we wanted to talk about, so Oh

 

Bill Fairman

01:11:50

Yeah. So our theme this month is how to do small dollar lending, investing with family and friends and then raising capital and we're gonna go over some of these items and then later on in the month we're gonna have some guests that are gonna be coming on that have experience in this and they'll give us some case studies on how they did it. Cuz the one thing I love about the real estate business is that there's a problem that is solved, whether it's on the lending side or the acquisition side or raising a capital side. And there's,

 

Jonathan Davis

01:12:33

That's the, you know, with everything that, that anyone does in, I think in any arena you don't look at how much can I make or how much will I pay? It's what problem or what pain is being solved or what pain or problem is being caused and how do I solve that. So if you can look at it that way, that's usually the, you know, better way to go about it.

 

Bill Fairman

01:12:54

Oh, I'm sorry, one last thing before we get onto this. I did see a piece yesterday, I believe it was about this second quarter for 2022 was the smallest percentage of fix and flips since 2009. I think it was.

 

Jonathan Davis

01:13:15

I believe it, It have to be. Yeah. However,

 

Bill Fairman

01:13:18

It was the highest profit of any time since then.

 

Jonathan Davis

01:13:22

The, the the net game per property. Yes. Yeah.

 

Bill Fairman

01:13:25

So two things to, to consider with those numbers is that there are fewer, we'll call 'em non-professionals doing it now. Yeah. So because it's harder to find inventory and things are questionable on how the future's gonna look. I, I think you're professionals that have good marketing, those are the ones that we're able to find the properties and, and get 'em fixed up and sold. Yeah. Secondly, excuse me, the reason they're making the most money is because, you know, the market in the second quarter was still pretty good. Yeah. Right. Oh yeah. I mean it was still about seller's market that said, I hate when they always come up with these fix and flip numbers because they only go by what they paid for it and what they sold it for. They have no idea how much anybody has put into it cuz they don't have those numbers. So how do we know they really profited more? We don't,

 

Jonathan Davis

01:14:30

It was the potential of profit is that

 

Bill Fairman

01:14:33

They just sold it more than what they paid for it originally.

 

Jonathan Davis

01:14:35

Yeah.

 

Bill Fairman

01:14:36

So, Alright.

 

Jonathan Davis

01:14:37

I mean there was more demand. Yeah. The, the highest, you know, appreciation. Yeah. So they had the, Hey Scott, happy birthday.

 

Bill Fairman

01:14:51

Have a birthday.

 

speaker 4

01:14:52

Happy a birthday. Thank you. Sure will. Get me out of here.

 

Bill Fairman

01:14:58

So that's funny. Gotta love live streaming, don't you? Yeah. Okay. So let's talk about the, the first one that we discussed, the small dollar lending. There's a lot of people that have small, say a Roth account that they're just getting started with their self-directed retirement fund and they have no idea how to get that money and put it to work.

 

Jonathan Davis

01:15:21

Yeah.

 

Bill Fairman

01:15:22

So one example is networking. If, you know, if you have a good network, you know people that need money, you know, other people that lend money Yeah. You can put that to work fairly, fairly easily. So I I'll give you an example. Let's say, you know, someone who needs a hundred thousand dollars loan,

 

Jonathan Davis

01:15:43

That's a small dollar amount.

 

Bill Fairman

01:15:45

No. Oh, you need somebody, you're no, you know, someone that needs a hundred thousand dollars loan.

 

Jonathan Davis

01:15:49

Okay.

 

Bill Fairman

01:15:50

You know, another person that probably has $99,000 they could lend if they wanted to and they wanna put that money to work. But you have a, you know, a Roth IRA that maybe has a thousand dollars in it or it might have six or $7,000 in it, but you don't have to use all that money. So how, how can you put that money to work or at least jack that up quickly?

 

Jonathan Davis

01:16:15

I feel like you're gonna make a VUL on reference. No. Oh, okay. Go.

 

Bill Fairman

01:16:20

So because you be, because you become the deal architect.

 

Jonathan Davis

01:16:23

Okay.

 

Bill Fairman

01:16:24

You have the borrower that needs the money, you know the person that has most of the money. Let's assume an interest rate of 10%. Okay, well the person that has money that's not doing any of the work,

 

Jonathan Davis

01:16:37

Can we do 12%? And that's really easy math for everybody.

 

Bill Fairman

01:16:40

Okay. Whatever.

 

Jonathan Davis

01:16:41

All right. 12%.

 

Bill Fairman

01:16:42

All right. So it's 12% interest rate,

 

Jonathan Davis

01:16:44

1% per month. Crazy.

 

Bill Fairman

01:16:48

You as the deal architect, you put the deal together, you get the, the friend who has, we'll just say 99,000. Okay. And then you have a thousand that you're putting in from your account. Now how is that a good deal for you? Well, you charge the actual interest rate is 12%, but the person that has the 99,000, they're happy getting 10, right? Yep. You also charge a couple of points origination on this thing. Yep. And maybe you get two or there's two charged total. You get one and the person that has the $99,000 loan gets one. Okay. Right. It's still 2% of a hundred thousand. That's $2,000. Okay. So the thousand dollars that you just

 

Jonathan Davis

01:17:40

Correct.

 

Bill Fairman

01:17:41

So now none of your money is at risk.

 

Jonathan Davis

01:17:44

You've, you've already, you've already made a hundred percent return and you haven't got the first right. Monthly check yet.

 

Bill Fairman

01:17:51

So as this loan goes on, you're the one collecting the payments, you're sending the 10% part to the person that has the 99,000. Actually you're not sending it to them, you're sending it to their custodian ira, assuming that they also have an ira. Yeah. And then you're keeping the additional 2% of that payment and it's going into your Roth throughout this transaction. So not, not only did you make a thousand dollars because at the end when it pays off, you get that thousand dollars back, plus you made a thousand dollars plus you're making 2% of the payment the whole time and you've only put that little small amount to work. So that's how you put small dollars to

 

Jonathan Davis

01:18:34

Work. And I know everyone's out there saying, But if I do that, aren't I subject to third party servicing laws? No, you're not because you're in it at a thousand dollars or 1%, you are an owner or a lender in that deal. Right. So you own a lean position and you can service your own debt, which allows you to service the entire loan. Right. So anyone that had that question pop up, which I know several of you did, just wanted to put that

 

Bill Fairman

01:19:01

In reality, nobody asked that question, but they should, In some states, you're not allowed to service a mortgage loan unless you were a licensed servicer.

 

Jonathan Davis

01:19:11

Third party just means someone else's loan. Yeah.

 

Bill Fairman

01:19:13

Unless it's your loan.

 

Jonathan Davis

01:19:15

Yeah. You are in every state of the United States, you are allowed to service your own loans. Right.

 

Bill Fairman

01:19:21

And because you have a piece of it, you're not a third party. Yeah,

 

Jonathan Davis

01:19:24

Exactly. You are a party to the transaction. Right? Yeah.

 

Bill Fairman

01:19:27

And then, and the other way of doing it is you could just be in second position in, in, in another small deal. But what it, what it boils down to is you still need to have a network. You can do these smaller deals, you just need to have friends that have deals. Yeah. You just need to be the deal architect. You don't have to have a whole lot

 

Jonathan Davis

01:19:49

Of money. And that's, you know, like that, that's just how it is in, in real estate. And, and most, I think in most things, you know, if you have a thousand, 2000, $5,000, you're gonna have to do a little bit more work to get that level of return. However, that work is going to allow you to get up to, you know, 150 and 200% return on your money and that can grow your small balance IRA or, or whatever investment vehicle it is. It can grow it rapidly. So that was a, you know, a really good, good point, Bill.

 

Bill Fairman

02:20:22

You wanna talk about investing with family and friends?

 

Jonathan Davis

02:20:25

Don't do it.

 

Bill Fairman

02:20:28

Okay. From a banker or from a lender side of things. Yeah. Never, never lend family money because if you, you have to assume you're not gonna get it back.

 

Jonathan Davis

02:20:39

Always go back to that, you know, setting at the Thanksgiving table. Yeah. It's like, you still owe me $30,000. That's right.

 

Bill Fairman

02:20:46

But there's nothing wrong with investing with somebody getting equity to a piece of property. At least you know that if something happens, you know, on a piece of property that's worthless.

 

Jonathan Davis

02:20:57

Yeah. Yeah. I mean, and you, you can jump

 

Bill Fairman

02:20:59

In. I'm just kidding. Family and friends are the first people you go to when you start.

 

Jonathan Davis

02:21:05

Especially when you're looking for more like mezzanine prep and common equity. Do

 

Bill Fairman

02:21:13

You want to explain that, what mezzanine is and common

 

Jonathan Davis

02:21:16

Prep? Sure. Yeah. So, so you know, we talk about capital stack all the time. So you have, you know, your first lean debt, which is typically like your banks or someone like us that's gonna take a firstly position. It is your, your first lean debt and then beyond that you're gonna have mezzanine debt, which can be a second lean position behind that. Or it can be unsecured or secured by, you know, some other vehicle through the llc. And then beyond that you have preferred equity, which is typically granted to, well you're limited partners in an llc. So you have limited partners and general partners. General partners are typically the operators of the property. Limited partners are the people who are bringing the equity and you, they get preferred equity, which means after the debt, they are the first people to get paid out. And then the general partner has the common equity, which means after the debt's paid, the pre equity's paid, then they make their money. So it's, it's just a waterfall effect.

 

Bill Fairman

02:22:21

And if you're wondering why it's called mezzanine. Yes. You're still in the building hearing the same concert, you're just doing it a little bit higher up than the Yeah,

 

Jonathan Davis

02:22:30

Yeah. Good, good reference bill. Yeah.

 

Bill Fairman

02:22:33

Takes you longer to get your popcorn.

 

Jonathan Davis

02:22:35

Yeah. So yeah, with friends and family, that's the best way is to do kind of, in my opinion, you know, that that pre and common equity route, just because it's people that you typically know, like, and trust. Right. And you feel comfortable maybe not having a, a fixed lean to a real property. Right? Yeah.

 

Bill Fairman

02:22:59

And let's cover capital raising very quickly. Well,

 

Jonathan Davis

02:23:03

That's the best one.

 

Bill Fairman

02:23:04

Some, some people are really good at it. Yeah. Some people are not. But if you're in the capital raising for any project or fund that you may have, it's all about relationships. People are not going to invest with you unless they like you and they trust that your decision making is competent. Right. Yeah. And it has to be, whatever project you're doing has to be easily explainable and at the same time it's got all the numbers have to work. It's, it can't be kind of one of these projects where if everything doesn't fall into place, you're not gonna profit. It has to have many contingencies that if this happens, we still make money here. If this happens, we still make money here. Yeah. If this happens, we can sell it. If this happens, we hold onto it. Yeah. It's all about

 

Jonathan Davis

02:24:06

Relationship. It really breaks down to, to each side, you know, to raise the capital, to be the salesman, to tell the story, to know, to know the project. And then the other side is the person who has the capital to be able to look at the story and look at the project and look at the numbers and say, Hmm, that works, or No, I don't think that works. So there's, there's really two sides to it. So if you're, if you're on the raising capital side, you want to know that inside and out. Like the, one of the, you know, I think pitfalls that a lot of people when, when they talk to me about raising capital, when I, you know, when I ask questions, they don't know the answer to them. And not that those are tricky questions. It's like, you should know, right? What are you purchasing at?

 

Jonathan Davis

02:24:51

What is your run? What run rate? What's the cap rate? You know, if this is commercial or multifamily, what's the cap rate you're buying into? What's the cap rate you're operating at? What's your profor cap rate that you're exiting at? If it's single family, you know, what am I buying this for? What are the comps in the area? What are, you know, what are the rents if something goes bad, you know, the what the project that we're taking on, do the rents, the market rents that area cover this. If they don't, what's that rate of return going to be based on those rents? To know all of those things and to be very transparent and, and open and forthright with them. Like that's the, that's the easiest way because when someone talks to me or when I talk to someone else, like when you know these things, it doesn't matter. Like I'm not saying like, let's make 24%, we're gonna just crush it. Right? Like people aren't looking for that because it's their, it's their money that's you hard earned or you know, whatever the case may be. They want to know that it's safe. They wanna know that you know, that you're gonna take care of it and you know what you're doing. There might be people out there who just want 24%, but my experience has not been that case. Yeah.

 

Bill Fairman

02:26:05

And look, you have to know number one, who your avatar is and who, who it is you're speaking to. First and foremost, when you set up the deal, it has got to be beneficial for each party. And from my perspective, it needs to be more beneficial to the investor than it is the sponsor. In our case. And we deal with a lot of private professionals, dentists, orthodontists, when you look at their business, and this may surprise folks that aren't in that industry, their overhead is in the 70% range. So they're operating on only about a 30% margin or less.

 

Jonathan Davis

02:26:52

Yeah.

 

Bill Fairman

02:26:54

Okay. Our fund last year had a 67, no, was it seven 67% profit margin,

 

Jonathan Davis

02:27:05

Different models. Yeah.

 

Bill Fairman

02:27:07

Now again, there's not nearly as much overhead, but what we do, what we try to do is make sure that the investor is benefiting the most we, you know, listen, we're still making a living or we wouldn't be doing it. Sure. But in, in order to keep your investors coming back and continuing to put money with you as your projects change, make sure that they are the, the biggest beneficiary of your investment investment. Right. And that you will never have trouble continuing to get capital raised because you're always number one, you're provi providing them with a good risk return and at the same time you're giving them the largest benefit Yeah. Of the project. Yeah.

 

Jonathan Davis

02:27:54

And, and again, like you said, you have to know who is your audience. Right. Are you talking to a lot of people who have self-directed IRAs? Well, equity doesn't mean a whole lot to the, Well, it doesn't mean anything to them, honestly. Right. Just don't get the, they don't get the tax benefit. So they're looking for growth and cash flow. So they're either gonna say, Hey, I don't mind to not take payments for a while if I can get X amount. You know, so just know who you're talking to and if you're talking to someone who has their, their cash and it's like they're, that's their savings that they've been working on. They don't have a retirement account. What's important to them? Probably cashflow. Cause they want to live off of that. Right. So maybe a higher payment is, is better for them. So just know who you're talking to

 

Bill Fairman

02:28:36

And, and at the same time, depending on where you are in life and what your needs are, some people already have what they have and they're just trying to protect it and outpace inflation. Yeah. And then you have other people who are young and have plenty of time to catch up. Should something go backwards on 'em or someone who got started saving late and they need high returns in order to, you know, catch up where they need to be and they're more willing to take risk. Yeah. So if you have a project that is low risk and we'll say a moderate return, you're not really gonna benefit the folks that need it right away. Yeah. So it's just not a good fit. So don't get discouraged cuz your deal is not, not good. It's just not right for them at this time.

 

Jonathan Davis

02:29:28

Exactly. Exactly.

 

Bill Fairman

02:29:30

So keep keep that in mind too when you're doing your little questions with your potential investors, what they're looking for, what their needs are, that type of thing. And then in this industry, there's, there's a lot of us that know each other and we're, while we may be competitors or we also work together, you could recommend that person to another fund manager who has some of those opportunities. Yeah. And they will in turn recommend people to you that are, you know, more in line with what it is that you're trying to accomplish. Absolutely. All right, so sorry we were long-winded. We had a lot of breaking news and Scott's birthday.

 

Bill Fairman

03:30:13

So thanks guys for joining us. Hope to see you again next week. We are Carolina Capital Management and thank you again. Sorry, I'm messing up with the stuff at the bottom. It's all right. No one notices until pointed out. Thanks for joining us on the Real Estate Investor Show Hard Money for real estate investors. And once again, we are Carolina Capital Management. We are private lenders for real estate professionals in the southeast. If you have a project you'd like us to look at, go to carolina hard money.com. Click on the apply now tab. If you are a passive investor looking for passive returns, click on the accredited investor tab. Don't forget that. Oh, I forgot about this. Yes. Wendy is going to be speaking at the Wise Women Expo and here is the link. It is October 14th and 15th. It is a Zoom only kind of event, but all the women are really smart women investors. Would you say they're wise? They are wise. Okay. If I was truly wise, I would've figured out that we had a graphic for that too. And I would've just shut up. Anyway, the link of not completely finished. I love it. Where was I? Don't forget to like Sheriff subscribe, Hit the bell Wednesdays with Wendy. Have a great week. Take care.