Mortgage Market: Making It Happen in Real Estate with Other People’s Money (Audio)

One of the best things about investing in real estate is the use of “other people’s money” or OPM. You can use OPM to pay for your deal while you get all the cash flow, appreciation and tax benefits. What do we need to know about the lending environment today?

In this episode, we’ll hear from private real estate lender Brian Stark. Brian has more than 20 years experience as a lender and is currently VP of Originations at real estate lender Icecap Group in New York City. He has actively invested in single-family, multi-family, and commercial real estate. He’s bought and sold hundreds of properties, wholesaled many more, and originated more than 1,400 real estate loans totalling well over $150 million.

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Transcript:

[00:00:00]

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Presenter: You're listening to The Real Wealth Show with Kathy Fettke, the real estate investors resource.

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Kathy Fettke: One of the best things about investing in real estate is the ability to use OPM, other people's money, to fund your deal. Yet you get all the tax benefits, the appreciation, and the cashflow from that deal while somebody else pays your loan off for you. What is the lending environment today? I'm Kathy Fettke and welcome to The Real Wealth Show.

Our guest today has been a private real estate lender for about 20 years. Brian Stark is VP of originations at IceCap Group, a direct private lender in New York City, making loans to real estate investors nationwide. He's wholesaled hundreds of properties, bought and sold hundreds of properties, and originated over 1,400 real estate loans, and he's here with us today on The Real Wealth Show. Brian, welcome.

Brian Stark: How wonderful to be with you, Kathy. How are you today?

Kathy: I am doing wonderful. I'm glad to have you on because we're seeing some changes a bit in lending, and I would love to get some understanding of it. We're seeing interest rates go up, how much have they gone up, and do you think that will continue?

Brian: Not to be contrarian, but the truth is, in the investment side, we still see rates pretty well depressed. Not in a negative way, we see them held pretty low. In some areas, they're even going down a tiny bit because there's so much investment activity and there's a lot of, you would call it competition among lenders, like the company that we run and others like us. Everybody's feeding for the borrowers and depressing rates a little bit. While there's a little interest rate bump for consumers, I think investment rates are staying stable, or maybe reducing a tiny bit.

Kathy: [00:02:00] That is really good news.

Brian: It's great news.

Kathy: I could see that because there's so much money out there chasing some kind of yield and not able to get it, but lending provides that. I'm not surprised, but I just haven't really heard that. Is it more private lenders and not so much the Fannie, Freddie lenders, the conventional?

Brian: Yes. For the purpose of this discussion, Kathy, there's two buckets, if you will. One bucket would be government-backed money like Fannie, Freddie banks, the people with the big fancy buildings downtown. Then the other bucket would be all the private lenders. When we say private lenders, we're not just talking about the nice guy that you sit next to in church who's got a couple of hundred thousand in their IRA, I'm talking about what have now become, in the last five, six years, multi-billion-dollar companies that have raised huge rounds of capital raises.

Hedge funds, private equity funds are in this business, our company has own fund, family offices. We're talking about very substantial private institutions that are in the business of making loans to real estate investors for fix and flips, buy and holds, and those companies are very competitive. We're not governed by United States government regulations, in most cases, we're not governed by stockholders.

We're basically governed by the owners of the company, who on a given morning might say, "Hey, let's get into this business. Hey, let's lower rates. Hey, let's do higher LTVs. Let's go compete with this company or that company. I want 50 more borrowers this month. Let's do another 50 million this month." Just that fast, they can lower their rates because it's their money.

Kathy: They must fall under some kind of regulation, I imagine it's pretty strict stuff.

Brian: To the extent that you and I are both regulated, we're not allowed to drive past a certain speed or steal somebody's car, we're regulated to that degree, but there's very little regulation of business-to-business lending. [00:04:00] Very little in most states. There are half a dozen states in the country where there's a lot of regulation and most of us stay out of those states actually.

Kathy: Which states are those. I assume New Jersey, California?

Brian: Actually, California's one, New Jersey is not. Arizona, Nevada, North and South Dakota, Utah, most of us are not too active in Alaska. The territories are tough because just it's a whole different business, like Puerto Rico and stuff.

Kathy: Interesting

Brian: Lower cost of money comes in a lot of forms. One form is, "Hey, our rates are low, we're charging 5%. Oh, now, we're charging 4.75. Oh, we can do it for 4.5." Another lower cost of money is lowering fees, closing faster, raising what we call leverage. So, "We'll lend 80%. Oh, we'll lend 85%. Oh, we'll end 80%. We'll lend 100%." All those things are coming together to make more money available at a lower rate. It's been said by the way, that there's over $2 trillion, with a T, looking for a home. Liquid money that's literally sitting in investors' bank accounts.

Kathy: I'm not surprised since $ 5 trillion was just created in the past year. It has to go somewhere and it likes to go to real estate.

Brian: It sure does, absolutely. [crosstalk[ You were going to say?

Kathy: I was going to say that we know that there were eviction moratoriums, there were all kinds of mandates this past year that was confusing, but it mainly applied to government-backed loans. If there was a private lender, they didn't necessarily fall under that regulation, or did they?

Brian: Eviction mandates are different from foreclosure mandates. I think any property owner wasn't allowed to evict a residential tenant. I think there were some, I don't know this law perfectly, but it's different in every state, first of all. I think if the tenant was in default before [00:06:00] the pandemic began, then an eviction was allowed to continue, but I think it's fair to say very, very, very few evictions have taken place in the last year.

I think it's also fair to point out that, by and large, residential tenants have paid their rent. I think you don't see large apartment buildings, large apartment communities with 60% unpaid rents. I'm sure there's landlords that have felt some pain, but by and large, people did pay their rent. Because not a whole lot of people at the upper and middle levels lost their jobs. Remember, people still worked, they just worked from home. There's definitely a strata of people that were feeling a lot of pain and we feel for them, but even many of those people paid rent. They had savings, they had other ways to get money.

Anyway, private lenders were affected to the extent that we looked at residential assets, and are still looking at residential assets, with a little greater level of concern than we may have a year or two ago. Before this virus came along, it was an automatic assumption, just like it would be for you that, "Oh, it's a house. It can rent for $1,300 a month. We can definitely get $9,000 a month for this," or whatever the number is, "We can get it."

Now, suddenly everybody has to say, "Well, wait a minute now, people are moving out of that neighborhood to get out of the city and out to the country. People aren't renting in that area too much anymore. That's a tough area, there's a lot of non-pay in that part of the city or part of the region or whatever it is." Suddenly, we're looking at residential assets not quite as solidly as we did maybe a year ago.

That's all gonna stabilize out, it's all going to play its way out over the next six or eight months. I think we're going to see that settle out, but definitely, it's affected us in that way, but I don't think any lender has been affected by eviction. Foreclosure is a different matter. When we know we can't foreclose, we're definitely a little reluctant to lend. [00:08:00] That's definitely been a thought.

Kathy: Absolutely there are certain states I would not want to be a lender in, and [unintelligible 00:08:07] judicial states where the foreclosure has to go through the courts.

Brian: Absolutely. We all love Texas, you can foreclose in 30 days.

Kathy: California is surprisingly pretty easy too, isn't it?

Brian: Is it? We don't do very much business at all in California, so I'm not as familiar there. You have all the sunshine and golden gate bridges and Rice-A-Roni and all that stuff, we don't get that.

Kathy: Oh, I'm sorry to hear that. We have [unintelligible 00:08:34] too.

Brian: That's true. Sand.

Kathy: Okay, sand.

Brian: Fabulous people with tans.

Kathy: Mountain skiing. YOu know what, everyone's leaving, no they're not. I just found out it's only 2% more than normal are leaving the state, but that's having a big effect on other areas.

Brian: Of course. It's funny, you mentioned 2%, and we don't think of 2% as very much, but 1% or 2% or 3% change in any industry, but especially in the mortgage industry and housing, those numbers add up to be hundreds of billions of dollars worth of results in a big industry like the housing industry across the country. If you hear something like, "The apartment community has a 2% rise in vacancy," that's a big number. That's a lot.

Kathy: As a lender, I'm curious what your thoughts are about the future. Do you think there will be a lot of foreclosures as the more moratorium lifts?

Brian: I'd love to be one of those guys that gets a lot of attention by saying how awful everything's going to be, but I like to tell you what I really think is going to happen, Kathy, and I don't think there will be. First of all, I think most residential lenders, most consumer lenders will put unpaid balances on the backend of mortgages and will work with homebuyers, homeowners.

I think homeowners that are really in trouble, many of them have an exit right now because the market is so hot [00:10:00] that in some cases people will sell and become renters for a while. If they're finding that, "Look, I've lost my job. I worked in the theater, I worked in restaurants, I worked someplace where my job's not coming back. I worked in some industry that's scaled down because of the pandemic and that's not going to come back." They're going to have so many options to sell. If they've got a little equity they'll probably do that.

I think there's going to be a very, very small uptick in foreclosures and I do not think people are going to lose their homes at record rates and suddenly there's going to be an avalanche of residential opportunities. Not so much in the commercial world, that's a whole different business that we could discuss. If you'd like to buy a large office building, now's a good time to be looking.

Kathy: Is it? Because I haven't really seen the impact yet, but are there starting to be defaults in commercial?

Brian: Well, there definitely are a lot of discussions and there are a lot of lawsuits already beginning, and there certainly are a lot of defaults in hospitality. Those are definitely areas where if you're interested, that's a good place to look. I think also retail. Those are not areas where I lend, but we see the trades and all that stuff and there's definitely a huge uptick in defaults and in lates.

On the residential side, I don't think so. I think most people will keep their homes, who want to keep their homes, and I think lenders are going to be, "This is a different thing from a mortgage industry collapsing because of financial reasons". First of all, the mortgage industry is not collapsing. Second of all, this is a non-manmade thing that everybody understands, including every company in the world. They have to work with people, and they are.

Kathy: I don't think any bank wants to go through that foreclosure crisis again.

Brian: No. Just think of the awful press if a large company would be found to be taking on a large amount of foreclosures against people.

Kathy: When people weren't allowed to work.

Brian: [00:12:00] No bank could tolerate that.

Kathy: It would be canceled.

Brian: It sure would, it certainly would. [laughs] By the way, foreclosures, even at the height of the pandemic, and I don't remember the exact statistic, but we never reached anything like 20% of all mortgages going into default, it was maybe 6% or 7% or 8%, something like that. It's a big number. Like I said, a little percentage like that is a big number. Sure it was hundreds of thousands a month or whatever, but the banks, by and large, could support that, it's built into their loss ratios. Sure it was extraordinary but it's not going to put a large bank out of business.

Kathy: What about with the eviction moratorium lifting, are lenders concerned that landlords will run into trouble because they haven't been able to collect rent? Or like you said, has that not really been an issue that you've seen.

Brian: Not an issue that I've seen. It's not quite in our space, but as I look at how that piece of the puzzle plays out, I really don't think lenders are going to be too worried about it for open loans because landlords will need to make an adjustment. A landlord has to make a decision, "Okay. Mrs. Johnson in unit two hasn't paid for three months and now I'm allowed to evict and I got to get rid of her because I need the unit back. Do I have the money to pay for the legal, can I afford the clean-up and unit prep? Do I have the cash to hold the unit and pay my mortgage for another two, three months while I wait for a new tenant?"

If the answer's yes, they're going to keep paying their mortgage, there'll be no effect on the lender whatsoever. If the answer's no, then they're going to have to get creative and figure out a solution. I suppose there might be a little uptick as some mortgagees decide they're going to walk away from their properties, but I just don't see that as being a big deal right now.

Kathy: Even if it does happen, there's such a lack of inventory that those rentals would turn into primary residences.

Brian: Right away [00:14:00] or rentals for somebody else. I think you're going to see shake out at the lowest end, that's where there's going to be problems, and maybe at the very, very, very highest end.

If you have a $4 million house and you're trying to rent it and you found that, "Gee, there's not a lot of people paying $50,000 a month right now, maybe that's going to be a problem." Or if you have a $39,000 house and you're having trouble finding a $650 tenant, that's not too surprising either. Everything else should be fine I think generally. Don't have a $39,000 house, that's rule number one.

Kathy: Good advice. Thanks.

[laughter]

Kathy: For somebody who is preparing to buy property and get more investments, what do they need to know? How do they become a very good borrower?

Brian: Well, that's a great, great question and I wish more people would ask you that question long before they call my telephone number.

Kathy: [laughs]

Brian: First thing we want to see, and I think every lender wants to see, is that you have decent credit. We understand that you could have a 580 credit score and be a good person. We're not saying that you're not a good person if you have "Poor" credit, but we make loans, and all lenders make loans, based on specific numerical criteria. We need to be able to sell our loans either to our own fund, to our own cash management structure, or to Wallstreet or other institutions that will buy our loan so that we can turn around and use that money and make more loans. That's the business that we're all in as lenders.

No lender, very few lenders hold all their loans, lend all the money, and then just wait for people to pay back. Number one, got to have decent credit. I would say don't even settle for 650, get that credit up to 700, 720 as a mid-credit score [00:16:00] before you come to a private lender to be in this business. If you're going to work with a formalized private lender, if you're going to go to raise private capital from private individuals, credit's not as important and it's definitely true that you can do that in that way. Speaking from the perspective of somebody who's working in the private lending industry, that's number one.

Number two, you got to have some cash. It's true that there are many ways to do this business without money. It's true. No money down, all these things, you can definitely do all that stuff, but from the perspective of somebody running a private lending company, we want to deal with people that have liquidity. We want to deal with somebody who can show us that they have in the bank enough money to make their payments for six months, enough money to pay your closing costs, your origination fees, and a little bit more. Because we don't want to make a loan to somebody who is going to be out of cash by month number two.

Have some capital, have some credit, have some liquidity. If you don't have any experience at all, definitely get some knowledge. Take a course, go through a workshop, get a partner, give up some equity. It's okay. Get a partner who's done 10 deals, done 5 deals. To jump into this business, or any business, all alone, knowing nothing, having done nothing, with nothing, you're just asking for trouble. It's so easy to make a wrong decision. It's great to do the first 6, 8, 10 deals with someone who knows what they're doing. Those are three pieces of advice I could share with you.

Kathy: That's great. Your suggestions for helping people improve their credit. I know we've worked with a credit repair company forever, and they help keep our scores really high-

Brian: Very important.

Kathy: - but any other tips that people should know about how to improve their credit?

Brian: Yes. I have had a couple of excellent credit repair professionals on my shows and we work with them as well. What we hear all the time is utilization. Keep it low, keep it under 30%. [00:18:00] One way to keep your utilization under 30% is to get a little more credit and use a little bit of it. In other words, some people think, "Oh, I pay all my bills off."

That's wonderful, great to pay all your bills off, but if you only have two bills, and you only have $3,000 worth of credit limit, you're not going to have much of a credit score. Get another couple, three, credit cards or credit accounts with a couple of $3,000, $5,000 limits. Use 22% of those credit limits so that your utilization rate stays low, but your available credit grows. Keep your utilization low, number one. Pay everything on time, everything. There's no such thing as making one late payment, it can't exist. Pay on time, always. Pay a day early if you have to, set it up [inaudible 00:18:48].

[crosstalk]

Kathy: Get it automated. Get it automated EFT. Just get it because that one late will really your credit.

Brian: It really does. Avoid letting anybody pool your credit, unless you absolutely need to. Definitely, definitely, definitely avoid letting anybody have access to using your credit. Don't give your kids a credit card that can affect your credit score unless you're paying the bill. Don't get a credit card with your--

Kathy: Don't get a credit card with your new boyfriend.

Brian: I was just about to say, boyfriend, girlfriend, whatever, definitely dangerous. Just be very-- You got to guard your credit like you guard your life, you really do. It's an ongoing process to build it and manage it and maintain it. Check it all the time. Once a week go in those accounts, make sure everything's cool. If it's not, set aside time and fix it.

Kathy: It's a really good advice. We're doing a refi to these incredibly low rates. We missed the super, super low, but we're still getting a good rate. We almost didn't get funded because I didn't have enough credit cards. I have two credit cards and one I never use and actually couldn't even find it. The other one, I just buy a cup of coffee [00:20:00] every now and then. I don't use them and they didn't like that I didn't use them and didn't have more, who would have thought.

Brian: I will say it's a little different once you become truly wealthy, and I don't know your actual net worth I know you're successful. Once you become truly wealthy it's a little different because you can do different things when you're in the high sevens, low eights credit score, 800 credit score area, and you have assets and you have substantial income, you can operate a little differently. You might not need to follow those rules that I've just described for somebody getting started.

Kathy: Got it. We're just about out of time, but is there anything else that our audience needs to know?

Brian: I will say this, first of all, the best time to get started investing in real estate was yesterday. Whatever day you're thinking about starting, don't let any time go by. Just get started. Jump in, figure it out, get going. Real estate takes time. It's a building thing. It takes time to build equity, it takes time to put deals together, it takes time for deals to happen.

Get started as soon as you possibly can, get all the education that you possibly can, learn everything. Become like a sponge, learn as much as you possibly can. Balance that knowledge against people who are trying to sell you courses that may or may not have good information. Spend as much time as you can with people who are truly successful in the business, not people who act successful, but people who are successful. What kind of a watch they wear or shoes they wear or car they drive, which may or may not be paid for, doesn't matter. What assets they own is what you want to look for.

I know a guy who's worth easily $1001 million, he wears mostly t-shirts, sandals, and shorts now. You'd never know he's got all that stuff. In fact, most of the guys in this business, I say guys because I really mean men, that I know, who are very, very, very successful, you'd never know. If you look at their assets, [00:22:00] those are the guys you want to hang out with. You're going to learn a lot in 10 minutes from those people. Spend your time with people who are where you want to be.

Kathy: That's our favorite game where I live, is trying to figure out, "Are they a billionaire or a homeless person" Because in the streets sometimes you can't tell.

[laughter]

Kathy: It seems like the one reason why somebody wouldn't do it you just said is fear that the economy is going to collapse, that prices have been going up for too long, that we're going to see another 2008. What are your thoughts on that?

Brian: The economy is going to collapse, yes. We don't know when but it will happen. The economy is cyclical, it always happens. The economy will collapse sometime. Who cares? There's always good deals to be had. Just learn to watch, be careful, don't borrow too much, don't leverage yourself too heavily. Always have cash, keep your credit strong. When the economy collapses, great, go buy more.

Kathy: I knew lots of people wrote about it in my book Retire Rich With Rentals. My mom's pastor had 10 rental properties during the downturn, they most certainly lost value, those properties, but he didn't serve them. He didn't sell them. He was collecting the rent and he was living off of the rental income. During that time, actually, rents went up because more and more people had lost their homes and were renting. He didn't actually feel the recession, and now those homes have gone up dramatically in value. If you're holding for rental income, you don't need to worry so much about the value of the property.

Brian: That's just right. This is a long game. 10, 20, 30, 40, 50 years you're going to be in this business.

Kathy: All right, Brian. It was really a pleasure to have you here. Thank you so much for joining me here on the Real Wealth Show.

Brian: Pleasure is mine, Kathy. Thank you very much and make it a fantastic day.

Kathy: Thank you for joining me here on the Real Wealth Show. You can get [00:24:00] a whole list of resources on our website which includes lenders and property managers and teams who can help you find the property, they'd renovate it for you, and have that property management in place. Insurance agents, inspectors, all kinds of information, and resources again at our website realwealthshow.com. Just click on the Invest tab. Have a wonderful rest of your day. Thanks so much for joining me here on the Real Wealth Show.

Presenter: The views and opinions expressed in this podcast are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information go to realwealthshow.com.

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