Thursday, March 19, 2020

Preppers For Business Part One #27

What would you do if half your business dropped off?

The Apocalypse Test

Have you done a Stress Test?

Wendy Sweet and Bill Fairman are joined by to go through their Stress Test and what they are doing to prepare for the worst so they don't get caught.

2019, they made huge changes to their business. They changed the criteria for what they were lending on. They changed who they lent money to.

They started lending to the 'Affordable Housing' market. These are the most liquid assets and easy to move compared to high-end loans in the $500K to a million.

They discuss the benchmark for yields, their average loan size and what monthly rent payments are likely to get.

If you are serious about building a strong long term business, the concepts shared in today's show are crucial.

Carolina Capital is a hard money lender serving the needs of the “Real Estate Investor” and the "Small Builder" borrower who is striving to build wealth and generate income for themselves and their families. We offer “hard money rehab loans” and "Ground up Construction Loans" for investors only in NC, SC, GA, VA and TN (some areas of FL, as well).

As part of our business practices, we also serve as consultants for investors guiding them to network with other investors and educating them in locating and structuring transactions. Rarely, if ever, will you find a hard money lender willing to invest in your success like Carolina Capital Management.
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Bill Fairman (00:04):
Hi everyone. It's bill and Wenndy from Carolina capital management.
We have a special guest with us. Jonathan Davis who actually does all the work.
He's the third leg of our stool and we laid on his leg the most right, he's the
only leg. We're just here for show. He's right. Don't say that in front of the
guy.
Speaker 2 (00:04):

Bill Fairman (00:29):
so you know, we always talk about, I know by the way,
please like us and share and what else? Oh,
Wendy Sweet (00:37):
Twitter and Insta pop. And I think it is. I think since
the pot.
Bill Fairman (00:47):
That's right. And a Carolinahardmoney.com is the website.
Wendy Sweet (00:51):
That's that last time I checked. That was correct.
Bill Fairman (00:56):
One of the things that we always talk about is the
importance of being involved in mastermind groups. Networking is very
important. And then obviously self improvement.
Wendy Sweet (01:10):
Getting better at being great.
Bill Fairman (01:16):
Now, Jonathan and windy had an opportunity to join a
mastermind group of ours on a weekend, and the subject was, if you, you know,
woke up the next day, you got the newspaper, of course I may get the newspaper.
So if you read the headlines on the internet and Carolina Capitol has lost 50%
of its business, what do you do first after you cry?
Wendy Sweet (01:45):
Right, right. It was called the apocalypse test and it was
really, really cool. So a little more detail about where we were. We were with
other trusted advisors that are in this freedom founders group. So it was a
great opportunity not only to see the folks that we get the, you know, we don't
really get to see them a lot when we're at the bigger events because we're
talking to, to possible lenders and other people like that. So it was really
nice to be able to, it was refreshing to get other business owners takes on
what you do in that scenario and what they are doing now. That's right. That's
right. It's a great tool. Yeah. We got a great peak inside of their businesses,
their operation, and they got a good peek inside of ours as well. And it's
really good because it's not like, you know, judging, you know, Hey, how well
are you doing and how well are you doing? It's, Hey, what are you doing that I
can mooch and figure out copy? Because you know, we don't make these things up.
We really just take other people's ideas and improve upon them. Exactly. We
don't take we, you know, we just employ their, you know, their current
strategy. That's right. That's right. And they do the same with us and we're,
we're glad to do that. Okay. I was going to say it's not necessarily improve
upon them, it's just make them your own.
Bill Fairman (03:03):
Everybody's business is a little bit different. So you're
just going to, I'm going to use the $5 word extrapolate. What they use into our
business. He's a big boy. We're always getting Jonathan about his $5 word. He's
got big words. He's a big word guy, so he's rubbing off on us is, Hey y'all one
of them. But anyway, it was really cool to be able to, to kind of, you know,
sit down and think about what would happen if you have that old crap moment.
Where have you done a stress test? That's really what the question was. Have
you done a stress test? And I was very proud of us because we have, yes, we
didn't do it. I think as in depth as we did at this meeting and it made us
think even more. But we have been doing this stress test and we were really
excited about what we already have in place and now we have even more to put in
place for something like that.
Wendy Sweet / Jonathan Davis (04:00):
So, and it's a great thought process to go through. It's
what do you do in those scenarios, which is great and it gets the juices
flowing of what are we doing now to prepare for those? Not what we do after it
happens, right? But what of, what are we doing now just to say, all right, if
this happens, not only do we have a plan in place, but we're in a better
position than most people. That's exactly right. And you know, we're not
running around going, this guy is following, this guy is falling. Although it
is. No, I'm just kidding. It's not falling. But there's going to be a
correction. We know that that's going to happen. We've been on this 12 year run
that usually is seven to eight. If you go back historically on when corrections
or adjustments in the market take place, that happens about every seven or
eight years and we're in year 12 right now.
Wendy Sweet / Jonathan Davis (04:48):
Yeah. And our 11 and 12 and we know there's something
coming down the pike and you know, we constantly look at what Warren Bufet did,
right. He, it made him even richer because he was smart. He, he knew what was
coming down the pike, and he didn't know exactly when 2008 was going to happen,
but he was well aware it was coming down the pike and he was prepared. He sold
off the things that were, that would have made him the most money and he sat on
cash until that correction took place and then he started buying things up.
Right? Yeah. And it's so funny how you know, the wisdom and that you're selling
off assets that would have made you a lot of money. But knowing that those are
the assets that are maybe not favorable to own if that correction or whatever
it is happens. So it's that discipline part. Exactly. Probably the most liquid
at the time. And that that's another reason it's not just about normal market
cycles cause it's really hard to predict that. What's hung the most stuff to
predict are black Swan events, right? Like the Corona beer virus that is the
most Google search,
Bill Fairman (06:00):
Corona beer is the most, Corona beer virus is the most Googled
search phrase,
Wendy Sweet (06:06):
I must be out of it. I don't know anything about that.
Speaker 3 (06:09):
And apparently you cure that with Lyme disease.
Wendy Sweet (06:13):
Yeah. I love it. I love it. Yeah.
Bill Fairman (06:18):
We're going to give you a little bit of an exercise to go
through and what, what we did to kind of look at our number.
Wendy Sweet (06:24):
Yeah. And we're, we're going to kind of give you an
outline of what they suggested that we might want to take a look at and then
we're going to do another part, cause it'll probably take a while for us to go
all through all through all of all of these things. And we want to kind of tell
you what we had set up for us to tackle what we're doing. And you know what's
really neat, what I really liked about when we first started talking about this
is in 2019 January, 2019 we made some huge changes in the way we do our
business. We let go of our sales team, which was crazy, but that we felt like
that's what God was leading us to do. And I'm really glad we did it. And we let
go of a of a very key, highly paid employee as well. Correct. We changed our
direction of what we were lending on. We're now, you know, we lowered our
average loan amount on our single family. We tried to get that down into the
bread and butter market area. We changed who we're lending to. We changed a lot
of things, wouldn't you say? Absolutely.
Bill Fairman (07:29):
Yeah. Essentially what we did was we made sure that the
assets that we were lending on are the assets that are the highest priced, the
ones that are going to be utilize the most in any economic situations. Right.
So we tried to stay in the affordable housing market. That's a market where
your first time home buyers are coming in, your people that are downsides are
coming in. If you know the market changes, people can't afford as much. They
still need a place to live. So that's the area we want to be in because the
market is not going to affect that nearly nearly as much. And if you have to
dump assets, they're the most liquid and the easiest to get rid of. Because
like I said, they're in that sweet spot.
Wendy Sweet (08:17):
That's right. And you know, we, being in in the market
that we're in, especially in the Charlotte market with, with, you know how well
everything's going in the Charlotte market for us to no longer do these, you
know, high end loans where the after repaired values are between 500,000 up to,
you know, even a million dollars cutting those off was Warren buffet crazy. You
know, it wasn't the right thing to do at that time in everyone else's eyes.
And, and you know, to a lot of people, we were looking like fools, but I'd
rather be a fool before all this happens. And then after. Yes a 100%
Bill Fairman (08:56):
it doesn't mean we don't do those loans. We just don't
hold them in our fund. Yeah, that's true. One of the beauties of this
marketplace right now is that there's plenty of institutional investors that
like the type of property and we will go ahead and do the loan and then we just
sell it off to them. It's just not in our portfolio.
Wendy Sweet (09:12):
Right. Right. With nothing. We don't want that risk.
Right. We don't want to hang on to that.
Bill Fairman (09:17):
What about internally? What are some things that we need
to do too internally as a business, make sure that we're, we're lean and mean
as it were.
Jonathan Davis (09:29):
Right. So my first response to that would be, one is
stress testing your portfolio, making sure that every asset can stand on its
own. Not that, Oh, we blend it all together and you know, aggregately it looks,
it looks good. You know, the weighted average coupon is this the, you know, way
to LTV is this, those are all great things. Those are the things that a lot of
these companies that have built machines that they have to feed, right, look at
that are run by being countered. So that's a bad thing. What we want to do is
say, okay, what is our average exposure in each market? What are the average
rents in that market? And then what does that yield us if we have to pivot and
turn everything into a rental? Right? And you know, you all hit on it before
it's, you know, those higher loan values while they make you more money in the
short term, they sit on the market longer and then when you can rent them out,
I mean you're not ringing them out for the yield that you would need.
Jonathan Davis (10:32):
So kind of like the, the benchmark would be a 6% yield is
what you want to get right. Since that's the preferred rate, yes because that's
the preferred rate, it kind of works out. Huh? So if you look at our average
loan size of 2019 we are looking at 156 loan amount and if you just take an 800
monthly rent payment, which you can get 800 and almost any market easily, that
would be low. Actually you took that and said, okay, if we had to rent it, here's
what we have, we're getting 800 a month. That's like 6.13 something like that.
6.13 yield so it passes that stress test, right? If you run that same thing on
a 450 loan amount, even if you're getting 15 or 1800 bucks a month, it doesn't
pass, right? So you know, stress testing that say, okay, Oh that asset doesn't
stand on its own.
Jonathan Davis (11:30):
We need to do something with that one. Right? Because if
the market changes, that is not a favorable asset that we want in our
portfolio. And at that points back to our commercial side to yes, how we are
kind of really getting a good handle on our absolute focus in what we're doing
on the commercial side. Can you talk a little bit about that? So we do on
commercial is we're looking at mostly multi-families. So when we say commercial
we're saying multifamily typically and we don't want into gas stations now we
don't want to go looking for a bar. And typically what we're looking at is you
are, well I want a Marina with a bar. There you go. There you go. A strip
center of the bar. [inaudible] strip center. Yeah. Oops. Yeah. But if we're
looking at multi tenanted, non owner occupied and in that same breath, what we're
talking about that we're focusing more on multifamily because the same thing we
just talked about, the single family, if we move into a correction or whatever
that market does, we want to say, okay, we're expecting a six yield and we can
get a six yield here. But if I have a, you know, owner occupied.
Wendy Sweet (12:53):
Yeah,
Jonathan Davis (12:54):
single tenant asset, that's commercial. Let's just say, I
don't know. I drove the other this morning, yeah office condo. I saw a Sherman
Williams going into the, you know, one unit, little standalone brick and
mortar. Like that's not something I want in portfolio if this happens because
if people, people stopped buying paint to do rehabs, assure and Williams is
going to go out of business there and then you're holding a shale that you
can't run out. There's, you know, there's no demand. Same thing with the
doctor's office.
Bill Fairman (13:25):
I was going to say typically if you have a national chain
that does a triple net lease on a single property like that, like a
Wendy Sweet (13:36):
Walgreens or, yeah, that'd be, that'd be a good one. Yeah.
Bill Fairman (13:39):
You know, some of your dollar stores, those are fine, but
even if they, they back out of it and they pay money, it's still going to sit
empty for awhile. Yeah, correct. Yeah, that's fine for some of the bigger
funds, but you know, we're not one of the bigger funds. Our fund is, is not
designed for the long term loan anyway. It's designed for the short term
acquisition with stabilization and we, we love the multi-tenanted commercial
market. It didn't always have to be multifamily. That's the best. That's the
sweet spot. But self storage, like you said earlier, strip centers, office
strip centers tend to be a little more, I want to say a higher maintenance
because a strip center is depending on bringing people off the street. Correct.
So you have to do a footprint, you said foot, you have to do a face lift about
every 10 years. You've got to spruce the place up, make it more attractive to
people driving down the main road
Wendy Sweet (14:48):
because there's new ones going on all up and down the
street.
Bill Fairman (14:51):
Do that with office and you know, of course you're going
to do continual maintenance and upkeep on an apartment complex. They keep it
looking good. But those are really the sweet spots in the, in the commercial.
Jonathan Davis (15:03):
So it sounds like we're going after the simple easy deals,
correct? That's right, yeah, exactly. So you know, one of the case studies, you
look at, let's say Blackstone, who proved the model of going in and buying a
bunch of rentals, weathering them for quite some time, and then exiting them in
a high market. That's exactly what we're, you know, on a smaller scale what
we're looking to do, we're looking to turn a calamity into an opportunity
where, okay, yeah, we can sit on these, we don't panic, we don't hit the panic
button. We don't say, Oh my gosh, you know, foreclose and you know, create all
of these issues that I have from the last foreclosure crisis. We say, okay, we
know what we're gonna do. Here's what we're going to do. And when the market
changes because we know it will. Yep, here's how we profit off of it. Here's
how our investors profit off of it.
Wendy Sweet (15:51):
Right. You know, the other thing that I really liked that
we seem to have spent a lot of time on that I really didn't think about, and I
didn't want to think about it because it hurts my heart, but the lien list that
they were talking about getting lien, making sure, you know, we've got what, 11
people that are here, you know, who not, who would we get rid of first? We had
to go backwards and go, who is the last person we could get rid of? And it was
tough to go through that cause you don't even want to think about something
like that. But you know you do what you have to do. And I think going through
that exercise was a surprise to do all of us. We really sit there and think
about, yeah, big surprises. I was the first to go, Oh it was no surprise.
[inaudible] sorry Barry, you left yourself open with that one. But it was
really, it was very interesting when you, you know, you look at your different
team members and you think, you know, what is it? Yeah. Know what that that
person brings to the table. What else can they learn? What do I not have to do?
It was eye opening and gosh, I hope we never have to get, get to that point
where we ever have to do that. But it was interesting, didn't you think?
Absolutely. Yeah.
Bill Fairman (17:11):
Let's get into a little more detail on that.
Bill Fairman (17:14):
We're going to have to do this in two parts.
Bill Fairman (17:17):
We only have about a minute and a half left on this. So
let's talk about stress testing your portfolio. And to do that, let's take a
portfolio and how much do you think we can take from it or lose and if it's
still making money, is that stress enough? For example, let's say that we had
to write down or we had to, we had a loss on 25% of the portfolio. Is the rest
of the portfolio strong and still making money? Yeah.
Jonathan Davis (17:54):
Assuming that 50% loss in the market kind of thing, this
is where we're just saying, Hey, if if 25% of our portfolio went bad tomorrow
for whatever reason, non-market related, what would happen to the
Bill Fairman (18:06):
Yeah, if we lost our interest payments on 25% now
assuming, you know, because we lend the builders. Yeah. Now we're going to have
to take those properties and rent them out. So there's going to be a gap in
time. Yeah. Between the time we're having to foreclose or take him back in the
time we get them rented and, and up and running. Yeah. So if you're doing this
same kind of test, do this over your portfolio, you have to, you can take 25%
of the income and you're still making money at least for six to nine months.
Jonathan Davis (18:40):
Yeah. How long can you go with that and you want to be
able to last at least six to nine months. Yeah. That's kind of the threshold
there where you want to be, the minimum is six to nine months. The answer your
question is yes. I mean when we stressed us that we can lose 25% of our income
and still provide above pref returns to our investors. We like that. We like
that.
Bill Fairman (19:05):
Okay, so as the alarm goes, we're at a time for this segment,
so thank you so much for joining us. We got part two on the next episode.
Please remember to share and like us and tell all your friends. Yeah, I think
we have some other videos that you can get through that are archived on either
above, below design.
Wendy Sweet (19:31):
It's around here somewhere. You'll find them.
Bill Fairman (19:33):
Scott does a great job of putting these things up there
and making us all look good.
Wendy Sweet (19:38):
Just don't put them as a mustache on my face. That one.
Bill Fairman (19:40):
Carolinahardmoney.com do you have any questions? We'll see
you on the next show.
Bill Fairman (19:55):
Thank you so much for joining us again. Really had an
awesome time. I knew we needed. Well we do. So if you like what you heard and
want to see more, what do you 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? 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?
Yeah, also subscribe like, and our website is easy.
Bill Fairman (20:38):
W w. w w w w
Wendy Sweet (20:44):
that's a lot of W's. Carolinahardmoney.com
Speaker 4 (20:48):
tell all your friends.



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