Mike Zlotnik, "The Big Mike", from www.BigMikeFund.com joins Bill Fairman. www.tempogrowthfund.com
Stock market versus Real Estate. Who Wins?
Is real estate more predictable than stocks?
What will happen to interest rates?
The Tempo Growth Fund is a long term fund in the fund raising phase. They participate in deals where the underlying investment is real estate.
Strong collateral is essential. Interest on defaulted notes is 24%. So the upside is high.
Wendy Sweet and Bill Fairman have been successfully lending money primarily in the Southeast to investors, rehabber's and builders. They also manage a real estate fund for accredited investors, in addition to, brokering loans for those with money to invest.
https://carolinahardmoney.com/
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.
Stock market versus Real Estate. Who Wins?
Is real estate more predictable than stocks?
What will happen to interest rates?
The Tempo Growth Fund is a long term fund in the fund raising phase. They participate in deals where the underlying investment is real estate.
Strong collateral is essential. Interest on defaulted notes is 24%. So the upside is high.
Wendy Sweet and Bill Fairman have been successfully lending money primarily in the Southeast to investors, rehabber's and builders. They also manage a real estate fund for accredited investors, in addition to, brokering loans for those with money to invest.
https://carolinahardmoney.com/
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! Thank you for joining us on our show. We may
or may not call this the Bill and Wendy's show now. So we are still in our
naming phase, but thanks for joining us. We try to bring education and real
estate investing, passive income types or real estate investing type of
education. I have to constantly remind myself to do this, but we have archived
episodes that are going to be somewhere, depending on what device or platform
you are watching this from. It is either going to be below or one of the sides
and click on any of those and watch any of the archive videos that we have
already done and please do not forget to like and share and recommend our show
to the others. So I am pleased today to have Mike Zlotnik, a really good friend
of ours. The guy is amazing. He is really a trained mathematician and he loves
real estate investing. We get a lot of our advice from Mike. We use most of it.
We also like to be a little independent as well. Wonderful guy. He just
launched his second fund, is that correct, Mike?
Mike Zlotnik (01:25):
New fund? Yes, it is called tempo growth fund.
Bill Fairman (01:28):
It is a tempo growth fund. And we are going to talk about
his fund and, the type of investments that are going into this fund. And Mike
always likes to talk about the adjusted risk and funds and we are going to get
a little deeper dive into this. But before we start, Mike, why do not you, give
us a little bit of a background on who you are, how you got started, what you
love to do. I know one of the things you love to do is hang out in arenas and
watch your daughter ice skate.
Mike Zlotnik (01:59):
Thank you Billy. It is a privilege to be on your podcast,
love working with you and Wendy and certainly appreciate the you originally
come from Russia with love like in the movie. But I came from what used to be
the former Soviet union, ran away from communists and socialists, happy to be a
U.S. Citizen and big supporter of this country and love this country. This is
my country. This was 89 when I came over. I had a career and have an education
as a mathematician. I had a career in software development when pretty high up.
Then I was just sick and tired of it. I was very successful and my passion has
always been real estate. I have been investing in real estate since 2000 and I
went to real estate full time, 2009 running the first fund. So we have fund
management since 2009 until now we launched our newest tempo, grow fund, our
flagship fund today, stamp opportunity fund, sort of love the space. This is my
passion. As they say, find three things you like, things you are good at, the
things that make you money. That is sort of the golden middle. So that is what
I do. Family-wise, I have married over 20 years, four kids and a cat and my
kids, I skate a lot. And that is why you hear that I am often at the ice
skating rinks and if people ask me if I ski personally, my answer is, have you
ever been to circus? Well, ever seen bears on ice. That is me. But my kids do a
little bit better than that. Let me put it this way.
Bill Fairman (03:32):
Well, we know you are much more coordinated than a bear on
ice, but you are as big as a bear sometimes.
Mike Zlotnik (03:39):
Yeah! That is the whole brand. Big Mike bigmikefund.com
that is my brand because I am a big guy and some of the best friends
recommended. That is the brand that should have.
Bill Fairman (03:50):
And you are in the Brooklyn area, right?
Mike Zlotnik (03:52):
That is right. I live in Brooklyn, New York and we invest
all over the country. Billy, your fund is an income fund, so we certainly love
the space. We love the income space, but we also operate in the growth space
and growth and income space. So we take advantage over the best opportunities
in whatever base they are, there are. But our whole model, and I think your
model is a very similar, is relationship-driven. We do business only with
people who we know like and trust.
Bill Fairman (04:19):
Right.
Mike Zlotnik (04:19):
So you have a great income fund. We believe we have great
growth and growth and income funds, sort of. You could do mixed strategies, you
could do a focus strategy. All these things make sense. And I think they make
sense even more today when the stock market is doing so well. It is at the
peak. We just never know when the music is going to stop. And when it stops, it
can stop pretty hard. So I am not advocating the collapse of a stock market,
but it is been so over performing overpriced, it needs to revert to the mean.
So one of the basic concepts is as folks continue to do well in the stock
market, they should consider the fact that the music may stop one of these days
and those who enter now can not enjoy the rifle the next 10 years. So, that is.
Bill Fairman (05:07):
Well, I mean, you know, the old saying, you know, you are
supposed to buy low and sell high, but most of the time people are, you know,
buying high and selling low because they are afraid of missing out on something
and they always buy at the peak of the market.
Mike Zlotnik (05:22):
That is the usual.
Bill Fairman (05:23):
The professionals do it the right way, but the general
public tends to be the, the whipping boy as it were. They get in cause they,
they finally hear that it is going so great. I think I mentioned this in a
previous episode that stocks are the only thing that when the only product that
when it goes on sale, people run screaming out of the stores instead of buying
them up.
Mike Zlotnik (05:48):
That is right. Because people do not think genuine value
investing. Most people are momentum investors. If things are going up, that is
when they come in and buy and when they have really up then they feel,
"Hey this thing will continue running." They don't realize that they
are over paying so much more for the assets that they are acquiring and stocks
are assets in essence. So the primary issue with stock market is, well the part
of my benefit is very liquid. It is one of the things that let people love
stock market. You could click a button and it is easy. The primary concern is
lack of predictability. It is been running really well, but the assets are
overpriced. People are paying way too much and I do not want, when I sort of
asked to focus on this discussion, but it is certainly a consideration for
people who think it is been great going great that this is the time to be very
mindful. This is the time to be cautious and a black Swan event, could trigger
quick and sudden correction as we see some volatility related to the Corona
Virus. Corona Virus can in fact trigger could be a black Swan event. So
everything is good until it is not. And that is the key point here.
Bill Fairman (06:57):
Yeah! And it tends to be, even though there is people who
are looking at the fundamentals, it tends to be emotion driven. Whereas, the
reason we love the real estate space, one of them is it is really a hedge
against itself. You have the opportunity to buy low and sell high and in assets
related to real estate. At the same time, if the underlying value now declines,
you still have an income component to it. So it is kinda like a stock that pays
dividends. Sometimes the dividends are higher and the growth is lower.
Sometimes the growth is higher and the dividends are a little bit lower.
Mike Zlotnik (07:35):
Predictable. That is one word that describes real estate.
You have a lot more predictability, especially when you control the price you
get in what you are paying for an asset and the income you project to get. If
you do your underwriting conservatively, you have a lot more predictable
outcome versus a very speculative outcome in a stock market. If you catch the
right wave, you do very well. If you catch the wrong wave, people do not
remember the pain points they well. People that remember the pain points, they
just want to, do not want to talk about it.
Bill Fairman (08:05):
Yeah! Wipe it from their memory because it is so tragic.
So tell me a little bit about the new fund, tempo growth fund. What kind of
assets are you looking at the, I know you just launched it and you are looking
for investors now. Tell a little bit about the fund itself.
Mike Zlotnik (08:25):
So we already have a few initial investments in the fund
and we continue to find great opportunities. So this is a growth fund contrast
to our growth and income fund. It does not have initial distributions. It's a
long term fund. It's got five to seven year horizon. We are raising capital
between 12 to 24 months. At that point we will close the fund and we are
investing in. I do not know if you follow my methodology with all the
investment quadrants. But we look, we have folk skim could go on a website and
just sort of take a look. So if you mentioned the four quadrants as a well
known, you know Robert Kiyosaki talks about quadrant my quadrants a little
different of quadrant one, two, three, four quadrants, one two investment grade
kind of defensive. They have good downside protection. Quadrant three and four
are speculative in quadrant one and three cashflow in quadrants, quadrant one
and three a cashflow in two and four growth. So we are as much as we can
investing in quadrant two deal. So I will give you some examples. So we like
distress commercial paper here in New York city. So we would buy or participate
in a deal where the underlying asset is a mortgage is a first lien mortgage
secured by a property at a low LTV or investment to value ratio. So here is an
example and we already invested 1 million bucks in this particular sector as
the first one of the first investments. So figure this way. I will give you an
example of a project that we invested in the past and give you a quick life
cycle of how it works. So there was an acquisition of an $8 million commercial
first lien mortgage, a secured by 27 newly built contiguous family houses in
Queens college point Queens, New York. That portfolio was easily worth 20 / 22
million. If you close your eyes and you discount it heavily cause these, these
houses traded $1 million a piece of Glenmore. So the collateral was very
strong, say 20 million, but it is more than that. And I know it was all 8
million. When you buy that you are at 40% loan to value ratio. It is extremely
low risk, very strong downside protection. And what's the upside on that? Well,
the upside is default interest in late fees. So as a lender, you do a lot of
lending. You do not want the paper to default, you are happy to collect
interest rate. But what do you normally collect? The performing paper 10, 11,
12% I mean that is the market today.
Bill Fairman (10:47):
Right.
Mike Zlotnik (10:47):
But on defaulted paper, it is 24% very typical here in New
York, generally between 18 and 24% more typical, 24% that particular deal at
24% default interest rate and they had 6% late charge. So, the late charge is
an instant kick on the KickUp. So you collected immediately the moment it goes
default and then you collect 24% it is our activity, your repeat. So deal like
this can almost no room to go down that low LTV and all the upside to accrue at
24% so you are making very strong risk adjusted return. You heard me speak
about that because of a very low LTV that loss reserves and that kind of deal
needs to be low. Generally when you are in a first lien paper, our conservative
LTV loss reserve less than 1%. Well 1% say so. If you are accumulating 24 and
you put 1% in loss reserves, you are now at 23 maybe even 22 if you want to be
conservative. So this is a very strong investment but it does not have the
cashflow until it rigidly pays for closure in New York is lengthy and it is
both his beauty and a curse. Beauty because you can accumulate a lot of default
interest. The curse cause it takes a long time.
Bill Fairman (12:02):
Sure.
Mike Zlotnik (12:02):
So, this asset class is just one of the investments we
like. We do that with the initial investments. We will continue to take more
positions than this because it is pretty defensive and as long as you know how
to take our property through the distress lifecycle with foreclosure and work
out it as necessary, you could do really well. That is just one example. The
next example, which I also like quite a bit of value add multifamily. If you
can, if you know the right, it will get where, I am a fund manager. So my job
is to find sponsors who are specialists in the right field and they have the
right type of deals. So will we invest with the right sponsor and the right
value add? You could get some cashflow or not depending on what the project is
doing. If it is doing a lot of renovations from start first and second year
could be pretty low on a cashflow, but you are building a lot of improvements
to the property, increasing rents and increasing value. So we like those type
of assets in general. If these two who fall into quadrant two in my methodology
we do some quadrant four deals, which are development or redevelopment deals.
For example, an old Macy's could get redeveloped into a self storage facility.
So that is a classic quadrant four deal because it is development or
development, it is more speculative in nature. But the highest and best use of
that asset is no longer a shopping, you know, a big box retailer like Macy's,
but a self storage facility. So those are cups, little bit of examples of what
we invested.
Bill Fairman (13:30):
Yeah! And there is a lot of redevelopment going on along
the, around the country, given some of the big box stores really never, you
know, they were not able to turn on a dime. It is like trying to turn a cruise
ship quickly and some of them were over leveraged. Some of them just never
changed their models to keep up with the different demographics on how people
are shopping and those properties are still valuable properties. They just have
to be redeveloped into something that people are wanting and yeah, you can make
some really good money figuring out what the public is after because you are
able to buy those properties for really pennies on the dollar.
Mike Zlotnik (14:15):
That is exactly right. At times some of these old malls
are being bought for the price over the land because they are located well in
the city. This land per acre, that is the whole price that you are getting the
buildings for free per per se. That is why redevelopment projects look
attractive, that you do not have to build a building, you just have to build
internal partitions and change the layout. But the structure itself is pretty
solid structure. So we absolutely like those projects and the right location
with the right sponsors, with the right financial dynamics, very financials.
They make a ton of sense and that is another part of what the fund invests in.
So we are pretty opportunistic into anything industrial office, commercial,
longer list the right sponsor, the right project, and we see strong value that
we certainly, you know, always look at downside protection. Does a project have
downside protection? What is it and what was computed risk adjusted return.
That is the bottom line. I mean that methodology is critical. The folks invest
in these projects. They have to think about realistic return and that is the
risk adjusted returns, the realistic return.
Bill Fairman (15:27):
I failed to mention this at the beginning. This is for
educational purposes only by the way. You need to read your PPM or prospectus
before you get into any investment. There are risks involved in any investment.
We all know that and your mileage may vary, but we are trying to do here on
this show is just show you all the different opportunities that are around
there and we are not trying to sell any securities or any funds in general. We
are just educating you on what is out there, okay? So, that said, how
geographically diversified are you thinking you are going to be in this fund?
Are you looking most areas of the country or just where the are they going to
be in, you know the mid markets or the large markets or just wherever you can
find the opportunity.
Mike Zlotnik (16:17):
So it is a great question. Generally mid market we are a
small fund and the opportunities we are participating in generally speaking,
raise capital anywhere from a few million dollars to 20, 30 I have seen a few
larger ones, but it gets a mid market. It is considered to be actually lower
part of the mid market. Mid market goes to up to up to a hundred million
approximately. So it is certainly mid-market low part of the mid market. The
reason this market is a land of opportunities is the big boys do not play here.
The big boys that generally play in the high end of the mid market than an institutional
assets. So you are not competing with large amounts of money. Although there
are plenty of players in the space.
Bill Fairman (16:57):
Sure.
New Speaker (16:57):
But a lot of the businesses done relationally. And that is
the key answer to your question. We invest only with people who we know like
and trust. We do not take any cold leads from the street. We are not interested
in whole business. We have a strong network of existing movers and shakers,
sponsors. We obviously you and I go to the CG mastermind, but why would not
that work expense well beyond the CG? So we are looking for the deals with our
experience sponsors and operators who know what they are doing. They are
specialists in this space. So we have connections. Again, people who do multifamily
Midwest, it is all they do. That is the value at Midwest, that is their
specialty. People who do, as I mentioned, distress commercial in New York city.
We have folks who do stuff in the South. We have strong connections to the,
again shopping, and the shopping doctor is an interesting, you know,
discussion. We will go in depth but we certainly have connections with a
specialist who buy retail properties in the Southeast and the whole Amazon
effect or e-commerce effect continues to take a bigger hold on our own retail.
But there are plenty of significant opportunities in the local strip malls.
Shopping centers, not a big box, typically not the enclosed big malls that
people still go to, service oriented retailers, service oriented businesses,
certain retailers, gyms, doctor offices, all those things need to be somewhere
and they need to be located conveniently to the housing. So these type of
assets, we have specialists in that area too. Some of these projects pretty
interesting projects too. So it is really no specific geographic focus. We will
go pretty much anywhere around the country. It is all the U.S. If we have a
strong sponsor and they have a good project and a good area where it was one of
the CG guys who invested with in the past, they do Georgia heavy value and
multi-family. They have the crews, the capabilities they are looking for deals
in those areas because they want to be able to move the crews around and be
able to take on these projects.
Bill Fairman (19:03):
Sure.
Mike Zlotnik (19:03):
So those are the considerations where the footprint is and
how good they are. And if they know what they are doing, if they are able to
solve all these value, add problems or challenges and execute on a plan, that
is the key to the success. It is not where in the country, it is who is doing
it. Can they get through the project and they get through the plan in
reasonable time and within the cost and the budget.
Bill Fairman (19:30):
Excellent. So I am talking with Mike Zlotnik and I want to
make sure I give you his information too. It is a BigMikeFund.com and then Mike
also does a podcast, Big Mike Fund Podcast. And he has a lot of great guests on
there as well. More questions about us, you can reach us at
CarolinaHardMoney.com. So, the income fund, is it a closed end fund or is it
going to be an open ended fund?
Mike Zlotnik (20:00):
So, it is another great question. So, let me finish up on
tempo grow fund. Tempo grow fund is a closed ended fund. So, we are going to
raise money as I said for 24 months on it for five to seven years, run on
assets to have a life cycle and then repaid folks with a backhand return. Most
of return will come in the form of capital gains some income on the way. And
that fund again in agreement with you when I am promoting anything, I am just
giving a little bit of information and folks are very interested in, they
should request the PPM. It is the only way they could they can consider the
funds. The fund does have significant tax efficiency. We are planning to use no
leverage on the fund, good for IRAs, no UBIT and it is leverage works both ways
in a grow fund leverage is extremely dangerous. So we are not doing that. We
are switching to the tempo opportunity fund. That is a growth and income fund
and that is an open ended fund. So we do effectively what is an open ended
thought with subscribed capital or quarterly basis, you do the same thing with
Carolina or your fund currently hard money. So, quarterly basis was subscribed,
we redeem investors and we focus roughly two thirds of our investments are
focused on income, about one third and growth. So we mix it up and the total
return is generated roughly from two thirds of income and one third
approximately growth through appreciation, capital gains. That is the tempo
opportunity fund.
Bill Fairman (21:25):
Well with the growth fund, are your investors able to get
some of the depreciation passed through along the way?
Mike Zlotnik (21:36):
Yeah, absolutely. That is a great question again. We will
pass through depreciation to whatever extent we will get them on individual
projects. So it works the same way you bought a building where you are
developing or redeveloping a building during the value of a phase of the
project. Generally speaking, renovations are capitalized as some expenses that
pass through as losses that actually go to. They pass through the fund and the
fund passes it all the way to the investors to the fund. So on the K one, it
looks like you are losing money on paper and the first few years. In addition
to the operating losses, you also going to get depreciation benefits as value
add part of it for rehab or innovations, complete depreciation starts clicking
in based on normal depreciation schedule, possibly some accelerated
depreciation. So all of this stuff will pass through. To whatever extent folks
can use it for their tax benefit great. If they can, they just carry forward
and in the backend that is targeted to generate the best type of income is a
longterm capital gain income and what is it will get offset by the whatever
operating losses that took place to get there.
Bill Fairman (22:39):
Yeah! So, that is the benefit there. You are not getting
any income during the period that the fund is locked down. However, you are
going to be able to get operating losses on a K one, you're going to get
depreciation, which is also gonna lower that tax burden. And then you have got
the long term capital gain versus the short term capital gain at the end when
you do get your profit. Now if you are investing in an IRA, you are not really
concerned about the capital gain, but you are not going to be able to take
advantage of the losses.
Mike Zlotnik (23:13):
That is right. One quick comment on the losses. So
generally these losses will pass through as passive relocation losses. They are
called PALS and there is an expression if you have a whole bunch of PALS, what
do you need? You need a lot of PIGS. Passive investment gains, so that's the
general methodology.
Bill Fairman (23:29):
Right.
Mike Zlotnik (23:29):
You are going to get this passive losses that if you are
an active real estate investor, you can deduct them against your active income.
But if you are passive, you cannot, you need the PIGS, you need the passive
investment gains to offset otherwise just carry forward passively.
Bill Fairman (23:47):
Yeah! See that is why Mike is the mathematician and I am
just the host of the show. But it is still tax advantage. You just have to be
in the right position. And again, this is something that can be covered in the
PPM and then as well as your tax advisor would be able to help you with these
different options as well. One of the great benefits of investing with an IRA is
that it is not being leveraged and it is not a business. You are not operating
a business so there is no UBIT tax that you have to worry about. And like I
said at the end, when you do get your gains, it is, you know, you are either,
depending on your tool is it is easily going to be taxed, exempt or tax
deferred.
Mike Zlotnik (24:35):
Yeah, it is a great point. We have no leverage in both
funds. Neither Tempo Opportunity Fund nor Tempo Growth Fund and we intend to
keep it that way. We are allowed for technical leverage but it is a case of
emergency only if we have liquidity crisis and stuff like that. But we are not
using it for any practical not to magnify the return.
Bill Fairman (24:52):
Right. The issues are with the IRS. They do not want it to
magnify the returns or or make it look like your $100,000 IRA is now a $200,000
IRA cause you use leverage to increase that back.
Mike Zlotnik (25:06):
That is right. This, that is the primary reason of the
UBIT. The leverage is what they can they consider unrelated business and the
income related to the leverage is subject to UBIT, but we do not use it. And
the side benefit of this IRA focus is the fact that it creates, it makes the
fund more conservative. The leverage works both ways. When things are running
great, that is great. When the things are running bad, the leverage is going to
cost the grief. So we have no plans for a leverage and especially in this
market, I would caution folks to be very prudent with leverage.
Bill Fairman (25:39):
Well, you know, Mike and I have had this discussion before.
Leverage is not just a problem with the unrelated business tax that you may
have with with IRAs, but in real life, we raise capital from individuals and if
the economy takes a turn or the the banks or the institutional investors that
provide leverage decide they do not want to be in that space any longer, you
are kind of left holding the bag. And if you have a portion of your fund
leverage, they want their money back and you cannot give it to them because let
us face it, these funds are not liquid. They are, the money's invested. And if
they want their money back, now what ends up happening is you have to pay them
a monthly fee or interest and any income the fund makes goes to them until they
are paid off.
Mike Zlotnik (26:41):
Yeah! It is like a quote. Liquidity crisis for a fund. So
that is exactly, yeah.
Bill Fairman (26:46):
So it can be very dangerous for fund operators to get
leverage on their funds. Now you know, there is a good payoff, but it is only
as good as the creditors want to stay in that space. And, and as we all know,
another shiny object will come up and I want to get into another space and
there is nothing we can do about that so you are better off just staying with
individual investors. Awesome!
Mike Zlotnik (27:11):
Yeah, I agree and this is back to, you mentioned the
investment quadrant methodology, and I know this is something I cannot claim
that I developed a quadrants concept is not new. Quadrants have existed for
thousands of years, but methodology that I have developed with investment
quarters in real estate is a way to look at these deals. Look through the
prison of these quadrants and it helps folks understand what are they investing
into. I mean investing in vehicles, into projects with good downside
protection, but more conservative structure or the investing into more
speculative, higher risk investments And generally speaking, leverage is not a
bad thing when you have conservative leverage at the low LTV and some of the
value of projects and multifamily, they do have leverage. We invested in an
equity in the projects might have 70% loan, sometimes 75% generally speaking or
with quality projects in significant value add. This is completely fine. The
initial every 75% but all the renovations will actually take the project
through the cycle where the leverage, the finishing leverage maybe only 60%
after the value of strategy and it can be refinance, it could can be sold. So,
good that long term bank loans at low interest rate is a good leverage. So we
are all for it. We just do not like over leverage projects where the leverage
gets really high. 85 90% basically hard money and some people do use hard
money. But those projects are called the speculative projects because of the
high leverage puts them in a very speculative arena. And if they execute well,
that is great. And if the execution plan fails is where the problem is, the
leverage can sink them. So that is the basic methodology.
Bill Fairman (28:58):
Well, I am glad you brought that up because I am not
discouraging leverage in most cases. And you are right. As long as your loan to
value or you are doing a a low leverage point. And I go back to the 2008 issue
that we had. The people that lost money and lost their homes, we are over
leveraged. Most retail buyers that bought a home, they are getting 5% down, 3%
down, some of them had no money down. And if the values dropped, they were
underwater and their mortgage and they could not sell the house unless they
brought a check with them to closing, to make up the difference. The people
that bought homes as speculative investments, not based on cash flow, they just
assumed the values would go up again, they over leveraged. But in most markets
now, there is exceptions to that. The sand States, they had quite a bit of a
drop in values, but mostly throughout the country. As long as you are at 75 to
70% and I am talking single family homes at this point, as long as you were at
at that rate or lower your, you were never underwater and you have a much
better land be exit strategy. And right now I encourage people to get a
conventional bank financing on individual rental properties as long as they
keep it at 75% of the value or less. Because you know, we have a window right
now where you are in low fives or fours on 30 year terms for, you know, a
rental property and let's face it, 10 years down the road that you still got
the same payment and you are paying it with dollars that are worth a heck of a
lot less than it was currently. So you are paying back this, this money with the
dollars that are worth less. So, it really is a great hedge. You just gotta be
careful not to over leverage these properties. But there is great debt out
there. I like to always go to the Dave Ramsey stuff and he is talking about
never having any debt and that is good for the masses cause most of them really
don't understand finance. But if I can make it a little bit more simpler, you
do not finance stuff, you want you finance stuff that turns into an asset, not
a debt, right? So you are creating an asset with leverage. You are not
financing stuff that you just want and you think you need, but you do not
really need it, you just want it.
Mike Zlotnik (31:40):
Yeah, I agree with you. This is the couple of comments on
this just to add some thoughts on the subject. So for sure today, the interest
rates are currently low and I am a proponent of the theory. They are going to
stay low for a long time. I am not saying we are going to go completely through
Japan model, but it is unlikely that we are going to hit the days of high
interest rates. Yes, kind of. You just cannot afford it. So the government will
do everything they can to keep the rates low. It comes down to fiscal
irresponsibility and the politicians wanted to kick the camp so they borrow the
money, growing national debt, unfunded liabilities. The bigger that thing gets
a, the more pressure there is to keep the rates lower. So the quantitative
easing or whatever else they are going to do, they are going to keep doing it
to keep the rates low. So, why am I saying this? Well if you get a 30 year
fixed mortgage today, it is possible the rates will drop some and you may be
able to refinance number of years from now even at a lower rate. So that
scenario is not a best scenario at all. If you have got good fixed rate today
and you got something better tomorrow, great. Obviously if somehow the rates
move up, you have that protection mechanism. But then one key point about
investing, and I just wanted to give this to the audience because it is a very
simple and very powerful tool to think about it. So if you are getting a mortgage
at whatever interest rate, let us just say the rate is four and a half percent,
the big question is this, does the rates of appreciation in that area exceed
the rate on the mortgage? So if the prices historically have appreciate in a
given area, but more than four and a half percent historically low over the
last 40 years, then you are ahead. No matter what you do, even if you have a
mortgage, you are paying four and a half percent of the bank, but the house is
increasing in value say at 5% a year, right? That alone is already creating
positive effect. On top of that, you are getting free cashflow. So the cash is
the King. And if you can do well with the cashflow, even the value temporarily
drops. If market fluctuates, you can survive the, the down storm. But this
basic technique, let me state it again, interest rate on the mortgage versus
the average rate of appreciation for every trade or appreciation is higher than
the interest rate than a mortgage in good shape for long term.
Bill Fairman (34:04):
And if you are in those areas of the country where they do
not appreciate very high, you have to make sure that you have a much higher
cashflow to make up the difference, right?
Mike Zlotnik (34:12):
Exactly! That is a great point. If appreciation is very
low 2, 3% and you are paying 400% of the mortgage, you are pretty much cash
your whole place for the cashflow.
Bill Fairman (34:22):
Right. Excellent. So Mike, your four quadrants, do you
have that listed on your website at BigMikeFund.com? people can see it and
look.
Mike Zlotnik (34:32):
There is number of educational presentation. So they go
BigMikeFund.com and they click corporate site then there is number of
educational are recording educational webinars and zoom calls where they could
see these quadrants. One of these days I will spit it out and a separate site,
but for now it is just literally under the education. If you go, the corporate
website is TempoFunding.com but if you go a BigMikeFund.com click corporate
will take you to the TempoFunding.com. In BigMikeFund.com, click corporate. It
will take you the TempoFunding.com, click education, you are going to see a
bunch of presentations that helps folks understand the quadrants.
Bill Fairman (35:11):
And you know, you guys have been listening to this show.
You know the knowledge that Mike has and one of the great things about him is
he is always willing to share that with folks. And that is one of the great
things about him and the group in general that we hang out with. We are all
about giving as much knowledge as possible because you know, the old saying
that a high tide lifts all the boats and we want everyone to be successful,
that it comes in contact with us and we are happy to give this information now.
Mike Zlotnik (35:49):
Sharing is caring. We are trying to done all life, trying
to give and end to help folk obviously, you know, be respectful of our time and
happy to help folks if you need detailed help, if you need more than just basic
sort of education. I did launch BigMikeCoaching.com. So, it is part of, it is
actually listed on the site, is focused on looking at a deals, helping folks,
if you will look into do a multifamily deal and trying to put together as
indication or if you are looking to invest one into one and you do not know how
to evaluate it. It seems to be a pretty serious issue nowadays. But folks look
into funds syndications, 99% of what is circulating out there heavily promoted
is not good, right? I mean this, with all due respect, a lot of crappy deals
are circulating. People do not understand this is a highly speculative deal and
the investors taking all the risk and the sponsors are getting paid enormous
fees to just take the deal down and then if the deal succeeds, they make a
giant share of the return. So these types of deals are terrible and there is a
few decent deals, funds like ours. I am not trying to say we are the best thing
up the sliced bread. Well, we certainly have very professional institutional
waterfalls and we care for our investors. So, investors come first and again,
we are not heavily promoted. That is the whole thing. The well established
funds with good track records and good managers. I am just, they are sort of
hidden gems, hidden secrets per se. And the stuff that is heavily promoted
through social media and what not are generally not high quality because they
need to make their fees and they need to promote. Then they are spending money
on the promotion, so it was just the general concept.
Bill Fairman (37:39):
Yeah! If you are hearing about them on a satellite radio
commercial, it is probably not a good deal.
Mike Zlotnik (37:45):
Just think about this, they are paying fortunes to promote
themselves, right? They got to charge all these fees to recover the money. That
is the bottom line.
And folks, keep in mind, we are not angelic by giving out
all this information. We do have a ulterior motive as well is that an educated
investor as a much easier investor for us to work with. So, we would much
rather have an educated investor knowing what they are getting into because it
makes life so much easier for the fund manager, does not it?
Mike Zlotnik (38:15):
I agree. The best investor is the one that goes into
investment with eyes wide open with significant experience and understanding.
We have some very high net worth individuals who are very sophisticated and the
reason they invest with us is for the reason that we provide almost
institutional level product of generally available only to high net worth
individuals and for sure, educated investor is much easier to communicate with,
much easier to work with and they ask smarter questions that we can get through
the process of Q and A and help them out much faster than folks are just
starting, let me put it this way.
Bill Fairman (38:50):
Absolutely. Listen, I appreciate you have given us your
time today. I know you probably have another skating gig you have to go to.
Mike Zlotnik (38:59):
None of the middle of the day when we were recording this,
but in the evening. Yes, I have to take one of my kids to the ice skating ring
this evening or usual practice. I appreciate the kindness and the invitation to
be on your podcast. We would love to be of service to you and folks who are
listening to the podcast.
Bill Fairman (39:14):
Excellent. So again, it is BigMikeFund.com and then there
is tabs in there for some of the other areas, the education and Mike does a
podcast as well. And that is called Big Mike Fund Podcast.
Mike Zlotnik (39:30):
Well let me crack a final joke. Let me crack a final joke
and then we will wrap up. So in this, this came as a suggestion, one of the
other podcasts and they asked me, what is the website, how do you find you? And
I told him BigMikeFund.com and what do they hear? Big Mike fun that count.
Bill Fairman (39:46):
Yeah.
Mike Zlotnik (39:47):
And the moment I heard about this, I thought, boy, there
is gotta be an interesting site and under that web name and if I happen to be
lucky and grab that websites. So if you go there, I promise you are not going
to find the kinky content.
Bill Fairman (40:00):
Okay. You were smart enough to get what people think they
hear too. That is pretty funny. Next time we are going to get a picture of the
cat while we are, yeah.
Mike Zlotnik (40:09):
Next time. She is somewhere roaming around the house.
Bill Fairman (40:16):
All right, Mike. It was a pleasure. Thanks again for being
on the show. Once again, BigMikeFund.com and then Big Mike Fund Podcast. Our
information is on CarolinaHardMoney.com. Please like and share and again, as I
said before, we have other content somewhere on the screen around it, you will
see it. It will pop up all around. So, until the next show, we will see you
later.
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