In today’s episode of Active Wealth, Passive Income Show of Carolina Hard Money Bill, Wendy, and Jonathan will answer and discuss the following “ Ugly Questions”
1. Why have you changed your LTV from 65% to 70%?
2. What is risk tolerance and why should I care about it?
Loan-to-value (LTV) ratio is a number lenders use to determine how much risk they’re taking on with a secured loan. It measures the relationship between the loan amount and the market value of the asset securing the loan, such as a house or car.
Watch this episode to learn more about risk tolerance.
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 (00:07):
Hello, everyone and welcome to Passive Income, Active Wealth show. I am Bill Fairman, Wendy Sweet over here and Jonathan Davis all the way in the corner. Well, at the end of the table,
Jonathan Davis (00:21):
They usually keep me in the corner.
Wendy Sweet (00:21):
Yeah. You’ve been a bad boy.
Bill Fairman (00:24):
We are Carolina Capital Management, our website. If you are interested in borrowing money,
Jonathan Davis (00:31):
When you are interested.
Wendy Sweet (00:32):
Yes, yes.
Bill Fairman (00:33):
All right. I like that better. CarolinaHardMoney.com, click on the apply now button. If you’re an investor looking for passive returns, click on the investor tab. Don’t forget to subscribe, share, like ring the bell, all that good stuff.
Wendy Sweet (00:49):
Tell your friends.
Bill Fairman (00:50):
We have a chat feature as well. So if you have any questions, it’s either going to be on the side or the bottom of your screen, depending on the platform that you’re on. How’s everybody today?
Wendy Sweet (01:02):
Good. And I can tell it’s nippy outside. You guys are in such nice little sweater.
Bill Fairman (01:05):
Yeah, sweater weather
Jonathan Davis (01:06):
Yeah. I was so excited to wear my sweater.
Bill Fairman (01:08):
Alright, stop touching us. That’s how we got COVID.
Wendy Sweet (01:13):
No, it was all your fault because you touched all of those things over there and I had to touch it after you.
Bill Fairman (01:21):
Why?
Wendy Sweet (01:21):
I think you had another meeting or something, was that it?
Jonathan Davis (01:24):
I just want to say I’ve been COVID free since 83.
Wendy Sweet (01:27):
Yeah, because he’s a baby and he never gets anything. It’s not fair plus he has kids that have, that have been out and about, and yeah, it’s nice to be young. You can fight things easier. I think
Bill Fairman (01:39):
This is true, but yes, it’s a sweater weather, even in the Southeast.
Wendy Sweet (01:45):
Yeah. It feels great.
Bill Fairman (01:46):
Right now, I got up and all the rooftops had frost all over. I’m a t-shirt and shorts kind of guy,
Wendy Sweet (01:55):
But It’s nice and a little over 60 now so it’s perfect.
Bill Fairman (01:58):
I do have some late fall clothes that I like to wear every now and again,
Wendy Sweet (02:03):
That still fit because he’s so thin and in shape now everything just drapes off of him. that’s my boy!
Bill Fairman (02:08):
What is it that you want,
Wendy Sweet (02:13):
Oh, I touched him again.
Bill Fairman (02:13):
What is it you want from me, now?
Wendy Sweet (02:15):
I know, you’re not used to me being nice.
Bill Fairman (02:15):
She has been extra complimentary today.
Wendy Sweet (02:18):
I’m just glad to be alive.
Bill Fairman (02:21):
We are too.
Jonathan Davis (02:21):
Stop touching us.
Wendy Sweet (02:21):
I got ask God to show me who I needed to love for him today and I guess it was you. Congratulations
Bill Fairman (02:31):
Thank you. Okay. So guess what we have economic news and this would be a good time to do the news of the day.
Wendy Sweet (02:42):
Oh, yes. Sounds great
Wendy Sweet (03:02):
This just in!
Bill Fairman (03:05):
I feel like we’re starting in Epic movie.
Wendy Sweet (03:08):
That’s right. Well, it is kind of Epic. It’s news and it’s not about politics so that’s really good
Bill Fairman (03:14):
On Wednesday, they did the housing starts and permits nationally and that really, some good news in there. We were up 4% in housing starts from last month and again, we’re approaching winter. So housing starts, so that’s good this, this time of the year.
Wendy Sweet (03:34):
It’s unusual, yeah.
Bill Fairman (03:34):
But we’re up 20% year over year, which is,
Wendy Sweet (03:39):
That’s incredible.
Jonathan Davis (03:39):
I’m sorry, say it again. We’re up how much?
Bill Fairman (03:42):
We’re up 4% from last month.
Jonathan Davis (03:45):
And?
Bill Fairman (03:45):
20% year over year.
Wendy Sweet (03:48):
That’s amazing, that’s amazing!
Bill Fairman (03:50):
So there’s a big Exodus out of the major metropolitan areas into the suburbs and builders are now feeling very confident about, you know, building homes.
Jonathan Davis (04:02):
Cause interest rates are so low. I mean,
Wendy Sweet (04:04):
Still.
Jonathan Davis (04:04):
Still low. I mean,
Wendy Sweet (04:07):
They’re well over a year, two years now a month, right?
Bill Fairman (04:10):
So yesterday, the 30 year fixed was 2.86%.
Wendy Sweet (04:12):
Unbelievable!
Bill Fairman (04:12):
2.86%
Wendy Sweet (04:18):
Yeah. If you’re lucky enough to be able to qualify for a conventional loan but we self-employed people.
Bill Fairman (04:24):
I tell you that,
Jonathan Davis (04:24):
You’ll get that W2 income.
Wendy Sweet (04:28):
I know, I love talking about it, but I can’t do it.
Bill Fairman (04:29):
I’m seeing 30 year fixed rates on, you know, if you’re really good credit, but you have a hard time documenting income because you are self-employed, there’s some stuff out there with rates still in the low fours for non QM loans too. So that’s,
Wendy Sweet (04:47):
Non QM means?
Bill Fairman (04:48):
Non-qualifying.
Jonathan Davis (04:50):
Mortgage.
Bill Fairman (04:50):
And what that means, none qualifying mortgage, it means it’s not Fannie or Freddie or FHA or VA, okay?
Wendy Sweet (04:58):
It’s not a true conventional line.
Wendy Sweet (05:00):
No.
Jonathan Davis (05:00):
Or it’s not,
Wendy Sweet (05:01):
Government backed.
Jonathan Davis (05:03):
Yeah.
Bill Fairman (05:03):
They’re using alternative documentation to prove you still thanks to Dodd-Frank you still have to prove that you have the income to support the payments. They, in this case, they do it with 24 month bank statements for business and personal, and they look at the cashflow and they make sure that you don’t have to, they do your debt to income ratio based off of cashflow.
Wendy Sweet (05:27):
Yeah. Are they using your business cash flow too?
Bill Fairman (05:30):
Yeah. Well, if it’s your business. The good news there is, it’s not a no doc loan, it’s an alternative documentation loan so they’re still improving that you can make your payments comfortably
Jonathan Davis (05:48):
Beyond fogging a mirror, you have to do a few things.
Bill Fairman (05:50):
And the other half of that housing starts is that in building permits up substantially as well. Not only are they building, but they’re planning to build.
Wendy Sweet (06:02):
And that’s what’s so crazy too, because you know, lumber is more than double what it was really just a few months ago. Sheet rock is cabinets. I don’t know that the pricing is up, but the length of time that it takes to get cabinets and windows and those kind of like ridiculous. Well, I’m just, I’m amazed at that costs are up so much, but they’re still just building, building, building.
Jonathan Davis (06:27):
How do you get a couple custom order windows? It didn’t, it only took me two weeks to get them, so,
New Speaker (06:32):
That’s not bad.
Jonathan Davis (06:33):
I thought I was going to be three or four weeks, so,
Wendy Sweet (06:35):
Yeah. That’s not bad. Awesome.
Bill Fairman (06:36):
Well, you have to look at it this way, supply and demand. How many times did we have land falling hurricanes this year in the US?
Wendy Sweet (06:43):
Lots.
Jonathan Davis (06:43):
Lots.
Bill Fairman (06:43):
I think we had 10.
Wendy Sweet (06:45):
We had a buttload.
Bill Fairman (06:45):
We had about eight or 10 of them. So guess what, you’re going to need building materials. And at the same time,
Jonathan Davis (06:52):
The supply chain was interrupted for,
Bill Fairman (06:54):
At the same time you had restrictions on people working. They had to figure out how to bring people together to be able to work in the same building.
Wendy Sweet (07:06):
And it looks like that may happen again.
Bill Fairman (07:08):
You had, a lot of people building stuff too, because they’re trying to keep up with new construction. So there’s a big demand on those supplies. So that’s something to keep up with.
Wendy Sweet (07:20):
I noticed you misspelled a word
Bill Fairman (07:22):
And it’s funny. I was just talking to him. I got a new t-shirt that says spelling bee champion, and it’s got champions building great.
Wendy Sweet (07:30):
That’s good. Don Harris had something on his Facebook posts that was really interesting. You know, with half the parents had to homeschool their kids. It was a great, great statement. All of it was misspelled.
Jonathan Davis (07:45):
And then with the famous one is a great spellers untie. Unite. Untie.
Wendy Sweet (07:49):
That’s pretty funny. That’s pretty funny.
Bill Fairman (07:57):
Yes, it is quite humorous. All right. Unemployment numbers, they, the initial claims are up over what they thought they were going to be initial claims were 745,000. They were only expecting 705. but the continuing claims were down there. You know, they’re in the 6 million range and that’s a number that’s going to be up and down and up and down until we finally get a vaccine that’s distributed to the majority of the population.
Wendy Sweet (08:33):
You think that’s going to make the difference that having the vaccine out there?
Bill Fairman (08:36):
I think that’s going to help. But at the same time, there are industries that are going to be completely, I don’t want to say restructured, but it’s going to be, there’s industries that are going to go away and there are going to be companies out there that are going to look around and say,
Wendy Sweet (08:56):
What’s missing?
Bill Fairman (08:56):
Do we need to, can we do more with less?
Wendy Sweet (09:01):
Yeah. We did that.
Bill Fairman (09:01):
So they’re going to restructure a lot of these different, especially the smaller businesses. They’re going to be doing a lot of restructuring. So you have to kind of take note of the industries that are performing very well right now, and are expected to continue to perform well.
Jonathan Davis (09:19):
Delivery tech.
Bill Fairman (09:19):
So it’s going to be logistics. It’s going to be anything in home, building, remodeling, that type of thing.,
Wendy Sweet (09:31):
And I really liked like that Jonathan mentioned delivery too. I mean, you know, I’m out in the boondocks cause I live on a farm, but, and there’s not a whole lot of people that will deliver stuff my way. But there’s new companies out now that are starting to deliver. They’re even pizza out where we are now. We, you know, for years you couldn’t get a pizza out,
Bill Fairman (09:51):
They’re filling that gap, but you have to think of what the margin is going to be for making money doing that last mile delivery part and I think,
Wendy Sweet (10:03):
They charged me extra.
Bill Fairman (10:03):
So you can, there are certain things that drones can deliver out a little bit further and they can’t be very heavy. So it’s going to be a selected items.
Wendy Sweet (10:16):
It’s really kind of cool.
Jonathan Davis (10:18):
I’m waiting for them to come out with the full, like a matrix style where you put on the goggles and you go in like ready player one. I mean,
Wendy Sweet (10:28):
And you shop that way?
Jonathan Davis (10:32):
Live. Live that way. Have you seen ready player one?
Wendy Sweet (10:34):
Yeah. That would be a great idea to shop that way, going up and down the aisles.
Jonathan Davis (10:40):
I know and you can sort through racks,
Wendy Sweet (10:41):
Yeah. Yeah.
Bill Fairman (10:42):
I think that’s the way to help save the apparel industry. So you can try this stuff on before you’d have it shipped.
Jonathan Davis (10:49):
What is it? The Oculus or whatever that you have online shopping. Pretty cool.
Wendy Sweet (10:55):
I think that’d be way cool. So if we just came up with ideas that people haven’t patented already,
Jonathan Davis (11:01):
Sorry.
Wendy Sweet (11:03):
I’m sure we’re behind
Bill Fairman (11:04):
My point to these employment numbers are, is that’s going to be shaky for a little while. So, you know, it’s going to be hovering. We’re going to have the same amount of people that are out of work and are going to be continued to be out of work because it’s gonna, some people are going to go back. Some people are going to lose job and if you’re in an industry that is constant, you know, I’m sorry to say this, but hospitality, food service.
Wendy Sweet (11:35):
Commercial space
Bill Fairman (11:36):
Travel, all this stuff, it’s going to be restructured. So if you’re worried about your future, you need to get some training in logistics, learn how to be an electrician,
Jonathan Davis (11:50):
Diversify your income. I mean, the guy there said,
Bill Fairman (11:55):
Keep your stead at a working mode.
Jonathan Davis (11:55):
But even if you’re still in the working mode, you can still, you know, what is it like there’s ways to use your self-directed IRA with a couple of hundred bucks, a couple thousand bucks. There’s ways to do that. So, you know, just diversify different avenues of income for yourself right now and then also for your retirement.
Wendy Sweet (12:14):
Invest in real estate.
Bill Fairman (12:15):
Yeah. And we talk about that all the time. You need to have more than one revenue stream. I think it was way then you’re stuck. Even in business, you need to have diversified revenue streams in your business. That doesn’t mean you think your eye off of what your main focus. As long as you’re good at that, then you can always open up new streams of revenue. Just don’t take your eye off what got you there.
Wendy Sweet (12:42):
Right. And personally, I mean, we’re all doing that too. You know, we have our side gigs, I’m doing rehabs and Airbnbs and you’re doing a bunch of rehabs and buying holds and it’s, you know, we’re trying to personally diversify as well within what we’re doing. We’re still sticking with what we know.
Jonathan Davis (13:02):
It’s all within the realm of real estate. I mean, yeah. I mean, I wouldn’t diversify over it, you know, I don’t even know. I would say, you know, stocks and bonds. One, I don’t like giving people that someone, I don’t know that control and I don’t understand it well enough to, well, I do understand it, but I don’t have, like, I feel like it’s more work than real estate. There’s people who do like day tradings and Oh my gosh, the amount of work and how much they have to research in those companies. I’m like, I’m not doing that. Yeah. Yeah.
Bill Fairman (13:34):
I’m laughing because you don’t want to give somebody control and ironically, that’s what we’re asking other people to do in the investment.
Wendy Sweet (13:41):
But it’s okay to do it with us.
Jonathan Davis (13:42):
We like control. We’re really good at it. Sometimes. Most of the time.
Wendy Sweet (13:47):
Yeah. That’s for sure.
Jonathan Davis (13:48):
Yeah. Scott said, you understand it well enough,
Wendy Sweet (13:50):
Well enough that you don’t want to do it.
Jonathan Davis (13:50):
Exactly.
Wendy Sweet (13:52):
That’s for sure.
Bill Fairman (13:54):
Oh, this isn’t enough banter. This is our Ask an Ugly Question session.
Wendy Sweet (14:02):
Session.
Bill Fairman (14:03):
So Scott. Thank you so much.
Wendy Sweet (14:14):
A little delayed.
Bill Fairman (14:17):
It’s okay.
Jonathan Davis (14:17):
So the first question is why have you changed your LTV from 65% to 70%? So I assume that’s asking us for Carolina Hard Money. Why we, and we just changed that last week?
Wendy Sweet (14:32):
On Monday this week, we just did it this week
Bill Fairman (14:35):
You wanna explain what LTV and ARV is?
Jonathan Davis (14:38):
LTV is loan to value. So, if your loan is a hundred thousand dollars and the value of your property is a hundred thousand dollars, that is a hundred percent loan to value. If your loan is eighty thousand and your value is a hundred, then that’s 80% loan to value so very simple. ARV runs the same way. It’s just whatever your loan is to the future value of the property, given that there’s a rehab component. So if you have, you bought the house for 50,000, you have a $50,000 budget, your loan amount, let’s just say you got a hundred percent financing, your loan amounts a hundred thousand, but the property will be worth 200 when you’re done. That’s a 50% ARV
Wendy Sweet (15:22):
And that’s a deal. If you can find that.
Jonathan Davis (15:23):
Find those, yeah.
Wendy Sweet (15:23):
There’s some out there like that
Bill Fairman (15:27):
And so ARV stands for after repair value and what you’re buying the house for now is the as is value versus the after repair value, we don’t have any acronyms for
Wendy Sweet (15:39):
No, we, well, and everything we do, we base it on the after repaired value and especially afterwards just sitting here talking about the economy. And I think off camera we were talking about, I heard somebody tell me yesterday that that Deutsche bank announced that they thought we were going to have a 20% inflation over the next four months, which I think is kind of insane. But, but who knows, you know,
Bill Fairman (16:02):
It’d be close to 20%. If they take out food and energy and the stuff we actually use, that’s what they meant. You know, the core inflation doesn’t use stuff that goes up and down.
Wendy Sweet (16:12):
Yeah. So why would we, you know, the virus seems to be having a comeback, so we might have shutdowns again and you know, why would we lend more money? And there’s many reasons for this that we’re doing that. Number one is we’ve changed some of the other things that we’re doing when we, when we lend the money. The first one is we are lending a percentage of the purchase price. We’re used to do a hundred percent of the purchase price, but now we’re doing 90%. So our borrowers are coming to the table with 10% of whatever that purchase price is as a down payment. So that’s one reason cause they have a little bit more money in the game. The other thing is, um, we are lending on lower valued homes. We’re out of the high end business. We’re sticking in a, recession resistant area, which we think is affordable homework and we changed that back in, January of 2019. And boy, am I grateful we did that, right? It changed everything for us and people thought we were crazy when we did that back in 2019, because there were plenty of homes that are worth over $500,000 that we’re selling like hotcakes, but
Jonathan Davis (17:43):
That month we decided to not do high-end homes. And we also, Wendy and I decided to be the only loan officers for the company and that was the best year that we ever had
Wendy Sweet (18:00):
Absolutely. We kicked butt. But we also obviously have a confidence in market values going forward. Somewhat confidence, you know, who can really have full-blown confidence in market values.
Bill Fairman (18:18):
Yeah. And I was going to say right after the first lockdown, no one really has a crystal ball, no one had any idea what it was going to happen with housing and we had to make sure that there was enough cushion and still do business.
Wendy Sweet (18:36):
Right. We stayed open.
Bill Fairman (18:39):
And now seeing the demographic changes, we just feel a lot more comfortable with increasing in values in most areas that we lend in
Wendy Sweet (18:47):
Great point too. Our market right we’re lending in.
Jonathan Davis (18:51):
I mean, you’re seeing, I won’t go as far as saying Exodus, but whatever it’s just short of an Exodus of people
Wendy Sweet (18:58):
You can use that, that’s what I’m saying.
Jonathan Davis (19:00):
People, you know, leaving the, you know, certain areas and coming to the Southeast. We’re seeing a lot of that new construction. I mean, it’s always easier to, you know, look back and Oh yeah, that makes sense. I mean, before COVID we had over a 3 million unit housing shortage in America. That never changed but because of COVID, it actually increased it because now you have and couple that with the really low interest rates, people can’t afford to leave. People are incentivized to leave a high rent areas to become homeowners in other areas. . So, you know, the perfect storm has led to, to this. I mean, maybe someone’s out there who said, Oh yeah, I saw this coming and I mean, I think there’s a lot of us who hope for, but I don’t think anyone could have said this is what’s going to happen.
Bill Fairman (19:58):
And truly the only obstacles, uh, for first time home buyers is down payment. And if they were, if they lived in a high cost area of the country and they want to move, you know, the biggest thing is I’ve been spending all my money on rent and cost to live and taxes and everything else. It’s hard to gather that down payment
Jonathan Davis (20:21):
And to further just go in why did we decide to go to that 70? I mean, another aspect that we changed was our loan terms. We used to do 12 months. Now they’re more six months.
Wendy Sweet (20:32):
Or nine.
Jonathan Davis (20:32):
Or nine, depending on your rehab level. And we’re actually doing, you know, we are doing new construction, but we do a lot of, like, fix to rents that require less rehab. So when you’re required less rehab, it’s way easier to determine the ARV, but you don’t have more dollars going into the project, which means that the value isn’t going up as far. So we can lend a little bit more with a little more certainty of what the value is going to be. The speculation comes in when I’m putting, you know, all this money in like, you know, let’s say a hundred thousand dollars into this rehab and I expect to create 180,000 of value with it, or 200,000 of value with it. It’s easier to say I’m putting 30,000 rehab in and I’m creating 45,000 of value or 50,000 of value. That’s a, more of a sure, value add that we can,
Wendy Sweet (21:31):
To see on top of that. It’s not just, uh, you know, the amount and then hoping to get that, but it’s also the time that it takes. So the smaller ones are going to take less time. So, you know, the market is still going to be where it was when you started the project.
Jonathan Davis (21:45):
Exactly. Six months. We know. I mean,
Wendy Sweet (21:48):
We can say that far in advance.
Jonathan Davis (21:50):
Barring a black Swan event. I mean, we know what’s typically gonna happen. Interest rates don’t significantly change in six months.
Bill Fairman (21:57):
Right. And so the larger projects, they’re going to take longer, there’s going to be obstacles to overcome because there’s obstacles overcome every single rehab. I don’t care if it’s $10 or if it’s 180,000.
Wendy Sweet (22:09):
Yeah. And we keep throwing out the timeframe here, the, you know, six months as a, as a term for a fix and flip rehab, we’re doing 12 months on new construction and really, that’s not even necessary for most new construction, but time is what keeps people from making the profit on their house. Right? They are always, what is your fix and flip?
Bill Fairman (22:35):
No, Don had a question. What’s your exit strategy for fix and flip?
Wendy Sweet (22:39):
Well, hit that in a second. That’s a good one.
Jonathan Davis (22:42):
Fix to rent.
Bill Fairman (22:42):
Fix to rent.
Wendy Sweet (22:43):
So time is what kills most people. They, you know, we love that you’re paying us really high interest rates. We love those payments coming in.
Jonathan Davis (22:51):
That’s not the point.
Wendy Sweet (22:53):
We would rather see is you be able to get out of it so that you can make the profit that you want to make and so many people that don’t make the profit that they’re projecting, it’s because they were in the project for too long.
Jonathan Davis (23:06):
Oh yeah. I mean that, almost every project barring, you know, a few anomalies that, you know, were structural issues that were not foreseen. Most people either don’t make money or lose money like you said, because of the timing, you know, very few, I mean, I would say less than 2% that I see is because of a structural issue that wasn’t caught up front. Most of it is you took too long. You lost, you know, whether it was your fault is not managing the project or your GC walked out on you or whatever it was
Wendy Sweet (23:37):
And it’ll all happened, right? It’ll all happen. I promise, I promise. So let’s answer Don’s question. What is your fixed to rent loan, exit strategy? We actually have a new program that we are about to put out. We’ve been saying it for months, but it’s finally on paper and in our computer now and to be truthful with you, I’m going to put my loans through first to see how difficult it is to get through this company cause we are, we’re not, it’s not a product that we keep, we’re actually doing it with a larger lender. The larger lenders actually who’s backing it. They have, I don’t know, eight, $900 million in the bank. So they’re a little bigger than us
Bill Fairman (24:24):
Well guess, we are partnering,
Wendy Sweet (24:26):
Yeah. That’s a good way to say it.
Bill Fairman (24:27):
With a lender, do the longer term stuff.
Wendy Sweet (24:30):
So I want to do my own, one or two of my own first just to see what kind of issues we run through to get it done and then we’ll start doing it for everybody else. But you know, we’re certainly not the only game in town I know, Vizio does a long-term what?
Bill Fairman (24:46):
Scott.
Jonathan Davis (24:46):
I’m not sure why it’s up there.
Wendy Sweet (24:52):
He hit the wrong button.
Bill Fairman (24:53):
That’s okay.
Wendy Sweet (24:56):
But we, he’s next. He’s coming up next, Michael [Inaudible].
Bill Fairman (24:57):
[Inaudible].
Wendy Sweet (24:58):
Yeah, but we are, there you go. It’s a good guy, but,
Bill Fairman (25:03):
We like to do promotions for our next show.
Wendy Sweet (25:03):
That’s right. So, Michael Moulton, I was getting ready to say, no. So Vizio lending I know is doing some longer term finance options. I think,, civic might have a program at their Lima One has a longer term program out there.
Bill Fairman (25:22):
Our short answer is the exit strategy is refinancing out of ours
Wendy Sweet (25:27):
Yeah. That’s exactly right.
Jonathan Davis (25:29):
And how do you refinance out? Most of them, I mean, I would say most of them have a 1.2 DSCR, which is debt service coverage ratio. I think we’ve talked about this before, you know, your principal and interest payment on the new loan that you’re getting, plus your taxes and your insurance have to be at a certain level. The income on the property usually has to be 20% higher than your principal interest taxes and insurance.
Wendy Sweet (26:00):
So if that payment was a thousand, you’re going to have to have a lease for 1200 a month or 1250 a month, whatever they’ve got that set up,
Bill Fairman (26:09):
Because they don’t want you to just to be able to make the payments. They want you to make a living too, because if you’re not making any money on these things, what incentive do you have to keep the paying the rear end rental property?
Wendy Sweet (26:20):
That’s exactly right. And the rates are all over the place. I mean, I’m seeing, the ones that we are going to be offering will be seven and a half will be like the lowest opportunity for you to get an interest rate and you’ve got to have I’m on, I think the credit score was a six, a 640 or six, or I’m sorry, a 740 or a 750 to get that really, that higher interest rate so they’re going to run between seven and a half and eight and three quarters is what I’m seeing on things like that. And then your loan to values are not what they once were. They’re going up to 70%, 75%. If you want to get up into the 80 or 85% range, you really need to be talking to a small local bank in your area. If you can qualify with them, that is absolutely the best way to go. First and foremost, always the best way to go. They’re going to give you the best rates. They’re going to give you the highest loan to value, they also,
Jonathan Davis (27:25):
But they’re going to take the longest.
Wendy Sweet (27:26):
To get done.
Jonathan Davis (27:26):
And you’re going to have to give them the most stuff.
Wendy Sweet (27:30):
Yeah. That’s true. I mean, there’s definitely a trade out, but for that difference of right, it’s worth it. Cause they’re going to be in the four and a half, 5% interest rate where,
Jonathan Davis (27:38):
But they’re also going to be on a 20 year am.
Wendy Sweet (27:40):
Yeah. And it might be renewable every five-years. So when you’re going to your local bank, you need to make sure that you’re asking for the commercial mortgage lender, not a regular home mortgage, residential mortgage lender. You want to be talking to their commercial guy because you, you want to be able to keep this in your LLC and that kind of thing.
Jonathan Davis (28:01):
And it’s all trade offs is what you’re looking for. I mean, at a local bank, you can probably get for a quarter four and a half, something like that, but it’s going to be on a 20 year am. And if you can get a six or 7% right on a 30 year, am those payments look the same. Yeah. So, you know, it’s kind of what works for you in that moment, from that property.
Bill Fairman (28:23):
And keep in mind if let’s say you’re paying seven to 9%, that’s really only going to work on your smaller dollar properties and if you’re buying them properly, because you’re getting them at a discount, you’re fixing them up. As long as you’re buying them low and low enough, you should, you should be able to make enough of a return to make it worth your while
Jonathan Davis (28:50):
That’s on the new program you’re working on, what’s the minimum loan amount?
Wendy Sweet (28:54):
The minimum loan amount is $50,000, which is really unusual cause most of them are at a hundred.
Jonathan Davis (28:59):
Most of them are 75 or a hundred.
Bill Fairman (29:02):
And I can tell you that a bank is not going to do anything below 75,000. [Inaudible]
Jonathan Davis (29:08):
So 50 allows you to buy what we like, you know, those high income producing properties and still make the seven to 9% payment and it’s an easier process. It doesn’t work on a $400,000 rental, it just doesn’t.
Wendy Sweet (29:25):
Which a $400,000 rental stuff. I don’t care where you are.
Jonathan Davis (29:28):
That’s pretty tough.
Wendy Sweet (29:29):
In fact, we were talking about,
Jonathan Davis (29:31):
I wish we we’re in California.
Wendy Sweet (29:31):
Yeah. Well, I’ve got a friend.
Bill Fairman (29:33):
That’s why I’m moving here.
Wendy Sweet (29:33):
He went with us to Africa. I was talking with him yesterday. He lives in Seattle and he said he just had to buy a house. It’s a two bedroom, two bath house. He had to buy it because rent for a two bedroom, two bath was $2,700 a month. If you’re in Seattle, that’s what he’s paying and it saved him almost half being able to buy a house there. So, you know, that’s kind of crazy but you know, we don’t have those kinds of rents around here
Bill Fairman (30:09):
And he could just pitch a tent and downtown, free rent.
Wendy Sweet (30:13):
Yup. And he’s living in Seattle, but guess where he buys property to buy and hold.
Bill Fairman (30:15):
North Carolina.
Wendy Sweet (30:17):
South Carolina.
Jonathan Davis (30:19):
Okay. Close enough.
Wendy Sweet (30:19):
He has some in Charlotte too, I should say. But he’s,
Speaker 4 (30:21):
South Carolina is one of the top five States with, you know, population, I would say growth, but you know, migration.
Wendy Sweet (30:29):
Yeah, we’re good.
Jonathan Davis (30:31):
Yeah. Greenville, Columbia are our,
Wendy Sweet (30:34):
Two hot spots. Nobody comes to Rock Hill. Cause Rock Hill is, there’s nothing going on there.
Jonathan Davis (30:39):
Nothing to see here.
Wendy Sweet (30:43):
I’ll tell you another area that’s really popped up that surprised me is Lancaster and Chester. If you’re looking for rental properties, those are great areas to hit, great areas to hit and I used to tell people to run like the wind, you know, when they were looking at property there.
Bill Fairman (30:58):
Typically that was where you’re fixing flip and they just weren’t, it wouldn’t move fast enough but it’s a great rental.
Wendy Sweet (31:05):
It was a great rental, but Lancaster is becoming a really good buy and hold because people from Charlotte are moving out toward that Lancaster and that’s what you’re going to see across the country is all of these major cities, you need to be investing in the second tier cities that feed those major cities because that’s where people are moving to.
Bill Fairman (31:27):
Yeah. The biggest thing was commuting daily into the bigger city. Well, you don’t have to commute daily now.
Wendy Sweet (31:35):
Yeah. Well, that s a great point.
Bill Fairman (31:35):
You can work three days a week in your house, two days a week in the office. You don’t have to do that daily commute. So yes, you can afford to be out for it.
Wendy Sweet (31:44):
Yeah. And you need that second office space so you don’t have all the homeschool kids. You’re experiencing that, aren’t you? That’s tough. That’s really tough. There’s a lot going on at home these days so the electric companies and the gas companies are making good money, cause I’m sure we’re using a lot more.
Jonathan Davis (32:05):
Well, we sold that, was it right after COVID I think, wasn’t it Warren buffet? Didn’t he bought some natural gas company or Berkshire Hathaway did, but yeah.
Wendy Sweet (32:16):
Did he really? Okay. So whatever he does, I’m doing
Jonathan Davis (32:20):
And then it was like seven or $8 billion in buying, you know, I can’t remember which one it was, but it was in the South East
Wendy Sweet (32:26):
He’s made a good decision or two.
Bill Fairman (32:28):
Yeah. It’s funny. He sold a very large piece of Apple. He had a lot of hand, a lot of money in Apple and people were saying, wow, he’s selling an Apple. It means it’s going down. No. After he sold a bunch of his shares in Apple, he still had the same dollar amount he started with because Apple went upside.
Jonathan Davis (32:51):
That’s funny.
Wendy Sweet (32:52):
He just needed cash to buy all that he has.
Bill Fairman (32:57):
He just need some case to diversify in buy and holding, that’s all.
Wendy Sweet (32:57):
Yes. And that’s what everybody, that’s how everybody should be looking at it too. So we are at 12:40 so we probably need to get to this next question.
Bill Fairman (33:05):
All right. So what is risk tolerance and why should I care about it? What, are you looking at me?
Wendy Sweet (33:14):
That’s kind of you, that’s on the lender side of life.
Bill Fairman (33:17):
It’s actually on everything.
Wendy Sweet (33:17):
Yeah. That’s true. That’s really true.
Bill Fairman (33:18):
There’s tolerance that we have for making a loan and then the risk tolerance for an investor.
Wendy Sweet (33:24):
Yeah, into a fund or a one off.
Bill Fairman (33:26):
So let’s talk about investing first, since they were all staring at me.
Jonathan Davis (33:33):
You complained last time I talked to that.
Wendy Sweet (33:38):
That’s right, there you go.
Bill Fairman (33:41):
In most cases, your risk tolerance is going to be age related and why is that?
Jonathan Davis (33:47):
Well, as you get older, you live less, right?
Wendy Sweet (33:49):
Yeah. And your stress is so much higher.
Jonathan Davis (33:56):
Oh, no.
Wendy Sweet (33:57):
We’re in the dry outs!
Bill Fairman (33:57):
So as you get older, you’re going to be more concerned about capital preservation than higher yields. When you’re younger, you can afford to take more risk because you have plenty of time to make up for it if it doesn’t happen.
Jonathan Davis (34:21):
Most of us have to because most of us don’t start out with a million dollars in the bank, you know?
Wendy Sweet (34:26):
I know, I didn’t.
Jonathan Davis (34:28):
I was like, all right, well, we’ve got to build something here.
Bill Fairman (34:33):
The other thing is, which is a shame that most people don’t really start their retirement accounts, except for, you know, if they’re with a company that has a 401k, they’re putting in the minimum, because frankly, when you’re really young, you’re using most of your money to live on anyway but if people really had a good retirement strategy when they’re younger, it’s amazing how much that adds up over time but for the vast majority of people, when they start to reach their fifties, they’re like, Oh crap, I guess I should have saved for some retirement. So those people, and I’m saying age-related. Those people are behind the eight ball and they, they kind of have to take a higher risk than they normally would. Fortunately, the rules allow you to put more money aside when you turn 50 than you do when you’re under 50. So they allow you to do, what’s called a catch-up. It’s still taking money out of your pocket and putting it in. But let’s talk about risk tolerance for lending.
Jonathan Davis (35:43):
Before we do that, let’s answer this question. If I invest with you all am I picking individual deals to participate in or purchasing into a larger fund?
Bill Fairman (35:53):
That’s a great question, Don.
Wendy Sweet (35:54):
It depends.
Bill Fairman (35:55):
If you’re an accredited investor and you’re putting it in the fund, you have no control whatsoever and that’s what we were talking about earlier with, making sure that you understand the management and what it is that they’re investing in because they have a control over your money. The benefit of being in a fund is diversification across the entire fund and that there’s guardrails in place. There’s, in our particular fund, because we are a lending fund, we have loan loss reserves were, , as part of the expenses of the fund. You’re sitting a certain amount of money aside in case there’s there’s losses so your yields, aren’t going to do this as the, you know, you have to take stuff back and you may have to have a loss in there.
Jonathan Davis (36:45):
There’s typically higher principle preservation insulated inside of the fund
Bill Fairman (36:50):
So you’re generally not going to get the same return each month, but in the long run, you end up, it ends up washing because when you’re in a fund, your money is always working. When you’re doing individual loans, and if you’re not an accredited investor, you don’t really have any choice. You’re going to get higher yields, but the high yield, it comes at a cost because typically the higher yield loans are going to be the shorter terms, which means the loans are going to pay off.
Wendy Sweet (37:25):
Yeah. And then you have to get it priced
Bill Fairman (37:25):
And you’re going to have to get it reinvested. And if there’s, let me give you an example. If you have an 11% interest rate and you miss one month out of the 12 months, invested your interest rates going to be 10. Well, if you miss two months, it’s going to be nine and a half, right? So don’t get too concerned with the return in a fund because it’s always happening and there’s a lot less work involved if you want a second job, and it depends. If you’re doing it yourself, it’s a second job. If you’re doing it with a managed company, like a company that buys and sells notes and they’ll help you buy and sell notes, that’s managed a company like ours, where will offer,
Wendy Sweet (38:18):
Pieces of our loans.
Bill Fairman (38:18):
Individual loans. The thing about it is with an individual loan, while you have a little bit more control, because you get to pick and choose which one do you want. You’re also putting a chunk of change into one asset,
Wendy Sweet (38:31):
Right. It’s not diversified.
Bill Fairman (38:31):
And it’s not as safe and while the initial yield looks good, the possibility of having gaps will bring your annualized return down. I hope that helps
Wendy Sweet (38:45):
So you need a little bit higher risk tolerance to do what we refer to as one-off lending. Then you do to put into a fund, which is, you know, you’re a member of the LLC of the fund and you own everything that’s in the fund.
Jonathan Davis (39:04):
Piece of everything.
Wendy Sweet (39:04):
Yeah. You get a piece of it, of everything that’s in there. So that was a great question. Thank you for asking that.
Bill Fairman (39:11):
Yeah. If you’re doing the direct lending, you’re the big fish in the small pond. If you’re in the fund, you’re a small fish in a big pond, but that’s okay, that’s why they have schools for safety,
Jonathan Davis (39:23):
But it’s all like, you know, I think Bill said this before, and it’s all about return on effort. I mean, you know, if you don’t have the time or don’t want to take the time, your return on effort in the fund, even though the yield may be lower than it all as a one-off your return on effort is higher in the fund than it is as a one-off lender.
Bill Fairman (39:42):
Yeah. And at the same time, you still have to do your due diligence. You have to do your due diligence on the management and what it is they’re investing with and do they have a track record and getting referrals from other fund investors and you know, how long they’ve been doing this for anyway, you’re welcome Don.
Wendy Sweet (40:00):
I do know. I mean, we’ve got people that invest in our fund and they also do some one-off stuff. So they have the option for both. To me, those are people that just enjoy the game.
Jonathan Davis (40:13):
And they have the time. They’re all, I mean, most people do it. I mean, most of them are retired. They’re just, there’s a few that aren’t, but they, like you said, they,
Wendy Sweet (40:24):
They enjoy the game! They liked that action and they enjoy doing what it takes to get loans out there and then, you know, we’ve got some people who love that game too, but they’re done with it and they just like, give us the money and go.
Bill Fairman (40:41):
Let’s move it along.
Wendy Sweet (40:42):
And we we’re talking about risk tolerance.
Bill Fairman (40:44):
Yes. Let’s talk about the borrowing side, the lending side, if we’re looking at a deal with her, but is risk tolerance mean for us as a lender when we’re looking at a deal.
Jonathan Davis (40:55):
Yeah. I mean, it really comes down to the five C’s of credit. I mean, that’s really, you know, what’s the collateral, what’s the person’s character, you know, what are the conditions of the market that we’re in right now?
Wendy Sweet (41:07):
Two more.
Jonathan Davis (41:10):
What was it, cash flow? Or I guess capital, wasn’t it, cash flow capital.
Bill Fairman (41:14):
Don’t forget about character.
Jonathan Davis (41:15):
Well, I already said character.
Bill Fairman (41:16):
Okay.
Wendy Sweet (41:18):
We really got that down.
Bill Fairman (41:18):
Oh, say it again cause I forget
Wendy Sweet (41:22):
Basically we have a lot of guidelines in place. You know, number one for us, we look at every deal as if we have to take it back tomorrow. That’s our number one thing that we’re looking at, how long will we have to sit on this property? Or can we get rent for this property if we have to take it back tomorrow, we’re looking at everything that way.
Jonathan Davis (41:45):
I mean, our last two, I mean, you know, not to get too specific, but our last two months, the average loan size that we funded was in the one twenties.
Wendy Sweet (41:54):
Yeah. We love that.
Jonathan Davis (41:56):
You can rent that all day long. I mean, that’s, you know, very rentable .then that’s how we look at things. You know, our average loan size, isn’t half a million. You can’t rent those. You can, but you won’t make any money.
Bill Fairman (42:10):
Yeah. So our risk, as far as risk tolerance goes, ours is low. That’s why we’re in the single family, affordable housing market. We want to keep our risk as low as possible. We want to have as much of a plan B, plan C as possible.
Jonathan Davis (42:29):
Now, do we lend in the multifamily and the commercial space? Yeah, we do.
Bill Fairman (42:33):
But those are low risk, as well,
Jonathan Davis (42:37):
Well, they can if you underwrite them correctly.
Jonathan Davis (42:38):
Right.
Wendy Sweet (42:38):
Which we hope we are.
Bill Fairman (42:40):
But you have multiple doors that you have possible income from if you ever had to take them back and there’s kind of the same thing.
Jonathan Davis (42:48):
But the risk tolerance also comes into how we, you know, we don’t do 80% commercial. You know, we don’t skew it to one side. We do typically 70% single family, 30% commercial multifamily, small, you know, small balance commercial stuff like that so the majority of our bucket is in single family and the very safe vanilla stuff and now we do other things that have a different risk profile that can produce higher yields to help boost this 70 but the core of what we’re doing is right here.
Wendy Sweet (43:25):
Right. This is a great question.
Bill Fairman (43:27):
Yue has a question, and frankly, her question is when you’re lending, you prefer an LLC or an LP. Now, I don’t know if you’re asking, as a lender being the LP or the LLC,
Wendy Sweet (43:43):
She is. That’s what she’s, I think so.
Bill Fairman (43:43):
Okay. I can’t answer this question for you. I am not an attorney. And I can’t tell you,
Wendy Sweet (43:50):
Yeah. You can’t even play one on TV.
Bill Fairman (43:51):
I can’t tell you the difference. However, I know everything that we do is an LLC. Uh, but you really should talk to a corporate attorney that can give you the reasons or, you know, the benefits of each and why.
Jonathan Davis (44:09):
I mean, like, you’re not, I can’t tell you, which, but everything I do is in an LLC.
Wendy Sweet (44:14):
That when you borrow.
Jonathan Davis (44:14):
When I lend or when I borrow, everything is in an LLC.
Wendy Sweet (44:18):
Yeah. I do that too. When I lend, if I lend out, I’m going to lend out in an LLC, but I also have done personal as well, just in my name and I know several people that do that do lend out just in their personal name. I think the majority of people who are lending out in the personal name, the biggest concern is they, they want some sort of veil of protection in front of their name. So people aren’t always tracking them down, asking for money. It might be that, you know,
Jonathan Davis (44:53):
Well, and then also if something, I mean, from my, again, I’m not an attorney. If that I had to take the property back, I prefer the LLC to own it and the LLC is not me and if there’s a slip and fall, there’s, you know, whatever happens on that property, I, Jonathan Davis, won’t give him a middle name because we’re not that close yet, but I’m not personally liable for that. The LLC is right.
Bill Fairman (45:21):
Yeah. The only way you would be personally liable is if there was negligence involved and they can prove that. That said, there’s not, anybody can go to the secretary of state of wherever that LLC is. Of course you’d have to figure out where it is first. And then you can find out who the principals are. The only way you’re going to have real anonymity, and you can still break that veil with a lot of work, have to think of people to court, and it’s going to cost a lot of money and this is why people choose it is a trust, a land trust of some sort but the corporate liability veil is really the most important, not necessarily your personal name, because people can find it. If they work hard enough, you know,
Jonathan Davis (46:05):
And you can pay it. I mean, just you don’t have to set even set up a trust, but you can just pay a third party to set up your LLC so it gets filed as them, as the person filing and your name is never on it, on the filing. Now, you know, now people can do research and, you know, they can request those documents, you know, however they want to get it, but they can get it. It just creates another layer
Bill Fairman (46:29):
And by the way, this is all personal opinion. We are not giving legal advice,
Wendy Sweet (46:33):
But you know, what we can do is we should invite Mary Hart and maybe Quincy Long to come in and talk about trusts and how they work and the, you know, the benefits and that kind of thing. That would be great. So we’ll put that on our list. I’m going to do it,
Jonathan Davis (46:50):
We can only tell you what we’ve done, we have LLCs, and we don’t know what you should do.
Jonathan Davis (46:54):
And they were recommended to us by our securities attorneys and everybody else involved. So, there’s gotta be a good reason for that.
Wendy Sweet (47:02):
We figured they know way more than us. So we just say, okay,
Jonathan Davis (47:06):
Is the fund a limited partnership or is it an LLC?
Bill Fairman (47:09):
An LLC. It’s an LLC owned by the investor. Yeah. Okay. Listen, it’s been, wait a minute.
Wendy Sweet (47:18):
I always enjoy listening to the three of you talk and answer questions. Thank you, Sue. It’s a wealth of valuable information. We’d love to hear stories from Mary and Quincy. We love Sue. Thank you, Sue.
Bill Fairman (47:28):
Alright we have to get them in because Sue is tooting our horn.
Wendy Sweet (47:31):
Yeah. And Sue is actually, I mean, she’s been lending with us for like mega years.
Bill Fairman (47:36):
She was on our show last week.
Wendy Sweet (47:36):
She’s in the fund, right? She’s in the fund.
Jonathan Davis (47:40):
And she’s the one-off lender.
Wendy Sweet (47:41):
She’s a one-off lender. She uses an LLC. She uses her IRAs. If we, you know, we had her last week and um, if you get a chance, you need to pull it up and listen to her talk. Cause it was awesome.
Bill Fairman (47:52):
Yes, absolutely. All right. We have other things to do, so we’re leaving.
Wendy Sweet (48:02):
We’re hungry.
Bill Fairman (48:02):
I’m just kidding. Thank you so much for joining us on Passive Income, Active Wealth. We are Carolina Hard Money. No, we’re not. We’re Carolina Capital Management, but we’re also Carolina Hard Money. Our website is CarolinaHardMoney.com. If you’re a borrower, click on the apply now. If you are an investor click on the investor tab. Don’t forget to share like subscribe, ring the bell, all that good stuff. I had a great time, didn’t you?
Wendy Sweet (48:30):
I did.
Jonathan Davis (48:30):
It was enjoyable for me.
Bill Fairman (48:31):
See you guys, later, actually. Bye.
Wendy Sweet (48:35):
Bye.
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