In today’s episode of Active Income, Passive Wealth Show of Carolina Hard Money Bill and Jonathan will answer the “ Ugly Question” of the day.
If a loan is collateralized by a house and you are only at 70% of the value, how can there be any risk?
If you have a loan or if you are borrowing money and the Loan To Value is a certain amount, let say 70%, then maybe you are assuming that there isn’t much risk.
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Bill Fairman (00:02):
Hello everyone. It's Bill and Jonathan with Carolina Capital Management. Welcome to our show. So have you ever wondered about the risk of the different loan to values on your collateralization? So in other words, if you have a loan or if you're borrowing money and the LTV is a certain amount,
Jonathan Davis (00:25):
There can't be risk, right?
Bill Fairman (00:26):
That's loan to value You're assuming if you're at say 70% of that value, there's not really much risk, right?
Jonathan Davis (00:37):
Let's find out.
Bill Fairman (00:37):
We'll find out right after this. Wow. I love that intro. So welcome to the show. This is the, what is it called? The Active In-, no. Passive Income, Active Wealth show.
Jonathan Davis (01:00):
Active Income, Passive Wealth.
Bill Fairman (01:01):
It shows up right on the screen every time and I still get it wrong. It's just old age. All right. So we are Carolina Capital Management. We do make loans throughout the Southeast. So if you are a borrower in the Southeast, looking for investment loan Carolina Capital, I'm sorry. CarolinaHardMoney.com. Just click on the apply now tab. If you're an investor looking for passive returns, click on the investor tab.
Jonathan Davis (01:31):
If you're looking for some active returns. We'll help you out too.
Bill Fairman (01:34):
We'll put you to work. Don't forget the share, like subscribe, hit the bell, all that good stuff and we have a chat, either on the side or underneath the screen, depending on the platform that you are. So you can always ask a question. We always like comments that are good. If they're a bad comment, then keep it to yourself. So let's, we listen, it's a lot of breaking news.
Jonathan Davis (02:04):
There's the news,
Bill Fairman (02:04):
There is, needless to say so. Wow. That's awesome.
Jonathan Davis (02:20):
That's a new one. It's nice.
Bill Fairman (02:22):
They're always keeping us on our toes.
Jonathan Davis (02:24):
Right.
Bill Fairman (02:25):
Okay. So Joe Biden was certified through Congress late last night. Well, actually early this morning, they ratified the election. At the same time, we had those two Senate seats and Georgia go to the, to the Democrat side of the aisle. What does that mean for real estate investors? Well, for one thing, and for the next two years, I think it's going to be awesome.
Jonathan Davis (02:59):
I agree. Yeah. I mean, well, and depending on what you are in, yeah, I think, there's definitely, we talk about this all the time. There's a housing need that hasn't it hasn't stopped and that's not going to stop just because a new president is in the office. Well, or, you know, the new, I guess, what is it? The executive branch now has the power to block all Republican, through the all Republican, I guess, bills through the, through the Senate and they had the power to pass.
Bill Fairman (03:30):
Well, not the executive.
Jonathan Davis (03:31):
Well, that's true. No, Camilla Harris is.
Bill Fairman (03:36):
When she breaks the tie.
Jonathan Davis (03:36):
Exactly she's the 51st.
Bill Fairman (03:37):
When she's breaking the tie and she's part of the Senate,
Jonathan Davis (03:42):
Technically. But you, we, yeah.
Bill Fairman (03:42):
But anyway, he's right. The only agendas that we'll get through are going to be the democratic agenda agendas. Now, if you're worried all hell is breaking loose. Well, that may happen, but not for the first couple of years.
Jonathan Davis (03:57):
Yeah, probably not.
Bill Fairman (03:57):
Here's in a nutshell, what's going to happen. At least that's my crystal ball. So Democrats are famous for spending, throwing money at problems, a lot more money than conservatives typically want to do, but they're going to do a lot on infrastructure spending. They're going to throw a lot of money at this economy. The fed is going to continue to print money. The upside to that is there's going to be plenty of capital out there. There's going to be plenty of construction projects going on. How is that going to help you as a real estate investor? Well, it's going to hurt you in one way is you're not going to have as many trades available because they're going to need them. One of the problems that we've had in this country is that students have been discouraged to do anything outside of a four year college degree and not getting your fingers dirty and we have a shortage of trades. So there's are going to be a lot of need for trades people with all this infrastructure construction going on.
Jonathan Davis (05:08):
Yeah. Electricians, plumbers, framers, carpenters, you name. I mean,
Bill Fairman (05:14):
Well, what's going to end up happening is there's going to be a lot of money throwing it in the economy, which means money is going to be cheap and easy because the fed is going to continue to print money. What's the downside to that is that the dollars will worth less.
Jonathan Davis (05:30):
Inflation rises, dollars worthless.
Bill Fairman (05:33):
Yep. So your hedge against inflation is going to be real estate.
Jonathan Davis (05:37):
Correct.
Bill Fairman (05:39):
People still always are going to need a place to live so their rental properties are going to be a good bet. Single family is always a good bet because it can be a income producing property. It can be a, you know, fix and flip type of a sale. That said, people are going to have plenty of jobs available to them with all this construction going on, if they get trained right and you'll still have plenty of demand for housing.
Jonathan Davis (06:10):
Like I see people, you know, they're talking about, you know, precious metals and stuff like that. You know, I guess that's fun if it were me and I was doing something outside of real estate, I would do natural resources, water, gas, solar power, or some kind of power. I would do that, you know, gold? I don't know. And this is just my personal opinion. As we get more to a digitized economy where all the money is digitized, how valuable is gold?
Bill Fairman (06:37):
Well, look at Bitcoin. It actually reached $38,000.
Jonathan Davis (06:41):
Yeah, exactly.
Bill Fairman (06:43):
And I don't know if it's as much for the coin itself, but the blockchain technology is going to be here with us, especially now that everything we do is remote anymore. It's really difficult to have to do, you know, personal signatures in some place with several parties that are there. So the blockchain is really going to help with that, I think. The job numbers, I, they were slightly better than expected, but I mean, it's still awful.
Jonathan Davis (07:26):
Yeah,
Bill Fairman (07:27):
The continue in claims were slightly up and they're going to continue to go up as COVID kind of stays with us until they get these vaccines rolled out. You're going to have places that are locking down and, you know, people are just going to be out of work. So in the short term, the job numbers, you're probably going to see higher unemployment numbers coming up for at least a short term until they get this vaccine rolling out and everybody gets that. What do you call it? The herd, immunity thing going on. But again, what's going to end up happening with all this spending because we don't have the money. It's all going to be borrowed eventually they're going to have to start doing the taxing and that's for me, that's the harm in doing all this spending it's got to come from somewhere and taxes are going to go up. Fees are gonna go up. Regulations are gonna become more active. One of the things that the Trump administration did was they really, took a lot of layers of regulation off of business. Who does that help the most?
Jonathan Davis (08:44):
Small business.
Bill Fairman (08:45):
Right. So big business loves regulation because it quells their competition because they have the money to overcome all these different layers of regulation. There was, there were times where it would take so long to build a road, the original construction companies that won the bid were out of business by the time it was approved because it took them so long, they couldn't wait. But the bigger global companies love regulation because it squashes their competition. And the other thing that it does, which is not good for the economy in general, is that it also squashes innovation because it's the small businesses, the people that find the niches that add innovation to the economy and that's all gonna get squashed because well, a lot of it is going to get squashed because people still have the capital to compete long enough through the layers upon layers of regulations that a lot of different businesses have to overcome. And listen, there's, don't get me wrong. There's nothing wrong with regulations. You have to have regulations. You have to be regulated for safety reasons as well as not impinging on the rights of others. The problem is when you have too much of a bureaucracy, it's, you know, it's like 14 different agencies that have regulations on the same thing. And every one of them have to sign off before you can get anything done. And that ends up becoming a problem. So short term, we're going to see a lot of money going into the, into the economy. So for at least the next couple of years, I think it's going to be full bore. I mean, the stock market is going through the roof, but again, to me it's kind of a house of cards. It's, based on all this extra money that's being injected into the system.
Jonathan Davis (10:50):
Extra money and a lot of speculation.
Bill Fairman (10:50):
But the dollar, the price of the dollar is going to. Now, it is up the last few days but it's going to, your money is going to be worth less and less. So inflation is going to end up rearing its head. The 10 year bond actually was up over 1%. It was 1.02 or somewhere in that range. So you're probably going to see fairly soon, the end of the sub 3% 30 year fixed rate mortgage, but you know what, it's all relative. I mean, anything South of 6%, it's still a good rate. Don't you agree?
Jonathan Davis (11:33):
I agree.
Bill Fairman (11:34):
And what's going to happen when rates go up.
Jonathan Davis (11:37):
Well, we're going to see more, guess less people purchasing less people refinancing.
Bill Fairman (11:44):
And what happens after that?
Jonathan Davis (11:47):
Well, then you have the trickle down and then,
Bill Fairman (11:49):
Well, it's market forces, and this is what I'm trying to. Prices of homes have continued to go up and up and up and it's a sellers market, right? So eventually it's going to be a buyer's market because you know, the fewer people can afford homes. The longer they stay on though on the market, which means people will have to come down on their prices to sell those homes so they can afford them. And so that's the market forces that are going to start to bring the pricing pressure down a little bit in the single-family markets. Now again, it's all real estate is local, so it's going to be different in every market. But for the most part the higher the rates, generally, the prices come down, the lower, the rates, the prices go up, but it's also a supply and demand thing. So there are several things that are
Jonathan Davis (12:46):
And so there's the multi, you know, like multiple facets in there, like the price of the, of the cost of the goods, you know, lumber right now.
Bill Fairman (12:54):
Yeah. It's almost through the roof. I think it doubled this year, didn't it? Or pretty close to it.
Jonathan Davis (13:01):
My rehabs, definitely. My one I'm finishing up right now. It's way over budget and it's mostly because of increased price of lumbering materials.
Bill Fairman (13:11):
And then think about it. You're going to have as these. And again, it's going to take a little while to move it through Congress and the Senate, but infrastructure spending goes up, then you're going to also have to compete for, uh, subs and trains and whatnot. So the cost of labor is going to go up.
Jonathan Davis (13:32):
And if there's not that many of them, because people have been discouraged to do that trade
Bill Fairman (13:37):
Well, besides the discouragement to get into the trains in particular, you also had people that were in the trades that got out during the, you know, the crash of '08, because the housing market took a big tumble and they were getting into another line of work. And there wasn't a lot of building going on so they went into other lines of work. So maybe they'll come out of retirement or so we'll see there, listen, there's always opportunity where things look rough. You know, I always have to look at the opportunity side of it. So let's get through our question. If a loan is collateralized, Oh, I'm sorry, the Ugly Question. Sorry, I didn't give you enough time to react. So if a loan is collateralized by a house and you're at 70% of the value, how can there be any risk? You would think at it at 70%, or it wouldn't be much risk at all, right?
Jonathan Davis (14:47):
So the, what I would go to is the 2007, eight, nine, did any markets compressed by more than 30%?
Bill Fairman (14:58):
Some but not all,
Jonathan Davis (15:01):
But some did. Yeah. Okay. So by tells me there's risk.
Bill Fairman (15:07):
Well, you say in your, we call them the sand States.
Jonathan Davis (15:11):
Yeah. You're talking about Florida.
Bill Fairman (15:12):
Parts of Florida, um, you know, the Nevada. So you're talking about Las Vegas, Phoenix, LA, a lot of those markets dropped quite a bit during the crash. And I mean, quite a bit, some of them lost 50% of their value.
Jonathan Davis (15:28):
Yeah, exactly.
Bill Fairman (15:30):
And then it was, I don't know that it was super widespread across all the price ranges, but on average, I mean, there were some homes that lost 50% of their bag
Jonathan Davis (15:43):
In the more high price, the home, the more percentage of value that it lost. I would, I mean, would you agree with that? Did a $4 million house lose more percentage of value than a 200,000?
Bill Fairman (15:57):
Yeah,
Jonathan Davis (15:57):
Yeah.
Bill Fairman (15:58):
So that tells you that, and this is, this is going to happen everywhere through all cycles, that the more affordable housing is going to lose less of a percentage than the, you know, upper middle-class type and luxury homes. And then homes again that are really in second home locations, they're going to lose a lot of value because, you know, you can't afford that second home. You either walk away from it or you try and sell it and then when everybody's trying to sell it, then obviously the values go down.
Jonathan Davis (16:38):
But aside from, you know, just complete market collapse, if you're at 70% LTV on a, on a property, I mean, it's how did you structure the loan? I mean, did you give the borrower a hundred percent of the purchase and all the rehab and you were at 70% of the ARV? And you go out there and your borrower's gone, they're not making payments and there's been nothing done to the house. Well, now you have a big problem.
Bill Fairman (17:10):
Yeah. Listen, there there's the risk changes based on current value versus,
Jonathan Davis (17:17):
Subject.
Bill Fairman (17:19):
Subject to completion value. So if you're at 70% of the, as is, then you're a much lower risk than you would be at 70% of the completed value. How do you mitigate that risk? Well, part of that is holding on to the rehab money.
Jonathan Davis (17:40):
Correct.
Bill Fairman (17:41):
So there's nothing you can do about market forces. Those things are out of your control. I was having, I was in the gym last night and one of the young ladies there said, I don't even look at the news anymore. I'm afraid to even go and see what's happening today because it just worries me to death. And I said to her, you have to, first of all, stop watching the news. You have to be informed, but you don't watch it every day. Control the things that you control and not worry about. Don't worry about all the other stuff that's out of your control, because there's nothing you can do about it. So worrying about it's a waste of your focus, focus on what you can do and not worry about that. And that's what we do in real estate. We focus on what is in our control and using the best data at the time. And to mitigate your risk is to hold on to those funds and make sure that you have them in case you do have to take a property back. Now that said, if you're doing your job properly as a lender and the inspections are proper, and the construction is up to par before you continue through these things, the only thing that's gonna hurt you is something that's out of your control, like a market downturn before it gets sold.
Jonathan Davis (19:06):
Yeah. Well, I mean a form of a foreclosure, let's just say you're at 70% of the as-is value is completed and you have to foreclose, you know, that value that you have on that property that you're 70% of is probably going to diminish because now it's not an, you know, it's not an arm's length sale, it's an REO and that diminishes the value, you know, very, I've sold a lot of foreclosure REO homes. I'm not sure that there might be one that we got the full appraised value on And it's very rare.
Bill Fairman (19:46):
Right. Well, it's a different property now.
Jonathan Davis (19:49):
Yeah, no, exactly. Yeah.
Bill Fairman (19:51):
Anything that's in mid construction is.
Bill Fairman (19:53):
We've even completed.
Bill Fairman (19:55):
Yeah. Well,
Jonathan Davis (19:56):
It's distress.
Bill Fairman (19:56):
I was going to get to that. If it's in mid construction and you're selling it, you're selling it at a discount because there's only so many people that are going to want to buy a house that's not been completed yet at the same time, even when it's finished, it's a house that you had to take back in foreclosure and now it's compared to other foreclosures when the appraisals come in. Now, I want to be very clear. When you're at 70%, 65%, your goal as a lender or a banker is not to make, is to come in, grab that property back because they didn't pay and try and make money on it because you're typically not going to make money on it because they haven't paid you in a while and you have accumulated interest that should be collected. You have late fees that need to be, you have expenses that are coming out of your pocket for upkeep of the, the yard that taxes, all kinds of stuff, insurance, all that stuff still has to be maintained. And if you're in the foreclosure process, it takes two, three, four months. And it depends on what state you're in. Sometimes it takes a year to two years or four. I know Jonathan was talking about one that he had with a previous company that when he started that company, it was in foreclosure.
Jonathan Davis (21:16):
And when I left four years later,
Bill Fairman (21:17):
It was still in foreclosure. That's why you want to make sure you make deals and less regulated States, let's say, right? That said that 30% or 35% or 40% of a cushion that you have is so you won't lose principle. That's what it's about. It's not losing principle. Are you losing money if you've lost principal? Well, it depends on when you had to start the foreclosure. If you did it after the first payment, you only got one payment on it, but if you had the thing for, you know, five, six months, and it's not selling or what, for whatever reason, you've got, you know, five or six payments that you made and you're getting your principle back. So you made money, you just didn't make as much as you thought, but the goal in these things, again, the 30%, 35% is to not lose any of your principal. I wanted to make sure that you guys saw over here in the chat. Um, those are the links to our next show coming up. We have a great guest it is, Nick Aalerud, and he is a real estate investor. He owns a real estate company. He knows property management fix and flips wholesale new construction, short sale, all kinds of stuff. He's going to be a great guest to have on. And that starts at 12:30. So thank you guys, I hope you enjoyed our bloviating for the first half hour
Jonathan Davis (23:04):
And just remember, there's always risk in real estate. Anyone who tells you otherwise, run from them.
Bill Fairman (23:08):
Listen, there's risk in any investment. The reason we like real estate is because you have a tangible asset and you're less likely to lose any principle when you're investing in real estate if you do it properly. The big run-up that we had prior to 2008 were people that were speculating, not investing. They just assume prices. And we're getting into that point now where people are buying homes, just thinking that, Hey, I hold this for a year and I can sell it for a lot more. And I see a lot of that going on. But remember, that stuff stops eventually.
Jonathan Davis (23:48):
Also, if someone tells you a deal is a no-brainer run,
Bill Fairman (23:54):
Don't forget to like share and subscribe, hit the bell. We are Carolina Capital Management. We do make loans go to CarolinaHardMoney.com. If you're a borrower and click on the apply now tab, if you're an investor looking for passive returns, click on the investor tab. Thank you so much for joining us and click on one of the links to get over to the other side and we'll see you here at 12:30. See you later.
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