Bill Fairman:
Hi folks. Have you ever wondered what kind of the process we go through to find out whether a deal is a deal or is it time to walk away and find something else? We're going to cover that when we come back. Hello! Welcome to the show and this is the Passive Wealth Show. I'm Bill Fairman. Wendy has switched places since our last show.
Wendy Sweet:
I feel a little bit higher.
Bill Fairman:
Jonathan now has a whole half a screen to himself.
Jonathan Davis:
[inaudible]
Bill Fairman:
We are Carolina Capital Management. Our website is CarolinaHardMoney.com. We are lenders in the Southeast, and if you are a borrower interested in borrowing in the Southeast, click on the apply now tab and if you're an investor looking for passive returns, click on the accredited investor tab. Don't forget the share, like subscribe, hit the bell. And what else? I think that's it.
Wendy Sweet:
Tell all your friends, ask a question in the comments center.
Bill Fairman:
Thank you, Cherub, for reminding me. We do have a little chat to the right or to the bottom of the screen, depending on what platform you are viewing from. And we'd love to answer any questions that you may have live while we're here. Not so live when we're not
Jonathan Davis:
Like, Bill said, we're going to be looking at when we get a deal from the intake, how we analyze it. So if you have any questions about any part of that, just shoot us a comment and we will happily do our best to answer.
Wendy Sweet:
And actually, we talked about this in our big year yearly meeting is we intend on doing this once a month now. Maybe even more often where we just go over leads of conversations that we have with people, how we're underwriting deals in the first three minutes of a conversation. You know, this isn't the full underwriting, but it's, you know, Hey, let's walk through this deal. Let's figure out if it's a deal or not and not only the deal itself, but also is this borrower somebody we really want to work with. So we know all that really in the first three minutes of a conversation with someone. And I think this is good for people who are interested in lending and it's good for people who were interested in borrowing, so they know what they need to be bringing to the table to make it work.
Bill Fairman:
Yeah. And if you want us to turn your deal down, live on camera and then put it into chat
Wendy Sweet:
I'm not going to have any names. I'm not going to talk about any addresses. And, so nobody's going to get nailed on this, unless it's something really good. And then we'll lift you up and give you a big shout out
Bill Fairman:
A benefit to our listeners. Since I'm in the fundraising side of the business, I'm not going to talk for a while.
Wendy Sweet:
That's a miracle waiting to happen, but anyway, that's good, Bill. I'm excited for you. So this, this first deal that are really, really, I wanted to talk about came in, actually on February 18th and it's in Baldwin, Mississippi, it's a little tiny town. Not really close to many big cities. I was looking at to see how close it was to Jackson and it's kind of out there on its own. It's a single family house. The current owner says to me, the first question I always ask is, you know, what do you think the after repaired value is? And the current owner believes that the after repaired value is $85,000 and this is a first time borrower, first time rehabber in this business for fix and flip, but he also is a contractor and remodeler. So he has good experience. That always makes me want to talk a little bit more when they have that kind of experience. This person also has a 700 credit score and at least 15,000 in the bank. That's not as much as I'd like to say, but he's got $15,000 in the bank. And actually, this is not a fix and flip. I made a mistake. This is actually a fix and hold of what he wants to do. So credit score is really important when somebody, or is interested in doing a fix and hold, because they're going to have to refinance out of our short-term loan and be able to qualify score wise.
Jonathan Davis:
So you wouldn't give someone a fix it to rent loan if they had a 580?
Wendy Sweet:
Only if I'm setting them up to fail. That's a great question, right? Because if they're trying to get it refinanced, nobody's going to touch that. And then they're going to be stuck in our loan in a rental property loan no less, because usually if they're buying it to rent it out, it's in a neighborhood that's full of rental properties. They're not going to be able to get out of it and although we appreciate making those big, getting those big interest payments back in, they're going to stop at some point and it's going to put them out of business and they're never going to want to do business again, so that doesn't help anybody. But currently on this one, this particular one, the after repaired value is 85,000. The estimated rehab amount is 35,000 and I trust that because this is a contractor slash remodeler. That's what they do for a living.
Jonathan Davis:
We would verify that down the process, but this is just the initial intake.
Wendy Sweet:
Absolutely. Absolutely. And then the purchase price on this is $32,000. So looking at this, we're looking at $67,000 as an investment in this house. That's what they're going to have in this house.
Jonathan Davis:
So you're at 79% LTV on, on the ARV, right?
Wendy Sweet:
Well, if we take 85,000 and we multiply it by 70%, that's the easy formula that you're going to use. The most they can be in this loan for it to really be a deal for them would be 59, 5 and so we're sitting at 67,000, there's two schools, two different schools you can think of here. One is it's either a deal. The other one is it could be a deal because it's a buy and hold. If he were going to flip it, I would say, run like the wind. You know, this is not a deal. You're not gonna make any money off of this, but since he wants to hold onto it as a rental property, the next question is how much rent can you get on this property? And his answer to me on this was, wait for it, $650. So now he's in a deal for 67,000 and actually it's more than that once you put the closing costs in there, right? Is it a deal, Jonathan? What do you think?
Jonathan Davis):
It's tight. I would say that you're too tight on that one. You're below a 1% per month on your income for the property, for the rents. You're right at 80% of the ARV value, which is right now, the max that you could refi out. So the max that you can refi out with anyone that I know would be an 80% rate in term a loan. So, I mean, like he's walking the edge, which one thing goes wrong, he only gets $600 a month in rent, not 650, or it's worth 82,000, not 85. I mean, he stuck. He's razor thin. So in my opinion, that's too close to the edge and you don't have enough margin,
Wendy Sweet:
Right. So if cash flow is your play on this, there's not really a lot of cashflow to be had in this
Jonathan Davis:
If he can get to a long-term, you know, has a 700 credit score, he can get to a long-term loan where he's paying, you know, 4 or 5%, when you add in taxes, insurance, your principal and interest payment. I mean, he'll cashflow, but I mean, it's not going to cashflow.
Wendy Sweet:
Maybe a hundred bucks.
Jonathan Davis:
It's not going to cashflow $200, which is what most people try to target is that two to 250 per unit cashflow per month and it won't hit it.
Wendy Sweet:
Right. Here's the other thing we're juggling with right now is, you know, we're kind of at the top of the market and what houses are selling for. So is now really the best time to buy and hold it? Is now really the best time to buy and hold? I think it is, but only if you're getting a kick-in deal, you have to really get those. You shouldn't be tight in a deal if you're going to hold onto it for awhile. Not at this point anyway. So, how did this one end? Well, we're still waiting to see what they're going to do. I've sent them off to really think about what they wanted to do and what their goals are as an investor and maybe they really need to look at some fix and flip type properties at the moment just to see what happens. This next one I wanted to talk about is a duplex in Spartanburg and they're telling me that the ARV, the after repaired value is about 101,000. This is their first deal. They have a 700 credit score. They have $9,000 in the bank. Not really quite enough. Purchase price is 67,000 and the estimated rehab is 40,000. So they're thinking that they're going to be in it for exactly what the after repaired value is. The rent that they're getting currently is 425, and it is their belief that they can basically double that to 800 on each side. That is unlikely. Wouldn't you say, Jonathan?
Jonathan Davis:
I mean, with a $40,000 rehab, so you're saying 20,000 per unit. I mean, 20,000 in a unit, I assume these are what? Two, ones or something like that?
Wendy Sweet:
They are.
Jonathan Davis:
Yeah. So you're doing a, you're doing a kitchen and you're doing a bathroom, paint and carpet and maybe like some other modern repairs around it. Right? It's pretty more or less cosmetic. I mean, you have to know the rent comps in that area. I mean, if it's getting 425 right now and you put in a new kitchen and all that stuff, could you double your rent if you're in the right area? Sure, absolutely. It'd be foolish to say that you couldn't, or if it's under the market rents right now, I mean, in its current state or other comparable houses renting for 650, you know, and it's just under market. So you have to show where, Hey, this is either currently under market. And when I do these repairs, here's where it's going to be and that's on market rents and here's the house next door or the unit next door or whatever it is and here's what they're renting for. But to answer your question, it's rather unlikely to double rents like that.
Wendy Sweet:
And the other thing that makes me think that it's probably not in a great neighborhood where they can get those rents up that high is because the after repaired value of the duplex is 107. That's pretty low.
Jonathan Davis:
Now bear in mind, duplexes are more difficult to value across the board. I mean a duplex will always value on a sells a comparison, much lower than a its counterpart of a single family home. That's just a one unit. We're always going to do it because there's less comparables. They have to go further out. It's just more difficult so when you're buying something like this, you are buying it for the cashflow and if you have to buy the property and rehab it for what it's worth, I'm not sure the cashflow is going to save your deal cause you're in it and what it's worth. I mean, if you don't have the cash to just pay it off out of your own pocket, you're going to have to come up with 20 to 25% with another lender to get it into a refinance so either way, you're going to come up with more money.
Wendy Sweet:
That's exactly right. That's exactly right. And the last thing you want to do is get into any deal broke. When you go to the closing table and the closing cleans you out, you do not want to be that person standing there with no money left because it's pretty likely something's going to go.
Jonathan Davis:
And for clarity's sake. Cause we do get this question a lot. I think I do, anyway. I'm sure Wendy does probably more. So, you guys are hard money. I'd shouldn't need any money to do the deals. Yes. You do. You need money because how are you going to pay the interest payments? How are you going to pay the taxes? How are you going to pay the insurance? You know, how are you going to show the proper, if it's a refinance and like to long-term for a riddle, how are you going to show the proper DSCR if you're going with a bank or a credit union, who don't analyze on just the asset itself,
Wendy Sweet:
Mention what DSCR is. There's not a lot of people will understand what that stands for
Jonathan Davis:
Debt, Service, Coverage Ratio. Most of them, if you get into like the secondary market where they only run it on the property, so that's your Principal, Interest, Taxes and Insurance PITI. And but if you go to the conventional route, they're looking at you, they're looking at, okay, well, if the property doesn't cash flow or what. Even if it does, I still need to know that you can pay this. So it is very important for you to have money, to get into these deals. It doesn't always have to be your money. You can get a partner. So, you know, there's many ways to do it.
Wendy Sweet:
That's a great point. That's a very good point. I've got this next one that came in in the beginning of February, I got a call from an investor and she is a very experienced investor and they're used to doing really big rehabs, like high end rehabs, like this. This one, the after repaired value is $1.7 million. Now, that's enough to make you tighten right up, isn't it?
Jonathan Davis:
I'm already nervous.
Wendy Sweet:
We used to do big loans like this all the time, but in 2019, January of 2019, we changed the way we do business and liked the affordable housing market. I think it's great when you can walk away with 5, $600, $600,000 as your profit. But you know, it doesn't happen that often and you have to sit and wait on it and sometimes it doesn't always work out that way so it's just a scary place to be. So this girl, I can tell you, it's in Charlotte, in this area called Providence plantation, which is a beautiful neighborhood and it's a strong neighborhood and houses are selling there quickly, I don't know how quickly, but you know, not like the $150,000 houses are, but it's definitely a good, strong, solid, solid area and this person has credit scores that were, you know, well, over 750, they had a million dollars in the bank. So they could do most of this deal on their own anyway and it needed minor updates but they wanted to pay for those updates on their own and minor and you know, a house of this caliber is a hundred thousand dollars. That's minor. So they did call us for a loan. And normally, we would have said no, just because of the price, right?
Jonathan Davis:
Yeah
Wendy Sweet:
But we both kind of thought the same thing. What was that?
Jonathan Davis:
I mean, if we're in at the correct LTV in an area that's still moving with a borrower that's this strong, it's all how Wendy and I think about things. It's all about risk mitigation and like, we like to do affordable housing because that mitigates risk. For a whole host of reasons, go look at our other shows and we explain why. But when you have something like this, how do we mitigate risk? Well, if we had to do the whole loan would we go up to 70% of the ARV? No, no, we wouldn't because then we're doing the exact same thing we would on everything else. And if we had to rent it out, it wouldn't cover it. So what do we do? Our first thought is lower the LTV. If we can get the LTV to a low enough place, we start to feel better. Is that where you were going, Wendy?
Wendy Sweet:
Absolutely. Absolutely. And in this particular case, you know, 70% of 1.7 million Billy's got his hand up is 1.19 million. Basically 1.2 and the purchase price is 1.250. So we know they have plenty of money in the bank. We'd love to help them out, but we certainly don't want to be in it at 70% or even 60%, or really even 50% of that ARV. That's still kind of scary. So we offered to do 50% of the purchase price on this deal, and they were thrilled with that. Go ahead, Bill. Did you want to talk?
Bill Fairman:
The other option there is to find another partner that may want to share the risk with us. So take part of the loan, still give them a higher loan to value, but share the loan with another lender and then that way you can also mitigate the risk because we're in it at ourselves lower.
Wendy Sweet:
That's true.
Bill Fairman:
If they're willing to do it at 50, then what the heck.
Wendy Sweet:
That's right.
Bill Fairman:
But if, you know, 60 would have been better, maybe we partner with another fund that would want to take, you know, half the deal as well. So credit unions do that a lot now. They're getting into commercial paper and larger multifamily and three or four credit unions will get together and make one loan.
Jonathan Davis:
Yeah, yeah. But the 50% of the purchase, I mean, in because they have the cash, right? Their payments lower. So what they have to come out of pocket each month for the interest, only payments is less. And they still get to get to sharing that upside. So you see like, properties like this, I talked to so many people, cause there's a lot there's there's lenders who will do this. There's a lot of lenders who won't. A lot of people have to get equity partners to do it and sometimes they get the wrong equity partner and they're giving up a lot of the profits. So if you can ever find a way to structure these with debt, debt is always cheaper than equity, always. Go ahead, Bill.
Bill Fairman:
And these people with a million dollars in the bank, they don't really need a loan. They're smart enough to leverage other people's money because, and especially in real estate, but in any investment, you always have to keep your exit strategies available to you more than one and if you're limited in liquidity, once you're into a deal, you are putting yourself in a corner. So you want to keep all those options open. It's a heck of a lot better to leverage it than it is to go into it all with the equity and what I mean by that is you're getting somebody else that you're going to give a piece of the action, so to speak and you're never going to make as much money doing it that way. You're giving up too much of your upside if you're doing an equity.
Wendy Sweet:
Yup. That's exactly right.
Jonathan Davis:
So you and this person talked and 50% of the purchase and they're going to do the rehab themselves.
Wendy Sweet:
That's right.
Jonathan Davis:
I like it.
Wendy Sweet:
I do too. That's a good, solid investment for us. And it takes a lot of the pressure off of them without having to bring all of the cash to the table when they know they can do that.
Jonathan Davis:
So we're at a 37%, LTV based on the ARV.
Wendy Sweet:
That's awesome. And that's learned to value based off of the after repaired value. I'm having to translate for Jonathan. He's throwing slang around.
Jonathan Davis:
Industry language.
Wendy Sweet:
That's right. We just want to make sure you understand what we're talking about. And gosh, I was going to do another one, but.
Bill Fairman:
Yeah, we don't have enough time.
Wendy Sweet:
We're out of time. Oh, good. We've got more. We can do in the next couple of weeks for ya.
Jonathan Davis:
Oh yeah. We got plenty
Bill Fairman:
So I hope you guys appreciated some examples of what we go through. Again, if you're a borrower or a lender, these are good things to go through. Compare. See why it's a deal. I mean, we don't want to do loans for ourselves. There are plenty of deals that we can do and make money on but it has to be a win-win. It has to be a wind for us. It has to be a windrower investors and it has to be a win for the borrower. If that make sense.
Jonathan Davis:
We don't like, you know, we've said this before. If we tell you it's not a deal, it's because we truly believe that. We do not make money unless we make loans. We are incentivized to make loans so that we can make money. If we're telling you, Hey, we're not going to make this loan. And this is why, I mean, you don't have to listen, but there's something to it.
Bill Fairman:
Think of your hard money lender as the Canary in a coal mine.
Wendy Sweet:
That's well said.
Bill Fairman:
If they're not willing to do it, you shouldn't be either.
Wendy Sweet:
That's right.
Bill Fairman:
All right folks, thank you so much for joining us. Again, check out Wednesdays With Wendy. Now, there's a link there. Get onto her calendar, the link she provides a lot of good content, personalized. She even has your name on the zoom call. So yay. It's personalized.
Jonathan Davis:
Hey, imma jump in,
Bill Fairman:
I'm sorry.
Jonathan Davis:
I'm sorry. We had a question. I just want to answer it real quick. It says what's the average length of your loans? How many months? It depends on what you're doing, but typically they're six months to 12 months. Six months is going to be like a light rehab or a fixed to rent and we also do nine months in there as well. So anywhere between there, but 12 months are going to be more of your heavy rehab or new construction.
Wendy Sweet:
And even higher on multifamily.
Jonathan Davis:
Yeah. And if we're doing multi-family repositioning, those are 12 to 24 months
Bill Fairman:
Or in short, our loans last until they're paid off. Hopefully. Thanks again, guys. We are Carolina Capital Management. Our website is CarolinaHardMoney.com. If you're a borrower interested in borrowing money, click on the apply now to tab. If you're an investor looking for passive returns, click on the accredited investor tab. If you're so moved to click on Wendy's link, that'd be great. Like I said, she presented some great content. Don't forget to subscribe, share, like hit the bell and I think I'm done here.
Wendy Sweet:
Well, and this person has another question too. We'd love to answer your questions directly. You can reach out to me, Wendy@CarolinaHardMoney.com and I'd love to have a longer-term conversation with you.
Bill Fairman:
And if you're worried about inflation buy real estate,
Jonathan Davis:
And the language to protect against inflation is the term of the loan.
Wendy Sweet:
That's right.
Bill Fairman:
And we can talk about how terms will affect that in our next show. How about that?
Wendy Sweet:
Sounds good.
Bill Fairman:
Excellent. All right. Y'all have a great week. We'll see you. Well, I won't be here next Thursday, but Wendy and Jonathan will.
Jonathan Davis:
I won't be here next Thursday.
Bill Fairman:
See you later.
Wendy Sweet:
I'm gone too.
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