Darrin: I'd like to ask you on Angad Guglani, what is the BIGGEST RISK?
Angad:So I had a few ideas on this, like we talked about Darrin, but you probably gave me a really good story. You did give me a very good real life story and somewhat shaped my thinking. And I would say the biggest risk being very concentrated in one market and one to expand will be concentrated in the other markets. Right? Well, we'll have heavy concentration in a handful of markets. Is something systemic like a major flood or ice storm like that was the example you gave. And something like that where, you know, I don't frankly, I don't read the policies as well as I should. We have a master insurance policy, and I'm sure there's some sort of cataclysmic event that might happen that probably voids the policies. And if that were to happen, that would be very dangerous. Number one. Number two, or, you know, like you said, if you have a major, you know, act of God event and your policy doesn't pay out and you have fixed expenses like mortgage and taxes and stuff and you fall behind on those, that's another big expense. Big risk. So, yeah, basically anything that comes of concentration, I would say is this is the BIGGEST RISK.
Passive income through real estate is an attractive option for investors with a good job, or would rather rely on an experienced operator rather than take on the risk of investing on their own.
Kathy Fetke, Co-Founder of Real Wealth Network, and returning guest to CREPN Radio identifies the risk investors face when investing passively. Real Wealth Network works to educate investors on the investment options available so they can prepare for a secure financial future. In this episode, Kathy explains the steps you can take to protect investment to minimize your risk when investing.
Passive Income Opportunities in Real Estate can be very lucrative. Ideally, passive income is truly passive that does not require you the need to tend to the day to day operational concerns. Instead, you place your investment with a deal sponsor, then receive handsome monthly or quarterly returns.
In addition to the positive cash flow, you receive the multiple benefits real estate provides. These include, depreciation, appreciation, and principal reduction. Together, these benefits combined with positive cash flow make real estate a tough investment to beat.
Sponsor due diligence is critical to save guarding your investment. The recent recovery from the 2008 market crash has provided handsome returns for anyone who invested post crash. Some deal sponsors have only experienced the upside of this recent market. If your only experience is from a once in a lifetime market, where everything increased in value, it’s doubtful you have a true understanding of the risk posed by real estate.
Unfortunately, the recent profits that have been made in real estate have attracted interest, and some less that stand up characters who appeal to the unwise potential passive investor. The digital, social media world makes it easy for anyone to market themselves as an expert.
Real Wealth Network performs background screens on all of the deal sponsors they invest with. Ideally, the sponsor or a member of the team will have more than 10 years experience, and has survived multiple market cycles.
Market due diligence is critical to safeguard your investment. It is easy to isolate any property and identify its upside. However, if you do not understand the market the property is located in, you can easily lose your investment principal or be stuck with a property that has no possibility to sell.
The real estate market is not singular. Real estate is local. It requires that you understand the local state of jobs, population growth, and the supply of housing. Is the housing affordability in the area?
What is the local government’s attitude towards development and landlord laws. Your understanding of the local market is fundamental to your success.
The current market cycle has little room for error. Prices are up, interest rates are down, and affordability is stretched in most primary and secondary markets. This is a very different market than the last ten years where the market has risen from historic lows.
Given this change, Kathy and her team have moved into single family starter home development. Interest rates are low, and qualified buyers can get affordable rates. The demand for first time home buyer homes is significantly greater than the supply. This is a great opportunity to invest with a developer for handsome returns.
Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”
Darrin: Kathy Fetke, What is the BIGGEST RISK?
Kathy: There are so many, but I would say the BIGGEST RISK is not being educated, which is why it is my mission to help people. Like I said at the beginning, the show to raise the wealth consciousness of the average person and definitely of the average investor because there are so many landmines. Whether you're investing in the stock market or in real estate or in Bitcoin or whatever you're investing in. You've got to really take a deep dive and understand it. We've been sort of trained over the years to not really understand it, but hopefully our financial planner understands it and we hand over our money and hope they do well with it. So we haven't really been taught that it was important for us to understand it. We don't we're not educated and in high school and probably not in college for most people.
So first and foremost, the biggest risk is not understanding what you're investing in. From there, I would say what I'm seeing is a lot of gurus. We're at that stage in the market where people have maybe done fairly well, then maybe they did one deal and it went well because we've been in the market and now they are a guru. I've seen this. They can very easily start a podcast or it's so easy to become sort of a well-known person. Thanks to all social media and the Internet and so forth. So these people now don't have a lot of experience, but they've kind of become this guru, so to speak.
For more go to:
Darrin: [00:00:08] Kathy Fetke, What is the BIGGEST RISK? [00:00:11][3.5]
Kathy: [00:00:14] Well, there are so many, but I would say the BIGGEST RISK is not being educated, which is why it is my mission to help people. Like I said at the beginning, the show to raise the wealth consciousness of the average person and definitely of the average investor because there are so many landmines. Whether you're investing in the stock market or in real estate or in Bitcoin or whatever you're investing in. You've got to really take a deep dive and understand it. We've been sort of trained over the years to not really understand it, but hopefully our financial planner understands it and we hand over our money and hope they do well with it. So we haven't really been taught that it was important for us to understand it. We don't we're not educated and in high school and probably not in college for most people. [00:01:00][45.7]
[00:01:00] So first and foremost, the biggest risk is not understanding what you're investing in. From there, I would say what I'm seeing is a lot of gurus. We're at that stage in the market where people have maybe done fairly well, then maybe they did one deal and it went well because we've been in the market and now they are a guru. I've seen this. They can very easily start a podcast or it's so easy to become sort of a well-known person. Thanks to all social media and the Internet and so forth. So these people now don't have a lot of experience, but they've kind of become this guru, so to speak. I'm seeing every day I get people coming, deals coming on my desk that, you know, hey, we just found a 400 unit apartment building. Do you want to invest in this or do you want to partner with us on it? And I'm not an apartment expert, but I do surround myself with experts. And we just kind of sent two deals yesterday to our apartment guru. He is a real one. He's been doing it for 40 years and he asked 10 questions. And basically they were really bad deals. So he, in fact, owns 10000 doors apartments and and just sold the bottom 10 percent that leased performing the the properties that were just OK. They'd already tried to rent the raise the rents as high as they could go. They'd already done the renovations. There was no more money that could be squeezed out of these properties. So they marketed them and they put them at the most ridiculously low cap rates, the highest price they could. They couldn't even imagine anyone would consider buying these properties. And there was multiple offers over asking price. So they basically sold the bottom 10 percent of their portfolio for the highest price. And they're sitting on cash, waiting for some of these deals to implode. Because there's so many people who just don't know what they're doing in multifamily, but are obsessed with the idea of it, thinking that that's that's the true way to wealth. Which it can be, if you buy right. So to me, that's that's kind of a I'm seeing that pretty commonly today. If you're going to invest in somebody syndication, make sure they have more than 10 years experience or they have someone on the team who does. A wise, wise advisor. Because there are a lot of the highly experienced people are just scratching their heads going. I don't see how this is gonna possibly work out for them.
Blockchain is the technology disruptor that provides liquidity for real estate syndication deals.
Yael Tamar, Chief Marketing Officer with Solidblock, explains what blockchain is and how it can be used beyond Bitcoin and applied for real estate syndication.
Blockchain technology was introduced in a 2009 white paper written by the founders of Bitcoin. Since that time, Bitcoin and blockchain have become synonymous. However, the truth is that Bitcoin is one of many digital currencies that utilize blockchain technology.
By definition, blockchain is a decentralized ledger that provides transparency to all its token users. All transactions are viewable to the token holders. The ledger is immutable, meaning you cannot edit past transactions without certain permissions.
The users are able to trade amongst token holders. Transfers between members are instant! Computers in the network approve transactions and adjust the participants balance.
The applications for blockchain are numerous beyond digital currencies. Food suppliers are implementing blockchain to trace food from the raw product through processing to consumer. The ability to trace every step allows you to pinpoint where contamination occurs. Banks are utilizing the technology for inter bank transfers.
The stock exchange is similar to blockchain. In the marketplace, every day, multiple buyers and sellers are able to acquire and dispose of stocks for a market set price. This is not the case in real estate. For this reason, real estate has always been considered illiquid.
Blockchain can change that.
Real Estate syndication has characteristics that make it ideal for blockchain. You have multiple owners who are tied to a single investment. In a traditional syndication, all investors must buy and sell at the same time. This lack of mobility could be solved by the use of blockchain.
Blockchain gives all investors the ability to instantly sell their interest, or buy additional shares from willing sellers. Sponsors can sell shares to raise additional funds for renovation, or limited partners can sell some of their shares to raise cash, or get out of the investment.
An example of Blockchain in Real Estate Syndication is the St Regis Hotel in Aspen, CO, which utilized Solidblock to provide the blockchain platform for its offering.
There is a cost to implement blockchain, and ideally, a syndication should raise over $3 million before considering the use of blockchain.
Digital representation of the asset provided at the issuance of the property.
Blockchain has more security than traditional banking. This is because there is no personally identifiable information stored on the network. Your personal information is stored in your digital wallet.
A digital wallet is a sequence of numbers. For any trades you make, there will be a record of your transactions attached to your digital wallet.
Smart contract is imbedded in the blockchain. This governs who can invest in your offering and who can join the offer and who can trade. Once you are invested, no one can take this away from you. If you find someone that is on the system, you are able to sell your interest direct without the involvement of any additional intermediaries nor cost. You can sell a part of or your whole investment. This has never been available to real estate investors before.
Unlike traditional currency markets, digital can trace any action on the platform. This includes actions from bad actors. If someone were to hack the system, and steal another members tokens, it would be easy to trace who received the money, and correct.
Digital currencies are not country specific, and are independent from the currency of your country. This allows investors from anywhere in the world to participate in the offering.
Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”
BIGGEST RISK: There are many risks in real estate. I guess the top ones are market risk, then picking the wrong asset. And I would say liquidity risk because of the impending crisis or recession that's going to happen. Now, on the asset level and the market level, you can mitigate these risks with information.
Number one is your due diligence. How much do you know about the asset owners, asset managers, developers and so on?
Number two is basically if they're doing the right. If there is a right fit from the asset to the market.
The third type of risk is liquidity risk. This is much more problematic because you have forces that are beyond your control.
For more go to:
Darrin: Yeal Tamar, what is the BIGGEST RISK?
Yael: So there are many risks in real estate. I guess the top ones are market risk, then picking the wrong asset. And and I would say liquidity risk because of the impending crisis or recession that's going to happen. Now, on the asset level and the market level, you can mitigate these risks with information. Right. So you can look and to market reports you have plenty, CBRE, Colliers. You know, that information is out there for you to show where they think market is going. There are credit agencies. There are all kinds of indicators, right. On the asset risk. And I guess it's split in two.
Number one is your due diligence. You know how much you know about these asset owners, asset managers, developers and so on. So if you did your due diligence. And number two is basically if they're doing the right. If there is a right fit from the asset to the market. Right. So if if residential real estate is a big one in this area or commercial or so, you kind of have to have real estate experience. Right. So understand this. So if you're a savvy investor, this kind of comes natural to you. So there's a combination of market research and the market fit. So this is a market fit. So both of these things you kind of can solve because with more information, more experience.
Now, the third type of risk, the liquidity risk is much more problematic because ultimately what you have is forces that are beyond your control. You know, like an impending crisis or a race or recession or or maybe there is a war breaking out all of a sudden in that country or a hurricane or a tornado. You know, there are many things that could happen. And insurance companies, obviously are also aware of these of these like force majeure or maybe even, you know, trends. So with this in mind, you know, we're talking to many real estate investors right now and they're saying, well, we're not investing in development projects in certain areas that we see there is gonna be a slowdown. So we're looking for either a quick flip or a yielding project in those areas. And it's understandable because they don't want to be tied in in a property that's going to go down in value. Now, that's liquidity risk.
Now, if we're solving partially, you know, the liquidity problem in which, you know, you can sell your property, you're probably not going to be able to sell it at a full price, obviously, because there's going to be less buyers. But you still have a possibility to recover some costs or to, you know, to get out before a certain time, which you deem more risky. So and that's over. We're in this business. You know, we feel that the other types of risks can be solved. Like I said, with more information and more data, which we provide to the maximum and the liquidity risk we're mitigating through enabling trade of these assets.
Multifamily Risk and Reward balance most of the time, unless you are Jorge Newbery.
Jorge Newbery, is a high school dropout with more drive and focus than most successful real estate investors. His drive for success has led him to create multiple successful companies and amazing success.
Before the age of 25 and prior to investing in real estate, Jorge had several entrepreneurial endeavors.
In 1992, Jorge recognized the opportunity in undervalued real estate based on all the loans he had been making to his clients. So, he purchased his first investment property, a 4 plex. Like his prior entrepreneurial endeavors he did not stop with a 4 plex. Subsequently, he purchased a 19, 50 and a 298 unit property all in Southern California.
The properties Jorge was purchasing were the most challenged properties available. This was because he recognized he could most positively add value in these unwanted, undervalued properties.
There were some hiccups along the way, like the time when he was sited for 32 housing code violations and the threat of jail. Fortunately, his prior work and reputation was recognized by the authorities, and jail time was avoided.
When he sold his Los Angeles multifamily properties, he had a proven value add system, over $1,000,000 in profit and a sense that he was unstoppable.
After his success in Los Angeles, Jorge turned his sites towards the Midwest in search of more risk and reward. His search led him to Pickwick Plaza Apartments in Kansas City, MO. The 233 unit property was distressed, and for Jorge, this was another opportunity. The purchase price was $1.6 M and he put another $1.5M into the value add rehab. Upon the renovation completion, the property appraised for $8M, which allowed Jorge to refinance, take some cash and find another property.
When he traveled to these locations, rather than rent a hotel room when he visited his properties, Jorge would take up residency in one of the property’s vacant units. Because he was buying such rough properties, this made him intimately aware of the living conditions residents were experiencing. Sometimes, the local press picked up on this and would publish stories about how the out of town owner was moving in with the residents of the roughest property in town.
Success breeds confidence. Jorge had successfully turned multiple rough properties into handsome profits. His track record attracted bigger challenges and capital to do the next big challenge.
Looking for the next big challenge, Jorge was led to Columbus, OH. There he found an 1,100 unit property named, Woodland Meadows, aka Uzi Alley due to the gang activity.
He purchased the property at auction for $13.5 M and promptly moved in.
The property had its own onsite armed security patrol with a jail. The security patrol was all white and the residents were primarily minority. When Jorge saw the jail with a tenant locked up, his first act was to release the tenant. Soon after, he closed the jail, terminated the security force, and assembled his own unarmed Community Patrol made up of Jorge, his managers and paid volunteer residents.
Originally, the property was built as workforce housing. When Jorge acquired the property, over 40% of residents received Section 8 vouchers. Many unemployed residents with lots of time on their hands
On patrol, it was common to find a large group of intimidating teenagers gathered on a street corner. Pizza delivery drivers refused to deliver in the community due to safety concerns. The Community Patrol would ask the group to leave. Ultimately the kids would leave one corner and move to another corner. The frequent inner actions with the teenage residents let the teens to ask Jorge for jobs.
The continuous request for jobs made Jorge ask his contractors, if there a way to train the kids and put them to work? He was spending millions of dollars to rehab the property, and the contractors had more than enough work. The contractors agreed to put a training course together for the residents.
For residents wanting jobs, the contractors training course taught basic skills needed to work in construction. The opportunity for the residents was this: If they showed up everyday on time and did not miss any of the training for two weeks, at the end of two weeks, they would get jobs.
The first class had three participants. After the two weeks, the three trainees had jobs. Word of the jobs for trainees quickly traveled through the community. The next class had 40+ trainees. The transformation was incredible to see. At first the trainees would show up dressed with their pants falling off. Within a few days, trainees started showing up dressed like they were going to church. They really wanted to learn and wanted the jobs.
The residents wanted change. Once they were employed in the community, they took pride in their work and community. They self policed, the community, and if someone wanted to harm their community, employed resident would actively discourage the would be trouble maker. Community pride was contagious.
Jorge was able to prove that by providing training and jobs to local residents, he created responsible citizens. Instead of paying the outside contractors money that they took home to their neighborhood, the tenants received training and compensation for the work they did to improve their community. The work gave the residents money so that they could pay their rent. Some of the trainee graduates went onto create their own businesses that are still in business today.
Pizza Delivery Drivers were no longer afraid to deliver pizza
Now he had a value add formula on how to turn around the biggest challenge he could find. Not only was he changing the property, but he was changing lives.
By December 2004, the property renovation was complete and occupancy had increased to 80%.
Christmas Eve 2004 an ice storm struck Collumbus, Ohio. Trees & power poles were knocked down, and power was out for all of Woodland Meadows. With no power, the electric boilers were unable to generate heat. For four days, the temperature was below 0 degrees and the water in the pipes froze. When the power came back on, it was clear that things were out of sorts. As the temperature rose, the frozen pipes thawed. Water started pouring through cracked pipes, into the apartments.
Realizing the damage caused would need a lot of money to fix, Jorge called his insurance company to see what help his policy could provide. The adjuster made a quick inspection of the property, and returned to his office. A couple of days later, the adjuster called to say, “you are not covered. The damage was caused by your boilers. You do not have boiler coverage, and you are not covered.”
Jorge’s attorney explained that on large claims, insurance companies often will use a strategy of delaying payment in an effort to force the claimant to settle for a reduced amount of money rather than the amount provided by the insurance company.
Jorge knew he had coverage and thought the insurance company would eventually pay the claim. Rather than wait until they paid, he elected to borrow against the equity in his other properties for some cash to pay for the repairs needed at Woodland Meadows. He figured that when he received the insurance settlement, he would pay off the loans.
After a couple months of trying to work with the insurance company to resolve the claim and their refusal to pay, left Jorge with no option but to sue his insurance company. By August 2005, Jorge was running out of money. He had over 200 people working everyday to repair the damage. To preserve cash, he reduced his labor body count from 200 to 20.
Then the city representatives visited the property asking, “why progress is slowing down?”
The City, unbeknownst to Jorge, had decided that they wanted to acquire Woodland Meadows. When the city visited in August, they sensed Jorge was at his breaking point, and they acted. In an effort to acquire the property, they notify Jorge that he has 3 days to evacuate the property.
The city claimed that a prior owner had made a construction shortcut and given that the buildings had filled with water, the buildings were imminent danger of collapse. Jorge hired an engineer to inspect the buildings, and he found no such evidence of danger of collapse.
The court awarded Jorge a temporary restraining order against the city of Columbus and 6 months to complete the repairs. Jorge then authorized his attorney to make the best deal with the insurance company to collect money and get the repairs made.
The damage was estimated at $45 million. The insurance company settled for $32 million and work was back on schedule.
When the city was unable to acquire the property under the false claim of imminent danger, they notified HUD of the conditions at the property. Under HUD guidelines, property owners receiving Section 8 income are required to maintain properties to a certain standard. Due to the damage caused by the ice storm, Woodland Meadows was below the standard.
HUD notified Jorge that he had 30 days to complete the repairs, or lose the funding for his Section 8 tenants. Jorge appealed to the local municipal court who requested HUD show up in court, but HUD refused stating that they are a Federal Agency and not bound by municipal courts.
Thirty days later, HUD returned to the property and terminated contracts worth $200,000 per month in rent. The loss of rent forced Jorge to accept the gravity of the situation and surrender.
Six months later the property was evacuated by the City of Columbus. Since then, all of the buildings have been demolished and a new high school has been built on the site.
Hindsight is always 20/20. Had Jorge understood the city’s desire to acquire the property, he believes he would have acted differently. In the city’s efforts to acquire the property, they had offered to help him acquire a different property. If he had accepted, he could have then taken a reduced settlement from the insurance company and moved on. Could a, should a, would a, didn’t.
Unfortunately, Jorge saw a problem that needed a solution. He acted in the way he believed was best to fix the problem.
In order to get the money he needed to fix Woodlawn Meadows, Jorge got loans against his other properties and signed as a personal guarantor. This had never been a concern in the past, because nothing had ever gone wrong. However, this time was different.
Creditors pursued Jorge personally for the outstanding loans. When he could not pay, the lenders pursued foreclosure on the properties. At the foreclosure auction, the bank bought the Kansas City property for what was owed on the first position lean.
Jorge’s experience as a mortgage broker made him realize that when the bank foreclosed on the property, the second position loans were extinguished. This meant that the second loan against the Kansas City property which was used to purchase the Oklahoma City property meant that the OK property free and clear.
This foreclosure experience caused Jorge to review all of his loans, where he found multiple mistakes, from minimal to egregious. These mistakes provided leverage for him to negotiate more favorable settlements with his lenders. In one case, the bank ended up paying him to settle the debt.
Shortly after this chapter in Jorge’s life, the Great Recession struck. Jorge recognized that millions of Americans needed help negotiating settlements with their banks. Jorge then started Debt Cleanse, to help others in need, find the errors in their loans in order to negotiate better settlements with their lender.
Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”
BIGGEST RISK: To not learn from the past. And so that would be for me to look at my own past and the past of others and see what has happened, how they navigated it and, whether it makes sense to, or how that should influence my actions today. And I'll give you a real life example, is that you know the market. I've been through a couple of downturns in the real estate market and towards the end of every up cycle is like today. Today there are the lenders are, freely giving out money. It's very easy to qualify. They have these, you know, kind of almost subprime loans called non QM loans, and things have gotten very easy and that happens every time. At the top of the market that the money is free flowing, the pricing gets expensive, everything gets really competitive. I'm trying to buy loans and other people coming up with money pay more than me, And they could be the winner of the bid. But really, time will tell whether they're the winner, the loser. So today, I think the biggest risk today is ignoring the past and the fact that we are probably in a very overheated real estate market and just overheated economy, which is likely to turn down very turn down in the near future. It's hard to say exactly when it happens, but now would be the time to take some chips off the table and avoid or at least minimize that risk.
For more go to:
Website: DebtCleanse: https://debtcleanse.com/
Book: Burn Zones
Darrin: Jorge Newberry, what is the BIGGEST RISK?
Jorge: To not learn from the past. And so that would be for me to look at my own past and the past of others and see what has happened, how they navigated it and, whether it makes sense to, or how that should influence my actions today. And I'll give you a real life example, is that you know the market. I've been through a couple of downturns in the real estate market and towards the end of every up cycle is like today. Today there are the lenders are, freely giving out money. It's very easy to qualify. They have these, you know, kind of almost subprime loans called non QM loans, and things have gotten very easy and that happens every time. At the top of the market that the money is free flowing, the pricing gets expensive, everything gets really competitive. I'm trying to buy loans and other people coming up with money pay more than me, And they could be the winner of the bid. But really, time will tell whether they're the winner, the loser. So today, I think the biggest risk today is ignoring the past and the fact that we are probably in a very overheated real estate market and just overheated economy, which is likely to turn down very turn down in the near future. It's hard to say exactly when it happens, but now would be the time to take some chips off the table and avoid or at least minimize that risk.
Capital Market trends are a barometer for where the commercial real estate market is headed.
Bryan Shaffer is the Principal Managing Director at George Smith Partners. GSP is a boutique capital market resource providing owners & developers the structure capital needed to complete projects nationwide since 1979.
The value of utilizing a broker like George Smith Partners is that they are in the market every day, and know when it is more beneficial to utilize one option over the other. This compares with a bank who has one model. The capital market is continuously changing. They work for the client in hope to create a relationship that continues to help the borrower get the money needed to grow their business.
Large commercial real estate projects come with tremendous risk. The borrower sees opportunity, while the lender sees the risk. If the lender does not feel comfortable with the borrower or the project, they will not finance the deal. An experienced finance professional has the needed relations with the various lending products. They can help the borrower explain their project to a prospective lender that will assure the lender of the projects upside, and set them at ease with the potential downside.
Most new investors use their own capital and raise additional funds from family and friends. A proven track record with successful, profitable projects will attract investors with capital who are looking for lower risk.
Mistakes Borrowers Make
The most common mistake borrowers make is to not focus on one particular market. If you are constantly chasing the next hot market, you will never develop the intimate local knowledge that puts makes investors confident you know the market.
GSP is best suited to help the owner or developer who is focused on finding deals and needs help raising capital. In these situations, they can partner with the project owner to locate the capital needed to finance the project. This allows the developer time to find more deals.
An ideal partner for GSP is someone who has done multiple smaller deals in a specific market and has intimate knowledge of the market. They have the market knowledge, but need help with raising capital. This is the perfect opportunity to work with GSP.
Commercial real estate is all about relationships. For owners looking to grow their portfolio and needing help to solve the capital requirements, GSP can be the solution. Their extensive network of capital sources include traditional sources such as commercial banks and insurance companies. Additionally, they have multiple new capital disruptors such as crowdsource funding and private equity funds like BlackRock and Blackstone, which are not available to all mortgage lenders.
A perfect borrower is one focused on growing their portfolio, like the client they helped grow from two apartment properties to over thirty properties. GSP was able to help bridge the gap from $10 million properties to $50 million properties.
The capital stack needed for a deal is made up of debt and equity. For both single operators and syndicators, the traditional sources of equity come from the individual developer, friends and family while debt has come from banks and institutional lenders.
The recent disruption of the financial market has made crowdsource financing a viable source of capital. Additional private equity funds like BlackRock and Blackstone are resources available to GSP, which may not be available to all mortgage lenders.
The market is client specific. If you are a proven developer in one market, that does not guarantee success in a different, new market for you. Lenders look for the borrower who has knowledge of the market based on their experience in the market.
A mistake many developers make is trying to follow the hot market. Jumping from hot market to hot market is not the path to proven success. Lenders want to know that you know what you are doing, and that you have success in the market.
Lenders like larger markets that provide insulation from failure based on the large number of potential opportunities to guarantee your success.
Lenders want to know that the deal sponsor has experience and success in the market your project is located in. The lender wants to make a safe bet that you will be successful. This is different than the borrowers perspective. The borrower wants big returns, the lender wants small safe returns.
Each asset class has its unique risk. Lenders like to lend to a low risk opportunity where they know they their investment is protected and will get paid back. The following are some examples of assets and situations where George Smith Partners were able to provide financing solutions to their clients.
Hotels are considered one of the more risky asset classes. They are susceptible to the winds of the economy. If there is a terrorist event, economic downturn or similar event, people will not travel as much nor rent hotel rooms.
To make a hotel less risky, GSP was able to do some additional research and apply their experience in the market to recognize the upward trend and make the case to a lender and get they borrower their loan.
Multifamily on the other hand, has more predictable demand and is less susceptible to down turns. People need a place to live. When the economy slows down, people lose their homes and need a place to live, so they rent. As long as you operate and keep the property full, the lenders will get paid, and they like that.
Office A recent office project where GSP was familiar with the marketplace gave the developer the help needed to complete the project. Because GSP recognized the positive trend developing that other lenders had neglected to see, they were able to get the financing for the borrower to needed to complete the project.
Most borrowers are excited to get a low rate for their loan. However, too often, borrowers fail to think through their plan for the asset they are financing. Is there a yield maintenance penalty that prohibits the borrower from selling or refinancing early? Failure to recognize this can on the front end can ruin your otherwise profitable deal.
The Real Estate market cycle goes up and down. For the past 10 years the cycle has been on the increase, compressing CAP rates, and driving prices higher. As the cycle continues, markets that have been hot are cooling as investors refuse to push prices higher, and instead they look to secondary markets for higher returns.
Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”
BIGGEST RISK: To me, I mean, you know, we are in the risk reward business. I mean, people get loans based on the level of risk. If it was a very risky loan, you pay twelve percent. If it's not such a risky loan, you pay three or four percent. So we're always looking at risk.
But if I look at a more global risk to my business and really to the market as a whole, I think you've got to think about the economy and what causes a real estate downturn and what influences a market to go from being a very hot market to a very cold market. And really its activity. So when activity dries out, when people stop buying properties, people stop selling properties and people have fear when people are thin or they don't move.
For more go to:
Darrin: [00:00:08] Brian Schaffer, what is the BIGGEST RISK? [00:00:10][2.4]
Bryan: [00:00:12] To me, I mean, you know, we are in the risk reward business. I mean, people get loans based on the level of risk. If it was a very risky loan, you pay twelve percent. If it's not such a risky loan, you pay three or four percent. So we're always looking at risk.
But if I look at a more global risk to my business and really to the market as a whole, I think you've got to think about the economy and what causes a real estate downturn and what influences a market to go from being a very hot market to a very cold market. And really its activity. So when activity dries out, when people stop buying properties, people stop selling properties and people have fear when people are thin or they don't move
And as you said, like the insurance provides a level of safety for those people so they can sleep at night and say, you know, if my property burns down while I'm sleeping. I'll be OK because the insurance will cover that. And then I think when you look at the real estate market, the risk is really people becoming too fearful that that is no longer good to buy, that there's there's no upside in buying. And that can happen really quickly. It's you know, 2008 was probably the best and the worst real estate market in the last 40 years. So, you know, you had everything peaking out and reaching its height. And then all of a sudden people's attitude changed and they decided that there was too much risk to keep buying properties and keep growing their portfolios. And that risk, the impact of lenders who then took a step back and said there's too much risk to lend. And then once they said there's too much risk to lend, it froze the entire market. So I think everybody's got a plan for and know that there will be a day again where risk outweighs reward. And you have to plan for that, just like you buy insurance. You've got to have a margin of safety. People that are well capitalized, I've never seen lose a property. But people that buy on a whim and, you know, aren't sure what's going to happen tomorrow and don't have the money if there is a bad year, get burned when there is a bad year. So to me, the BIGGEST RISK is that that that change in the marketplace, that freezes everybody. But the solution to it is just like buying insurance is a solution and knowing that if there's a buyer, you'll be saved. The solution to being a real estate investor is balancing your capitalization with the amount of your outflow. You should never be at a point where if something goes wrong tomorrow and it can't be fixed for six months, that you're out of business.
Passive Income is the goal of all investors seeking wealth creation.
Lior Gantz is the founder and editor of the number one rated financial newsletter, Wealth Research Group.
At 12 years of age, Lior had to go to work out of necessity. His father’s business was struggling, and there was no money. He hustled, babysitting, teaching basketball, and delivering goods to others. By the age of 16, he had saved $20,000.
His banker suggested he invest his money to earn greater returns. In order to do so, Lior needed his parents to sign a waiver, which they gladly provided. His grandfather gave him two books on investing, and Lior was hooked on passive income.
In 2015 his friends urged Lior to publish his thoughts and ideas, which was the creation of Wealth Research Group. This is where Lior publishes his thoughts and observations for readers who want to learn about wealth creation.
Lior’s father’s business was furniture and upholstery. It’s demise was due to the changing global economy that is full of new, cheaper goods from foreign countries. His failure to adjust forced Lior to learn a new way early in life. The blessing to experience this at an young age helped Lior create an expectation based on global competition rather than tradition ready for disruption.
Western corporations have taken advantage of cheap labor overseas. This cheap labor provided a greater profit spread for investors. The downside is loss of traditional jobs and trade in balance. The ultimate question that needs to be answered: are cheaper goods more valuable than the loss of jobs? While cheap goods are good for consumers, the loss of jobs depletes the consumers needed to consume the cheap goods.
The price of progress is the pain of change. Consumers like cheap goods. Within an economic system, wages only go up. So, how does a system convert from a traditional economy to a nimble world economy?
There are 48 countries that produce for less than China. You cannot regress to compete against cheap labor. Change requires skills. Workers need to be trained for the jobs in the new economy so that they can contribute to the new economy.
Governments have a few tools available to change the course of the economy; lower interest rates or impose tariffs on foreign imports. Historically, the US has preferred low cost foreign goods and chosen to lower interest rates rather than impose tariffs.
The challenge with any governmental use of its tools, is whether or not the desired results will happen. When the US lowers interest rates to make borrowing money less expensive, the hope is to make low cost capital available for companies to borrow. This allows them to make additional purchases.
Millennials are gainfully employed and paying down their student debt. As they progress professionally, they are inheriting higher paying positions vacated by retiring baby boomers. Millennials income is projected to peak in 2030. At the same time, they are coupling up and looking for suburban housing to raise a family.
This momentum will continue and will shift the demand for housing from the multifamily to the single family. This will be the new wave of housing demand.
Private Equity is flexible. Where they see opportunity with a positive return, they go. It is projected that these funds that acquired huge real estate portfolios in the crash will look to sell these as the millennials become buyers.
If the cost to acquire a home is beyond the cost to rent, millennials may continue to rent.
Neighborhoods access to good schools, safe neighborhoods will continue to attract parents of small children. But, home ownership is no longer sacred.
Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”
BIGGEST RISK: You have to know what you are investing in and who you are investing with. If you invest in large proven companies, you are investing in the culture more than the people. You can trust that the culture will continue to drive profits. However, when you invest in small companies, this is speculative, because it is not proven. In this case, it is important to know the who.
For more go to: