Big Investors Impact on Investing in Single Family Homes

Overview

The world of investing in single family homes changed after the Great Recession. Once the sole purview of Mom & Pop investors, today huge hedge funds like Blackstone own tens of thousands of houses.

In this episode, broadcast from the 4th annual Single Family Residential Investment Forum in Scottsdale Arizona, we interview several of the many interesting folks we met there…and discuss how the new level of sophistication is changing the way the single family game is played.

Discussing how the recent changes impact investing in single family homes:

Your host who has seen a market change or two, Robert Helms
His single family minded, co-host, Russell Gray
Managing Director at FirstKey Lending and chair of event panel, Dennis Cisterna
SVP of Acquisitions & Underwriting at Patch of Land, Doug Cochrane
CEO, Real Wealth Network and Talk Show Host, Kathy Fettke
Long time listener and Real Estate Syndicator, Sep Bekam

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(Show Transcript)

Welcome

Robert Helms: Welcome to the Real Estate Guys Radio Program. Lots of ways to invest in real estate. Lots of styles of real estate investing. We’re going to talk today about the basic real estate investment: the single family house. It’s not what it always was. Things are changing, and a lot of great news. We’re at an amazing conference. We’re going to share a lot of guests with you today and a lot of great thoughts today on the Real Estate Guys Radio Program.

Single Family Home Market Changes

Welcome to the Real Estate Guys Radio Show. I’m your host, Robert Helms, from Phoenix, Arizona this week. Let’s say hello to co-host financial strategist Russell Gray.

Russell Gray: Hey, Robert.

Robert Helms: We’re at the Fourth Annual Single Family Rental Investment Conference put on by IMN. This is a group that we’ve been to some conferences of over the years. They do a bunch of great events and a whole bunch of different areas. About half of what they do is in real estate, and then they do continual education for attorneys and all kinds of different great stuff. Very, very interesting event. It’s single-family based. We’re talking about single family assets, but 80% of the room are in suits and ties.

Russell Gray: Yeah, I think obviously the Fourth Annual, right? Single family homes have been around for a very, very, very long time.

Robert Helms: Longer than four years.

Russell Gray: This is the fourth annual. What you see, the first thing you recognize, you talk about the suits and ties, but you just recognize that there has been a major shift in the single family home market. We’ve watched it happen. We went through the meltdown. There was a lot of mom and pop investors in the space in the run up. It was the hot commodity. Everybody and their brother and their mother and their sister was out there buying single family homes, bidding it up to whatever, holding it, hoping that they could sell it a year later for $50,000 or $100,000 more. Of course, we all know what happened.

In the wake of that, the prices dropped. It was a huge correction, to use a Wall Street term, and then a guy named Warren Buffet comes out and goes, “Hey, you know what? If I could go buy 200,000 family homes right now, I would.” The problem is it’s not a well-organized industry. It’s a mom and pop industry. Little by little, companies like Blackstone and big hedge funds aggregated capital, they went out there and painstakingly, property at a time … They were also able to buy groups of properties out of distress, foreclosure, from banks, and buying what they call tapes. Then they get rid of the garbage, they clean up the other stuff, then they get it tenanted, and they hold it for the production of income until some future date in time.

Around this has evolved this entire industry now that is creating software products and analytical products and all kinds of ancillary services so that that portfolio manager who is sitting there on 1,000 properties or 2,000 properties, or in some cases 10 and 20,000 single family properties, has a whole host of services that didn’t exist. Now a conference that is not completely dedicated to that, because there’s a lot of mom and pop investors here, too, but there’s a lot of people here that … Industries that did not even exist 10 years ago to service this particular niche. Of course with the big decline in home ownership in the United States and the big increase in rental, not just the number of renters, but the price that people are willing to pay to rent, it has really attracted a lot of attention.

It’s an interesting place to be, four years into the conference, especially talking to the people that have been here for a little while that are saying, “This is what I’ve seen the changes.” Of course, for us it’s just a point on the curve, but a lot of interesting things here.

Robert Helms: We’re going to meet many of the folks that are speakers and attendees, a lot of listeners that we’ve been able to say hello to here. It’s going to be a great show. You’re going to learn a lot, I’m sure.

You’re tuned to the Real Estate Guys Radio Program. I’m your host, Robert Helms.

Update On The Single Family Rental Industry

Welcome back to the Real Estate Guys Radio Program. We are in Phoenix, Arizona talking single family houses. Let’s say hello to a gentleman who chaired the first event yesterday, Mr. Dennis Cisterna. Dennis, you were the first guy out of the gate yesterday. You had a great panel. You were talking about kind of the big picture of where we are in the single family world. Give us the high notes.

Dennis Cisterna: Sure. We like to start off this event by really covering what’s going on in the macro economy, how that impacts the housing markets, and more particularly, how that impacts the single family rental industry. We cover a lot of the basic topics: GDP growth, employment growth, unemployment, the unemployment rate. There’s a lot of different factors going on right now that are contributing to a greater opportunity within the single family rental industry.

I think if you talk to most people on the street or you read any of the conventional wisdom about the economy, it still feels spongy. People don’t think we’re doing bad, but they certainly don’t think we’re doing good yet.

Robert Helms: Right.

Dennis Cisterna: One of the reasons for that is really the housing market. Although people think it has recovered, there’s really a lot of fragmentation and misinformation in the market right now.

For example, housing starts, building permit issuance is down 75% from the highs of the pre-recession, and about half of what they are historically. If you think about it, the population of the US is much larger now than it was in 1960-

Robert Helms: And increasing.

Dennis Cisterna: And increasing every year, and yet we’re only issuing half a million permits.

You haven’t had a real recovery in the owner occupied mortgage market. Even though the population is growing and growing, and there’s a need for a larger housing stock, we’re not building more homes and most of these people can’t afford or qualify to get a mortgage. You’re seeing some stagnation when it comes to existing home sales and new home sales. When you look at the price appreciation, a lot of it has been fueled by investor demand more than traditional demand from a consumer.

As it relates to the single family industry, it’s not a new market. I know a lot of people read in Bloomberg or the Wall Street Journal that Wall Street is taking over Main Street.

Robert Helms: Right.

Dennis Cisterna: That’s a great headline. There are 15 million single family homes in this country that are rented out right now.

Robert Helms: Okay.

Dennis Cisterna: Less than 200,000 of them are owned by institutional Wall Street firms, 1.3% of the market.

Robert Helms: One of the most amazing slides you showed was the number of people who just own a single house are by far the majority owners.

Dennis Cisterna: That’s right. One owner, one property, one rental property, is 48% of the market. It’s 11 million different people that own one rental property. A lot of that has been financed historically by Fannie Mae, Freddie Mac kind of investor loans, one to four units. What’s also interesting about this is because your audience doesn’t do just single family houses, the larger market considers plex product, duplex, triplex, condo, townhome, all that. When you’re looking at that, the market is actually 22 million homes, so it’s even bigger.

Robert Helms: Wow.

Dennis Cisterna: It is all related to the same. It is taking advantage of a decline in home ownership in the United States, which has steadily gone done since the recession hit. Because of a number of different forces, most economists project it’s going to continue to slide down. It’s kind of a perfect storm for people who want to invest in renters because you have a surging amount of demand. You have increased rental rates. You have a consumer base that can’t buy a home right now.

The personal savings rate in this country is declining so it’s making it harder and harder for people to even come up with the 3% they need for an agency backed loan, never mind 20% if they’re going to get a jumbo loan or nonconforming loan. It’s made a real struggle for people to increase that home ownership rate.

As a result, you’ve seen not only a tremendous amount of demand for rental housing, but some really incredible yields for folks that are investing in the space.

What used to be the norm was, okay, I’d get a Fannie or Freddie loan and I’d buy up to the amount of properties that my personal income allows. One of the real big benefits of the Wall Street firms coming in is they shook up the capital markets here where banks and private equity groups are saying, “Well, I’ll lend on those kind of homes. This seems like a safe bet. We expect housing to continue to appreciate. We expect there to be demand. This feels like a safe asset class to lend on.”

Starting in 2011 and 12 you had companies that started entering the space as lenders, instead of you, the smaller investor, being constrained by your personal income. You’re a dentist, great, if you’re a school teacher, you’re never getting past one investment property. Hence the 11 million people.

As these lenders entered the market, it let you stretch your dollar further. It also, because the debt was reasonably priced, these aren’t hard money loans that people are providing. These are more term loans, five, 10, even 30 year fixed rate loans that are generally priced more affordably than what the yield is on the property so the debt is accretive.

Not only is it letting you stretch your dollar further, but you’re able to get higher leveraged profits on top of that. Instead of buying one property with your $100,000, you’re buying 3 or 4 properties. Instead of making cash on cash return of 11%, you’re making 17%.

I’m sure a lot of your listeners look at all types of different asset classes and different investment objectives. 17% anywhere you’re going is pretty darn good. That doesn’t even factor in the potential appreciation for housing, right?

If you look at where home prices are right now, we’ve kind of righted the ship where pricing right now is kind of where it should have been if it’s been at it’s historical appreciation rate of 3% or so. There’s still a lot of markets that are undervalued.

There is some feeling that eventually the mortgage markets will begin to thaw, and what a great treat that is for someone that’s owning an income property that’s appreciated over time. If they need some additional liquidity they can sell part of their portfolio. It’s really just a very dynamic market right now.

It’s not really different than what happened in the, speaking of other asset classes, self-storage, multifamily, just normal big apartments. In the 1960s, the numbers weren’t that dissimilar. There was one owner, one apartment complex, that’s it. It wasn’t until REITs started being formed and people started aggregating we started to see the scale.

The good news is this industry’s taking off a lot of the efficiencies that those sectors have already created, so you’re seeing the maturity of this market happen at a pace I haven’t seen with any other asset class.

Because of the sheer size of it, 22 million units, there is opportunity out there whether you live in California or Texas or Florida or New York. You just have to be diligent about what you’re doing, as you should with any kind of investment.

Robert Helms: Whether you’re interested in acquiring two or 300 houses or just a couple of houses.

A Look at FirstKey Lending

Dennis Cisterna: That’s right. It’s been really interesting for me at FirstKey Lending, we’re one of the specialty finance companies in this space that we were created to help the smaller and middle market investors grow. I’m never going to have one of these publicly traded companies come to me because they can go directly to Wall Street and get their own bonds issued.

Robert Helms: Sure.

Dennis Cisterna: But, a guy comes to us with five properties and he wants to own 50? Great. We’re going to provide him the leverage to increase his liquidity to keep buying more houses. There’s other lenders that do that same thing.

It’s really interesting. We’ve only been around for about three years. We’ve done a little over a billion dollars worth of loans over that time. The smallest loan we’ve done is one property, $75,000, and the biggest loan we’ve done is an acquisition line for over 100 million.

It’s really interesting when you have a good operator, a good investor. Once you unlock the power of debt, and again, reasonably priced debt with good terms, it’s amazing how quickly they’re able to scale their company.

I think if you took a survey of these big Wall Street guys, these guys must be the most efficient operators of all, they have the scalability. There should be economies of scale. I could bring out a parade of midsize investors that own between 50 and 500 homes and they blow those yields through the roof.

Robert Helms: That’s one of the recurring themes here, right? We’re seeing these mid-level guys. There were folks who have 3000 houses, 200 houses, all over the map. A lot of folks looking to get more, right? That’s a big theme here. You don’t see … There’s a lot more acquisition than you see divestitures it seems right now.

The Current Status of Financing

Robert Helms: The person that you deal with on a lending basis is a pretty wide range. It’s not just any one type of investor. Financing is critical for single family homes. We heard folks on different various panels who were putting together portfolios for cash, but our typical investor, listener, is probably somebody who wants to use leverage. The way that loans have changed over the last several years has been crazy. There’s so many changes, regulations, and so forth. What do you see? Is there going to be more availability of financing? On your panel there was the talk about nobody can qualify. What’s that look like?

Dennis Cisterna: Those are really two different types of lending, right? Getting an owner-occupied mortgage for the house you want to live in, that’s consumer financing, and that is the most regulated industry you could think about. I don’t do that personally. FirstKey doesn’t originate-

Robert Helms: That explains why you still have hair.

Dennis Cisterna: Right.

That industry is a tough nut to crack. If you look at a lot of what’s going on in that industry, it’s ripe for disruption. You’ve probably read a decent amount about these venture capital online crowdfunding kind of places where you apply in 15 minutes and you get your loan.

Getting any kind of consumer loan and following all the rules, there are not loans like that that take 15 minutes. That being said, what they do is they look at the qualifying metrics of a borrower much different. Whereas if you are going through a traditional mortgage for a home you want to buy, they’re looking at your income, your taxes for the last couple years.

They’re looking at your credit score. It doesn’t matter if you had one blip on your radar. The recession damaged the credit score for millions upon millions of people. There are a great percentage of those people that have then rectified. They haven’t missed a payment on anything since then. They just … The economy collapsed. There’s not much you can do, so why take these people out of the ball game?

Some of these new lenders in the space are saying, “This guy’s got a good job, he makes a lot of money, he can afford this mortgage. He’s paying this much in rent, if not more, already. Why not give this guy a reasonably priced loan?” That’s happening in the market right now. I think it’ll continue to happen.

With that side of the space you’re going to need the old guards of traditional mortgage finance to kind of pick up on the technology slant and pick up on a new way of underwriting their borrowers. The tried and true method obviously didn’t work before because everything still exploded anyway.

When it comes to these investor loans, these are business purpose loans, right? They’re not subject to the same amount of regulation that a traditional mortgage for an owner occupied unit would be. The big difference is, if any of your listeners before have done a Fannie or Freddie investor loan, it’s really all about the income of you as the borrower, not anything about the property. It’s silly when you’re buying an income producing property to not consider that.

One of the things that FirstKey has done, whether you’re the borrower of one property or 1,000 properties, we’re looking at the income on the property level. Of course we want you to be a respectable, solvent, smart business person, but we don’t expect everyone to be a multi-millionaire that wants to borrow to expand their real estate portfolio. Because we’re looking at the income of the property, then that goes back to, “Well, you need to become an efficient operator.”

Opportunity for Investing in the Single Family Homes Market

Dennis Cisterna: What’s great about this market is because it’s so fragmented right now, the yields are there. There’s the benefit of the technological advances in property management and rent collection.

Ten years ago there was only one way to collect rent, and that was by banging on the guy’s door for a check if he didn’t pay. Now, one of the big advancements that you’ve seen on the multifamily sector that certain operators are using on the single family side is, “Well, we’re going to do ACH debit and automatic payment with our tenants.” A. It’s less work for them. B. It reduces our collection loss tremendously.

This is all about effecting the bottom line, right? Even if you buy something at the right price, you want to make your yields even better by being a better operator. There are so many tools available to the average investor that weren’t there just two or three years ago.

This industry is piggybacking off all the work the multifamily sector has done. It’s piggybacking off all the work the big Wall Street guys have done when they acme into play. It’s basically rolling downhill for all the individual investors. They’re getting the benefit of technology, capital markets. It’s really interesting what’s going on in this sector right now.

I myself am an investor as well, right? Even though I do these loans, I’ve studied the housing markets for 15 years, and I haven’t really seen this kind of an opportunity for investors, big or small.

I think those don’t come along very often. If you had a ton of capital when the recession came, yes, you could have made a ton of money. If you were like most people, you were scrapping together and you didn’t know what to do. Now, with the advent of attractive financing and the fact that you’ve had appreciations in certain markets and still more room to grow, as well as increasing rents. That’s another great thing about it. Because there’s so much demand for rental properties, it keeps pushing rents up in a lot of different markets. It’s really an attractive space right now, and we’re still in the second inning of it.

Robert Helms: Yeah. All right, good stuff. I know we’re going to have folks that are interested in finding out how they can get ahold of you guys and learn more about your loan programs. What’s the easiest way to do that, Dennis?

Dennis Cisterna: The easiest way is to visit our website, which is FirstKeyLending.com. F-I-R-S-T K-E-Y lending dot com.

Robert Helms: All right, good stuff. Thanks for your time and a great contribution to the conference.

Dennis Cisterna: Thanks so much, appreciate it.

Robert Helms: You’re tuned to the Real Estate Guys Radio Program. More when we come back from Phoenix, Arizona. I’m your host, Robert Helms.

Crowdfunding with Patch Of Land

Robert Helms: Welcome back to the show. I’m your host, Robert Helms. We’re talking single family investment and very happy to have Doug Cochrane with us from Patch of Land. How are you, sir?

Doug Cochrane: I’m doing well. Thanks for having me on, Robert.

Robert Helms: Absolutely. Let’s talk about what you guys do. We’ve spent some time in the last couple weeks talking about crowdfunding and in fact you are hot and heavy into that. Tell us about Patch of Land.

Doug Cochrane: Sure. We are a real estate crowdfunding company that deals strictly with debt. There’s other companies out there that work in equity. We’re strictly a debt lender. We’re nationwide. We work with developers around the country, anything from single family homes, multifamily homes, hotels, all sorts of asset classes in the commercial range as well.

Robert Helms: This is fascinating because a lot of portals out there are all about a deal that gets split into pieces and investors can invest in it. What you guys do is pretty unique, though. You provide funding to a developer, to a syndicator, to put together a deal, and then you go out and piecemeal out the debt. Is that a way to explain it?

Doug Cochrane: Yeah, that’s a way to explain it. What we do, the elevator speech is we originate the loans, we underwrite them in house, and then we pre-fund the deal, meaning that we bring our own money into the deal, so we can get to the closing table quickly and so our borrowers can get on with their projects. Then what we do is we open it up to the crowd.

We put it up on our site, we give it a full property profile, the borrower profile. We’re very transparent. We put up everything on the site so that our investors, our accredited investors, who are our crowd, they come in, they can read about the project, see if that’s something that they want to add into their portfolio. It’s fractionalized. We have anything from one guy might take out the whole deal or we might have 20 or 30 people who put in smaller pieces.

Robert Helms: Of course you’ve already done all the underwriting, so you have the reports, disclosures, information about the property and I would also imagine, the sponsor.

Doug Cochrane: Exactly. What we do and part of the pre-funding that’s a benefit to both our borrowers and our investors is we’re willing to put our own money into the deal. Even if our crowd decides not to fill up the deal, we’re still confident of the project. We’ve done our underwriting and our due diligence, and we believe in the property and the sponsor that we’re willing to keep our own money into the deal as well.

Details of the Loans thru Patch of Land

Robert Helms: Let’s talk about, there’s kind of two angles of this. One is, “I’m a accredited investor. I want to put money at work. You guys have vetted deals. I’d like to be on the lending side. I could diversify by product type and market by investing in several deals.” What does it look like from that investor’s perspective? How do they sign up for the sight? What is it that they do? What are the minimums and range of investment and that kind of stuff?

Doug Cochrane: Sure. Our minimum per deal is $5,000. Typical loan size, we have a minimum loan amount that we do is $100,000. We go up to about 10 million. I think our biggest deal so far has been about 3.2 million on a hotel.

To get involved, I encourage everybody to go to the site, PatchofLand.com. Sign up as an investor if you’re an investor. Fill out some forms. Somebody from our IR team will contact them and bring you through the process. We ensure that everybody is accredited before they can invest in a project. If you’re a borrower, the same thing. You go to our site, you fill out a simple form, a loan officer will contact you and get you through the process and get you to the closing table as quickly as possible.

Robert Helms: What some of the critics say about crowdfunding is a lot of the deals don’t happen. In this case, the deal has happened. You guys have already funded it. It’s not a matter of, “I pledge $5,000 or $100,000 if the loan happens.” It’s already happened. I guess by the time that they see it on your site, it’s a done deal.

Doug Cochrane: It’s a done deal. The minute that they invest in the project, their money is working right away. We pay out dividends every month. They’re based off of borrower payment dependent notes. The second that you’re investing, your money’s at work.

Robert Helms: Can people invest with their IRAs?

Doug Cochrane: Yes.

Robert Helms: Okay. That’s pretty common today that people with self directed IRAs are looking for this kind of investment.

Doug Cochrane: Exactly.

Robert Helms: Let’s talk about the timeline. What’s the typical underwriting look like for on the developer side? I come to you with a project. I’m looking for funding. What’s that time period like?

Doug Cochrane: On the residential side, one to fours, we can typically close a loan within two weeks. We move pretty quickly. We’ve done it in five days, which is moving boulders. Honestly for our developers, the guys who are really organized and professional, those are the ones that we can get done very quickly. They know what they’re doing and it’s a pretty simple process.

Robert Helms: How does the loan compare on a competitive basis with some other loan they might get from a local bank or a lender?

Doug Cochrane: It’s very competitive. We, again, we’re a nationwide lender and we stay competitive within regions. Different regions have different pricing scales. Loans are priced based on the inherent risks, LTVs and experience and where it’s located, is it judicial, non-judicial. We have a whole proprietary scoring model when we’re pricing out loans that take into account all these different data points. We’re very competitive in that respect.

For our borrowers, our borrowers are guys who are getting great deals. Part of getting a great deal is being able to move quickly. That’s part of our biggest benefit is, like I said, we were able to close a deal in five days, which was pretty impressive and got us a borrower for life I think.

Robert Helms: Oh, wow. That’s awesome.

Doug Cochrane: On our commercial deals, we typically can close those out in about three to four weeks. They take a little longer. It’s a little more intense.

Robert Helms: What kind of loan to values?

Doug Cochrane: Loan to values on commercial deals it’s typically about 65%, maybe 70, depending on mitigating circumstances. On the residential side of things, if it’s a straight purchase, no renovations, typically about 75%. If there’s renovations involved, which is most of the time, it’s the majority of the kind of deals that we do, we look at a combined loan to value of 80%. What we’ll do is we’ll help finance the purchase of the property and the renovations as well.

Robert Helms: If you are looking at a deal and it’s passed muster for you guys, you make the loan, now you go out and look for the crowd. How long does it typically take for a loan to fund?

Doug Cochrane: That’s a great question. We’ve had loans … Our fastest loan filled up in about nine minutes.

Robert Helms: Okay, that’s pretty fast.

Doug Cochrane: I think that was about $200, $250,000 loan. Our average loan size is about 375. On average our loans close out in about 24 hours. For the larger ones it might take a little longer. Maybe a week.

Robert Helms: What kind of terms are these loans. Is this long-term financing? Is it more construction financing? Or is it all of the above?

Doug Cochrane: It’s short-term, typically 12 months. Interest only, no pre-paid penalties. We can go out as far as 18 months. We work with our developers. If we know that the renovation’s going to take a little bit longer, it’s up in Minnesota, it’s up in the northern regions and it’s wintertime, we kind of help take that into consideration that they might need a little extra time. We’ll give them an 18 month loan. We’re not trying to restrict anyone in their deals. We’re trying to work with our borrowers and individual circumstances. For the most part they’re 12 month, interest only, no pre-paid penalties.

Robert Helms: Doug, let’s talk geography. What kind of range of area do you guys work in?

Doug Cochrane: We’re nationwide. We’re currently in 20 states. We’re always looking to open up a new state. We have a high concentration in, I’d say, New Jersey, North Carolina, Florida, California. We’re, like I said, I Chicago. We do definitely like the Chicago area a lot as well, or I guess our borrowers like us there.

Robert Helms: All right, so whether or not you’re looking for a loan or you’re looking to invest in part of a loan, just go to the website at PatchofLand.com.

Doug Cochrane: Exactly.

Robert Helms: All right, good stuff. Thanks, Doug. Appreciate it.

Doug Cochrane: Thank you, Robert. Thanks for having me on.

Robert Helms: You’re tuned to the Real Estate Guys Radio Program. More when we come back from Phoenix, Arizona. I’m your host, Robert Helms.

Talking Single Family Home History with Kathy Fettke

Welcome back to the Real Estate Guys Radio Program. We’re talking single family houses. We’re in Phoenix, Arizona at the IMN Single Family Rental Investment Forum, and it’s a great pleasure to say hello to a long-term friend and fellow broadcaster, the amazing Kathy Fettke is with us. Hi, Kathy.

Kathy Fettke: Hi.

Robert Helms: It’s been too long.

Kathy Fettke: It has been way too long. It’s so fun to see you here at this amazing conference.

Robert Helms: Absolutely. We like to say that you’re one of the good gals out there educating and sharing ideas and all that kind of stuff. How long have you had your radio show.

Kathy Fettke: So long, it feels like. I started in, I think, 2000.

Robert Helms: Okay, so been doing it quite a while. Tell us today what you see as opportunity in the marketplace and what are you sharing with your students.

Kathy Fettke: I’m really just excited to see that I’m right. I’m around, we’re sitting here with these, the largest institutional investors in the world right here at this event and they’re copying us.

Robert Helms: Isn’t that something?

Kathy Fettke: Isn’t that interesting? Everything that comes out of their mouth, I think you and I said first. Don’t you think?

Robert Helms: Yeah, that’s pretty funny that that’s the case.

Kathy Fettke: Do you think they listen to us?

Robert Helms: I’m guessing maybe so. What’s funny, I don’t know if you track your broadcast listenership, we learned that our number one listener market is Washington DC.

Kathy Fettke: They are listening.

Robert Helms: I never would have guessed that, but I think maybe they are listening. It is, it’s validation.

Kathy Fettke: Yeah.

Robert Helms: Ten years ago a conference like this wouldn’t be attended by so many suits and ties, right?

Kathy Fettke: Of course, it would be mom and pops.

Robert Helms: It is very interesting the first day one of the slides was up it was the majority of single family homes are owned by mom and pops, by a person who owns one rental house.

Kathy Fettke: Right, right.

Robert Helms: There aren’t that many big institutions, but there’s more and more.

Kathy Fettke: It’s very interesting to see how they’re trying to make this into an industry, and they’re here to stay. Probably the biggest thing I got from this event is that they see the rental market growing, which you and I both know is happening.

All the reasons and the data behind that why people are leaning towards renting or they just can’t buy, although I’m going to constantly be encouraging them to do it. They should be buying. That is just an incredible … I thought we had the best opportunity in 2008, 2009, and I, you know, sometimes wish we could turn back the clock. Then to see these big players jumping in now? You got to know it’s not too late.

Robert Helms: Right, exactly.

Kathy Fettke: I remember when I first got into real estate, I would look at people who bought long ago and be a little jealous, you know. Just a little envious. You got in at the right time. You know, the same thing in looking back at 2009. It’s like, you could buy a house in Riverside for $65,0000. Why didn’t I buy 1,000?

Again, to see so much hype over what you and I and many of our listeners have been doing forever is really interesting. I’m a little fearful, tiny bit, that they’re going to just completely take it over. But like you said, nah, that can’t happen.

Robert Helms: Well yeah. A couple things that have happened about that, right? The first big groups that came in after the carnage and bought stuff in a lot of the markets that we have experience in, we thought that was going to be a game changer. It was for a little while.

To me, this new crop of folks seems to be a little better funded, a little more sophisticated. They’re buying better. They are taking some of the things that you’ve been teaching for a long time and following that, where before it was just hot money chasing whatever deals. Because the pricing was low, and we’ve had now home price appreciation, then it looks like they did well.

Today it seems like you’ve got to still sharpen your pencil. You’ve got to be careful of market selection. You’ve certainly got to be careful of tenant screening. All the basics of our business. It’s going to continue to be important.

Kathy Fettke: What I love about what I’m seeing here is it really truly is turning into a viable industry. I just walked down the aisles and you’ve got all these companies who are wanting to profit on this new thing. You’ve got these carpet companies that are offering cheaper discounts, and roofing and so forth.

In some ways I think it will become easier for the mom and pop, because they’ll just be better property managers out there and they’ll be better screening process and there’s all this software’s out there now that’s helping us do our research more. I think for me, again, it’s just really interesting to see. I feel a little old. Like, “Back in the day we used to have to do all this ourselves.” It’s becoming institutionalized.

Robert Helms: You know some of these … One of the panels yesterday where the eldest company was touting the fact that we were formed way back in 2008. Oh, wow, since the dawn of time. We had real estate before that, right?

It is changed. The very nature of the single family asset class now is different. A tenanted house is a different asset than an empty house, than an owner occupied house. Even though you’ve got multiple exit strategies, it’s one of the strengths of single family, and on our show we spend a lot more time on broader economics and we look at a lot of different stuff. We don’t spend as much time on single family as we certainly used to. This has been a really great thing for us to get our minds back into the single family home space.

Kathy Fettke: Yeah, I bet. Some of the most brilliant minds are here. Hearing their enthusiasm … Just hearing them talk about the stuff we have been, or at least I for sure have been talking about for years, which is cash flow, cash flow, cash flow, and then to have them basically say the market only wants cash flow, they don’t even care about the equity.

There doesn’t seem to be value on it on the market. They’re just trying to build these cash flow portfolios that then they can sell, which is kind of … I know there’s an appetite on Wall Street for that in anything. The software companies, the friends I know who own software companies, they’re just looking to create the membership sites and so forth. It’s all about cash flow. Again, it’s such an opportunity now to hopefully maybe even train the tenant. As standards rise, tenants may not be able to get away with some of the things they’ve been doing.

Robert Helms: Yeah. In the age of information, more information available than ever, even the whole tenant screening process has changed.

I remember certainly right after the big ugliness of the crash, your tenant had no credit score. You could no longer even use, it was no longer valid to even ask because everyone had lost a home, lost a job, lost their credit. Today they’re looking at different things, technology. Just walk into the exhibit hall here, all kinds of ways to make our lives easier as investors. That’s exciting.

Kathy Fettke: Yeah.

Robert Helms: At the same time, any time the big boys and girls start to get in it does make you pause and go, “Hmm, I was in the right place but can I maintain my edge?”

Your listeners, our listeners, can be very nimble. They can move quicker. That’s the other thing. The bigger the industry gets, the more there are chances to exploit those little unique opportunities, some of the smaller markets that you might favor as opposed to a larger market and looking for where there is opportunities, the market shifts. It changes. Today’s great market wasn’t great 10 years ago necessarily.

Kathy Fettke: No, no. Again, that’s how I got started. That’s again why I find this all really fascinating because back in 2004, 2005, I was doing loans. No matter what the headline news said, no matter what the chief economist of whatever came out with, I knew something was wrong. None of it made sense.

What was the book? There’s No Housing Bubble? That came out from David Lee Ray from NAR came out. I forget what it was, but basically saying there’s no housing boom. He came out with it in 2006. These top economists were saying one thing, but your gut, all you had to do was listen to your gut and say, “Why can I give someone up to five million dollars, a NINA loan, no income, no assets? Who would do that?”

Robert Helms: Something has to be wrong here.

Kathy Fettke: Who sat in a board room in a suit going, “This is a good idea. Let’s just give money away to anyone.”

Robert Helms: Of course now we know how that turned out.

Kathy Fettke: Right.

Robert Helms: Yet it does seem like there’s liquidity back in the lending side of the business again. We’re starting, I don’t know if it’s the same path or not. Don’t have a crystal ball. There was a period of time where you couldn’t get a loan and now there is.

What’s really interesting, I’ve discovered it here, I don’t know if you’ve seen it, but the lenders that are showing up that are specifically lending to investors, not any interest in loaning to an owner occupant, they’re just investor lenders from one to 100 units. That’s pretty good stuff.

Kathy Fettke: Yeah, it’s amazing. Back then when I was seeing the problem and we knew that there was, that California was over inflated, I got to have Robert Kiyosaki on the show and just like you and some people who had been around enough to know that something was wrong. They weren’t listening to the economists either. They were the ones that told me they were investing in Dallas.

We rapidly urged people to sell, sell, sell California and exchange it for Texas. I can’t tell you, you probably experienced this too, how many people would look down their nose at me and say, “Nothing happens in Texas.”

Robert Helms: Right.

Kathy Fettke: I’m going, “Maybe that’s a good thing, because something is about to happen here.”

Robert Helms: All the markets that were the high run of markets were the worst when it came to the exits and Texas was pretty slow and steady. Today there are Texas markets appreciating 12 and 15% a year. Is it time to be wary of Texas? I don’t know.

Tell us how we can listen to the podcast and get involved with the Real Wealth network.

Kathy Fettke: Wonderful. You can look at RealWealthShow.com or Real Wealth Show on iTunes, and then Real Wealth Network is how you find us. Membership is free and we just do a lot of education on how to be a smart real estate investor.

Robert Helms: That’s what we love about you.

Kathy Fettke: Yeah, thanks.

Robert Helms: Thanks for being on the show.

Kathy Fettke: Thanks so much.

Robert Helms: There’s Kathy Fettke. More when we come back. I am your host Robert Helms. We’re the Real Estate Guys.

Listener Guest and Real Estate Syndicator, Sep Bekam

Welcome back to the Real Estate Guys Radio Program. We’re in Phoenix, Arizona this week at the single family expo. This has been a pretty amazing event and one of the greatest things for us is when we run into listeners. Let’s welcome one of our long-term listeners and successful students, Sep Bekam. How are you, Sep?

Sep: Good, Robert. How are you?

Robert Helms: I’m great. First of all, thanks for reminding us about this event. I had been to a couple of the IMN shows over the years and I’ve been on their mailing list, but you reached out and said, “You guys ought to consider coming to this.” This has been a great event.

Sep: Yeah, glad to hear that.

Robert Helms: Let’s talk about your story a little bit. I think when we first met you were still active as an engineer and you got the real estate bug. Tell us your story.

Sep: Sure. So I am a long-time listener. I’ve been listening to you guys since, I think it was 2010. Bought a couple properties, just two four-plexes and came to the first syndication event that was in 2011.

Since then, with the tools that you guys have provided me and taught me over the years, I’ve been able to scale that up. I quit the rat race last year and I’ve been focusing primarily on multifamily syndication. Most of the properties were taking what you guys taught me and putting that into real life.

The challenge has been, multifamily has been, the cap rates have gone down quite a bit. There’s a lot more competition. Russ talks about a lot of the, even foreign capital has just wanting to be in US dollars. It’s hard to find the yields that my investors are used to with that asset class. I came across the IMN events through some mutual friends, also Real Estate Guys listeners, and focusing more on syndicating these portfolio-type deals.

Transitioning from Investor to Syndicator

Robert Helms: Let’s talk about this transition that you made from investing in your own account to now going out and raising money to invest. That’s a big jump for a lot of people. Take us through what that was like.

Sep: Sure. You hear a lot of success stories where everything goes right the first time, where the properties cash flow automatically. My experience was very different.

It took me two years to get my first, actually all the properties I had at the time, to cash flow. To date, I’ve gone through about 10 property management companies and I’m still a firm believer in using third party property management.

All the challenges that I had with the evictions and not being able to produce the income, it was always an owner problem. It was not having the right team managing that asset. You guys are really big in terms of having those systems in place and treating real estate like a business and not about the properties.

Along the way, as I was able to solve those problems with having the right team, that I’m thankful for, I’ve communicated that with my investors and I think they actually feel more secure in being a part of that type of pool of capital for a deal. They don’t have to go mistakes their own. They can leverage my experience and know there’s a good steward at the ship to protect their capital.

Robert Helms: It’s such a good point. People want to invest with someone who’s been there and seen that. Everyone wants to think we have a good track record, but the lessons you learn when things don’t go well make you a better manager as things get better, right?

It’s not about not making mistakes. It’s about learning from the things that go wrong. You’re a great student. I know that because you keep coming back and you put into practice what you learn, which is rare but necessary to be successful.

We were talking earlier today with some folks about how when the market changes you need to correct your strategy. You give a great example of that.

Multifamily makes sense for a lot of reasons, but right now where we sit, it’s hard to get inventory, the cap rates are compressed, the big guys are chasing the little guys out of the room.

Let’s talk about the single family market. That’s an interesting market. We’re starting to see the opposite effect having, where bigger money’s coming into the single family space. We’ve been talking about that here at this event for a couple days. What are your take always, your epiphanies, from what you’ve been learning in the last couple days here?

Sep: Sure. In essence, the hedge fund and these REITS got into buying these thousands and thousands of properties back during the recession when the, if I can phrase it as, there was blood on the streets at the time. They were taking advantage of the opportunity and they kind of created that space.

Before the notion, including myself, was that single family, well, you can only do 10 properties and then from there you have to go on to … you ran out of Fannie and Freddie type financing. Now there’s actually lenders that step in to fill in the void. There’s not really a cap on how many single families you can have.

In terms of thinking about the forward economy, if we’re buying a property, multifamily property at a compressed cap rate, that’s a speculation if we’re expecting that same property to have that same cap rate three years from now, five years from now. I think it’s safer to be in an asset class where the rents are still inelastic but the numbers make sense from the get go. You don’t have as much competition in there.

It’s really interesting in these panels at the conference where the REITs and these large fund managers are talking about the same concepts and ideas that you and Russ talk about on your podcast.

A couple years ago this was foreign concept to me. With you guys’ training and teaching it kind of opened my mind to that. I can see what they’re saying. They’re concerned about the same thing, slower wage growth. They’re going more for those markets where it makes sense at the get go.

Robert Helms: Yep, and it is a changing platform, right? We see the various asset classes within real estate change, fall in and out of favor. As an investor you got to be nimble.

I think one of the big things that people get stuck on is our motto, “Education for Effective Action.” You’re a guy that’s taken action. What would you say to a listener out there as a word of encouragement. You’ve worked hard and we’ve watched you really take the lessons and sharpen your pencil and study and take a lot of classes.

You’ve now gotten to the place where you’ve got a nice portfolio, things are going well. What would you say to that investor who’s not there yet?

Sep: I think it’s better to invest in themselves, for them to invest in their own education. Even after I went through your guys’ trainings, as I continue to do so, the properties I first started out with, I probably wouldn’t have bought them with the extra tools that I have on my tool belt now.

It’s powerful because then you learn that you’re not competing for properties on the MLS. You can find those great off market deals. You can set up systems in place so that those deals come to you automatically. You don’t need to put 25% down in every deal. You can go raise that capital from investors and have the capital waiting for you over there.

I think the education is definitely necessary, especially if you’re shy like me and sales doesn’t come naturally. If you’re afraid about making mistakes, I think those are definitely the people that should be in the business, because there’s a lot of sharks out there, but there’s definitely a need for people that actually want to protect their investor’s capital and grow that.

Robert Helms: All right, good stuff. We’ve got, of course, our syndication event coming up in January. Are we going to see you again at that one?

Sep: Absolutely.

Robert Helms: All right. Sep has been I think to virtually every syndication event we’ve done. It’s happening January 29th and 30th in Phoenix, Arizona. Come on out. You’ll have a great time and you get to hang out with Sep, as well. Appreciate your time today, man.

Sep: Thank you very much, Robert.

Robert Helms: Keep doing the thing.

Show Recap & How Sophistication in the Industry Affects Investing in Single Family Homes

A wonderful time here in Phoenix, Arizona. What a great variety of folks we’ve had on the show today.

Russell Gray: Yeah, it’s been great. It’s really interesting to see some old, familiar faces. It’s always great when listeners, you guys are out there in the audience, any time you come to a live event, please come see us. Say hello.

Robert Helms: It’s our favorite thing.

Russell Gray: It’s a lot of fun because we get a chance to hear how people are responding to the stuff we’re sticking out here on the radio and on the podcast and the newsletter and the blogs and all that. We really appreciate the feedback, good, bad, and ugly. All of that’s good.

Just as far as the conference itself, you know you heard that there’s just a lot of different people here that are viewing this asset class from different lenses. There’s so much opportunity because there’s so much change.

I think the big issue is going to be for people who just don’t acknowledge that the change is happening. We spend a lot of time on some of the macroeconomic factors. We talk about even some geopolitical factors on the show. We certainly talk about demographic factors, there’s geographic factors. Add to that mix now some technological factors and some business factors.

There’s a whole level of sophistication coming into this industry that really didn’t exist before. When you have that it does tighten the margins. You can’t just be a sloppy little operator out there competing against these big, well-oiled machines that are run by corporate executives that are savvy operationally.

You’re going to have to compete against that, and they’re going to be able to bid. We’ve heard a lot of the complaints over the years from the operators out there that are bidding, “Oh, these hedge funds are bidding it up to where it doesn’t make any sense.” Well, it doesn’t make any sense based on your operational cost. They can go in and they can buy an inefficient asset and they can make it efficient.

All of a sudden, a price that didn’t make sense for you can make sense for them. If you don’t adjust, if you don’t take advantage of some of these innovations and tools yourself, then you’re going to end up getting squeezed out of the market completely.

Robert Helms: Here’s the great news. Because those kinds of folks are in the marketplace, and vendors are sprouting up to support them, the fact that there are so many different non-owner-occupant lending opportunities out there today … You can borrow property now. The Fannie and Freddie stop is no longer there because of that. That’s all happened to serve these folks, and you get to be the beneficiary of it.

If it had just been mom and pops, the lenders that are popping up today, several of which are on this conference, wouldn’t be here. They’re in the business to service the guy with 500 or 1000 homes, but you get to benefit from that. Same with software, same with systems, same with buying power. A lot of the tools out there today, we get to take advantage of. The thing the individual investor can be is a lot more nimble.

Russell Gray: I think just coming back to that debt comment, which is an important one, a lot of times as real estate investors we only ever think about equity. It’s all we think about.

We think, “Okay, we’re going to buy the property. We’re going to be the owner.” We’re on the equity side of things. There are a lot of people who want to invest in the space that don’t want to be the equity. Their investment is to make the loan. That’s a great partnership.

Yes, they’re there to service from an equity perspective. Of course, you’re an equity guy, so you would do that. I came out of the debt side, right? Yes, you want to service, but really what you want to do is you want to get yourself in a position to get a stream of income.

As a real estate investor I’m going to go out there, I’m going to make a down payment. I’m going to take out a loan. I’m going to now receive a stream of income through the rental income. Then I’m going to service the mortgage.

The piece of this rental income stream that the lender gets is just the debt service. I get the difference between the profit, or the income on the property and the loan. Of course that’s what I’m doing is arbitraging. If I can borrow at five and earn at eight, then I make a 3% spread on the borrowed money, right?

The point is, it’s a symbiotic relationship. There are many people who want to feed on the single family home space at an institutional level. When that happens, lots of money becomes available. That means there’s lots of opportunity for people to access those funds, because the people on the debt side need you, on the equity side, to manage the asset because they don’t want to.

Robert Helms: All right. Big thanks to IMN. You can find out what they do at IMN.org. Lots of conferences in lots of places. Of course, to all the guests today, thanks for their time and expertise. Until next week, go out and make some equity happen.

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