Mortgage Market: Making It Happen in Real Estate with Other People’s Money (Video)
One of the best things about investing in real estate is the use of “other people’s money” or OPM. You can use OPM to pay for your deal while you get all the cash flow, appreciation and tax benefits. What do we need to know about the lending environment today?
In this episode, we’ll hear from private real estate lender Brian Stark. Brian has more than 20 years experience as a lender and is currently VP of Originations at real estate lender Icecap Group in New York City. He has actively invested in single-family, multi-family, and commercial real estate. He’s bought and sold hundreds of properties, wholesaled many more, and originated more than 1,400 real estate loans totalling well over $150 million.
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Transcript:
[00:00:00]
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Presenter: You're listening to The Real Wealth Show with Kathy Fettke, the real estate investors resource.
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Kathy Fettke: One of the best things about investing in real estate is the ability to use OPM, other people's money, to fund your deal. Yet you get all the tax benefits, the appreciation, and the cashflow from that deal while somebody else pays your loan off for you. What is the lending environment today? I'm Kathy Fettke and welcome to The Real Wealth Show.
Our guest today has been a private real estate lender for about 20 years. Brian Stark is VP of originations at IceCap Group, a direct private lender in New York City, making loans to real estate investors nationwide. He's wholesaled hundreds of properties, bought and sold hundreds of properties, and originated over 1,400 real estate loans, and he's here with us today on The Real Wealth Show. Brian, welcome.
Brian Stark: How wonderful to be with you, Kathy. How are you today?
Kathy: I am doing wonderful. I'm glad to have you on because we're seeing some changes a bit in lending, and I would love to get some understanding of it. We're seeing interest rates go up, how much have they gone up, and do you think that will continue?
Brian: Not to be contrarian, but the truth is, in the investment side, we still see rates pretty well depressed. Not in a negative way, we see them held pretty low. In some areas, they're even going down a tiny bit because there's so much investment activity and there's a lot of, you would call it competition among lenders, like the company that we run and others like us. Everybody's feeding for the borrowers and depressing rates a little bit. While there's a little interest rate bump for consumers, I think investment rates are staying stable, or maybe reducing a tiny bit.
Kathy: [00:02:00] That is really good news.
Brian: It's great news.
Kathy: I could see that because there's so much money out there chasing some kind of yield and not able to get it, but lending provides that. I'm not surprised, but I just haven't really heard that. Is it more private lenders and not so much the Fannie, Freddie lenders, the conventional?
Brian: Yes. For the purpose of this discussion, Kathy, there's two buckets, if you will. One bucket would be government-backed money like Fannie, Freddie banks, the people with the big fancy buildings downtown. Then the other bucket would be all the private lenders. When we say private lenders, we're not just talking about the nice guy that you sit next to in church who's got a couple of hundred thousand in their IRA, I'm talking about what have now become, in the last five, six years, multi-billion-dollar companies that have raised huge rounds of capital raises.
Hedge funds, private equity funds are in this business, our company has own fund, family offices. We're talking about very substantial private institutions that are in the business of making loans to real estate investors for fix and flips, buy and holds, and those companies are very competitive. We're not governed by United States government regulations, in most cases, we're not governed by stockholders.
We're basically governed by the owners of the company, who on a given morning might say, "Hey, let's get into this business. Hey, let's lower rates. Hey, let's do higher LTVs. Let's go compete with this company or that company. I want 50 more borrowers this month. Let's do another 50 million this month." Just that fast, they can lower their rates because it's their money.
Kathy: They must fall under some kind of regulation, I imagine it's pretty strict stuff.
Brian: To the extent that you and I are both regulated, we're not allowed to drive past a certain speed or steal somebody's car, we're regulated to that degree, but there's very little regulation of business-to-business lending. [00:04:00] Very little in most states. There are half a dozen states in the country where there's a lot of regulation and most of us stay out of those states actually.
Kathy: Which states are those. I assume New Jersey, California?
Brian: Actually, California's one, New Jersey is not. Arizona, Nevada, North and South Dakota, Utah, most of us are not too active in Alaska. The territories are tough because just it's a whole different business, like Puerto Rico and stuff.
Kathy: Interesting
Brian: Lower cost of money comes in a lot of forms. One form is, "Hey, our rates are low, we're charging 5%. Oh, now, we're charging 4.75. Oh, we can do it for 4.5." Another lower cost of money is lowering fees, closing faster, raising what we call leverage. So, "We'll lend 80%. Oh, we'll lend 85%. Oh, we'll end 80%. We'll lend 100%." All those things are coming together to make more money available at a lower rate. It's been said by the way, that there's over $2 trillion, with a T, looking for a home. Liquid money that's literally sitting in investors' bank accounts.
Kathy: I'm not surprised since $ 5 trillion was just created in the past year. It has to go somewhere and it likes to go to real estate.
Brian: It sure does, absolutely. [crosstalk[ You were going to say?
Kathy: I was going to say that we know that there were eviction moratoriums, there were all kinds of mandates this past year that was confusing, but it mainly applied to government-backed loans. If there was a private lender, they didn't necessarily fall under that regulation, or did they?
Brian: Eviction mandates are different from foreclosure mandates. I think any property owner wasn't allowed to evict a residential tenant. I think there were some, I don't know this law perfectly, but it's different in every state, first of all. I think if the tenant was in default before [00:06:00] the pandemic began, then an eviction was allowed to continue, but I think it's fair to say very, very, very few evictions have taken place in the last year.
I think it's also fair to point out that, by and large, residential tenants have paid their rent. I think you don't see large apartment buildings, large apartment communities with 60% unpaid rents. I'm sure there's landlords that have felt some pain, but by and large, people did pay their rent. Because not a whole lot of people at the upper and middle levels lost their jobs. Remember, people still worked, they just worked from home. There's definitely a strata of people that were feeling a lot of pain and we feel for them, but even many of those people paid rent. They had savings, they had other ways to get money.
Anyway, private lenders were affected to the extent that we looked at residential assets, and are still looking at residential assets, with a little greater level of concern than we may have a year or two ago. Before this virus came along, it was an automatic assumption, just like it would be for you that, "Oh, it's a house. It can rent for $1,300 a month. We can definitely get $9,000 a month for this," or whatever the number is, "We can get it."
Now, suddenly everybody has to say, "Well, wait a minute now, people are moving out of that neighborhood to get out of the city and out to the country. People aren't renting in that area too much anymore. That's a tough area, there's a lot of non-pay in that part of the city or part of the region or whatever it is." Suddenly, we're looking at residential assets not quite as solidly as we did maybe a year ago.
That's all gonna stabilize out, it's all going to play its way out over the next six or eight months. I think we're going to see that settle out, but definitely, it's affected us in that way, but I don't think any lender has been affected by eviction. Foreclosure is a different matte