(00:00:01) – Welcome to Episode Six of Season 16 of The Growing Empires Show. Today I’m here with my special guest, Gary Masciitus, and we’re going to talk about creative financing in today’s marketplace. So stay tuned.

   (00:00:16) – Welcome to Growing Empires, hosted by real estate entrepreneur and trusted investment advisor Jennifer DeJesus. Growing empires provides insight to building wealth through passive income, producing real estate investments for those who want to build and manage a more profitable real estate portfolio.

  (00:00:36) – Well, welcome back, Gary, to the Growing Empire show. I’m so glad that you’re back for round two.

  (00:00:42) – Thank you. Jennifer, it’s a pleasure to be here. It’s been a few years, I think maybe 2019 since we, uh, last had this conversation on a podcast. And I’m looking forward to it. A lot has changed.

  (00:00:53) – Yeah, for sure. A lot has changed. Well, I’m going to kick off this episode with you sharing a little bit about your background and the work that you’re doing now.

  (00:01:00) – Okay. Sure. So, um, so by way of background, I’ve been in finance for 33 years now.

  (00:01:08) – I spent 23 years on Wall Street helping public companies raise capital in the convertible bond market. And my client base at the time was all institutional financial money managers like hedge funds, mutual fund complexes, pension funds, insurance companies, etc.. And, um, you know, then the financial crisis hit, kind of when I was at my peak on Wall Street, but had some unique family commitments. My my youngest of three, who’s now 16, was born in 2007 with special needs and kind of a myriad of health related issues. And, you know, I made the decision at that time to to leave the large investment banks and start folks basically focus closer to home, um, and back. You know, ten plus years ago, it wasn’t common to have have a trading desk job working from home. So that meant like a really a career change for me, um, where I had to just kind of work with the smaller companies, and I thought it was the right thing to do with, uh, you know, my family’s situation.

  (00:02:19) – So, you know, then, uh, in 2016, I realized it was a pivot was needed, and I wasn’t really sure kind of where I could best utilize my skill set that have been learned over, you know, the prior 23 years. And, um, I was actually in residential mortgage lending in the early 90s before heading off to Wall Street. And I thought that might be a good place to, um, kind of, you know, jump back in and pivot into. And so I got my, uh, residential lending licenses at the time. I’ve since let them go because I’m strictly doing commercial lending at this point. But, um, you know, I got my residential licenses and quickly realized that my skill set and temperament was best suited to working with investors as opposed to, you know, helping people buy homes to live in. Um, so that kind of started my journey back into, uh, into lending. And I had the good fortune of my best friend and his two sons being large value add commercial real estate investors in the Lehigh Valley.

  (00:03:31) – And, um, you know, I had, uh, talks with them and they were looking to, you know, back back, you know, 2015, 2016, hard money or private money was very expensive still. And they were looking for alternatives to fund value add projects, whether it be a rehab or a bridge loan. And, um, I realized that there was kind of a niche there for that that wasn’t quite being, I think, fully fulfilled. And, um, the investors that I dealt with on Wall Street, uh, the hedge fund managers, etc., a lot of them, you know, had interest in real estate lending. So I started doing private loans between, um, hedge fund managers, you know, kind of friends and family, their personal and friends and family money and, um, you know, with clients like, uh, like my friends that were, you know, looking for other sources of, you know, more reasonably priced private capital. And that kind of started my journey into, uh, commercial lending, which has, you know, changed from there, which we can get into as, uh, you know, we get further into the questions.

  (00:04:41) – Yeah. So that’s actually what we’re going to talk about today. We’re going to talk about lending as it is relative to today’s market specifically. So I’ve asked Gary to join me to share his wealth of knowledge that he’s gained throughout the years on these subjects. So let’s just start out with a quick, you know, kind of just where we are today versus where we were maybe a year or two ago from the perspective of investment loans. And the difference is that you would have seen a couple of years ago to what is currently happening today.

  (00:05:12) – Sure. Okay. So there’s a couple different, um, paths to kind of go down, uh, regarding this question. So one is, you know, how have things changed? Well, you know, with the substantial increase in interest rates over the last, you know, year to year and a half, rates have more than doubled. It’s caused a, you know, a shift in both the real estate landscape as well as the lending landscape. Um, you know, projects that would easily hit whatever cash flow metrics were required in order to qualify for a loan have changed dramatically because payments have gone up so much mortgage payments because of the, you know, north of doubling of interest rates.

  (00:06:01) – So, you know, a year, year and a half ago, I mean, rates hit as low as in the high twos and low threes in terms of percentage. You know now they’re in the you know squarely in the sevens and in some cases into the eights depending on the lender type and loan type. So you know it’s definitely um it’s definitely changed. Um, you know what the cash flows of a property look like, which oftentimes can mean a larger down payment being required depending on the project and, and loan type. So that’s kind of one change. Um, you know, the other change I would say is I kind of feel like even two years ago, the banks and the credit unions were dominating the commercial lending space. And I guess I want to clarify what I mean by commercial lending, particularly if, you know, the target audience is newer investors. So, you know, in the 1 to 4 family investment space, um, that is still considered a residential property. Once you get into into five or more residential units, it’s considered a commercial property now.

  (00:07:18) – Defining something as a residential or commercial property is different than defining what type of loan is being used on that property. So there are residential conventional loans for the 1 to 4 family space. These would be similar, you know, to the loan types that someone would take to buy a residence or to buy anywhere between a one or a four family investment property. It’s fairly, you know, similar process. You know, the lender is going to want to see, you know, 1 or 2 years worth of w-2s and tax returns, etc.. So that’s kind of the traditional conventional lending space. The commercial lending space, um, can be used for 1 to 4 family properties, and it can be used for the larger, you know, five plus unit properties. And what that type of loan does is it takes the loan off of someone’s personal balance sheet and puts it into a company balance sheet, like an LLC, for example. And so so I would say two years ago, banks and credit unions, even in the 1 to 4 family space, were very aggressive in lending.

  (00:08:32) – Um, and over the last two years, as rates have come up dramatically, you know, these same banks and credit unions that were aggressively lending a year or two ago, you know, or have a different balance sheet now because they, you know, when they issue these loans, they’re keeping them on their books. They’re not selling them off to investors in a secondary market. So, you know, they’re kind of stuck with all these low interest rate loans on their books until they roll off, you know, your typical commercial loan, the bank locks the rate for five years at a time. So, you know, it’s another, you know, 3 or 4 years before a lot of these loans will start, you know, kind of naturally, um, rolling off or resetting into the whatever the higher interest rates are at the, you know, at the time of that, that reset. So, so banks were very aggressive. They’ve gotten more conservative. They’re they’re still lending. They’re still a place for banks and credit unions.

  (00:09:30) – But I would say the lending type that has come on to the scenes over the past year or two, or what is known as DCR loans, these are basically 30 year rental loans on 1 to 4 family properties, where they’re locking the rate for 30 years at a time, just like a conventional loan would have that rate lock. But it’s it’s a commercial loan. It’s to your LLC or entity. It doesn’t show up on your personal credit report. Uh, the underwriting guidelines are much simpler than banks. There’s no w-2s or tax returns, etc.. And so, you know, that would that would be I think the biggest change I’ve seen in the lending landscape is a transition from bank lending to the darker space in 1 to 4 family lending.

  (00:10:23) – And are you currently doing that DCR funding or lending?

  (00:10:27) – Absolutely. So, um, I would say it’s probably 80% of the loans have done in the last six months have been, um, you know, direct loans in the DCR space or also the bridge lending space.

  (00:10:44) – So I think I think it would be helpful. Um, and you can you can slow me down if you want to talk about this later, but, you know, to talk about the, um, the, the different, you know, loan types that are out there, um, not only the different loan programs, but, you know, kind of at a high level, I would break down kind of the, the overall lending types that we do into, uh, you know, a few different categories. So one category would be the private lending that I talked about earlier. That’s truly private money. You know, uh, being lent, it’s not loans that are getting sold off to institutions. It’s not a bank holding it on their balance sheet, etc. it’s truly private money. Those are typically shorter term loans. Um, the DCR loans are what I would categorize as, um, a direct lending product for my company. So, um, the difference between a private loan and a direct loan is as follows.

  (00:11:51) – The over the last several years, um, institutional money, institutional investors have been putting capital into buying these commercial commercial mortgages on 1 to 4 family properties. Specifically, I would say that’s kind of where the biggest growth has been. So, you know, we could have, um, a private equity fund or an insurance company. A someone that’s looking to put large amounts of capital to work by investing them in mortgage backed securities. Um, these DSR loans that we’re talking about, these 30 year rental loans. My company is a direct lender on them, but then they get sold off, just like a residential loan gets sold off at the closing table by a residential mortgage company. The same thing is happening with these DSR loans. So we underwrite them. Um, you know, we get them from start to finish and then they get sold off to institutional investors. That doesn’t impact the real estate investor in any way. It, um, you know, there’s a professional loan servicing company that services the loan, collects their payment every month, you know, collects their taxes and insurance and pays them out when they’re due, just like on a residential loan.

  (00:13:15) – So yes, we’re that that would be a direct lender type loan. The same is true for bridge loans, rehab loans, fix and flip loans. My company is a direct lender for those loan products. And we’re, you know, using institutional money to, uh, to sell those off kind of on the back end.

  (00:13:36) – How do those types of products really help in the current environment of of rates? Right. Um, like how does it change the outlook for the investor or how they are maybe analyzing a deal?

  (00:13:52) – Sure. It’s it really opens up a lot of opportunities. And in some cases it can be just like the difference between night and day when comparing, let’s say, a commercial bank loan or a residential loan to, let’s say, these DSR loans. So there’s a number of substantial benefits to these DSR loans and a reason that they have become more popular. I would say that it’s still a relatively misunderstood product by even relatively experienced real estate investors. And, you know, so many newer investors just don’t have any idea what, you know, how they can enhance what they’re looking to do with potentially building a real estate portfolio.

  (00:14:41) – So to give a couple different, you know, kind of main benefits. I mean, the first one is let’s say you have someone who’s self-employed or doesn’t have strong tax returns or w-2s, um, etc.. Um, you know, the residential lenders as well as the commercial banks and credit unions are going to care greatly about not only what are the cash flows of the property itself, like, what are the, you know, what are the leases or rent that you’re collecting look like relative to the expenses, but they’re going to care on what your overall financial picture looks like as well. And that’s a term that they call global cash flows. So with the the DSR loans, these 30 year rental loans, they’re a light doc loan there. There’s no tax returns w-2s pay stubs. Um any of that kind of traditional things that a lender would want to see how these loans are underwritten or based on the credit of the borrower, the having enough assets liquidity to put down a down payment, the closing costs, and to have some, some reserves left over.

  (00:16:01) – Um, and there’s, you know, not to overly simplify it, but that’s pretty much what’s involved with the underwriting process, cash flows of the property compared to principal interest, taxes and insurance on the property. So what your monthly principal interest taxes and insurances. And you might say, well, yeah, Gary, that sounds that sounds pretty. Or it might be thinking as a real estate investor. Well, that sounds pretty common there. Don’t banks do that? And the answer is, well, not exactly. So when a bank or a credit union look at the cash flows of a property, they are more fully underwriting the cash flows of the property and including some assumptions that a lot of times newer investors don’t factor in. So. So whereas the DCR loans only care about the lease payments, uh, or lease income, I should say, compared to what the monthly principal interest taxes and insurance payment is, the commercial bank and credit unions are going to factor in, you know, vacancy assumptions on a property.

  (00:17:09) – And an investor might say, well, you know, the property has been fully leased. Well, the lender is going to want to take a look at okay, well residential properties. We’re going to haircut. The lease income, 5% is kind of the standard, and we’re only going to use 95% of the income. And then in addition to the taxes and insurance in the expenses of the property, they’re also going to factor in other numbers that are not factored in on these DSR loans. Like, you know, let’s say, for example, the landlord or the owner of the property is paying water and sewer or electric or gas. Um, they’re going to factor in those actual kind of hard costs, uh, into their calculations of how much income, net income is left to support the loan payment. They’re also going to factor in things like maintenance and repairs that don’t get factored in on DSR loans. They’re going to use assumptions anywhere between probably three and a half and 7% of the rent income is going to be, you know, used kind of as a bookmark in these, uh, this operating statement that they’re putting together to, you know, to make some assumptions.

  (00:18:20) – What is realistic for long term, um, you know, income on the property after properly factoring out logical, um, you know, um, expenses that one is going to have owning a property. They’re also going to factor out things like assuming a management fee. You know, your company is obviously a management company with DCR loans. We don’t need to subtract out a management fee where we’re making the calculations. So, uh, whereas a bank or a credit union is going to factor in something for that. So what that means, Jen, is that, you know, you’re going to have more haircuts on the lease, income from a property when you’re determining how much money is left over to service, the mortgage payment. Um, and what that means in today’s environment, with rates so much higher than they were, you know, two years ago, it’s going to mean, in many cases, a property won’t qualify for 75 or 80% loan amount with a bank or credit union in many cases, whereas with the DCR loan, most of those will still qualify for 75 or 80% of the purchase price or the, you know, appraised value on a refinance, for example.

  (00:19:39) – So it’s had great impact with, you know, with the current interest rate landscape.

  (00:19:44) – So what are the typical rates on a car loan?

  (00:19:49) – Okay. So, uh, rates on DCR loans at this point are primarily in the low to mid eights. However, they can be bought down into the somewhere into the sevens. If an investor wants to, um, pay points at closing in order to lower their rate, each point is 1% of the loan amount. This is this is something that is also available with residential style investment property loans, which are going to have fairly similar interest rates to DCR loans and fairly similar points. It’s just the way that they’re underwritten is going to be very different, you know? So, um, yeah, I mean, there’s basically, um, you you have something that is has competitive rates with residential rates, but it’s a low doc loan program. So, um, and you.

  (00:20:43) – Also mentioned that it was a 30 year, a 30 year Am. So we’re also talking about lower monthly payments, which.

  (00:20:49) – Right, so.

  (00:20:50) – Helps the property cash flow better.

  (00:20:52) – That. That’s right. And for the newer investors out there you know, 30 year amortization you know you might be familiar with that if you own, let’s say your own home. Right. But that’s not common in commercial lending. It’s common in residential lending. But commercial banks and credit unions, you know, in the Lehigh Valley, for example, you know, most lenders are going to have either a 20 or at most, a 25 year amortization that they’re calculating your payment over. Um, so that’s going to reduce, as Jen said, the, you know, the the net cash flows that they’re looking at to support your mortgage payments. So it’s going to in many cases not all cases, but in many cases it’s going to reduce the leverage and and increase the amount of down payment that you’re going to need to make. Um, if you’re not using a 30 year amortizing program.

  (00:21:44) – So what is the typical, um, credit score that would be required for one of these DCR loans?

  (00:21:51) – Okay.

  (00:21:51) – So DCR, um, so I’m going to answer the question straight up, and then I’m going to we’ll talk about some, you know, creative solutions as well. Um, and you know, the last time you had me on here, it was kind of creative, you know, creative financing strategies. And that’s evolved over time as well. So, um, so to answer your question, the minimum credit score for a DCR loan is 680. Mid score. Okay. Um, the, um, if you have a 680 mid score, the leverage and rate interest rate are going to be different than if you have a 700 to 719 credit score or a 740 to 759 or a 760 or higher. So this um, this concept is what I would call risk based pricing. And it’s also what happens with residential lending. Your interest rate and points that you pay a closing are going to be dependent on what your credit score is. So that’s also true with DCR loans. But where where the creativity starts to come in in DCR loans and commercial lending in general is quite often, um, unlike residential lending, where it’s generally just the person that’s buying the property.

  (00:23:15) – Um, that is, you know, typically on the loan, you know, once you start bringing entities into the mix, let’s say you create an LLC, you could have just one person on that LLC, you could have five people or more on the LLC. Each of those people can potentially bring different attributes or different positives to the overall equation that a darker lender is looking at. So I’ll give you an example here. So so typically anybody that has ownership in the LLC of 20% or more with most DCR programs, their credit is going to get run as well as, you know, the, you know, basically anybody with 20% more ownership, typically their credit is going to get run. And traditionally or typically the DCR lender is going to use the lower of the let’s just say there’s two people on the LLC. They’re typically going to use the lower of the two people’s mid scores. Um, there are some lenders like ourselves, like GSM, where, you know, my company, where we can now go off of the higher of the two people’s mid scores.

  (00:24:30) – And better yet, we can also, um, structure an LLC where let’s say, let’s say you have two people, one has, let’s say the assets or the potentially the investment knowhow, and one has and they don’t have maybe as high of a credit score. And then you have one person that may not have the the experience, but they have a high credit score. Well, you can pair the two of those people together in an LLC. And we only need a guarantee on the loan by the person with the higher credit score, as long as that person has at least 51% ownership in the company. So one thing I’ve been seeing is, uh, ownership being, let’s say, 51% to 49% in an LLC where the 51% owner has is the guarantor on the loan, they have the higher credit score and the 49% owner may be the experienced real estate investor, or the one with all the capital or part of the capital that is that they’re bringing to, you know, closing. So you can you can kind of bundle together different people to do really creative and interesting things in commercial lending, particularly in the DSR product.

  (00:25:53) – That’s very cool. You also mentioned bridge loans. Are is that something that’s currently happening? Is it common to today’s marketplace with everything that’s going on, or is that is that a thing of the past?

  (00:26:06) – Um, so, so interestingly, Jen, I would say there’s been a pickup in bridge loans because so many of the properties, um, that are not value add projects. So let’s say, you know, let’s say you have it could be a 1 to 4 family property or a larger multifamily property, right? Where, you know, maybe the owner hasn’t been quite keeping up with with market rents. And, you know, banks and credit unions for the most part, are going to want to underwrite based on the current rents that the property has, not what the market rents might be in six months or a year or two years as the new owner comes in and does their thing and raises rents and increases cash flows of the property. So so I would say, you know, like a couple of years ago, most of the bridge loans that I was seeing were rehab loans.

  (00:27:04) – You know, people were coming in to buy rehab, you know, get a and either flip a property or, or do the BR strategy, which for those that aren’t familiar by it, you rehab it, you rent it out. You. Refinance it and then you repeat with your next property. Um, so, you know, so those. We’re still doing a lot of rehab loans, but I’m starting to see some kind of straight bridge loans right now where the property just, um, you know, it’s in good shape, but it needs to be repositioned. You need to acquire the property, get rents raised, and then once you have those higher cash flows, then we can refinance you out and get you more leverage on the property, you know, whereas if you let’s say if you bought a property, um, you know, and you had to put and you didn’t do a bridge loan, maybe it only qualifies for 50, 60, 65% financing based on the cash flows right now that are in place.

  (00:28:05) – Whereas if you do the bridge loan, um, raise up the rent, you know, rents and get the property kind of stabilized, then maybe that’s going to be eligible for 70 or 75% financing. And you can, you know, kind of take your cash, some of your cash back out, that you would have had to have sunk into that property. So you so you’re you inevitably buying properties today without bridge loans, a lot of times your equity kind of gets trapped in there. And, um, that’s that’s fine if you have unlimited sources of capital or equity, but most people don’t. And so bridge loans are being used more to, uh, to just kind of transition a property to get it to where good long term financing can be put in place in a two step process.

   (00:28:56) – The episode will continue in just a moment.

  (00:29:00) – As an investor, we know it’s important to stay on top of market trends and real estate opportunities that add value to your portfolio. We also know that having a trusted source of reliable information to help you stay a step ahead of other investors is critical to your success.

  (00:29:13) – If you’re interested in having these types of resources as well as access to me and my team, I invite you to join the Empire Investment Club, a free service that gives you an easier way to make sense of today’s and tomorrow’s real estate opportunities. As a member of the Empire Investment Club, you’ll get access to relevant resources and investment focused experiences such as live interactive webinars, market trend presentations, and investor socials designed to equip you with what you need to succeed. So whether you’re an active investor, passive investor, a combination of both, or just starting out the club is where you’ll get what you need to build a portfolio you love. To join, just head over to Jennifer dejesus.com. Sign up and we’ll see you in the club where everyone’s on a journey to becoming a better investor. Would you say that the DSR loans now are more more prominent as far as the today’s current market, would you say the bridge loans are, or is there a different type of loan that you’re seeing a lot of investors take on in this current environment?

  (00:30:13) – Okay, so definitely I would say DSR loans are far more popular.

  (00:30:19) – Uh, we’ll use your term popular. They’re definitely far more popular. And then and in many cases, um, a, a, a DSR loan can sometimes be used like a longer term bridge loan. So, um, let me give you a let me give you a, I guess, a good, a good example of that. I had a client, uh, a client that came to me. He happened to be a an experienced real estate and fairly experienced real estate investor. And, you know, he was looking for a bridge loan product on a property that he’d really kind of like to hold over time longer term. But he came to me saying he wanted, you know, a bridge loan. I’m like, well, okay, what’s your strategy? What’s your goal with the property? It’s like, well, I’d actually really love to be able to hold it long term. It’s a good property, you know, etc. I just have a lot of equity trapped in there. So I was like, okay, well how about we take a look at maybe using a DSR loan as a, as a long term bridge loan? And, um, you know, with I think one thing that needs to be said is most commercial loans, whether it be a DCR loan or a commercial bank or, um, you know, that type of loan, most of those are going to have some form of prepayment penalty on them.

  (00:31:43) – Um, that’s actually, um, changed with DCR loans in Pennsylvania. Pennsylvania specifically has its own set of rules with DCR loans, where basically it’s a double edged sword. So it’s not like free to investors. But now DCR lenders over the last, you know, six months to a year, pretty much cannot write a DCR loan in Pennsylvania specifically with the prepayment penalty unless the loan amount is above $300,000. So you’re not going to see that on a lot of single family properties in the Lehigh Valley. But, you know, once you get into two, three, four unit properties that can that can be meaningful, or maybe you’re pairing two properties together in multiple properties. If the combined loan is above 300,000, then there’s no prepayment panel. There’s a there. It can be structured with or without a prepayment penalty. So so now all these loans are getting sold off to to to uh, mortgage backed security investors in the background. Clearly a mortgage backed security investor is not going to pay the same for a loan that could come off their books in two months, three months, six months or a year if it doesn’t have a prepayment penalty on it.

  (00:33:00) – So so basically, the trade off on there is the real estate investor when they use the DCR loan. Um, we can do it, but they pay an extra 1.25% of the loan amount at the closing table as a no prepayment penalty fee, which is far less than what a prepayment penalty would be in the first couple of years on a property. It typically, you know, starts at either 5% or 3% and declines a percent each year. So, you know, so DSR loans can be used as short term bridge loans, um, instead of using a traditional bridge loan, which is typically only in place for 12 months at a time. So a typical bridge loan is a 12 month interest only loan, um, that does not have a prepayment penalty and can be paid off anytime within the 12 months. And then if you want to keep that property or that loan longer than 12 months, you need to pay extension fees. So if you have a property that you know, maybe you’re a little unsure on, like what your your strategy or the timing is going to be, you can put a DCR loan in place as long as the property is what I would call rent ready.

  (00:34:17) – It can’t be a rehab property. It can’t. It can’t have like substantial deferred maintenance or safety items or anything like that. But it can, you know, it could be a little, you know, rundown or shabby or just need some, you know, updating, let’s say light rehab. Um, you know, we can we can do a DCR loan in that program on that property. And if someone creates that extra value by fixing up the property, raising, you know, rents over time, then we can refinance in another DCR loan. But you’re not forced to do something in 12 months like you are with the DCR loan. So I see it as an interim strategy to use. See our loans as temporary loans as well as permanent loans. Um, and not to go too far off topic. I’m seeing this a lot, and I know the the the target audience here is more newer investors. But, you know, I think you should know and the investors should know that, you know, government agency, commercial financing as people build their portfolios and look at larger multifamily properties, that is a space that has increased dramatically as the banks have tightened lending standards over the last year.

  (00:35:35) – Um, government agency is not. The problem with the larger multi families is they typically do have a value add component to them, even if that value add is raising rents and it doesn’t need rehab, the those the agency lenders are only going to go off of those rents that are in place now. So I’m seeing a lot of bridge lending, uh, where I’m doing a bridge loan that ends up refinancing into an agency loan once the property is re stabilized at higher rents. So I don’t want to go too deep on that because I know it’s not the right target audience. But I think it’s important for people to know that.

  (00:36:18) – Yeah, know our target audience is actually not just newer investors, but it’s it’s people that are very seasoned. Right. So everybody’s struggling in this particular market. Right. Because, you know, obviously interest rates do change the landscape of of what you’re doing. Um, but what I hear a lot, and this is from both new and seasoned investors, is that it’s almost like it’s paralyzing.

  (00:36:42) – Right. So people like freeze for a second. Yeah. And they say, oh, well, I can’t buy a property because the rates are too high. And, you know, I always go back and I say, well, it’s too high. Based on what. Right. Too high based on last year or the year before that. Like, think about the history of the history of time, right? I mean, I personally have had double digit, uh, interest rates on mortgages, both residential and commercial. Sure. Um, so, you know, it’s just it’s reflective in how you analyze a deal for sure. And as you are looking to buy properties, you may not buy the same property today that you would have bought last year, with interest rates being lower. However, if you can connect with lenders as yourself and look at more creative financing options on the interim, I think there’s still a lot of opportunities out there to buy properties that will cash flow very well. And don’t forget, just as things go up, they go down too.

  (00:37:42) – So at some point somewhere along the line, um, and I doubt you got to wait 30 years for it to happen, interest rates will go down. You could refinance out. You could. You have a lot of options. So, you know, I think that the point of me bringing you here and to have this conversation again, is to illustrate the fact that people do not need to be paralyzed just because the market shifts, because guess what? It’s the way of life. And just like it goes up, it’s going to go down, it’s going to continue, and it’s going to be these waves and these cycles. What’s most important is knowing how to pivot in those environments so that you can continue to buy good deals, great deals that cash flow very, very well with maybe just a different type of product. But but stopping investing altogether is craziness.

  (00:38:27) – Absolutely. 100% agree. And you know, look it all depends on what lens or what filter people are. You know, what perspective they’re looking.

  (00:38:37) – You know, at, you know, interest rates from, like you said, like we’ve seen double digit rates. Um, we’ve seen, you know, low single digit rates. And there’s been cycles over the last, you know, there’s always going to be cycles. And, you know, it’s funny, one of the concepts that gets used in things like investing in stocks, right, is dollar cost averaging. A lot of times for some reason that doesn’t translate into the real estate investing world or it’s not like a natural thing that people think about. But, um, you know, yeah, as rates go up and down over time, um, you know, you’re kind of going to be averaging into things. You’re not you’re not pulling the trigger and backing up the truck and buying your entire real estate portfolio in at one time, at one day or one year. This is a this is a process of, you know, um, building a portfolio over time that’s going to, you know, lead to your financial, you know, independence if you’re not already there.

  (00:39:40) – Right? So you gotta it definitely can be paralyzing. And look, I’ve seen that like in crashes on Wall Street, like when, when if let’s say a company reports earnings and the stock gets cut in half or goes. Down by 75%. Well, yeah, everybody a lot of people get paralyzed and they need to kind of recalibrate and adjust. But then, you know, they realize, well, heck, this is just a short term thing. This company is still there. They still have, you know, earnings growth in the future, the same thing. So you know, what’s what’s funny is people don’t think about it as much like when interest rates are low and things you know are cash flowing. But they should be thinking about it then as well. Right? Because your typical bank loan only is locked for your interest rates, locked for five years at a time. So you’re going to have people that bought two years ago that have a, you know, three and change percent rate that three years from now.

  (00:40:42) – If rates don’t come down, their property might not, you know, hit the cash flow metrics that the bank requires. And they might need to either sell or bring equity to close to to the reset in order to keep their loan with the bank, or look at other things like DCR loans to kind of fill that, fill that void. So I think when times are really good and, you know, it’s kind of a bull market and real estate and rates are low, people don’t really think about the risk. That’s the time to think about the risk, not when you know rates are higher and your optionality that you have now will. Heck, rates have moved so far that, you know, it’s very likely that we do see some pullback in rates, like things don’t just go in one direction. I’m not going to I don’t have a crystal ball and I don’t want to like try to speculate. But um, you know you do have that optionality if you’re if something cash flow is okay. Now with, you know, these higher rates, if they come down, you have that option to refinance and really boost the cash flows of your property.

  (00:41:47) – So, you know, I would not be paralyzed by the current environment. I did see a slowdown, I would say in maybe July and August, I don’t know if it was summer slowdown or just kind of where rates, you know, kind of how they were moving more violently at the time. But the interest rate picture is kind of settled down over the last couple of weeks. Most people probably haven’t even realized, like the ten year US Treasury rate, which is what a lot of kind of people mentally benchmark, you know, for where interest rates are that moved up through, you know, 5%, you know, three weeks ago it’s back down. I think it’s around 4.4% or something today. I don’t I don’t have a chart in front of me. But that’s a substantial pullback from, you know, a kind of a violent move up that we had. And um, you know, I’m not an economist. I, we obviously all kind of think in the background what the Fed’s doing, what’s going on in the economy.

  (00:42:46) – But you know, history will tell us that the tightening cycle with rates and the fed is only going to go on so long. And that typically 18 to 24 months after they start raising they have to start lowering. It might be different this time, but it probably won’t be. So you know, um, you just got to find good. Um, there’s still good opportunities out there. Um, I mean, I could tell you that, you know, I’ve seen business north of double this year in, uh, in my mortgage financing business. And so there there are plenty of deals out there and there’s plenty. It takes more work, but it’s out there. The deals are out there.

  (00:43:29) – So last question for you, Gary, and I definitely appreciate all of your expertise is what would your advice be to people either entering the investment game or looking to scale today? Right now, what would be your advice or best practices to get ready for whatever is the next cycle that we’re going to endure?

  (00:43:51) – I mean, I think I would say two things.

  (00:43:53) – First of all, don’t wait. Um, find a way to dip your toe into real estate investing, because if you sit there on the sidelines, you know, momentum kind of and keeps you kind of staying put. Once you start kind of moving forward, it will cause you and force you to, you know, to take further actions and really start to, um, you know, put all the reading and, and, and, you know, um, studying and watching, um, you know, videos and, and whatever you’re doing to try to learn about real estate, it’ll start putting that into practice. And there’s nothing that’s more valuable than getting started. And, and, you know, real estate is something that can create financial independence. And but it’s not going to happen unless you start and you can’t you can’t build a portfolio overnight. So just get started. And if and if it means finding something someone to partner up with because like we said, you know, maybe you need to do something creative based on your situation.

  (00:45:07) – Well, let’s talk about that. You know, whether you’re talking to me or somebody else or Jen about that. Like there are ways to get around things that might be, um, blind spots that you have or mental roadblocks that you have. Just start taking a look to get started on something. That would be, I think the main thing I would say and then as far as best practices and just kind of, you know, thinking about things, I would say over time, uh, like there’s all different types of real estate investors and different philosophies and business strategies and models on how to go about real estate investing. But, you know, start small, um, start in the 1 to 4 family space, start in the single family space. Eventually you’re going to find that, you know, if you want to make real estate, let’s say, you know something that’s a full time, you know, thing for you, you know, then you’ll see what your path is there to maybe start selling smaller properties to buy bigger properties.

  (00:46:10) – But if you don’t, if you haven’t started accumulating smaller properties, you’re never going to get going. So you’re really just you need to start. And, um, yeah, I just, uh, I think that there’s there’s tremendous opportunities out there. You’re not going to buy everything today, you know, start scaling in to, um, to, uh, to a real estate portfolio over time. But just get started.

  (00:46:34) – Well, Gary, as always, thank you so much for your time and your expertise. And I think you gave a lot of great insight and tips on to how to navigate this particular marketplace. Um, so thank you very much for that. And as always, it’s been quite a pleasure.

  (00:46:50) – My pleasure. Thanks, Jen. Really appreciate, uh, talking to you as always. Thank you.

  (00:46:55) – Thank you for listening to this episode with Gary Macitas regarding special financing for today’s marketplace.