305: Special Guest Interview with Gary Mascitis—Creative Financing (Part 1)
Gary Mascitis with GSM Financial
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Episode Transcript
Welcome to Episode Five of Season Three of the Growing Empires show. I'm here with my special guest, Gary Mascitis from GSM Commercial Capital, and he's here to share his wealth of knowledge in regards to creative financing options, so stay tuned.
00:15
Welcome to Growing Empires, hosted by real estate entrepreneur and trusted investment advisor Jennifer de Jesus. 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.
00:34
So welcome, Gary, to the Growing Empires show. So glad that you're here. Thank you, Jennifer. Appreciate you having me. Awesome. So let's kick off this episode with you sharing a little bit about the work that you're doing now and how you got into the financial services industry or commercial mortgage banking. Sure. So just to give you a quick background on that I've been in finance for over just over 30 years now, I started out in actually the mortgage lending industry for residential, for a few years, and then I decided to go off to Wall Street for 23 years and came back into financing a few years ago. My focus is specifically commercial lending a full range of products from hard money, private lending, through bank type financing, through government agency financing. So pretty much the full suite of products. You know, the bulk of my time has been over the last 30 years has been helping people or companies raise capital, when I was on Wall Street, I helped companies raise close to $200 billion and it gave me very good insight into all aspects of finance from legal to accounting, etc. And it really is something that when I left Wall Street, I wanted to be able to take the tools that I honed there to help Main Street in financing properties. Oh, fantastic. Well, I'm really excited to have you share some of your knowledge today. So to my listener, did you ever wonder how the rich build wealth? Well, I can assure you that in some form or another creative financing played a role. Leverage allows you to use money that is not your own, and it allows you the ability to spread your dollar further. Today, we're going to talk about some of those creative financing options with Gary that allow you to invest in a smart way. I've asked Gary to join me and share his wealth of knowledge and secrets that he's picked up over the years. So today we're going to discuss what is creative financing and why you need it to build wealth. What are private loans or hard money loans? What is government agent financing? And what product does Gary feel that he has that beats all of the other competition? So let's get started.
02:50
What is creative financing, Gary? And why do you feel that somebody needs it to build wealth? Well, um, I think of creative financing this way, you know, if you compare it to someone commissioning a sculptor to build a statue, right? Most most are going to have the same, potentially the same tools available to them. But it's really how do you how you utilize them. And you know, what the finished product that you deliver is going to be in it can be very, very different. It's very similar in lending, you can have the same client and the same set of facts with what their situation is, the finances of the property, etc. But you can end up with very different financing in the end, depending on how you go about that, which lenders you talk to or which brokers you go through, and what they have to offer. So I think of creative financing as finding the most efficient and effective way to finance a property based on an investor's financials as well as the specifics of a property. So if somebody has an abundance of cash right now, in today's market, right, and we're talking, we're October 2020, just to give some timestamp here, you know, and there's a lot of competition out there for properties, very low inventory. Do you feel that if somebody has cash right now they should be using it? Or do you feel that they should be taking advantage of financing whether or not they could purchase in cash? I think regardless of you know, what the market conditions are in terms of real estate inventory, and pricing, you know, the the choice to use financing is one that you know, if you're buying a property that the numbers make sense on the property financing is really only going to potentially enhance your returns depending on how you're looking at returns and it gives you a different risk reward characteristic versus buying in cash. You know, clearly, if you use all of your cash to buy a property, or you buy a property using all cash, which are two different things, potentially, then you, you don't have the cost of financing. But you know, you're, you're going to have some limitation on how much real estate you're going to be able to buy, right. And it's very common, that I have investors come to me, where they started out by buying properties with cash. And quite often, when they come to me, they're low on cash, and they say, hey, geez, I'd like to, you know, I'd like to continue to expand my portfolio. And sometimes they come to me and their liquidity is very low, sometimes it's not, I deal with all range of investors from, you know, people that are just starting out to people that are very experienced, and own hundreds or thousands of units. So, but it is, it is common, where newer investors start out using cash, and they realize that in order to continue to grow, that they need to figure out how to employ leverage. Now hopefully, when they come to me, they have some liquidity, because I've had people come to me and say, you know, I've used up all my cash, now I want to take cash out on my properties. And a bank will see that and say, Okay, well, I understand you're going to have liquidity after you cash out refinance against your properties. But, you know, where's your liquidity right now? So, you know, we, I see all different types of situations. But, you know, using, if you have a property, that the numbers make sense, leverage can help. If you have a property that the finances of the property, the cash flows of the property really don't make sense, whether you buy it with leverage or cash, it's still a poor investment. It's just how you go about acquiring it, you know, whether using cash or financing, but a bad property is a bad property, a good property is a good property, and, you know, you can enhance your overall returns on your cash by employing leverage. And with that said, the upside of using cash is that in the event of a market downturn, you obviously don't have a situation where you can have a property go underwater, which is, you know, basically losing value in the property relative to what your what your equity is, it's going to hurt, but you know, it becomes more painful if you employ leverage, and you're over leveraged, to the point where, you know, a market decline in real estate prices could cause you to, you know, lose all of your equity, and then some, in a serious downturn. So, you know, there's different risk reward characteristics of using cash versus using leverage, but as long as you're buying a property that makes sense, you know, using some type of leverage, and via taking out a loan will make sense.
08:15
Absolutely. And I always usually say to that, you know, leverage just helps you spread your money a little bit further, right? If you use, you know, you were talking about if it was all the cash you have, or just buying in cash, right, the two differences between that but sure, you know, using cash is, is risky, too, you know, it's definitely risky, you know, because, you know, there's maintenance on the buildings, there's things that happen, there's real life that happens, you know, a family member can get sick and if you're using all your cash, and you've got no leverage, you know, you you might not have a way to make up the difference. So sure, liquidity is definitely key, particularly in an environment like we're in right now, where, you know, we had on Wall Street, what we would call a black swan event, or something that was entirely unforeseen, and it can really impact someone's, you know, financial situation, or employment situation outside of their real estate. So, you know, cash is king, as they say, and having liquidity gives you options. And, you know, if you if you're just using cash and you have relatively low liquidity, and you encounter, you know, a serious issue, like you said, whether it's medical or whether it's financial, financial markets, it can, it can really be painful. Understood.
09:32
The episode will continue in just a moment.
09:39
This season is all about winning the money game with your real estate investing. However, simply investing in real estate with all of its advantages that it promises, you can still get taken to the bank if you don't know how to make smart money decisions or have access to the right resources to save you time and headaches. Building your investments so that they grow in value over time requires a lot of factors to go right. And the money part is a big one. It's not always about the property, it's how you make the critical decisions about leveraging money so that you have the most control and freedom while growing your portfolio. Whether you're concerned about the validity of that too good to be true offer on a property or you can't settle on the right mortgage structure, I can help. I will answer your money questions on a quick call and if I don't know the answer, I can certainly connect you with somebody who does. Visit GrowingEmpires.com and schedule that call with me today. That's GrowingEmpires.com and I will help you make smarter money decisions and put you in full control of your investing success.
10:32
So let's talk a little bit about private loans or hard money loans. Give me some pros and cons of you know, the two or both. On hard money lending or private loans, which I think are pretty much synonymous at this point, you know, something, something that I didn't share in my bio is I did work for a, I was a hard money lender, it did work for a national hard money lender for for some time, which financed a combination of different types of situations, a lot of times hard money, or private money is used for acquisition and rehab financing, fix and flip, or fix and hold type properties. It's also used for people that have credit impairment, where they can't obtain financing through a bank or a bank like lender. So you know, there's kind of a full range of hard money and rehab type financing out there, I think it makes sense to focus on the acquisition or acquisition and rehab financing, when we talk about hard money as opposed to you know, situations where someone has serious credit impairment and that's their, private lending is their only option for financing unless you want to delve into that. But so, you know, hard money is basically financing a an asset or a hard asset in this case, real estate. So it's, it's it is a commercial real estate loan, whether that be on a residential property or a commercial property, the type of loan is a commercial loan, just like a bank loan. So the documentation is very similar to bank financing. And, and it is structured as a commercial loan from a legal perspective. And, you know, hard money can be used a few different, a few different ways. Let's say, for example, you have a situation where you have a real estate investor looking to make an acquisition and a seller needs a quick close, banks are cheaper, but they're not quick, in that type of situation, let's say you need to close in three weeks, then we would use hard money or private financing, however you want to call it in order to finance that property in many cases, or, you know, let's say there's a situation where you have a vacant property banks are not generally in the business of financing vacant properties. Good point. You know, there are, you know, cases where property is either vacant or not stabilized where you know, or it's not fully leased out, basically, and your only option might be some form of private financing. So in many cases, this is the most typical case that I will use a hard money for my clients for his, you know, situations where there's some work that needs to be done on the property and then they are able to either raise rents or get it to kind of stabilized situation where the property is fully leased up. And then we'll take a look at the alternatives to, to to go into bank financing from there because hard money is more expensive than bank financing. And they are much less expensive than it was just a few short years ago where your typical hard money private loan was 14-15% and investor paying four or five points. It's not like that. Now basically what has happened is Wall Street money has come into that marketplace. And there are now mortgage backed securities that are based on rehab loans. So basically what you have is you have national lenders that are originating loans throughout the country. They get just like residential loans they get packaged up and sold off to to investors, and the 800 pound gorilla in that space is actually KKR, Kohlberg Kravis Roberts, which some of you may might know, they're a private equity firm. And, you know, they basically are funding a lot of the national hard money lenders in this space. So what it's done is, it's driven down pricing substantially, you know, I see hard money lending rates, some depending on the situation and the timing. Now, COVID is, you know, kind of changed the parameters and the pricing a little but you know, you can, you can potentially get pricing starting at set, you know, in the sevens or eights, in terms of percentage points, it's interest only loans, they're typically for 12 months, there's typically no prepayment penalties, so you can pay it off at any time. In some cases, we can get financing up to 90% of the purchase price plus 100% of the rehab on the property, as long as the after repair value, once it's fixed up is, you know, gives that investor enough equity. So an appraiser will do both an as-is appraisal and an after repair appraisal or as an as-stabilized appraisal to make that determination. So, you know, it's really, it's a very different space than than it was and it's, it's a great tool to to have in your arsenal. Fantastic.
16:21
Have you ever had anybody that experienced like not being able to finance out of a hard money loan? So I actually, so before I give the official response, thinking back I so with some of the credit, I don't focus any longer on people that have like serious credit issues, like going into foreclosure, like I financed the number of those type of properties with hard money. And they did, they did have issues financing out. So I don't know, if we want to get into into that type of aspect, you know, the lenders worked with them. But it's, you know, dealing, it's a it's almost like a whole different segment of hard money lending, to go into that real credit impaired side of things. Okay, so is that really the only reason? Like, should somebody be concerned about hard money about getting out of it at this point? I mean, we're talking about extreme cases. But I mean, like you said, it's a short term loan, so you know, up to a year or so, and then you you, you refinance out or perhaps sell the property off, right, or and satisfy that loan. But is there anything that an investor could do during the term of that maybe one year period, that would cause them to not be refinanceable on the backside? Well, if they're, if they basically an investor could have a situation where their credit has become impaired, right, they've lost their job, there's some other medical situation, whatever the case might be, that has a could have a dramatic impact on their finances. So one of the things that banks are looking at post COVID, is they're focusing more heavily, and they'll ask very specific questions on how someone's income has been impacted this year, you know, with with COVID, someone can have a great tax return, right, and they're not employed now, or they're self employed, and their year to date, you know, P&L is still suffering, beyond like, you know, the initial three month period where a lot of people were impacted, they could still have a business that's severely impacted. So that would be the situation that could impact somebody's ability to obtain permanent financing and to get out as they had planned. But other than that, I haven't really seen any situations where we've used a bridge, I'll call it a bridge loan, a hard money loan, a fix and flip loan, etc. I haven't really seen any situations other than serious financial impairment of the guarantor that would cause somebody not to be able to refinance out. Now, there was a three month window, particularly in Pennsylvania, where you weren't able to write a real estate contract for a while, right, where, you know, the banks were also, the commercial banks were pretty much shut down for a call at a two to three month period, they were focused on the Paycheck Protection Program loans, and they were focused on stemming the blood flow from, you know, the carnage in their in their portfolio where they had some real estate loans go go bad, and, you know, they had to attend to that and there were a lot of talks with investors about forbearance, you know, and different, you know, methods to try to not have that investor, you know, pay the loan on a regular regular basis. So banks did pretty much shut down for, I'm gonna say two solid months, and then it took another month or two for things to really kind of start to open up. Banks are also, you know, the one thing that hasn't fully come back is maximum leverage, particularly like on cash out refinances at this point, you know. So in prior to COVID, it was very typical were on a purchase kind of the standard loan to value one could get on a bank type loan was 75%. In some cases with a small handful of lenders, or a small percentage of lenders, you could get 80% financing on purchases. Refinances - it was standard where you could get 75% loan to value on a cash out refinance, and almost all lenders now have cut that down to 70%. And I think that's a temporary phenomenon. Yeah, I'm seeing that as well. And I agree with you, that's just that's just the knee jerk reaction to what happened. Right? Exactly. You know, and it's, it's just a way to kind of get us back to moving you know, normal, normal business.
21:09
We will be back with more for my special guest in Episode Seven of Season Three, so stay tuned.
21:17
For more information about how Jennifer can help you plan, develop, and manage a strong real estate investment portfolio, visit GrowingEmpires.com.
Contact for Gary Mascitis:
Phone: 732-598-7950