Hey, everybody, welcome to
real estate strategies with Ken McElroy, I'm happy to have Kevin Highmark on.
Kevin, how are you?
I'm doing great, Ken.
So Kevin is a partner with Capital Fund.
That's Capital Fund, with the number one not spelled out one number one.
And he's here to talk about why you don't need your own money now.
This is a big topic because this is my number one topic, Kevin.
Everybody asks this question.
I didn't realize until later that I didn't need my own money to do deals, right?
A lot of people don't.
Yeah, it's really.
So it's it's kind of a mind shift for people.
A lot of times people think, OK, first, I need the courage,
then I need that that I I need the money and then I need the property.
But it's not true.
No, it's actually not in that order at all, is it?
No, no, not at all.
Exactly what you're talking about.
People
understanding different sources of capital and how they can really expand their
they're real real estate investment strategies is huge.
You know, when you own a home, there are all over you on credit score.
They're all over you.
Give me your W-2.
You know, how are you going to qualify for this loan?
You guys look at the asset, write the collateral.
So you might have horrible credit,
but you guys are looking for to get paid back on as the actual collateral.
It's a very different scenario, right?
Yes, exactly.
And and actually, you know, there are hard money lenders out there
that that lend on owner occupied residential homes.
So properties where if you and your wife are going to go
purchase a home, you need a loan to do so.
There are some situations where you can get a hard money loan
or at least lenders call themselves hard money lenders.
And really,
essentially all that means is it's coming from a private source of capital,
and they're using their own underwriting strategies, but they still have to conform
to all of the federally regulated steps in order to originate
a owner occupied residential loan.
We chose a different strategy.
We didn't want to jump through all those hoops to make those loans,
and we wanted to work with investors.
So that's why when we originate these hard money
loans, we just conformed our own underwriting strategies,
which, like we're talking about, is just the value of the asset.
So we don't need to verify the ability to repay.
We don't need to look at,
you know, income like I've mentioned, no pay stubs, nothing like that.
Yeah. So guys, think about this.
They're lending against the asset you're trying to buy.
They're concerned.
Obviously, they want to make sure that you could perform.
But the end of the day,
if you don't, they take back the asset and they get paid back on the loan.
So everybody gets paid back the property.
The hard asset is actually what pays everyone back every single time.
And what is it traditional bank do if you default on a loan?
They take back. Yeah, they're taking back the property, right?
So we're doing the exact same thing, except for we can close in 24 hours.
We can lend on properties that need rehab.
We can lend on different types of assets
that you know, we don't just do residential.
That's our primary focus.
But multifamily, ground up construction, commercial land
development, we do look at all different types of projects.
So guys, this is why you don't need your own money.
What you need is an asset, and that's what they lend against.
So that's that's.
So hopefully you could cross it off your listing
and stop making excuses around that one.
So one thing
that we're really starting to see also, which might be great
for your audiences, is over the last two years,
we're working with a lot of borrowers who are taking on their first project
or, you know, they're starting to scale a little bit.
They did one or two properties and in 2019
picked up two or three properties in 2020 and 2021.
They said, Hey, maybe I can do this thing full time.
Now they're doing six or seven properties in 2022.
We've already had discussions with them and they're looking to
to really scale their operations, and they're doing this using 10% .
You know, on average, our interest rates about 10% hard money.
And and where most people get hung up is, well,
how can you make any money if you're paying 10%?
Yeah.
What's the what's the alternative?
OPM guys, it's all OPM.
It's just how much you pay. Exactly.
Because if you go
and you string a group of five people together to go in on this project
and you're sourcing them and their investors, their
their dollars are equity right alongside yours.
You're paying a lot more in 10% to them, right?
You don't get to keep much of that upside on the back end.
It's all just money that's being lent out, right?
Yeah.
At different rates with different terms.
Yeah, basically, it's just money.
So it either falls into two buckets.
Bucket one is equity bucket, two is debt.
The question is how much you pay for it and we call it the cost of capital.
Right, exactly.
That's it.
So if I if I've got it, let's say I'm borrowing my equity at
six, let's say my
equity asset and I'm borrowing my dad at, let's say,
for my blended cost of capital, if they were equal, would be five.
OK, so you have to look at the two buckets,
you have to look at that and you have to look at equity
and you have to look at your blended cost of capital.
The difference with what Kevin does is his is typically shorter term, right? Yup.
So it's not really fair to take hard money and figure it out over.
30 year period, because you don't actually have that cost of capital
for more than, say, a year or two. Right.
On average, our loans are paying off in five months right now.
There you go.
So when you think of the number, it sounds like, Wow, why would I do that?
You got to think of the term.
You have to put that very important piece in.
When I'm looking at my cost of capital, I'm looking at 2030 year deals, right?
Right.
So a big, big difference. Another big mind shift.
So this is a way for you to get property.
This is a way for you to do what you want to do
and then figure out what you're going to do with it.
Maybe that's a salad.
Maybe that's to keep it.
Maybe that's to put long term debt on it.
It doesn't matter.
But this is a way for you to get into the game, right?
Yeah, and that's a good point.
It's not just I've mentioned we look at different types of assets.
It's not just fixing flippers that we work with.
We we we help borrowers lock down plenty of five to 10 million dollar
classy multifamily properties where they don't want to go out and raise
a bunch of investor dollars
because they're going to have to pay their investors , you know, a 15 to 20% yield
if it's a good deal, you know, in this in this this market segment,
but they need to put dollars into the rehab
and they can't go get a bank loan and the property is not cash flowing, right?
Like you said, a property that's been neglected.
It's not.
It doesn't have a high occupancy rate, so they need to put some work into the deal.
And that's that's where we come in.
We can do rehab loans as well ground up construction. So.
And like you said, it's a short amount time
we don't have any prepayment penalties on our loans.
I was going to bring that up.
It's it's by design.
So this is a sneaky little secret.
Yeah.
Guys, when I do a deal, let's say a traditional
Fannie Mae Freddie Mac deal, you know, it comes with a price
and that price is called yield maintenance or prepayment.
And it's very, very typical for me to have a 234
5 million dollar exit fee prepayment fee on some of the deals I'm doing.
You guys, I don't have this right.
That's right.
And oftentimes if if the intent is to buy,
rehab and sell this property as quickly as possible.
Well, if you have a prepayment penalty with one of these larger institutions,
they the seller, I'm sorry, the buyer, when you go around and flip
that property, they're going have to eat that cost,
which is going to just eat into your profits.
So it might even be you might even be a wash if our interest rate may be higher.
But if you're holding that loan for six to eight months
and you don't have that prepayment penalty it, make sure your property
more marketable to let's say somebody is gone to a hard money lender
like because this is an area that I know you're you're pretty good at.
What?
What would they be looking for?
What should they be looking for?
And what can our listeners ask before they'd make that next step?
Where do you get your money?
So this is by far the most important thing that I've seen because we
we all get into interest rates and fees and what you can expect in that regard.
But the most important thing is reliability
and the the main factor that can impact a hard money.
Lenders reliability is where they're getting their capital opium again.
Yes, yes, exactly.
So yeah, we can give you our money,
but we're getting our money somewhere to yeah, the
the place that we're getting our money is from our own fund
and we raise can, as you know,
we raise our money from private, wealthy individuals almost exclusively.
We do have debt,
which allows us to be more flexible and keep yields to our investors.
You know, high, but primarily our source of capital is
is wealthy individuals who give us full discretion over these funds.
Yeah.
So we have a fund set up, it's ready to go.
The request comes in.
We underwrite that property.
We get terms back usually the same day, if not less than 24 hours.
And because we have confidence over the fact that we're making
the right decisions on these loans, we have full discretion over those funds.
We can fund the deal.
So we we really do find in 24 hours.
In fact, we got started back in 2009 funding
trustee sale deals, which here in Arizona, you bring a 10,000
dollar cashier's check you deposited if you get the winning bid receipt
and you have 24 hours to get the rest of the funds.
So since day one, we had to be able to find deals
in 24 hours, so we had to set up a model that allowed us to do so.
So awesome.
Take care, Karen. Thank you. I appreciate it.
How do I know you've got a real estate guide?
So how do they find it? How do they find you?
How do they get more information? Yes.
So, so go to capital fund one numerical
one wine.com forward slash Ken McElroy.
That'll get you access to the real estate guide that we're talking about. So.
So, you know,
help you assess on what your strategy is and how you can best go about it.
But go to our main website, Capital Fund Whatcom.
There's a bunch of landing pages and links and information and blogs and everything
that you need to really understand hard money.
And then, of course, contact information.
Yes. Kevin, thank you.
This is a great topic on why you don't.
Need your own money?
You definitely need money to make money, but it does not have to be your own.
So, Kevin, thanks, buddy.
Thanks again. Yeah, bye.