TM I N FORM . I NS P I R E . E DUCAT E . EMPOWE R .
Is Real Estate Education Still Needed?
IN A WORD, “YES”—AND HERE ARE THE AREAS WHERE IT IS MOST NEEDED.
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PUBLISHER & CEO Eddie Wilson
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MANAGING EDITOR Carmen Fields
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DESIGNER David Rodriguez
CONTRIBUTORS Daren Blomquist Mark Burch Jenifer Calandra Grant Cardone Aaron Chapman Kurt Coleman Kori Covrigaru Joe Fairless Rob Fuller Suni Goff Shenoah Grove David Jacobs Kyle Jones Zach Lemaster W. J. Mencarow Susan Naftulin Gary Pinkerton Chris Ragland Damon Riehl Jeff Roth Josh Shein
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4 | think realty magazine :: march – april 2022
FROM THE EDI TOR
Madness Is in the Air!
F
at this time is to tackle the eviction moratorium and lack of resources
or any avid basket- ball fan, including
myself, March may be their favorite time of year. The best teams in the nation are all com- peting to be National Champions.
provided, primarily to the small housing provider. Check out the Legislative Lookout section (on page 11) for updates and information on the traction our GRC is gaining. Finally, in line with the educational theme of our March edition, Think Realty is committed to expanding its Resident Expert Program, offering our members access to the most trusted advisors in the investing business. Think Realty’s Resident Experts are doing the business every day, not just talking about it. They are able to speak from a first- person perspective because they are in the business day to day. Who better to gain insight from than someone with true experience willing to share their knowledge, always aiming to raise the standards in our industry? Check out articles on pages 8, 16, 18, 22, 32, and 72 to meet a few of our Resident Experts and learn their areas of expertise. •
Right now, real estate is very similar. With the housing supply shortage, many real estate investors and lenders are competing for deals, hoping they come out on top, maximizing profit margins and creating generational wealth. Think Realty has its own version of March Mania. We will be back in Hous- ton for our Think Realty Conference and Expo March 24-25. An impressive speaker lineup is already in place, covering trend- ing topics with information every real estate investor is vying for. For a Texas market update and more information on investing in Houston, head to pages 48 and 54 to hear from a few of our sponsors who know Texas investing. Our recently formed GRC (Government Relations Committee) is working hard to make sure the voices of real estate investors are heard. Our main objective
Here’s to your investing!
CARMEN FIELDS, MANAGING EDITOR
thinkrealty . com | 5
CONTENTS
INSIDE THIS ISSUE
12
COVER FEATURE
In a word, “yes”—and here are the areas where it is most needed.
IS REAL ESTATE EDUCATION STILL NEEDED?
by Eddie Wilson
6 | think realty magazine :: march – april 2022
PROFILES 8 Are You Prepared for the Upcoming Market Crash in 2022? by Glenn Stromberg LEGISLATION 11 Think Realty’s New Government Relations Committee Identifies First Key Issue Eviction moratoriums and how they impact housing providers will be the focus of position paper for legislators. by Chris Ragland
DESIGN 60 Home Design Is Everywhere Multiple sources of information are available to help you learn more about home design. by Michele Van Der Veen
36 A Property Manager’s Perspective on Investing in Real Estate A professional property manager weighs in with 15 tips on making wise real estate investment decisions. by Jeff Roth
62 5 Common Photography Mistakes When Listing Rentals
38 Why Multifamily Is in a Good Spot
Labor and materials issues will delay and limit new construction, keeping both rents and home prices strong. by Kyle Jones 40 How Deed Restrictions May Impact Your Real Estate Investment Investors must be familiar with any deed restrictions before embarking on a new venture. by David Jacobs 42 Investing with Turnkey Rental Real Estate Building wealth—and your network—with partnerships by Zach Lemaster MARKET & TRENDS 44 Market Spotlight: Baltimore, Maryland The forecast for real estate investing in “Charm City” looks positive in 2022. by Josh Shein 48 Top Reasons to Invest in Texas It’s difficult to choose just one place to invest in Texas. by Shenoah Grove 52 After a Two-Year Hiatus, Will Foreclosure Volume Return in 2022? After two years of foreclosure famine, many wonder whether a foreclosure feast is in store for 2022. by Daren Blomquist
Avoid these real estate photography mistakes to give your rental properties the best chance
to stand out. by Kori Covrigaru
OPERATIONS 64 Prioritize Your Personal Development Investing in yourself first will better position you for success in other investments. by Kurt Coleman 66 16 Ways to Find a Good Real Estate Teacher Big promises, showy displays of wealth, and “too good to be true” claims are red flags. by W. J. Mencarow
FUNDING 16 Tap into Private Lending When Buying a Short-Term Rental
An article series on navigating the private lending world. by Damon Riehl
18 Capital, Real Estate, Cash Flow, and the Velocity of Money
A 200-year-old financial product—combined with real estate—can create financial freedom and a perpetual legacy. by Gary Pinkerton
68 PlanOmatic Survey Reveals How Single-Family Rental Investors and Owners Utilize Property Data
Nearly 25% of respondents use data collected on-site for property maintenance; 21.4% use data for portfolio forecasting. by Kori Covrigaru 70 5 Educational Tools at Every Investor’s Fingertips If you’re determined to succeed in real estate, make education an ongoing priority. by Joe Fairless
22 Planning for Your Prepayment Penalty
Understanding the types of prepayment penalties will help you devise a strategy for selling your property. by Eric Stewart 26 How Can You Benefit From the BRRRR Method? The BRRRR method is worth considering if you’re an investor wanting to use one property to fund another. by Mark Burch INVESTMENT STRATEGY 28 Checkbook IRA, or Checkbook LLC? Whatever you call it, there’s trouble ahead with this risky retirement plan strategy. by Garrett Sutton 30 9 Do’s and Don’ts for Going the Distance with Rental Property In a changing real estate landscape, buying to lease may be your next big move. by Susan Naftulin
72 Why Using Credit Scores to Screen Tenants Is a Big Mistake
You’re eliminating some of your best potential long-term tenants when you base a rental decision solely on credit scores. by Greg Slaughter 74 Free Listings for Your Real Estate Property Here’s how to get your properties listed online to attract attention, leads, and conversions. by Jenifer Calandra PRODUCTS & SERVICES 76 What the Heck Is Lead Generation, Anyway? … and how should investors really use it? by Suni Goff 80 Don’t Become the Prey in Today’s Predatory Sellers’ Market Software tools allow lenders to use independent comp data to ensure the best deals. by Rob Fuller
54 Using Self-Directed IRAs to Invest in the Houston Market
Self-directed IRAS are putting the power back into the hands of real estate investors across Houston. by Sarah Shellam
56 Reset Expectations by Ingo Winzer
58 4 Reasons Multifamily Isn’t in a Bubble Although the talk of bubbles is everywhere— from single-family homes, stock market to crypto—the apartment housing market not only will be impervious to the bubble bursting but will prove to be a protection and a beneficiary. by Grant Cardone
32 How Real Estate Investors Can Benefit from Inflation
Where and how you place your investment capital is critical, especially in an inflationary market. by Aaron Chapman
thinkrealty . com | 7
PROFILES
RECESSION RESISTANT INVESTING
Are You Prepared for the Upcoming Market Crash in 2022?
by Glenn Stromberg
was hoping the article title would get your attention. First, am I 100% sure a crash is coming? Yes! Am I 100% sure it’s going to happen in 2022? No, but I really do feel in my gut it is going to happen in 2022. Obviously, on Jan. 1, 2023, we will see if I am right. Here’s why I think it is going to happen this year. Our country and our economy have never been in this situation before. Our government is printing trillions and trillions of dollars. We have the highest inflation rate since the early 1980s. The supply chain is broken and, in my opinion, there are bubbles everywhere: the stock market, the bond market, and even some areas of the real estate market. Let’s take a closer look. FEDERAL SPENDING Back in 2008, when the govern- ment bailed out the banks, the total bailout package was $700 billion. Today, with the way the federal government is printing money, that would be a rounding error. Even before the coronavirus hit, the fed- eral government’s printing of money was out of control; after the pan- demic hit, they put it on steroids! I
Unfortunately, there is no end in sight. Once again, in my opinion, government spending is totally out of control. I’m kind of a geek—I study monetary history and past govern- ments that have printed money like the federal government is doing now. It never ends well. SUPPLYCHAIN In my lifetime, the supply chain has never been broken like it is today. When I go into a store of any kind, I make it a point to look at the shelves and see if the store is fully stocked. Without exception, every store is missing inventory—some a little less and others a lot. I talk to every business owner I know and ask whether they are having problems getting parts and inventory. Without exception, every- one has said “yes.” On a personal level, in my business, we are feeling the supply chain shortage as well. My company had plans to develop a build-to-rent community in the Huntsville, Alabama, area. We bought 264 acres and were designing 203 half-acre tracts with brand-new 1,500- to 2,000-square-foot manu- factured homes. There is an incred- ible demand for affordable housing, and the projected profit we were going to make was extraordinary.
But when we got the property under contract, the manufactured homes factories had a four-to-six-month backlog. Because we needed eight to nine months to develop the property and install all the utilities, that back- log would have been fine. By the time the 90-day due diligence ended, the factory backlog increased to more than a year, so we had to pull the plug on the project. Fortunately, we bought the property at a good price, and we were able to flip the land and make a nice profit. STOCKMARKET My area of expertise is real estate, but I have a couple of close friends who have been in the financial plan - ning arena for many years. They are real pros, and they tell me they have never seen the market like this before. Stock price-to-earnings ratios are at all-time highs, the bond market is a mess, and the whole system is being propped up by all the federal government money printing. If you look at the charts, the stock market is due for a large correction, and many believe it will be in 2022.
REAL ESTATE PRICES Now to my area of expertise—the real estate market. What has created
8 | think realty magazine :: march – april 2022
them all: inflation. According to the government, the consumer price index (CPI) was approximately 7% last year. Does anyone believe that real estate, food, health care insur- ance, and gas at the pump went up only 7% last year? No way! The government wants to keep the CPI index number low, so they don’t have to pay the higher rates to Social Security recipients. A man named John Williams founded a company called ShadowStats. He calculates inflation the way the government calculated the CPI index years ago. These days, every time something goes up too much, the government throws it out of the basket of goods used to calculate the CPI. John estimates the real inflation rate last year was 14%, and I agree with him. Think about that, if you had $100,000 sitting in the bank last year, the best you got was 2% on it. That means you lost 12%
the boom and fantastic rise in the values of real estate throughout the country is the federal government keeping interest rates artificially low. Back in the 1980s, rates were 12% to 18%. Today, the rates are in the 2.5% to 4.5% range. I estimate the federal government can’t raise interest rates too much, because they can’t afford to pay it on our national debt. During my almost four decades, I have never seen such a shortage of affordable housing throughout the country as there is today. I am in several mastermind groups with some of the top real estate invest- ment companies from coast to coast. Everyone says the same thing: “There is little to no affordable hous- ing in their market.”
of purchasing power, or $12,000 of true wealth disappeared. Inflation is a stealth tax and, in my opinion, it’s the worst and cruelest one of all. I foresee inflation only getting worse, not better, in the coming years. WHATARE THE OPTIONS? So, what should we do as inves- tors? Where should we have our money if I am right and the crash occurs this year? Obviously, we all must decide that for ourselves; I’m certainly not going to tell you what to do with your money. But, I’ll tell you what I’m doing with my money. I am going to be 100% in hard assets, outside of the cash I need to run my business and personal life. My asset allocation will be 10% gold and silver (which has been a great hedge fund against currencies and inflation since biblical times) and 90% real estate (only affordable
INFLATION Finally, let’s talk about what I believe is the biggest problem of
thinkrealty . com | 9
housing that will cash flow no matter how bad things get). Here’s why I’m making these choices: No matter how bad things get, everyone will continue to need to eat and have a roof over their heads. Everything else is negotiable! My company, Stromberg Invest- ment Group, has a unique niche in the real estate space. I truly trust our company slogan that “It’s the best kept secret in real estate investing.” Our business model is to buy existing mobile/manufactured homes—dou- blewides that are typically 1,400 to 1,800 square feet on a half to 1 acre of land. These are real estate, not personal property. They have a deed of trust or a mortgage, depending on the state, similar to a single-family home. We get a title commitment on every property. My company currently buys prop- erties in four states: Texas, Georgia, North Carolina, and South Carolina. We purchase about 10 properties a month. After we purchase a home, we rehab it like new, put a tenant in the house, and property manage it. We keep about a third of the proper- ties and bring in private lenders to finance them. We sell/turnkey the other two-thirds to our investors. We don’t use banks; we use all private investors. We structure lucrative real estate deals for private investors inside or outside of an IRA. We have created a win-win for us and for our investors. Our investors are totally passive, and they love that! So, you’re probably thinking, “Why manufactured homes versus single-family homes?” Depending on the area, manufactured homes are a third to half the cost, and proportionately the rent and rate of return is much better. You’re probably also thinking, “Don’t the houses depreciate?” Absolutely not! As a matter of fact, in most
cases, they appreciate the same as a single-family home. For example, for the properties we purchased in Dallas/Fort Worth in 2012 to 2014, our all-in price (acquisition cost plus rehab) was around $60,000. Today, these same properties sell between $150,000 to $200,000. Now, you’re probably thinking, “Why don’t we sell them all right now?” Because the rent rates have increased so much. In 2012-2014, rents were $800 to $900 a month; today they are $1,300 to $1,500 a month. After all expenses, these properties cash flow from $600 to $800 per month. Plus, we get to write off the depreciation and the appreciation. Using my example, the $140,000 of true appreciation is growing tax deferred. I expect with inflation this will continue to go up in the future. My attorney says to never use the phrase “recession-proof,” so I don’t, but he did say I could use “recession resistant,” and that’s what I call it. Here is my 2008 crash story. Back in 2006 and 2007, I was buying the same type of properties I’m buying today, but I was flipping them. When the crash hit, the capital markets froze and I wasn’t able to sell any- thing. I had 18 properties with inves- tor notes, and I have always said, “I would rather take a bullet to the head than not pay my investors.” So, what did I do? I never intended to become a landlord, but I was driven to it. I went out and talked to prop- erty management companies and took ideas from each one of them I liked and created a great property management system, which is truly the key to buy-and-hold real estate! What I learned is that our model works great in good times, but even better in bad times. When a crash hits, people downsize and rent instead of buy. The demand for our
properties, which is always great in a good market, goes up three times in a crash. This happened in 2008 and when the pandemic hit. Our collection rate was 97% and bet- ter throughout the pandemic, even with the forbearances on foreclo- sures and evictions. Therefore, I feel I’m perfectly positioned no matter what happens in 2022, and it’s why I believe affordable housing real estate is the safest and best place to have your money, in good times and in bad! If you would like more information or have any questions, please feel free to reach out to me through our website: Stromberginvestmentgroup.com •
Eager to learn more about real estate investing? Please visit www.thinkrealty.com/courses for additional subject matter information from our Resident Experts.
Glenn Stromberg began his career in real estate in 1982, quickly rising to the top of the real estate game. He owned and managed a Clayton Home
franchise and owned and operated 13 inde- pendently owned manufactured home dealerships. He also ran a successful fix-and-flip business. During his 39 years in the mobile home industry, he developed mobile home subdivisions; owned a mobile home park; owned and operated mobile home sales centers; and bought, sold, and leased single-family homes. In 2006, he formed Stromberg Investment Group with the mission to be one of the best real estate investment companies in the country. The 2008 crisis that took over the American economy led Stromberg to redefine his business model and cre- ate the current model SIG uses, allowing investors a safer option to investing and receiving higher returns without the high risk that Wall Street or the “flipping game” yields. With over 500 homes under management in more than four states, SIG deploys over $1 million dollars in investment capital each month and closes an average of 12 properties each month. Stromberg Investments offers investors lucrative passive turnkey options and long-term lending opportunities.
10 | think realty magazine :: march – april 2022
LEGISLATION
LEGISLATIVE LOOKOUT
Think Realty’s New Government Relations Committee Identifies First Key Issue Eviction moratoriums and how they impact housing providers will be the focus of position paper for legislators.
W elcome to the first Legislative Lookout brought to you by the Government Relations Committee at Think Realty. Our aim is to provide you with a quick update on what we have been working on, specifically as it relates to issues that impact real estate investors and stakeholders such as yourself. For the past couple of months, we have been growing the committee to better take on issues as they arise. The committee is comprised of seven initial members, and we will be adding two more. We are each assigned a specific geographic area of the United States to better support our members. On the legislative front, we have identified the first key issue we will be tackling: eviction moratoriums and how they impact hous- ing providers. Finally, we have committee support to host our first panel at the next in-person Think Realty event, scheduled for March 24–25 in Houston, Texas. We hope to discuss the various eviction moratori- ums further and showcase our plan to develop a position paper that will be shared with legislators who are crafting new laws around this hot topic. If this issue has affected you, this is the place to make your voice heard. • Chris Ragland has managed real estate-related businesses for the past 20 years, including brokerage, disposition, insurance, management, finance, and development. Although he has exposure to all aspects of real estate, Ragland’s favorite role to play is investment mentor. An active investor and principal in several real estate- related ventures, Ragland continues his mentoring mission through his investment firm Ragland. In addition to real estate, Ragland serves on several boards for non-profits and is also active in the start-up community in Austin, Texas. He also serves as First Chair of Think Realty’s Government Relations Committee.
by Chris Ragland
thinkrealty . com | 11
COVER STORY
EDUCATION
Is Real Estate Education Still Needed?
IN A WORD, “YES”—AND HERE ARE THE AREAS WHERE IT IS MOST NEEDED.
by Eddie Wilson
s an 18-year veteran and third-generation real estate investor, I feel like I have seen it all. I have
tage of curious and novice investors. As such, it has a bad reputation. Most people today would never dream of being called a “real estate educator” or “guru.” People run from those titles. Because of that, we lack qualified and cur - rent educators. We have education in the industry that is sometimes more than 40 years old. We desperately need a new generation of educators who have weathered the storms of the financial crisis and understand what virtual wholesaling is, or what an i-buyer does. With that as my premise, here are a few areas where we need education. WHOLESALING We need a re-education of wholesaling. Given the landscape of how to find houses and changing state laws, much of the wholesaling education out there is highly dat- ed. I have even heard some that borders on illegal. Wholesaling is typically an early entry into real estate investing. It is the way someone with very little capital can begin to find distressed deals and aggregate some mon - ey. With more education available, more people will take advantage of it. Also, some of the largest REI companies in America are doing this, which can be a recipe for disas- ter. You will find a massive behemoth of a company that is now competing with a brand-new investor jumping into the market. Education is critical. New investors must learn not only the tactics of taking on a distressed deal from acquisition to disposition but also how to find the deals with new digi - tal techniques and how to find the right markets to do it in. ALTERNATIVE INVESTMENTS The second area where we need education is in all the alternative investments. Given the demand issues of single-family residences, it may be too difficult for a new investor to start there.
A
seen the market cycles, both the ups and the downs. I have seen people make hundreds of millions, and I have seen some of the most gruesome losses. For me, real estate is a lifestyle. It is a philosophy and a way of living. After watching my father build his portfolio, I never wondered whether I would buy real estate as an investment strategy. That would be like asking Michael Jordan’s son whether he has ever held a basketball. After what seems like a lifetime of investing and as the owner and founder of Think Realty, the question I often find myself asking is this: “Is real estate education still needed?” In recent years, I have met a single mother who flipped an entire distressed house with her children by watching YouTube videos. I have met young people in their early 20s who have sizable portfolios of cash-flowing assets. When you ask the rudimentary question “How did they do it?” the answer is always that someone told them or showed them. The medium through which they have been shown may have changed. Instagram or TikTok may have replaced an in-person mentor, but they all were left breadcrumbs of knowledge to follow. So, to answer my question about whether real estate education is still needed, I give a resounding answer: Yes. Yes, real estate investment education is still needed. It is needed not only by new and prospective investors but also by people who are currently investing. Education is always best delivered by the person who has experience that is both practical and current. I remember sitting in a college marketing class scratching my head over a 70-year-old professor teaching us marketing from a con- text of how he did it in his day. He may have had knowl- edge, but it was neither practical nor current. Real estate education has been a breeding ground for the lowest of society and those who would take advan-
12 | think realty magazine :: march – april 2022
New investors must learn not only the tactics of taking on a distressed deal from acquisition to disposition but also howto find the dealswith newdigital techniques and howto find the right markets to do it in.
EDDIEWILSON
thinkrealty . com | 13
We see teaching revolving around more sophisticated strategies, but the basics of financial literacy are missing.
EDDIEWILSON
So, we need education on all the alternative classes (i.e., mobile homes, self-storage, residential assisted living, short-term vacation rentals, land development, modular housing, small commercial, and nearly a doz- en others). These areas of investment are rarely taught, but based on the region where the investor is located, these alternative classes could be extremely lucrative. Many of them have a much lower barrier to entry. FINANCIAL LITERACY Another area that needs teaching is financial literacy and investment philosophy. Most of the early real estate education was first taught with new financial literacy parameters. Some of the early teachers would start by creating a mindset of financial freedom. They would speak of how your passive or active cash-flowing asset should pay for your monthly expenses to grant you independence from a job or other responsibilities. This is rarely taught now. We see teaching revolving around more sophisticated strategies, but the basics of financial literacy are missing. PASSIVE INVESTING The last area I will speak about is passive investing into syndicated deals or funds. Due to celebrities in our space who push these opportunities, new investors will jump straight into them and may not be ready. They have never been taught how to vet the deals or viability of the investment. They may be accredited by status but still do not know the major factors for due diligence. I have seen hundreds of investors struggle after mak- ing investments in these types of strategies too early. They limit their growth because they never take a more
basic step first. Because much of this type of investing is pushed by influencers, I do not believe people will change course, so they must be educated to make better deci- sions. This is critical! In addition to the ones highlighted here, there are many other areas where practical and current education is needed. I hope some of you seasoned investors will take the challenge and reach back to others to help them along the way. I hope that someone reading this will be challenged to begin the process of leaving breadcrumbs for others, just as someone has most definitely left them for you. If you are a new real estate investor, I hope you also read this list and rededicate yourself to finding someone who teaches and practices the education they push. Be aware of their track record and activity. Make sure they teach fundamentally sound principles of wealth genera- tion and financial literacy first and foremost. As a third-generation real estate investor, I hope to see my children doing the same someday. I also hope that what they do not learn as I pass down my own experiences can be filled by generous and authentic teachers who are willing to help everyone share in the true American Dream. • An entrepreneur and visionary by nature, Eddie Wilson’s widespread interests have led to successful ventures across the globe, from operating nonprofits and owning an ad agency that worked with well-known household brands, to investing in hundreds of real estate projects and building a nationally syndicated radio show. Today, he guides AAPL and Think Realty with his marketing, funding, and real estate investing knowledge to ensure their establishment as the premier organizations in their sectors. Wilson graduated from The Ohio State University with a degree in broadcast sales and marketing. He also studied marketing at Georgia Tech and business management at Emory University.
14 | think realty magazine :: march – april 2022
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FUNDING
PRIVATE LENDING
Tap into Private LendingWhen Buying a Short-Term Rental AN ARTICLE SERIES ON NAVIGATING THE PRIVATE LENDING WORLD
by Damon Riehl
ntil recently, the private lending world had significant concerns
are considering leasing a portion of their properties on an interim basis, whether they’re located in a hot tour- ist location or not. HURDLES TO OVERCOME Here are the major hurdles to clear when investing in a short-term rental: 1 Greater likelihood of vacancy than annual rentals 2 Inconsistent rental rates during different times of the year 3 Lack of data available for lenders to validate and confirm
the rental estimates provided by the buyer—including both the expected vacancy and the rental rates. For example, a real estate inves- tor would like to purchase property in a Northeast skiing destination. If the property did not have an established history as a short-term rental, the lender would assume the property could be rented for about four to six months a year and would have zero income for the other six to eight months. This risk was something the lenders couldn’t fit into their previous credit
U
about the consistency of income from short-term rentals. Lenders are much more comfortable with an annual lease for a defined rental amount, which results in a low risk of significant vacancy. With the explosive growth of Airbnb and VRBO, however, more real estate investors are looking to increase cash flows by renting prop - erties on a short-term basis. In the past, it has made sense to rent this way in coastal towns or vacation des- tinations. But now, savvy investors
16 | think realty magazine :: march – april 2022
NO RENTAL HISTORY - ANNUAL MARKET RENTS DO NOT MEET REQUIREMENTS Lenders will consider financing properties at the maximum 75%-80% Loan to Value (LTV) even in situations where the annual market rents do not support a loan of this amount. Currently, lenders are using the AirDNA full report and assuming a reduction of 20%-30% from the gross estimated revenue. If the property meets the lender’s cash flow require - ments with that reduction, the loan is approved for maximum LTV. So, if one of these methods works for the loan request, you can expect similar rates and loan amounts as an annual rental loan from a private lender. If all else fails, and the property does not meet any of these methods, there are a few lenders that will lend up to 75% LTV without considering the cash flows. These rates will be mark - edly higher, generally 0.5-1.5% based on the FICO score of the borrower. So, while you’re on vacation this spring, stop by a real estate agent’s offices to see if you too can pick up a vacation rental for your portfolio. It could be the start of riding a new wave of investing. • Eager to learn more about real estate investing? Please visit www.thinkrealty.com/courses for additional subject matter information from our Resident Experts. Damon Riehl, founder and CEO of Investment Property Loan Exchange, has more than 35 years of lending experience in a broad array of asset classes, including commercial and residential mortgage, small business, and construction lending. He held top leadership positions as head of commercial lending for Ocwen Mortgage, head of unsecured lending for Citibank, global mortgage leader for GE Capital, head of construction products at Fannie Mae, and a member of the Harvard Joint Centers for Housing Studies. Riehl has built six de novo lending platforms and used that knowledge to build and grow Investment Property Loan Exchange and the FinTech platform LoanBidz.com.
Typically, these lending practices are applied in the following ways. ESTABLISHED RENTAL HISTORY If the property has a 12-month history as a short-term rental, the lender will review that information and the data from an AirDNA report, with a 20%-30% reduction from that estimate. The lender will use the lower of these estimates to deter- mine whether the property will meet cash flow requirements with a full 75%-80% LTV loan in place. NO RENTAL HISTORY - ANNUAL MARKET RENTS MEET REQUIREMENTS Lenders will review the apprais - al and the market rents, as if there were an annual lease in place. If the annual market rents work for the cash flow calculation, the lend - er will assume the property can be converted to an annual rental in the future, if needed. The lender will generally approve the loan if the income from the AirDNA report is equal to or greater than the annual market rent.
models. As a result, they financed these properties with a reduced Loan To Value (LTV) of around 65%- 70% and charged a rate 0.5%-1.5% higher than normal rental loans. METHODS FOR EVALUATING CASH FLOW The private lending market is working hard to understand the risk and improve the loan options available for short-term rental pur- chases, but lenders are at different stages of product development. The top lenders in the shortterm lending space use these methods to evaluate the cash flow of a new short-term rental property: 1 Require a 12-month history as a short-term rental 2 Use the market rents from the appraisal, as if it were an annu- al rental lease 3 Use a data source, like AirDNA,to estimate vacancy and rental rates
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FUNDING
FINANCIAL PRODUCTS
Capital, Real Estate, Cash Flow, and the Velocity of Money A 200-YEAR-OLD FINANCIAL PRODUCT—COMBINED WITH REAL ESTATE—CAN CREATE FINANCIAL FREEDOM AND A PERPETUAL LEGACY.
by Gary Pinkerton
n the Declaration of Inde- pendence, Thomas Jeffer- son added the phrase “life, liberty, and the pursuit of happiness.” It was inspired by the 17th-century scholar, philosopher, and thinker I
John Locke, who wrote “life, liberty, and the pursuit of property.” Locke was resolute to the idea that common property or posses- sion converts to private property or possession with the combination of
a human’s mind, body, and hands— which are nobody’s but that person’s. Because they are natural rights, he believed, the pursuit of private property is, in and of itself, a right. As a dissenter to the Crown, Locke
18 | think realty magazine :: march – april 2022
are inherent risks. That is why the wealthiest individuals in the world have a comprehensive plan that con- sists of other financial products and strategies that help mitigate these risks and add to their overall growth of wealth. One of those is the Perpetual Wealth Strategy. The key features of this asset are privacy, tax-free growth, and guaranteed financing. The asset is a uniquely designed insurance policy offered by a mutual life insurance company. The purpose of the vehicle is to build liquid, imme- diate wealth that can be used right away. It’s a personal banking system without limits and shielded from tax. Sophisticated business owners and investors have used this account as a foundation for their wealth for hun- dreds of years without fail. So why isn’t this account main- stream today? For the wealthy, it is. For the rest of us, Wall Street has drowned out everything but its own financial agenda. But now, with the right advisor and knowledgeable company, you too can establish an effective foundation to magnify your real estate gains. The key features are more valuable today than ever before. PRIVACY This unique asset is 100% private to those searching. As stated, it is a private account a private individu- al sets up with a private insurance company. As a real estate investor, you value asset protection—it is a step you take to avoid circumstances that could jeopardize your wealth. This private account can also protect your liquid capital.
insisted on freedom and civil rights. He inspired many other intellectuals, creating an immense desire to make the great exodus to America and pursue property, which history has proven many times is a vital compo- nent of freedom. THEASSETTHATWORKS Why does real estate work so well? Abraham Maslow’s hierarchy of human needs explains that human motivation starts with basic survival needs—what he identifies as physi - ological needs. No other motivation can exist unless the base level of human needs is first met. Among these basic needs is shelter.
Real estate houses everything in our country—businesses, retail stores, government, and families. Everything has a connection to real estate. In America’s debt-based soci- ety, investors can be a landlord with very little money, protect themselves from inflation and allow the tenant to pay off that debt, gain tax advantag- es, and receive cash flow along the way. There simply has been no asset in world history that has outper- formed real estate long term.
ANOTHERASSET THATWORKS Real estate is not foolproof. Despite the inherent benefits, there
TAX-FREE GROWTH One of the biggest wealth destroy- ers is taxes. The private banking
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would like their estate to own the real estate, but perhaps not the debt they used to acquire it. The legacy value can also act as the sum that transfers into a trust for use by your inheritors to attend college, go on family retreats, start a business, start a family bank, or invest in more real estate. THE GREATEST SYSTEM IN THEWORLD Using this unique insurance account with real estate is one of the best ways to build wealth and finan - cial freedom. Real estate, this unique insurance account, and the imple- mentation of the velocity of money is a method the financially successful have used for generations. Now you too can implement the Perpetual Wealth Strategy. This system is not taught by tradi- tionally trained financial advisers. It is used by specialists who understand the value of the account based on the features explained, and most impor- tantly, knowledge about how it can be applied to real estate, specifically. Now you have the opportunity to marry the most sought-after asset in history (real estate) with the most time-tested financial vehicle available today to create wealth, financial free - dom, and a legacy for your family. •
system described here existed well before 1913, when the tax code was created. Today it is the only account left in which you have tax-free gains and are not forced to withdraw the money at a point in the future like you must with Roth IRAs—the other account that has a tax-free growth characteristic. GUARANTEED FINANCING A real estate investor’s best friend and worst enemy is financing. When credit is good, money is cheap. When credit is bad, money doesn’t exist or is drastically expensive. The guaranteed financing feature allows an owner to borrow from this account at the rate that it is earning. The loan is with the mutual insur- ance company and is contractually guaranteed when you sign up with
the account. You can borrow up to the full amount of your account. The financing feature is like a line of credit, so when you make pay- ments to your principal loan bal- ance, another loan can be taken at any time—as long as the total loan balance does not exceed the total cash value in your account—without any repayment requirement. Use it for any purpose—it is excellent seed capital for any real estate deal. ADDED BONUS There is another feature that sep- arates this financial vehicle from any other: There is a legacy value. The legacy value pays out tax-free upon the passing of the person who pur- chased the account. Legacy value can be extremely helpful for real estate investors who
Eager to learn more about real estate investing? Please visit www.thinkrealty.com/courses for additional subject matter information from our Resident Experts.
Gary Pinkerton is a wealth strategist, veteran, bestselling author, and real estate investor. He is passionate about freedom, small business, building wealth
and legacy, and reducing taxes. He owns and helps others couple high cash value life insurance with real estate and alternative investments. Pinkerton is a graduate of the U.S. Naval Academy, commanded the nuclear attack submarine USS TUCSON, was a Pentagon division director for the Joint Chiefs, and a senior ethics professor before retiring as a captain.
20 | think realty magazine :: march – april 2022
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thinkrealty . com | 21
FUNDING
PREPAYMENT PENALTY
Planning for Your Prepayment Penalty
UNDERSTANDING THE TYPES OF PREPAYMENT PENALTIES WILL HELP YOU DEVISE A STRATEGY FOR SELLING YOUR PROPERTY.
by Eric Stewart
In recent years, lenders have seen record volumes of long-
It’s important to keep in mind that the lender enters into that agree- ment with the opposite benefit, so they hedge their risk with time. What does that mean? If the lender is going to honor the specified rate for an extended period, they need to receive a min- imum return on their investment.
They accomplish this minimum yield (return) by imposing a penalty if the borrower pays off the loan before a certain date. This date is typically referred to as the “open period.” Although these long-term fixed rate loans are very attractive, the pre- payment penalties can be extremely expensive and dramatically increase
F
term loan requests for commercial property acquisitions. This makes sense as a hedge against rising interest rates. That hedge provides certainty that your interest rate will remain the same for a set period, no matter what market rates do.
22 | think realty magazine :: march – april 2022
the cost of sale. Borrowers, therefore, need to understand the prepayment penalty options available and cal- culate the impact each will have on overall returns. TYPES OF PREPAYMENT PENALTIES The three most common prepay- ment penalties associated with these securitized loans are: 1 Step–down 2 Yield maintenance 3 Defeasance We won’t do a deep dive into the formulas for calculating each type. But knowing the general scope of each form of prepayment penalty will help you understand how the cost of sale can increase or decrease, depending on the specifics of the debt at the time of sale. NO. 1 Step-Down The step-down prepayment penalty is the simplest to calculate. It is just a percentage of the Unpaid Principal Balance (UPB) at the time of payoff. This percentage will typically decline every one or two years depending on the various lenders’ programs. A common starting point for most loan programs is 5% of the UPB in year one, and then the penalty declines from there. The decline schedule is often a function of the loan term. For instance, if you struc- ture a 10-year term, it is quite com- mon to see a prepayment penalty that starts at 5% and declines 1% every two years, eventually resting at 1% beginning in year 9. Once a borrower gets toward the end of the loan term, the prepay- ment penalty is typically not a major factor and the cost of a sale can
Because the asset is being sold and is no longer in place to gener- ate revenues to service the debt, the proceeds from the sale are used to purchase securities sufficient to generate a stream of income that will service the debt through the remaining defeasance period. A third party is used to “defease” the loan, and it is typically a higher cost transaction than yield main- tenance or a step-down prepay. If market conditions allow, the seller may benefit from the defeasance and participate in that arbitrage. Please note that this will be spelled out in the loan docs, and the lender will often secure the right to any profits generated above the debt service. You should be able to negotiate and participate in that benefit. STRATEGIES TO REDUCE THE IMPACT OF PREPAYMENT The expense associated with any of the above-mentioned prepayment penalties forces investors to pay close attention to their exit strategy and to determine which prepayment struc- ture provides the lowest cost to exit. The following strategies are com- monly used to reduce the impact of a prepayment penalty. 1 Plan your work and work your plan! In other words, choose a prepayment penalty that burns off close to or at the time you expect to sell or refinance out of the loan. Although this strat- egy may be cost prohibitive for an early sale, it makes sense for a long-term hold. 2 Consider a shorter fixed-rate period. Some lenders, such as Freddie Mac, offer a loan structure with a rate that is fixed for a specific period and
be absorbed without dramatically diminishing the returns. That said, each deal will have unique timing and pricing. NO. 2 YieldMaintenance The yield maintenance form of prepayment penalty is quite com- mon with both Fannie Mae and Fred- die Mac loans. Although the actual formula can be rather complicated, the premise of the penalty is in the name itself. You are agreeing to maintain the yield that you promised to the lender. So, for example, you sell your prop- erty with a $3 million UPB, so the lender receives $3 million payoff at closing. They will then invest those funds in an equivalent investment vehicle with the same maturity and earn as much interest as the current market will bear. Per your agreement, you will make up the difference between your note rate and the market yield at the time of payoff, essentially “maintain- ing the yield” you promised to your lender. The yield maintenance is in place until the open period, so you will need to maintain this margin for the bulk of the remaining term. You can see how this prepayment penalty could get extremely expen- sive, especially in a flat or declining rate environment where that mar- gin is greater. Even when rates are rising, they would need to increase at a healthy pace to offset the fact you are buying an investment vehicle with shorter maturity, which usually pays a lower yield. NO. 2 Defeasance Defeasance, another form of prepayment penalty, is most seen in conduit, or CMBS, loans. When a defeasance prepayment is executed, the debt is not retired or paid off. It is more of a substitution of collateral.
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