Bill: The problem with single-family housing is that we’ve had a shortage, and we’ve had it for a long time. We’re about what? Five million homes behind, starting back in 2008 when a lot of people exited the industry, and we’ve never caught back up.
Jack: Hello, everyone, and welcome to another episode of the “Jack Bosch Show,” where we discuss all things finance and real estate. Today, our focus is on financing and raising funds, as well as making your business recession-resistant. Joining us as guests today are Wendy Sweet and Bill Fairman. How are you guys doing today?
Bill: Awesome. Thank you so much for having us.
Wendy: Yes, absolutely.
Bill: By the way, I don’t know if you can ever make a business or your investment recession-proof; you can make it recession-resistant.
Jack: Okay, all right.
Wendy: That’s the goal, right?
Jack: All right, I like that distinction. You’re absolutely right. Some businesses perform better during recessions, but even those businesses face challenges. Take the Dollar Store, for example. The Dollar Store probably does well during a recession, but over the years and decades, some Dollar Stores have still gone out of business. So, being recession-proof doesn’t guarantee ultimate success if the business fundamentals aren’t right, correct?
Wendy: That’s exactly right.
Bill: You know, speaking of Dollar Stores, now, in addition to recession issues, we also have inflation. They can’t carry as many products as before because they’re trying to stay within the dollar range. There are plenty of stores now that don’t even carry eggs because they cost way more than a dollar.
Wendy: That’s right.
Jack: Right. Or they sell boxes with a single egg.
Bill: And then you have to insure them from the house to the store in case they break.
Jack: That’s exactly right. Very cool. So, you’re right; Dollar Stores are now $2 stores. Just like the 99-cent burger has become a $10 burger, with that said, let’s dive into it. Tell us about yourselves. First of all, you’re brother and sister. I just want to clarify, sister and brother. Ladies first. And where do you guys live?
Wendy: We live in the Carolinas. I’m in Rock Hill, South Carolina, and Bill is in Indian Trail, North Carolina. We’re right on the border where Charlotte is located, between North and South Carolina. We lend throughout the Southeast.
Jack: So, you’re private lenders with a fund. What else do you do?
Wendy: Well, as a side gig, we have short-term rental properties in the Carolinas and Florida. We also own self-storage facilities in Tennessee and Missouri. And we’re constantly involved in buying and selling properties on the side. But our main focus is lending. It’s a full-time job.
Jack: All right, yeah. So, tell us about that. How did you get into it? What do you typically lend on?
Bill: Well, generally, we try to stay within the median price point in single-family fix and flip properties and ground-up construction. This is part of our recession-resistant strategy, which comprises about 55% of our lending portfolio. One of the lessons we learned from the 2008 housing crisis is that rents do not typically decrease even during a housing recession. By focusing on the median price point, we have multiple exit strategies. Plan A is when the loan matures and pays off. Plan B is if it doesn’t pay off, someone else can convert it into a rental property if we end up taking it back. Plan C would be to sell it, and Plan D is to hold onto the property and rent it out ourselves if the market conditions are unfavorable for selling. Over time, these properties tend to hold their value, and even if values temporarily decrease, we believe they will eventually rebound.
We also lend on small multifamily properties, small self-storage units, and strip centers. About 90% of our lending is in the residential sector, with the remaining portion in smaller commercial properties.
Jack: Yeah, what you said aligns with a recurring theme in my podcast. Many guests have emphasized the importance of setting yourself up in a way that you can’t lose.
Wendy: From your mouth to God’s ears.
Jack: Absolutely. In a recent interview with Ron Lagrande, he discussed acquiring properties with wraparound mortgages and renting them out through lease-purchase agreements, ensuring that even in the worst-case scenario, he still generates income.
What you described is quite similar. You have multiple potential outcomes: selling the property with profit, renting it out, renting it out if you have to take it back, and, worst case, still obtaining returns close to your target. With a long-term holding strategy during emergency situations, you can avoid losses.
Wendy: And that’s the key, Jack. Regardless of the asset class or investment strategy in real estate, the key is to have multiple exit strategies. It can’t be limited to just one or two. You must always consider the worst-case scenario because, as we know, it can happen.
Jack: Absolutely. The worst-case scenario teamed up. You have to be prepared for it.
Bill: Real estate and markets are constantly evolving, and positioning oneself to take advantage of these changes is crucial. It’s better to be proactive rather than reactive. However, unexpected events, such as black swan events, can occur beyond our control, and that’s when having additional strategies becomes essential to minimize any potential issues.
Jack: 100%. Now, let’s delve deeper into your business model. When it comes to houses or similar properties, what are the typical parameters you look for? For example, loan-to-value ratios, have they changed recently? I’d like to hear more about what’s happening in the current market.
We’re in the beginning, or in the middle, or perhaps we haven’t even started, or perhaps we are at the tail end of it. Nobody really knows. Nobody has a crystal ball. But we’re somewhere in a downturn of the residential real estate market. Land is a different kind of thing right now, at least the way we approach it. So, what measures do you take to protect yourselves? You mentioned the price ranges. You focus on the medium level. Why is that?
Wendy: In our area, which is the Southeast of the United States, affordable housing is considered to be around $500,000 or less. If, for any reason, we have to take back a property and cannot refund the investors, we ensure that we can rent out the property to continue generating investor returns.
To mitigate risk, we never lend more than 70% of the after-repaired value (ARV) of a property. While some individuals may have been buying based on the assumption that property values will continue to rise, our lending is not based on that speculative approach.
Jack: That’s akin to the musical chairs strategy. It’s similar to what happened in 2007. Everyone bought with the belief that there would always be someone else willing to pay more until the music stopped.
Wendy: Exactly. We don’t engage in that kind of behavior. The numbers and formulas we follow have proven successful for decades. The 70% ARV rule has stood the test of time. The only things that change are people’s willingness to take on higher risks, bring more money to the table than necessary, and act greedily.
When underwriting properties, we now focus on comps from the last three months rather than the usual 6 to 12 months, given the rapid changes in the market. We may require a higher amount of out-of-pocket funds at closing, but overall, we maintain a cautious and conservative approach. We prefer a calm and plain strategy because we value our sleep and our investors’ returns.
Bill: Additionally, we are operating in a strong market that is still growing. More people are moving here than leaving, which is favorable for us. If we were lending in a different area, we would adjust our parameters accordingly. That’s why we only lend in our local market, as we have a deep understanding and presence in it.
Jack: So, if we take an example of a $500,000 house with an after-repair value supported by comps from the last three months, you would lend $350,000?
Wendy: That’s correct.
Jack: And in that case, do you lend the purchase price plus the rehab up to $350,000?
Wendy: We lend 90% of the purchase price and 100% of the rehab costs.
Jack: So, in this example, if the house needs $100,000 for rehab, you would lend 90% of the $250,000 purchase price, meaning they would need to bring $25,000 to the table. You would lend around $225,000 or somewhere close to that. And for the $100,000 rehab, you would lend the full amount as long as the total amount lent does not exceed $350,000, right?
Wendy: That is correct.
Bill: Yes. Despite being a private lender, we operate similarly to a bank. We require six months’ worth of reserves and conduct thorough due diligence, including reviewing bank statements, pulling credit reports, and conducting background checks on the primary officers of the LLC involved in the project. We work with experienced individuals who know what they’re doing. While we used to work with newcomers, the past five years have allowed us to learn from and cover up many mistakes. Now, we believe it’s time for professionals to be in the business.
Wendy: Yeah, it’s not easy out there right now. You have to be cautious in everything you do and rely on your brain trust, seeking guidance from experienced individuals who have been through similar situations. There are many pitfalls in the industry, and the key is to avoid them. One way to do that is by actively participating in local groups, masterminds, and your local Real Estate Investors Association (RIA) groups. These avenues help you stay informed about what’s happening in your area. And when you encounter challenges, it’s important not to hide them.
Jack: Absolutely. That’s an important point. Many people try to conceal their difficulties and maintain appearances, but eventually, the truth comes out, and it can have devastating effects on one’s reputation.
Wendy: That’s precisely right. I’ve seen numerous cases where people hid their struggles instead of reaching out to experienced individuals who have faced similar situations. We’ve all experienced losses and encountered obstacles. The goal is not to dwell on the problem but to support and assist in overcoming it and achieving success.
We can’t provide loans to individuals who are out of business. We prefer borrowers who are actively engaged in their business endeavors, and we want them to continue thriving. So, it’s not just about doing the business; it’s about surrounding yourself with a network that uplifts and encourages you to improve. There’s enough opportunity out there for all of us.
Jack: Absolutely. You mentioned something interesting about the professionals stepping up and knowing how to run numbers tight. In the past, as you mentioned, there was some margin for error because the market could compensate for mistakes. However, in a stable or declining market, time becomes a crucial factor. The longer it takes to rehab a property, the fewer mistakes you can afford. Speed and accurate numbers are paramount because even a small $5,000 or $10,000 error can have significant consequences. Would you agree?
Bill: That brings us to the reason why we’re in the lending business.
Jack: Okay, tell me more about that.
Bill: Well, if you’re a contractor or a flipper, you bear all the responsibility. Everything falls on your shoulders, whether things go right or wrong. While you may earn more profit in terms of dollars, you also invest significantly more hours compared to other parties involved in the transaction.
On the other hand, being in the lending position allows you to control the asset without being directly responsible for it. You invest the least amount of man-hours into the project. If we calculate it on an hourly basis, lenders make more money per transaction than the property owners themselves.
Jack: That’s a valid point. Now, how do you structure your lending? Obviously, you don’t have an endless pool of your own cash. You didn’t win the lottery or anything like that. I know you’ve flipped houses and earned money, but how does your structure typically work? I understand you also have a fund. So, let’s discuss how you raise money and how it’s structured for the investors who come to you. What do they receive, and how is their investment secured? Please provide some insights into the workings of your system.
Wendy: Let me start by…
Bill: Can we start by sharing our background first?
Wendy: Yes, let me begin by telling you about how I initially entered this business in 2001 when I started working with Larry Goins. You’re familiar with Larry.
Jack: Yes, I know, Larry. We’re all part of a large mastermind together.
Wendy: That’s correct. Larry and I had a mortgage company together, specializing in investor-only loans. During that time, I noticed a pattern: one person had money but couldn’t find houses, while another had no money but found plenty of houses. So, I started lending their money to each other. At the time, I didn’t even realize it was called hard money lending. That’s how I stumbled into it, and that’s how the hard money business grew.
Eventually, I reached a point where I had raised $23 million from other people, specifically self-directed IRA money. It became a complex puzzle, juggling three people to be in the first position and lending money to another individual. It was getting out of hand. That’s when I convinced Bill to join me in 2012. He had actually introduced me to the business initially, but I kept showing him my bank statements, proving that I was making money. I pleaded, “I can’t do this alone anymore. I need your help.” So, he came on board, and together we started Carolina Hard Money. It was Bill who took charge of setting up the fund.
Jack: It seems that the brother-sister relationship isn’t so different from a husband-wife dynamic.
Wendy: That’s right.
Bill: Sometimes it is…
Jack: We do what our wives, or in this case, the lady in the relationship—your sister—tell us to do.
Bill: So, the fractionalized loan approach required a lot of energy, but it wasn’t very productive. We decided to start a fund, and all the initial investors we had were active investors. They actively reviewed deals, appraisals and made decisions about buying notes. With the fund, everyone became a passive investor without any say. So, we had to either retrain them or bid them farewell.
Wendy: Only about 25% of them actually came into the fund. Some weren’t accredited investors, meaning they didn’t meet the net worth or income requirements. Retraining the active investors to be passive was a challenge. However, over time, they realized why they should do all that active work when they could make nearly as much passively and still have safety. One advantage of a fund for investors is greater diversification. Our fund currently holds $20 million, with an average loan size of $200,000.
Bill: Not $200!
Wendy: $200,000. That translates to a significant number of loans. If a few of them go bad, it goes unnoticed. We allocate loan loss reserves as part of our expenses. It doesn’t affect the yield, but if someone had $200,000 invested in a single asset that goes sour, it doesn’t mean they’ll lose money, but they won’t make any until we figure out what to do with the property. It’s about strength in numbers.
Bill: And mentally, it eases anxiety about worrying over a deal that’s not generating payments. Our fund is designed to be simple. Our loans are interest-only, and the investors are equity members of an LLC. At the end of each quarter, we deduct expenses and distribute all profits to the investors. They can choose to reinvest and compound the returns or take it as income each quarter. It’s a straightforward process. I prefer simplicity.
Jack: What is the typical return?
Bill: Our expected returns, as stated in the documents, range between 7% and 9%. During the COVID year, we were in the 7% range, but for most of the time we’ve been in business, we have been in the upper 9s to 10%.
Jack: All right, very good. That’s actually very nice. And I love the fact that you actually allow them to keep it and compound it. That is really one of the key things that is not the case in most funds or even in private placements and multifamily syndications. Once a property is funded, you usually don’t need more money in the deal, right?
In your case, you’re looking to grow your fund continuously, so it makes sense to offer the choice of either taking the 9% or 10% return or reinvesting it to keep it working for you. It’s highly attractive because in a normal deal if you pay out the returns and people use the money for daily expenses or vacations, their money isn’t growing and compounding. But in your case, it does, and it’s a brilliant little tweak that I haven’t heard very often. So, that’s a really cool thing.
Wendy: It’s great for self-directed money too.
Bill: Exactly. That money would sit there anyway, but that’s the difference between owning a note or a piece of a note and being in a fund. When a note is complete, you have to look for another note.
Jack: Exactly. And if you get busy and that money comes back to you and sits there for three months before you invest it again for another three months, you end up making 10% for only six months of the year, bringing down your average return to just 5%.
Wendy: Yeah, I do that myself with my own money.
Jack: Oh, I do that all the time with my own money. It sits there, makes good money, and then it comes back. So, I love that idea 100%.
Bill: Yeah. So, those are the benefits of the fund. However, the downside of being in a fund is that if you’re a micromanager or someone who needs to be in control of everything, it will drive you crazy. So, if you have that personality type, funds may not be a good fit for you. But for most people, they don’t want a second job managing their money. They just want to watch it grow, and their due diligence is on the fund manager and the company, not necessarily on how the money is working.
Wendy: And that’s another good point you brought up. Whether it’s us or any other fund, it’s important to understand who the sponsors are, who the fund manager is. You need to know their track record, their character, their experience. Those are the questions you should be asking when considering any fund to invest in. It’s not just about the asset and how the fund is structured but also about investigating the sponsors because there are people out there who do good and know what they’re doing, and then there are others who are like Madoff-type characters.
Bill: Well, the vast majority of fund managers aren’t the Madoff-type. And even if things go wrong, they didn’t do it intentionally. Things happen.
Jack: No, I 100% agree with you. This is a key point in any investment you make. For example, if you invest with a rehabber and they are a lousy operator, they might waste your money on unnecessary things that don’t add value to the property. Then, they might struggle to sell the property because it doesn’t look good, or they abandon it, putting your money at risk. But if you invest with a clean, experienced operator, even if it’s not a fund, they will put your money to work, maximize every dollar, and provide a smooth experience. The same principle applies to funds and multifamily operators. In our case, we’re currently facing a situation where we bought a multifamily property six years ago, positioned it for sale, and it was hit by a hurricane causing $2 million in damages.
Wendy: Oh no.
Jack: The insurance company doesn’t want to pay, and our partner gave up, saying he can’t invest any more money. If that syndication had been led by someone who casually thought, “Multifamily is a good idea; let me raise some money while I have a job,” we would be left with a $2 million repair and no one to fix the property. We’d be forced to do a fire sale.
Wendy: That’s right.
Jack: However, since we are the right people, we stepped in and are investing $2 million of our own money into the deal. We just had a call with our contractor today, and we have to spend another $400,000 on air conditioning repairs alone because the hurricane destroyed them all. By the end of this year, we’ll have invested between $2 million and $2.5 million into that property. We won’t make any money from it, but we are committed to paying our investors back.
Wendy: That’s right.
Jack: And we have those reserves on the side. We never thought we would need them. But you know what? Because stuff happens, we now have the ability to use them. We have the lines of credit, we have the cash ability to put that thing in place, and that’s the difference between an operator that doesn’t know what they’re doing and an operator that knows what they’re doing. So, yes, you do need to check your operator; you need to check the principles, the syndicators, the people in charge because that’s where your return lives and dies by. I’m 100% sure of that.
Wendy: And your character too, Jack. I mean, you stepping up to say, “Hey, I’m gonna die before I don’t pay my investors back.” You know, that’s character. There aren’t a lot of people out there like that.
Bill: One good question to ask if you…
Jack: Unfortunately, you don’t know them until it happens, but then…
Wendy: That’s right. Yeah. That can be true.
Bill: A good due diligence question to ask for any operator is, how long can you operate with a 25% vacancy rate? Or let’s say 75%, in your case, a 75% vacancy rate? How long can you operate with that? Because, you know, you’re waiting on repairs. In our particular situation, how long can you run with only 75% of your current business model? If you lose 25% of your business, how long can you survive like that? The same thing with us. The money that we make is not transactional. It’s mostly from loan fees and interest payments…
Jack: You’ve got two income sources, the fees, and the interest. So, I totally get what you’re saying. You’re basically saying, well, if you lose 25% of your transactions and if your entire business is depending on the transaction fees, you’re in trouble. So, yes, that’s a good question to ask, like, how long can you operate?
Wendy: Right. Plus, you want to ask people about their scars. I mean, anybody who’s been through the wringer is more than happy to share what they’ve been through and how they got out of it. That’s what makes somebody strong—what have you been through that’s really knocked you to your core, and how did you get out of it? That’s the key. Did you walk away, or did you dig out of it? The person that dug out of it is the one you want to be doing business with.
Jack: Yeah. Actually, that reminds me of something I just heard the other day. They studied a whole bunch of people, including those who went through the horrible German Nazi times and were in concentration camps. They measured their happiness level later in life. It turns out that a lot of people who had the hardest hardships, including the concentration camps, later in life actually scored higher and were happier because they were put through the wringer. Of course, it was horrible, and nobody needs that in their life. But there’s something to be said that if life tests you and you come out of it and figure out how to make it through, you have a different level of appreciation. You also have a different level of performance in your life because it’s like, “If I was able to get through that, I can get through anything in life.” That’s the kind of people you want to surround yourself with. So, I 100% agree with that.
Bill: Yeah. I think you hit on the appreciation factor. You do appreciate life more when it’s been tested.
Jack: Yeah. Well, in everything they say, there’s everything and everything you want to accomplish in life. People always have good ideas, and there’s the idea and the end result, but what people don’t see in the middle is the shit sandwich.
Wendy: That’s right.
Jack: So, the bigger the shit sandwich is—excuse my language here—and if you’re willing to go through it, and you’ve gone through it, the more you’ve grown and the more you can handle. The people who had the biggest challenges are the people that have the biggest abilities at the end because you don’t grow by doing nothing.
Wendy: That’s right. You’re not afraid of the unknown because you know it now; you’ve been there. The unknown isn’t as scary as it once was once you’ve been through all that.
Bill: And in business, failure shouldn’t be considered failure. Failure is a learning experience, and you just need to make sure you don’t do the same thing again.
Bill: It’s okay to fail at things, just don’t fail at the same things over and over again.
Wendy: That’s just how it is.
Jack: If you have to re-learn the lesson a few or too many times, it’s time to look for something else. But other than that…
Bill: It’s time to be a W2 employee at that point.
Wendy: That’s right.
Jack: Yeah. Not everyone is made to be an entrepreneur. I mean, I love Gary Vaynerchuk. He talks about that, and there are other people out there. Not everyone is made to be the owner with all the stresses, tensions, risks, and everything that comes with it. Some people are made to become amazing number twos. And if you look at it, like, what’s his name? Steve Ballmer? If you look at most of the people in Microsoft, they’re like billionaires. They’re not owners; they’re not the founders. Bill Gates was the founder, and there was one other guy.
But on Apple, the same thing. Some of these multi-billionaires from Apple were just employee number three, employee number four, employee number five, and played a critical role in the company, but they never owned the company. So, there’s something to be said about that. Well, with that said, guys, let me see how can we help you. If somebody wants to invest with you or wants to learn more about that, how can they get ahold of you guys?
Bill: Well, it’s pretty simple, carolinahardmoney.com, or they can email me at firstname.lastname@example.org.
Jack: Right. Very good. That’s easy enough. And I think they can contact you and email you for both if they have deals that they need financing as well as if they want to invest money, right?
Wendy: That’s correct.
Jack: Right. So, what’s the minimum criteria for a person to work with if they have a deal that they want money for? What are you looking for? And are there some parameters, like how many deals they have done, etc.? How long have they been in business or in the current market?
Wendy: Well, we’d like them to have at least a couple of deals under their belt. We want to make sure they have some money in the bank. A credit score needs to be at least 650, but really, we’re kind of looking at 680 at this point. We’d like to know that they’re involved in the area with small groups, investor groups, that kind of thing, constantly training themselves. So, those, and of course, the deal has to work. That’s key.
Jack: Very good, very good.
Bill: But they can run a scenario by us, and we’re not going to waste their time. The deal either has legs, or it doesn’t, and we’re happy to look at them.
Jack: Wonderful. Is there anything else that you want to share with us? I love the business model. I love the fact that investors get compounded. I love the fact that you’re careful right now, that you’re doing 70% after-repair value, that you require the partners or the actual rehabbers to have some experience. I mean, these are all little factors that make for a big shield and make it, if not recession-proof, then very much recession-resistant, so very much so.
Bill: I just want to end with the fact that single-family housing is not going anywhere. The problem with single-family housing is that we’ve had a shortage, and we’ve had it for a long time. We’re about, what, 5 million homes behind starting back in 2008 when a lot of people exited the industry, and we’ve never caught back up. So, single-family housing is still in demand.
Now, real estate is local, so there are areas where people are moving away from that may be losing a little bit of value, but if you stick in those areas, then you can easily pull up these stats. Go to U-Haul and figure out where all the trucks are going. You’ll know the areas where the prices are still holding. They may take a little bit longer to sell, even though interest rates are going up.
Wendy: People always need a place to live.
Bill: If you’re worried about your asset being backed or your money being backed by a solid asset, single-family housing is still going to be a pretty safe bet.
Jack: And the United States is also still one of the few countries where the population is growing. Now, obviously, there’s population growth in third-world countries, and that continues to be the case. But like China is about to go off a cliff population-wise. I mean, they realized they had the one-child policy, and they want to change that, and now people can have more than one child. But it’s almost too late because their entire population is now in their 50s, 60s, 70s, and they’re about to, as hard as it sounds, die off.
They’re going to have 30% to 40% fewer people in China in the next 40 to 50 years than they have today. Europe is the same thing. Europe is aging dramatically. I just was in Europe with my daughter, and she’s like, “Hey, I only see old people around here.” And it’s like, well, she’s 15, everyone over 25 in her mind is old, but she’s right. She’s right. There are some families with young kids, and particularly in smaller cities. As soon as these kids grow up, they go off to colleges, and they go off to the bigger cities. And in my particular case where I grew up, it’s one of the areas in Europe or in Germany where people go to retire, so it’s very pretty, so there’s lots of population, but they’re all older, and they’re all going to pass away at some point in time.
And if you look at that, the U.S. is one of the few places in the world; through immigration and other reasons, we’re still having net population growth. So, this shortage is not going to go away. I 100% agree with you. So, this is a safe area, particularly, you’re in the Carolinas, the Southeast, it’s a growth area of this country, you’re in a good spot with a good model. So, I love it. Thank you very much for being on the show.
Wendy: Thank you.
Bill: Thank you, Jack.
Wendy: Thank you for having us.
Bill: It was awesome. Appreciate you.
Jack: All right. With that said, guys, if you enjoyed this show, make sure you are listening to it on iTunes, give us a 5-star review, share it with friends. If you’re watching this on YouTube, as always, make sure you hit that subscribe button, hit that notification bell. And if you’re listening or watching it anywhere else, do the exact same thing. With that said, see you in the next episode. Thank you very much, guys.