Considering A Private Loan? Here's A Crash Course On Private Lending
Play • 42 min

In this episode, Nate Trunfio shares a wealth of information on the domain of private lending.

 

Find Nate at https://limaone.com/nate/

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Transcript

 

Tom:

Greetings, and welcome to The Remote Real Estate Investor. On this episode, we have Nate Trunfio of Lima One Capital. This episode, we're going to cover a lot of materials focusing specifically on portfolio loans. All right, let's do it.

 

Awesome. And welcome to the podcast Nate. Thanks for jumping on.

 

Nate:

Hey, thank you guys for having me. honored to be here.

 

Tom:

All right, so before we get into the main content, let's start with a little bit about your background.

 

Nate:

Sure, yeah, I'll try not to bore too many people here. My career in life has been spent in all things real estate related, and specifically financial services and lending, younger ish type of guy. So graduated college in the mid 2000s, and got right into the residential mortgage lending world sort of conquered a lot of that through becoming a top sales producer, than stepping into the management came very early on. So some great learning lessons as a leader and manager, 24 years old, managing people twice plus my age, and then really just continued on that path through just growing and climbing the ladder.

 

The residential lending space serves a huge need, but it's a lot of red tape and a slower sales cycle than what I was looking for. So I jumped out of residential lending into alternative b2b, ran to different private debt funds there that led to another big need of small businesses in dire need of capital, especially today in this COVID world. And then I found my happy home and private lending over the last four years was the president of a smaller company, prior to now being at Lima One where I run all the sales and marketing and throw my hat in the ring of just a lot of other areas just to help the business grow.

 

And my sort of inner inner driving question is always How can I make myself others people process and things better around me, and that's what just keeps me ticking every day and has led me throughout the journeys and stops in my career.

 

Michael:

I feel like we're about to interview a Swiss Army Knife of residential real estate investing, this is gonna be super exciting.

 

Tom:

So when you started, was it more in like traditional residential lending versus private capital?

 

Nate:

Exactly, yeah. So learn through the red tape and all the rigmarole but you know, it's important in that world to be very knowledgeable and all the nuances if you want to be successful. But yeah, so when I was getting into financial services, it was very much a refi. Boom. So it was mainly focused on refinances to homeowners predominantly their primary residences, certainly to del purchase as well, with that got me you know, introduced to financing and real estate in general.

 

Michael:

Were you involved in that space during the 08-09 housing crisis, Or did you exit prior to then?

 

Nate:

That's when I got it right around there. So it was a great welcoming to all things, real estate,

 

Michael:

And you still managed to become a Top Producing salesperson during that time?

 

Nate:

Yeah, man, look, I certainly don't have the looks for those on video. I'm not, I'm not the smartest guy in the room. But my nack is I just I grind. I work hard. You know, I think that's the lesson to anybody younger in their career. You know, you don't have to have all the skills, knowledge and experience to be a top producer and anything. You just have to work your tail off.

 

Michael:

Yeah, that's great advice.

 

Tom:

That's fantastic. So let's learn a little bit about more about Lima one right now. So I've been to several conferences and somewhat familiar but for audience who have not heard of Lima, one capital?

 

Nate:

Yeah, absolutely. So Lima, one capital is a premier private lender in the top three to five in the nation, we lend in 46 different states, our sole purpose and mission is to provide financing solutions for real estate investors, because we know that the residential realm just doesn't suit investors who need to move quickly. They need different products than you know, traditional financing. And so that's exactly what we provide.

 

So we lend on all things related to different real estate investment strategies. It's fix and flip new construction, single family rentals on a single asset level as well as large portfolios. And then last but not least also multifamily. You consider us to be a private lender, most people will call it hard money. although in reality, I'd liken it to a lot more soft money. It's not hard money like it used to be. It's become somewhat institutionalized. And at least by that I mean that Wall Street has has an appetite for it, which is allowed us to drive down the cost of capital in terms that we provide out to investors.

 

So you know, we are a very big player in the space and again, we help numerous different types of real estate investors, whether it's their first deal, they do 100 deals a year, they buy, you know, 200 unit multifamily complexes to five unit complexes. I mean, no matter what shape and size you are, no matter what your investing strategy is we should have a financing solution for you.

 

Michael:

Awesome. is one of the 46 states Alaska or is that on the no go list?

 

Nate:

That is on the no go list, if I recollect.

 

Tom:

Contiguous. Michael, you gotta be contiguous.

 

Michael:

I know. I know.

 

Nate:

We're in Hawaii though.

 

Michael:

Oh, yeah? Oh, man. All right. Let me know when you guys are up in Alaska.

 

Nate:

Will do yeah,

 

Michael:

I'll be your first client!

 

Nate:

We'll fix and flip some igloos.

 

Tom:

I think you kind of answered my next question I was going to get into is the customer profile that you guys serve. So but it sounds like all over the board from individuals to funds, if you guys have like predominantly like more in one area are really pretty spread all over the place.

 

 

Nate:

Yeah, I mean, we're pretty diverse. Our core client is somebody that sort of graduated to real estate investing full time. But it's not to say that we don't finance a lot of people that are doing it is sort of a second job or supplemental income or creating additional cash flow on top of their W2 jobs, you know, our products in a process or they're designed to move quick, without a ton of paperwork, we don't collect tax returns on any of the products that we have, just to put that in perspective. And certainly, that's a mainstay in residential lending.

 

So we look at things a little bit differently. And we're customized to make sure that we can provide investors with what they need from a product perspective, but just as importantly, a process as well.

 

Tom:

How about if I'm buying through a self directed IRA, and with that type of a product? I can't get traditional lending, because I'm buying it with LLC? Do you guys do a lot of work with that type of customer?

 

Nate:

The short answer is yes. The lending to somebody who's purchasing through an IRA can be a little convoluted we, we absolutely have solution for it. But yeah, I mean, that that's definitely one of the corners of our customer segments that we service, most of the time you find people with that sort of investing strategy to be, you know, have a W2 job or retire from their W2 job in our investing is, you know, for long term cash flow purposes. So we absolutely service that as well, as you know, people that are using combination of that strategy of IRA, verse raising their own private money for their own equity, among many other different types of categories of our customer profile.

 

Michael:

You mentioned that you guys are private capital lenders, but also been classified as hard money. What would you say is the difference between the two? Because people are categorizing number one, as both? You know, should somebody go Google private money? Or should they go Google hard money? How do people know where to go look for those types of different options?

 

Nate:

Awesome question we could go on. And I can talk about sort of the debate in our industry. Yeah. Regardless, whatever you look up online, you're probably gonna find us and certainly our peers slash competitors in the same realm. But there is a differentiation, when you truly look at, you know, what I would call the definition of the nowadays private lender, versus hard money. And when the use cases are so hard money, if you didn't know actually started BC, before Christ times. So it's been around forever, it's one of the longest forms of lending…

 

Michael:

I thought it was before COVID, the new BC now.

 

Nate:

That's a good one, I might steal it.

 

I'll save you from the litany of other, you know, historical progressions from there, but it is one of the longest, you know, oldest forms of financing is hard money. Hard money is asset based lending, truly looking at an asset and lending off of the the assets value, really without taking much else into account.

 

So when you're looking at prior hard money today, it would be somebody that doesn't maybe have a track record of investing in real estate maybe has some blemishes on credit, and is looking for just a more of a financing solution that is just truly based on the asset for a number of reasons. Private lending is really developed because of Wall Street's appetite for it. And some of the backing by the largest institutions in the world. Now invest in this space, it's become institutionalized. They call it on Wall Street residential transition loans, because what I was told was over in Asia, they didn't like the sound of fix and flip, it just didn't go well. So they named it residential transition loans, sort of on the trading desk level at Wall Street.

 

So the difference is that private lending does look a little bit at the combination of borrower and asset level, although we don't look at tax returns, we predominantly look at an investor's track record and experience in investing, because we believe that shows proof of concept so there is a little bit more paperwork. And you know, in our world, we are appraisals, where as hard money is typically more lent by somebody in that region that doesn't need to go through formal processes of like appraisals, and they're looking at just the asset value, they know the market well, they know the asset well, they give a low percentage of the value of the asset to mitigate against the other risks and not looking deeper in the profile of the borrower. So hopefully that does that help give a sort of delineation between the two?

 

Michael:

It does, it does. And it would be great to learn a little bit more about kind of some case uses or case studies about if you could define and describe your ideal borrower, who are they? What kind of things would they bring to you versus who might be not a good fit for private money? Or for the one specifically?

 

Nate:

Sure, yeah, so the easiest way to answer that question, which is a great one, is if you're looking to continuously grow and scale and investing in real estate and do it on a consistent basis, you're going to get a lot more value and benefit out of the private lending realm, mainly because of two reasons. One, we'll be able to provide typically higher loan amounts more proceeds, which allows you to spread your capital to more deals and assets, and then to our cost of capital is going to be cheaper than what true hard money would offer you. There's a lot of different variables and reasons why somebody uses hard money and it certainly has its use cases.

 

But most often you find it's somebody that maybe isn't necessarily in real estate investing per se, or focused on scaling and growing in it. But yet they have a real estate based asset that they want to pull some quick cash out on. Maybe they have some blemishes on their credit profile, whether it's bankruptcies, previous foreclosures, or what have you, but as people that do have equity and assets that want something quick in order to obtain financing on it, but for the most part, people that consist, you know, that are the most common and using hard money, it's really hard to grow and scale a portfolio with just that type of lending compared to, you know, higher leverage and lower cost of capital in sort of the private lending world.

 

Michael:

Great.

 

Tom:

I'd love to walk through a couple of use cases of just as it relates to product as well as process. So I think a common one with a lot of remote investors is you know, they take advantage of the the 10 loans they can get just within their own name. And then it's like you get beyond that it's like, okay, what's next?

 

So let's say I an investor, I have whatever 10 properties to my name, and I'm acquiring a small portfolio of five, like, what would that conversation of kind of strategizing with that person? Like? Do you roll it all into a portfolio loan, this is getting very much kind of in the weeds in the tactics, I think that this type of a conversation is probably pretty common for a lot of investors who are getting some traction within their portfolio. And and they're growing. And I'd love to hear the different products and process as it relates to a solution like Lima One.

 

Nate:

Yeah, absolutely. And we're excited about the continued partnership with Roofstock, because our financing solutions are an add on to those that, you know, typically are growing their initial cash flowing rental, you know, assets or portfolios with traditional financing, which, as you said, allows them to typically get up to 10, under Fannie Freddie type rules, and then they had to look for alternative options where absolutely those alternative options. So let me continue down that path. And then I do want to talk briefly on the do I package this in a portfolio, do I get single loans on assets, that's another great point that you brought up there.

 

So where we come into play is either you don't qualify any longer for conventional financing, meaning Fannie Mae, Freddie Mac, you know, investment loans, or you surpass the maximum 10 loans. Either way, we come into play because we don't follow any of the underwriting guidelines of Fannie and Freddie. It's sort of our own world and rulebook. And the way that we look at deals is on what we call from a rental perspective, debt service coverage ratio.

 

So we don't get tax returns, we don't look at personal income, we look at the income on the asset compared to the underlying debt. And then we make sure it cash flows properly. And we have very similar like loan to value leverage mechanisms that the residential world would have, you know, we're minimum 20% down on an acquisition in that world and 75% cash out on a refinance. So you know, whether you hit the ceiling of 10 deals a Fannie Freddie, or you got through a couple and now your lenders telling you, hey, you have a dti, you have a debt to income ratio problem, we can't qualify you because debts outweigh your income to the 45 ish dti that they underwrite to, that's when we would come into play.

 

The other thing is, for the most part, across all our products, we can close a lot quicker than residential lending. We don't for better or for worse, we don't have to follow what they call like respa and Tila, which is different disclosure processes that are very impactful and really helped right side the residential lending industry from some of the wrongdoers in the 2000s that were scapegoated for the bust, you know, but that does slow the process down by having those disclosure process put in place, anywhere from three to five total days. And you know, to us investors, we know executing and showing up at closing it, you know, at the close of escrow date is imperative to retain your name and then get further deal flow from the sources that you do.

 

Michael:

Oh, that all sounds that sounds great. Nate curious. For most of our listeners, I think they're very familiar with conventional mortgages, Fannie Freddie mortgages, government subsidized cheap interest rates, especially right now when we're recording this in February of 21. into twos and threes and investment properties, similar 30 year fixed products, what are some different products that you've seen investors use to scale quickly? I mean, do you have 30 year fixed products? Or what kind of interest rates are you seeing in today's market?

 

Nate:

Sure, a couple of ways to attack that question. So we delineate our product suite amongst sort of two sections. One are bridge loans, and the other are more permanent financing loans. So to talk about the permanent financing first, those would be products that have a 30 year amortization, we can do them in a five one arm, which is the lowest rates at seven 110, one arms, adjustable rate mortgages or a 30 year fixed. So we do offer those types of terms.

 

Now because we're not doing as deep of a dive is Fannie and Freddie would from an underwriting perspective, and we're only looking at you know, debt service coverage ratio income on the asset predominantly, there is more perceived risk to us in the way that we lend. As a result, we have to pass along higher interest rates, right. The inevitable question becomes, well, what how much higher and what do they look like? So you know, your Fannie Freddie investment property rates will certainly vary depending on a number of factors, but for the most point, our product in the private lending world rental type investment loans, it's going to be about 200 to 300 basis points higher, what that is, is two to 3% higher than conventional rates, typically. Certainly exceptions to that where it can be less than 2%. But I'm going to be conservative in what I say in the estimates.

 

And then a lot of listeners might be saying, Oh, crap, I'm never gonna call these guys because that's way too expensive of money for me, right. And certainly, that may be the case for your investing strategy. But as I said, Before, we find our niche and our void to where you're looking to grow significantly. And you by nature and laws of residential lending, you can only own 10 investment properties unless you start trying to cheat the system some way. So which there are ways to get around that by having other borrowers buy the properties and things like that, we won't go down that road. But not only that, you just need to make sure that your investment strategy aligns with your financing vehicle. I think that's just an important point. I mean, there are a lot of really great real estate investors that do use hard money, true hard money, that's more expensive than us, but only because, you know, maybe they move even quicker, they can get loans on assets that we might not land on.

 

But the bottom line is, you know, you can make money in real estate any which way, you know, there's different beliefs in Should I financed or do it all in cash, we definitely won't have that conversation, because that's a deep one. But if you're going to use a financing vehicle or a loan of some sort, you have to make sure that the vehicle is aligned with your strategy and your end goals. And yeah, I mean, it will eat your cash and cash returns a little bit or your total returns because the rates higher your interest payments higher. But at the end of the day, if it allows you to buy more assets and add to your overall cash flow, that's the essence of continuing to create true generational wealth, that end of the permanent financing products. And yes, we do offer 30 year amortized 30 year fixed might be a little bit more expensive, but certainly serves its purpose.

 

And then on the bridge side, just to put it very simply, a bridge loan is taking an asset or a financing vehicle that allows an asset to go from A to B, right, we are the bridge between A and B. So those products are you know, the the bread and butter is a fix and flip, we're buying a distressed asset that needs X amount of renovation work or some level of repair, sometimes they're severely distressed. So we financed not only the acquisition, but the renovation hold back so that you don't have to come out of pocket for that in full and wait for it to sell. And then we allow you to navigate through the reposition the value add as they say, to get to destination B, which is either one of two items of sell the property and flip it or hold it and you follow along the lines of the investment strategy of bur I can't roll my Rs so pardon me. Buy renovate rent, refinance, repeat, right. So that's the burn mentality, we can service the bridge loan for the repossession and the renovation and the rental loan, or you can go get a conventional loan, if you have less than 10. And qualify, that's sort of where investors use those different types of products. And sometimes they're combined, and you're using two vehicles to one strategy. But the bottom line is, you know, we're here to serve as either end of that.

 

Michael:

That's such a good explanation. And a point I want to touch on is like about the expensiveness, or the cost of the loan or in terms of the interest rate. So often I hear that same issue is like, Oh, you know, I've met this lender, and they give me three and a half for this lender Give me three and a quarter. But at the end of the day, I think it's so important to look at like the bottom line is okay, how does that half a percent or maybe in this case, two to 3% affect your bottom line in terms of dollars and cents. And on smaller loans, it tends to become more negligible. And so again, to your point, if it gets you in the deal, and you're still cash flowing, versus not doing the deal and not cash flowing, sometimes it is worth you know, paying that extra cost.

 

So, again, to all of our listeners, don't let the numbers scare you. But go see if the deal makes sense. And then move on.

 

Nate:

One other quick tip I do want to give here because it is a great point. So I appreciate you articulating and summarizing my points probably better than I did. But one thing that's important to you know if a lot of listeners are used to the conventional, Fannie, Freddie world, and some may use that product to almost fix and flip assets. Well, the problem with that is if you think that through, you know, conventional loans, Fannie and Freddie have started to come out with renovation type loans for even investors, it's a lot more tedious than ours, they take a lot longer to close, and then to move through the like the draw and rehab process is extremely cumbersome.

 

So that aside, if you're going to look to buy an asset and say put 20% or 25% down and then invest another 25,000 renovation on top of that you're not only down you're 25% down payment and the 25,000 renovation, you know, but you're also paying for holding costs along the way. With a bridge loan, like a fix n flip will finance the combination of the two purchase and renovation amount. So you don't have to be out that 25,000 renovation because you don't get that money back until you either refinance and recoup and recapitalize or you sell the property, but that 25,000 could be used to go buy another $100,000 asset at 25% down. Right?

So that's where a lot of people will overlook that we will provide higher leverage when you're using a method that involves renovation. And by going the conventional route that yes has a lower cost of capital less interest that you pay, it can be well designed if you're only trying to do one offs. But if you're really trying to scale and spread your money among multiple deals, using a lender that gives you the highest proceeds and loan amounts to facilitate the transaction is going to serve you and be best suited.

 

Tom:

Makes a lot of sense. I'd love to hear you touch on, you know, this use case, again of you know, having whatever 810 properties and that question of Okay, do I roll this up into a portfolio loan? Or do I just, you know, do a bunch of, you know, 30 year individual loans? When would it make sense to do either or say you have this growing portfolio?

 

Nate:

Yeah, so great question. And to me, and this is the same for any type of loan product, it's, you know, first you really need to understand where you're going to go and what your overall vision investment strategy is. Because if you're going if you're you think you only have the capacity and the goal and the dream to acquire a smaller amount of assets, it may not make sense to put a portfolio loan sort of into your plans, if you're looking to really significantly scale you do you want to analyze looking at portfolio loan options for a number of reasons, a lot of the portfolio products will allow you to remove them from Fannie Freddie loans, which then opens you back up to using those again, number one, but it also just depends on again, the overall your overall strategy.

 

So if you know you're going to hold assets for a long time, and you know, you're not going to sell them no matter what the markets doing, you know, then portfolio loan may make sense. But the word portfolio on won't make sense, if you really know you need that flexibility of moving one asset in and out of your own portfolio, because in portfolio loans, they have what's called a turbo pay down, which essentially, you pay down your loan amount a little bit more per each asset that you pull out, which therefore you don't get access to as much of the return of capital on selling an asset. So that's where I go back to, you need to know your long term vision. And if it's to acquire a lot of properties and hold them for a long time, a portfolio loan might make sense.

 

And then this is shared necessity of a portfolio loan is, again, you know, conventional, you can only get up to 10 assets, Fannie Freddie, so if you're looking to buy in bulk, you know, you have to get some form of portfolio loan. And you know, even if you don't you do them individually, you're going to be limited at some point cost can be costs are consolidated in a portfolio loan. So a lot of times it can be cheaper than doing them on a single asset basis. And then you'll eventually get to a level of the portfolio realm, that the terms are significantly more favorable than when you do get them on a single asset. So not to confuse people. But what I talked about before was sort of a, like a smaller single asset rental loan, we have large portfolio rental loans, that's for anything of minimum five properties 500,000, up to 5100 properties, 10 $15 million in total assets value, and that product is maybe 100 basis points above residential lending, but you have to gain that critical mass to be able to get eligible for that. So I know I'd sort of shotgun and spread among that question a little bit, but hopefully gave some valuable tips.

 

Tom:

Love it. Yeah.

 

Michael:

Nick, can you give everybody an overview of what a portfolio loan is for those that might not be familiar? And also, if we could maybe touch on the differences? Because I think there's a lot of misnomers around portfolio lenders and portfolio loans. And the portfolio lenders keeping it on their books versus portfolio loan, what that product looks like. So, riff on that for a minute, if you would.

 

Nate:

Yeah, absolutely. So, a portfolio loan is simply put, you know, writing a blanket loan across multiple assets. So what happens is, you know, whatever the amount of assets you want to say is, let's say 10. You write one loan, that encumbrance all 10 units. And within that loan, there's different segments of the of the larger loan that is assigned to each property. By doing that, and taking out portfolio loans you can alleviate, you know, the need to go conventional and the limitations of having 10 properties at a given time. As well as there's some cost savings by doing things in bulk. Just like when you go shopping at Costco and BJs. When you buy in bulk, a lot of times you can get discounts. And that's probably a good way to look at a portfolio type loans.

 

 So we have a phenomenal product when you own one you either own or you're buying five properties and 500,000 that are $500,000 or more, we'll put it all in one big portfolio rates on those are very aggressive. They're only about maybe called 1% 100 basis points above conventional rates. And the reason why it's lower is it's less risk, we have more assets to sort of pool into the loan, again allows us to pass along cost savings to investors.

 

Michael:

Real East Coast guy with the BJs drop in there.

 

Tom:

I know I noticed that. Is most of the portfolio loans that you guys originate, like off of the acquisition or through a refinance, or is it pretty split?

 

Nate:

Yeah, great question. I would say it's probably 7525 refinances. So I think that's a great point is that the other purpose portfolio loans a lot of times is that you're buying one offs, whether you're buying them with a conventional type loan, or you're buying them with a bridge loan and fixing and repairing them. And so you're aggregating them, and then you go take it out with permanent financing and a portfolio loan. So again, that is either allowing you to pay off more expensive bridge loans, or wiping the slate clean of Fannie, Freddie and then starting back at zero, because you just paid them all off the ones that you accumulated. And then you can go and run wild and getting Fannie and Freddie rooms and dealing with all the red tape over and over until you get back to your 10.

 

Michael:

So I got a portfolio loan a couple of years ago, and I think they're the best thing since sliced bread. I got them with a commercial lender out in the Midwest, and I've got them on to commercial properties. How does a refinance work? Let's say two of the 10 have appreciated. How does a refinance work? Are you looking aggregate at the entire portfolio value? because these things are cross collateralized or talk to us a little bit about that?

 

Nate:

Yeah, great question. I'll touch on two points in reference to that. So we do look at the values of everything combined. So because they are cross collateralized, you're essentially looking at the, you know, gross total value of all the properties in a portfolio loan. And then there's a guideline called seasoning, that will depend on exactly how much you can take sort of cash out on. So seasoning references, how long somebody own an asset, typically, in the portfolio realm, it's either six months or 12 months. And once you've surpassed that timeframe, and you've seasoned the properties, then you can get a loan that's just based on the loan to value of the accumulation of the assets.

 

So if it's two or three assets that accumulate to a million dollars, and you've owned the property for two years, you've certainly passed those seasoning guidelines that I talked about, you know, for us, we provide 75% cash out. So on that pool of million dollar properties, we'd be able to give a $750,000 loan amount.

 

Michael:

Great. Now I want to touch on kind of shifting gears just a little bit is value. It's a super hotly debated topic, I think in the real estate community. Most of our listeners, I think, are very familiar with single family homes, and going to get an appraisal done determines the value based on a comparable sales approach. Versus in the commercial world. They use the income approach for the appraisal to determine value. If I have 10 single family homes as part of a portfolio and I'm trying to get financing for it. How do you How does Lima One determine the value? And I mentioned DS debt service coverage ratio is very looking at income. Are you looking at comp sales?

 

Nate:

Yes, the very easy answer as both.

 

Michael:

Okay.

 

Nate:

So when we value and get appraisals, as you said very well on single family assets, we do use and look at a sales comparison approach. So to determine what we can lend in the LTV, the loan to values, which I said 75% cash out will be dependent on the sales comparison approach determined by an appraiser and then we'll lend that X percent up to it again, cash out world we can go up to 75%. Now, where it comes into sort of both, is that we have to make sure that that loan amount based on our maximum loan to value also passes the debt service coverage test, essentially. So again, the debt service coverage ratio is looking at your assets income compared to the liabilities in the asset, which is not only the mortgage, but it's also the property taxes, the homeowners insurance, any HOA dues as well if it's a condo or pod or anything like that.

And so as long as it will surpass the minimum ratios, that is the income based approach. So the values themselves are not based on income base. But there are underwriting guidelines and stipulations that require a certain income level. And the easiest way to put what is that income level, it's typically anywhere from 1.1 to 1.2, debt service coverage ratio.

 

So again, your income must surpass your mortgage payment debt, your taxes, your insurance, and your HOA dues, if applicable by 110%, or 120%. Why is that important? Well, the easiest answer I'll give you is we too, as a lender, we don't want to take your properties back. So we want to make sure that you can afford to pay your mortgage payment and your expenses. Therefore, we want to ensure that we underwrite a loan amount that doesn't make your debts and your expenses higher than your income and puts you in that tough situation. Unfortunately, a lot of landlords now with COVID with you know, people not paying rent are in that situation regardless, but that's why we put that rule into place is to make sure your property cash flows with our debt.

 

Michael:

Yeah, great explanation that makes total sense. And Darren, that's a bummer. It'd be so great, right? If we can get all this killer performing asset Well, that's worth a whole crap ton more awesome. So we can we can borrow against it. But that's really good to know. And I think that's really the responsible way to do it. Right, is make sure that people aren't biting off more than they can chew.

 

Tom:

Absolutely. I look into my notes. I have one more question on costs of going through private capital. How do origination fees differ from traditional loan using private capital? Are they love to hear your thoughts?

 

Nate:

Yeah, great question as well, to be very blunt and transparent. Typically going through the private lending realm is going to be more expensive from a fee perspective. You know, there's a number of ways to price out conventional Fannie Freddie loans that you could incur more fees, but most of them is, as they say, in the residential mortgage world are written at par, which is essentially you know, you're paying usually just an underwriting fee and no people think is very evil points, right? In the private lending world points. origination points is something of norm.

 

So typically, it's anywhere depending on sort of the the level of investor that you are anywhere between like one and two, one and two and a half percent of points, origination fees on the loan. So that is more expensive for from that regard. But the lender, excuse the credit excuses, it's more risky. So there's a cost effect as a result of that.

 

Michael:

Nate, for those people who aren't familiar, what's the point?

 

Nate:

A point is 1% of the loan amount, so on $100,000 loan 1.1% would be $1,000 in fee.

 

Michael:

Perfect, love it. Well, don't love it. But that's a great explanation.

 

Nate are a lot of the private lending world or maybe just you know, speak for the Lima one, are these non recourse loans? Or all these are these full recourse?

 

Nate:

Yeah, really good question. More often than not, they are full recourse. But there are also alternative options to get non recourse on most products. So that's speaking generally here at Lima One, we do have non recourse across most of our options across most of our product sets. But you know, in the world of private lending, especially the bridge side of it, you sort of should expect recourse, you know, which is the same as Fannie, Freddie, you know, that those are recourse based loans as well. But a great question, we can certainly service a non recourse loans and provide them, it just depends on a couple variables. And sometimes there is a little bit of an interest rate price to pay, not much, but a little bit just for that compensating factor.

 

Michael:

Sure.

 

Tom:

This is a quick kind of definition, do you mind defining recourse non recourse,

 

Nate:

It means that you are guaranteeing repayment and that you are liable for repayment of the full loan amount, no matter what happens, you know, if you can't pay off the existing loan, so whether that's, you know, you can't make payments, and you can pay it off in full, then you owe the full balance. Or if for some reason, like in a flip scenario, the flipped info is what you thought and you sold the property for an amount that's less than what you owe, then the lender has recourse or the ability to go after you for that remaining difference of what you sold the property for versus the larger amount that you owed on the asset.

 

Non recourse essentially means that, you know, there's not formal ability for a lender to take the mortgage back as a liability against you personally, most of the time non recourse or all that I know at least is written to an entity. So the entity still has to like there's still the ability to go after the entity for it, but you as an individual warm body person, or not on the hook for it. Unless you can commit what's called a bad boy act sort of what it sounds essentially you commit fraud.

 

Tom:

Reminds me of those like shirts from like the 90s. And early on that bad boy shirt. Nevermind.

 

Michael:

Like that movie with Will Smith, bad boys.

 

Tom:

Sure, yeah.

 

Michael:

Good, both good enough.

 

This is gonna seem like kind of a to Prague, maybe silly question. But first and foremost, if somebody if you're gonna be working with somebody, you're like, Oh, I want non recourse a, is that a red flag? And B, if that's an option, why wouldn't any everybody go the non recourse route?

 

Nate:

Yeah, another great question. Why wouldn't everybody go the non recourse route? Well, sometimes it's just not available. You're absolutely right to most people, I would rather have non recourse and recourse. Yeah. My counter to that. And rebuttal is always do not have confidence in your project, you know, do you not have confidence in your ability to execute on your deal in your strategy, to not have confidence and paying back this loan? Are you going to screw me? Right? I mean, that's sort of so so that leads me to the you're the other part of the question, you know, yes, from to some extent, maybe that's looked at somewhat negatively, but at the same time, non recourse is most prevalent on larger loans, larger assets, with larger scale operators and real estate investors that do this for a living.

 

Many of them have companies of employees that work under them within their real estate, investing arms. And in that world, it is just a lot more common for non recourse products, the multi million dollar type loan scenarios. And that's just because you're dealing with typically very high net worth individuals that, you know, certainly have potential meat in the bone that a lender could go after. And yes, they're confident in their business strategy. But they've also worked their entire life to build up the 5, 10 million dollar net worth and they don't want to sacrifice the Armageddon potential instance, or the COVID type of pandemic world events that we've occurred is unforeseeable, that could come back and bite them in the butt.

 

So it's a great question. Yes, sometimes there's a negative connotation from the lenders perspective on some sorts of deal levels. But as you go sort of upstream, as I'll say, that's when it becomes a lot more than norm and is not really not looked at negatively from a lender's perspective.

 

Michael:

Okay. Good to know.

 

Nate:

And it doesn't hurt to ask, right? I mean, just like anything, asked, you might as well ask because the worst thing you get is No, we can't help you.

 

Michael:

Sure we are getting pretty long here. I feel like we could go on for days chatting with and asking questions. But I know we were chatting before we started recording here that you are also drinking the Kool Aid when it comes to real estate investing.

 

Nate:

I try man, I got my sippy cup.

 

Michael:

So you mentioned that you're in the middle of a couple of flips. Can you give us just kind of a high level overview of what you're doing? And then do you use Lima One capital to fund some of those rehab projects? Yeah, so the first is a resounding yes, absolutely. Use leave on capital. That's just the truth.

 

So I have two projects going now. I honestly never really have the ability or time to do more than two, you know, a lot of people watch HGTV and house flipping is really cool and sexy and probably easy to do. It's, you know, is it cool? Yeah, you know, beauties in the eye of the beholder. You know, sexy, I don't know about that. But it's not necessarily easy. So I want to make that clear. It's not to scare people away from it. But it takes a lot of work. There's a lot of variables, there's a lot of things that can go wrong. I will also sort of give my one piece of real estate investing advice. This is probably very cliche, but you make your money on the buy in a real estate investment.

 

What I mean by that is that if you buy a property at a discount to what it's worth today, it's hard to not make money on it. And so why I say that is the only deals that I'll personally do are ones that I know I'm buying, right that technically, there's some room for error, because on the two deals that I got going, there were some errors and you know, I can't point fingers and blame COVID you know, you know, very real, but at the end of the day, you know, they didn't go as planned. Most people lie on the real estate investor side, when they try and say like, Oh, I can predict my budget on a flip in a renovation very accurately. That's not true.

 

Michael:

Bunch of garbage.

 

Nate:

The average variance even for your top tier flipper is probably 15 to 20% in cost on your renovation expected budget, I'm already self deprecating that I'm not the best at it, per se, I'd work in the lending space into this supplementally. But I mean, I ran into that through COVID, you know, and I've gone through, I needed to connect sewer to public sewer on one property, the initial route that I predicted to go wasn't available, it couldn't happen, didn't work, had to go a new route, had to fire a contractor through COVID because he ran out of money, really unfortunate, but my project was dragging and he was ahead of me on sort of terms and payments, I then had to step in as my own GC, find my own subs. I mean, it was snowballed, and it was very cumbersome.

 

But the bottom line is, you know, you stay disciplined. And I'll make money on both those deals just because I bought them right. And so I know I cover a lot there and can go into deeper detail on sort of this any stories you'd like within it. But the bottom line is, you know, I will opportunistically invest in real estate because I've tons of passion for it. I like to think I know what I'm doing. You know, at least when I tell myself that. And you know, the bottom line is as long as I'm buying right, it's it's going to be hard to lose money on the deal. I'm not going to make as much money as I would have thought. But at the end of the day, because I followed sound principles, I will make money on both these assets.

 

Tom:

Great, make the money on the buy. I love that it's so good is like pretty much stapled up on the wall. And one of the one of the companies that I worked at one of the very first single family rentals was make money on the buy make money on the buy. I'd love to hear one of your stories you'd mentioned before. You had one I don't know if it was what it was related to get time.

 

Nate:

Which story do I want to tell so honestly, you know, one cool story of one of the properties I had that literally was bought, I mean, I'm under contract to sell it, but it was bought March 12 of 2020, which was not too long before the formal full nationwide announcement of COVID. But it was actually crazy enough. I'm at home working right now. It's my neighbor's house. It's right here. So what happened was over about two month period of time, I saw nobody was living there anymore. Every week when there's trash day, they'd be pulling out two or three trash cans worth of junk among some bigger items. And one day I just approached him said, Why are you doing this? Because I have a feeling I know why. And sure enough, it was you know, the patriarch and matriarch of the family that bought it in the 1950s passed away, pass it on to kids who couldn't take care of it anymore. They had one of their kids in the property she moved out and now they're you know, they needed a quick option to sell it. I said, Look, I can buy this property, essentially cash without you having to move any more junk out. And what a great project for me because it's literally right there next door to me. And you can find deals anywhere that way.

 

So to me, that was a pretty cool story. You know, I would never have imagined fixing and flipping my neighbor's house. And now since I'm under contract, I'm doing my best to not let the buyer know that I did the work because I don't want to door knocks on my door a week or two later saying Hey, isn't this done right or I want you to fix it. So we're trying to secretly trying to sell it right now.

 

Michael:

How cool is that? Yeah. So are all the projects you're working on? Are they all flips? Or do you do any burrs any kind of long term buy and hold or are buying hold?

 

Nate:

Yep. So good question. I'll liken it back to what is your investment goal and strategy. The last couple years, my world has been focused to drive income larger amounts of income, which means that right now I'm only doing fix and flips. So to me since it is a lot of my late night work or early morning work before I plug in for, you know, full days of Lima one, I want that larger gratification tied to that extra work. And that's why I'm currently fixing and flipping but I know there will be distress coming in the market. You know, I think 2021 is going to be a good year. But soon at the end, or thereafter, we'll be transitioning to buying and holding, because I think there'll be a lot of product that comes online that it'd be a lot easier to find. It's hard to find deals right now. I mean, it's it's one of the hardest challenges that real estate investors have.

 

 

Michael:

Cool. Thanks for sharing.

 

Tom:

Awesome, Nate. Well, thank you so much for coming on. I feel like we have more episodes in the future with you. I mean, we're, very quickly, you know, over 45 minutes onto it. But thank you so much for jumping on any final plugs on how to get ahold of you or Lima One?

 

Nate:

Sure yes. So check us out online Limaone.com. To get in touch with me directly or to make sure that you get in touch with a senior sales representative to find out your financing options…

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