REIA 231 Eric Nelson: How to Get Creative with Financing to Expand Our Investment Opportunities

Welcome to Real Estate Investing Abundance, the show for busy, fulfilled professionals like you to learn how to develop financial independence built on solid passive real estate investments. Now, here is your host, Dr. Allen Lomax.

Hello, enlightened investors. Thanks for being with us again today. A pleasure being with you. And we're going to take a look here at how to get creative with financing to expand our investment opportunities. Erik Nelson is the founding principal of Wild Oak Capital. He has been investing in real estate for over 10 years and is a real estate coach and the host of Real Estate Mindset Podcast. Erik, take us into the show and share a moment from your life that helped you to be who you are today.

Sounds good. I was actually struggling to think of one moment, right? But both my grandparents were kind of, I want to say old school, but one My dad's dad was a farmer. My mom's dad was a rancher. And so I have so many stories of them really kind of instilling what I'll call like really solid values from their past. And so one thing my dad's dad taught me was how to carve. Like he would sit and teach us how to truly carve little cowboys and stuff. He was super into it. And so, you know, he'd always talk about patience and honesty and kindness and a lot of those kinds of values while we would do that stuff. And so, you know, I have these memories of just carving and patience was really one that he stressed because he was like, you can't rush a carving. You know, it takes what it takes type thing. And then you, he's like, you can't really lie about it either because, you know, the product is what it is. And so I, it's kind of shaped a lot of who I am now, where I've had to gain some patience, especially in real estate. It's hard to find deals and so you have to be patient to find 'em. And then we pride ourselves on transparency. And I think that's incredibly important if you have any investor capital in any of your deals is just to be beyond honest, even if it's hard to say it, and then incredibly transparent. So I would say, you know, my grandparents, I'm really grateful for my parents, really grateful for my grandparents for instilling a lot of those kind of values that really only come from being shown how to live and not necessarily being told how to live.

Yeah.

Well, Eric, take us into multifamily financing options.

Yeah. I mean, I think that's kind of a big jump, like from grandparents to financing, but there's a lot to talk about when it comes to multifamily financing. Right now we're in kind of a tumultuous time. I'll say the last 6 months have been kind of a huge shift in multifamily financing world. And that's true probably for single-family as well, but maybe even more so in multifamily. We were kind of used to the government-backed lending programs, you know, Freddie and Fannie debt. And once the Fed raised rates, those rates went kind of crazy and the bridge lending went a little crazy. And so we made a really major shift to local banks within the last, we'll call it 5 months. And so we're seeing rates slowly climbing, but not as quickly as they did in the federal situation. And so the last few deals that we've done have been with local banks and it's been pretty nice because the rates are still fairly low. They aren't climbing as fast as the Fed's raising things. I think they're kind of watching out for the lenders as well, in my opinion. And then it's kind of cool because we get to build a relationship. If you're with a local bank, there's something nice about going to lunch with your lender and asking questions to one person. And so I've kind of enjoyed that shift a little bit. But essentially what I'll say is there's lots to talk about in regards to financing, but it's been a major, major shift in the last 4 or 5 months. And one other thing I'll say is we talk a lot about bridge debt that was used, potentially overused in the last 2 3 years. And bridge debt is usually short-term, high-leverage debt, you know, with the plan to refinance. And the thing is, if you got 3.5%, 3.25% interest, I mean, maybe a year ago, and you are relying on a refinance at maybe even a higher rate, let's say 4%, you know, now rates are at 6%. So people are finding themselves in trouble. And so I was always really worried about bridge debt. So luckily we never took that avenue, but I certainly hope no one gets burned by that. I hope that people can find a way out of that situation, but that's another thing that's shifted. hugely in the lending world, at least in multifamily.

Yeah, for sure. You said there's many opportunities in terms of options for financing multifamily properties. What are some of the other things besides the government, the Freddie and Fannie Mac, and then the local banks?

Yeah, I mean, I think a lot of, I think a lot of people sort of overlook the owner financing potential in a multifamily world, especially in a larger deal, right? If things start to get over $2, $3, $4 million, I think buyers are afraid to even ask the question. Would the seller finance such a large amount of debt? And it turns out that there's actually still quite a few mom-and-pop owners in multifamily. And that's even more true in self-storage. You know, even though we don't do self-storage, that's something for your listeners. If they're looking at that world and they want to get invested in that space, I would encourage them to look at a potential owner finance situation because maybe someone's owned the property for a long time, or maybe they inherited it, or maybe they have some debt which you could potentially pay off and then they would carry the rest. Right. So I would say there's lots of creative ways to finance a deal and to not pigeonhole yourself. I mean, I think that's probably the biggest piece of advice is, you know, coming back to patience is take the time to look around, take the time to call multiple banks. I'm not saying Freddie Fannie can't happen because lots of deals are still using that. The one thing is typically they're going to want a little bit more down right now because it's sort of a, I don't know, a sort of a wavy market at the moment. And so a lot of these Freddie Fannie lenders want you to put more down. So it used to be, but used to be, it wasn't very long ago. a year ago, 80% loan-to-value was not that crazy. Now it's more like 65%, 70% maybe. And so what you're having to do is come up with more cash. And so, you know, there's lots of different ways to get the deal done. I would certainly encourage the first question to be owner financing. And then, you know, personally I would look at local banks second. And then if you can't, then this, the federal debt's still great because it's, you know, it's pretty predictable. But in my opinion, the market we're in right now, it's not your best option.

Well, minuses and pluses with anything you're going to go with. I mean, even owner financing it, it always sounds like, oh, that's such a wonderful thing. But that also depends upon the terms and the interest rates you get from the owner. And, and I have seen people that go into an owner financing thing and they're really overpaying for the property because they get it owner financed. And even in those situations, it can be something that can backfire on a person. So whatever the financing terms are, you need to really look at the whole deal in conjunction with what's going on there. Eric, you have been involved in not just multifamily, but also single-family. And you have shifted your focus, I think, from single-family to multifamily. Tell us about that transition and how it went and why exactly you've gone to a focus on multifamily.

Okay. I think lots of people who are doing multifamily have that sort of transition, right? I think it's probably the easiest to bite off buying a single-family as a rental. You know, you think, okay, I can buy the house down the street or in my neighborhood. You know the market, you're nearby, Maybe even self-manage. I think that's really common. It's not necessarily a bad way to get into real estate at all. Another common thing that I highly recommend would be what's called, I mean, Brandon Turner coined this term, but house hacking basically. Let's say you buy a duplex, live in one side and rent out the other. That's a really good way to get into real estate as well. And I think that's how I did. So bought some single families early on. Basically my wife and I had scraped together some cash and we just decided to buy a rental. And truthfully, I wasn't very educated. That's one piece of advice I'd give as well is if you're looking at real estate, read the books, go on BiggerPockets, listen to the podcast, listen to podcasts like this, get educated about what you're doing and you'll be in a better position than I certainly was. And so I never lost money, but I could have made more faster if I would've been educated. I didn't look at it like a business. I was looking at it like, okay, I can buy a house, the mortgage will, or the rent will cover my mortgage 30 years from now. I'll have it paid. That's kind of like thinking, but there's a whole lot more to it and there are some risks that you can avoid the more educated you get. And so over time, essentially what happened was we ran outta capital. And I think again, that happens to lots of people as well. Maybe they buy 2 rentals and say, well, this 20% down thing is not so easy to save up for. So truthfully, what I was looking for was other ways to partner with people and I sort of stumbled across syndication. And I don't know how much you talk about syndication on your show, but I think it's a pretty unique tool. If you're looking to invest some capital, you can invest passively in a deal. And so we'll run the entire project. You get to buy a portion of an apartment building and you don't have to do anything and you don't, you're not liable for the debt. You know, there's not a ton of liability as a property owner in that situation either. There's just a lot of pros really to it. So let's say you're a high-income earner, maybe you have some capital set aside, you know, maybe even in your retirement account, you can invest in these deals. That's a pretty cool thing. So when I found out what it was and learned more about the vehicle, that's when I really got excited about it. So that transition, to your question, was really a long period of time, but I took my own advice. The first thing I did was I spent a ton of time getting educated. So I read a bunch of books, listened to a bunch of podcasts, and learned about as much as I possibly could about multifamily syndication before I really jumped in. And then, you know, with the podcast, it's kind of nice because now I get the word out, right? So that's what I'm doing now is like telling people about what we're doing. It's a pretty cool thing. So even though the transition was sort of long and slow, I'm really glad I did that because now that I feel like I'm an expert in this field, it's easier for me to find the deals. It's also easier for me to find investors because they know, okay, you took a lot of time, energy, money to be where you are, and we have a track record. You know, showing what we've done. And so the transition was long, but I think it was worthwhile.

Well, I totally agree with you. And that's certainly the way that I got started was with house hacking as well. And also not particularly well-informed when I was going into it either, but it's an easy way to do it. It's the lowest risk way to get into real estate rentals that I know of. Certainly you could lose money in conjunction with it, but it would be hard to do so. It really would. It's almost failproof. And what it does, I mean, it introduces you to that rental market. You're going to be dealing with your tenants. They may be living next door, but a tenant's a tenant and it gives you that experience as well as the fact taking you through that whole closing and purchase process. So it's a good way to get going. Not the only way, but it is a good way to do that. Eric, before we go any further, share with our audience what you have to offer and how it is they can find you and get in touch with you.

Sure. Yeah. Again, I think what we really have to offer for most listeners is a passive investment. By that, I mean exactly what I described before is let's say you have $25,000. That's our typical minimum. You can invest and be a portion of an owner in an apartment building. And so we look in Texas, Oklahoma, mostly Tulsa and Arkansas. And so we typically have a handful of deals per year where you can jump in invest with us. And what we do is we kind of run the whole thing. You'll get a little bit of capital every year in a quarterly distribution, and at the end you kind of get your money back plus the proceeds. And truthfully, along the way, we kind of do everything. So every year you'll get a K-1, you know, just as if you invested in a business. And then at the end, of course, you'll get all your proceeds. And so that's really what we offer is a passive investment that's pretty sweet and it has a lot of the tax benefits that real estate has to offer. And again, it's pretty passive. And so if you go to wildeoakcapital.com, you can check out what we're doing. If you click on the Invest Now button, we won't spam you with a bunch of emails, but you can actually see our past deals. You know, there's some videos on there describing what we're up to. If there's a current deal, then of course I need to talk to you about it, understand your goals, make sure we're a fit, but you can kind of see what we're up to. So if you also go to wildeoakcapital.com, you'll see my podcast, which is The Real Estate Mindset. And that's something I just love. I love the mindset behind it. You know, thinking about the why we're doing this business, why we're investing, all those things is a huge passion of mine. So really everything can be found there. And if you want to reach me personally, it's eric@wildeoakcapital.com.

Eric, speaking of mindset, what do you mean when you're talking about real estate mindset?

Yeah. So I think if you go to a conference, you know, if you're looking to learn about real estate, if you are listening to a podcast or reading a book, you know, I think the initial feeling is, How can I make money? So you're kind of looking for the nuts and bolts. You're kind of at a conference, you're sort of hoping for the speaker that tells you, here's how you do syndication, or here's how you buy your first rental property, or you're kind of looking for those things. But in my opinion, like I described, if you take a step backwards and actually think about your mindset around investing and around your goals and the why behind you want to make that money or whatever it is you're trying to achieve, that really to me is the most powerful thing. And so lots of people Read books. Lots of people have a desire, but not that many people take action. Or maybe they take a small bit of action and fail and quit, right? That's pretty common too. So they say, okay, I want to buy a rental house. They can't find one, or it's frustrating. And they make some offers and don't get accepted. And then they sort of move along and say, okay, whatever, I'll just go back to my W-2. And that's totally fine, right? But if you really have this passion to find a way to either replace your income or maybe have supplemental income or move some retirement account money or some of your cash into real estate, really look at the why behind it. So for me, I know my why is time freedom. I want to spend as much possible time as I can with my wife and children. I like to travel. And so in investing in real estate and creating a team where we all work together, but we have time flexibility, that's really the why behind it. So if I ever get bogged down or if I get frustrated again, I can say, you know what? This is worthwhile. It's a worthy journey because I can have passive income myself just because I invest in our deals as well. So I can have mailbox money where I can spend some time traveling, for example, And know that I'm still building my wealth, still making some income. And for the long run, I'll eventually have more and more time. And that's really what I'm after. And not to say that everyone has that same goal, but that's what drives me. And so the mindset behind it is, why are you doing this? You know, why are you listening to this podcast? Why are you interested in real estate? What's the eventual goal? And that will continue your drive way over, you know, just the money, right? To buy a new car or something. That type of thing fades.

Eric, you've been on this journey into real estate investing for some 10 years or so. And so you've been through the whole cycle in a lot of different ways. You started out by house hacking and you didn't really have a clear idea as to where you were going to go with this. Where along the line of that trajectory would you say that you really started developing what you refer to as a real estate mindset?

Yeah, I mean, that's an awesome question. I think that's again, one of the reasons why I'm so passionate about it. It's almost like telling someone to learn from your mistake. Right? Like, if I would have started with the end in mind, like I'm describing, I think I would have been a much faster trajectory, just a better, clear vision of what I was trying to do. And so along— I mean, I'll tell the story. My first investment was with my brother in college. It was actually in 2008, 2007, I think we actually closed on the property. And so speaking of cycles, as you can imagine, the value of the property dropped. Now we added a bunch of value, we finished out the basement, we added bedrooms, done tons of landscaping, painted everything, all that stuff. So we were able to walk away with a small profit. But ultimately, you know, the market didn't do us any me favors. And knowing what I know now, I mean, you can almost watch the current market we're in, the similar timing, right? If I would've— but what happened after that was I was a little scared off, right? In reality, if I had a bigger picture, you could have dove back in after that sale and bought at the low and made quite a bit of money, but I was fearful. And so that's one thing that I learned from is you don't necessarily be fearful, just be wise. Watch the longer market cycle. In the next 2 years, we're probably going to see a situation where Lots of people are afraid of real estate because it's perhaps leveled off or even gone down. That's actually quite the opportunity. Instead of being fearful, that's, you know, that's a good time to consider jumping in. So having this mindset around a larger vision, a longer timeline, I always say real estate is a get-rich-slow game. You're not going to get rich overnight, and it takes a ton of patience and a ton of practice to eventually build wealth. So if you're looking for a get-rich scheme, in my opinion, this isn't it, right? I think maybe you could flip some houses or something and make some quick cash, but ultimately you're not going to build a ton of wealth doing that. If you have the patience and long-term vision, that's really the way to go in real estate, in my opinion. So to answer your question, where did that happen for me? It was just over a period of time, right? Like, so after that first house, my wife and I bought another single, then we house hacked. We actually still live in that today. We still live in a triplex and it's because we have great neighbors. Our house is super nice. I mean, it's definitely a huge blessing. It's not like we're slumming, you know, we have a really beautiful home and there's— I'm incredibly grateful for, but it is a triplex. We have 2 rentals and, you know, that's kind of a unique tool. It's a pretty nice way to live because Our renters are paying for our mortgage. That's not a situation everyone can do it, but basically that sort of opened my mind to, hey, look, we don't have to have this enormous property. We don't have to have this enormous house. We have some things that we like, but we have the larger vision of, okay, we can actually take some extra income now, place it into other real estate investments, and over a longer period of time, we know we're going to build some wealth. And so you really took a kind of trial and error, took some time, took a lot of listening to podcasts, books, things like that to really gain that mindset. And I hope that's what I'm teaching in this podcast and other podcasts is really start with a vision. Where do you want to be 10 years from now, 5 years from now? And what does that take to do that? And then the actions behind it will follow.

Well, Eric, I wish I had taken your advice many years ago. It took me much longer to get here than it did you. But I also, the first place I house hacked was a really large house and I did all of the renovation and turned it from a single family into a triplex. And I loved that house and I lived there a long time. So you don't have to slum it when you're house hacking. And it actually became quite addictive. Because my mortgage was paid for by the other 2 units and the tax advantages that came with it. It was just mind-blowing. But, and so it just, it really became kind of addictive. I didn't really want to leave that situation, but life happens. And so I eventually did. But, but it can be a beautiful deal. At any rate, I know this is really speculative, but all, everybody's asking these things. You say that the next 2 years is going to be a rough ride in real estate. From your perspective, how rough a ride do you think it's going to be? is going to be. And I guess the question I have, the aspect that is really driving prices up and cap rates down in the multifamily market are institutional investors who have come in plethora to really drive the prices up and the cap rates down. Do you think those institutional investors are going to be leaving the market in the next 2 years?

There's a lot there, and you're right. I mean, it is a lot of speculation, right? And I think a lot of the answer to your question will be slightly market dependent. So in my opinion, I think we're already seeing higher-end markets getting Kind of pummeled. I mean, if a really luxury market, in my opinion, is going to get hit really hard specific to multifamily, I think I don't see institutional money necessarily leaving, but because of the interest rates they were having to pay, I think cap rates will have to raise to your point. So over the next 2 years, I don't think multifamily's going to have a crazy bumpy ride. I think cap rates are going to decompress, you know, meaning, so we saw cap rates in the 3s, let's say in the Dallas market, for example, Hopefully come back to more like 5, 6, which is more really where the market should be. And a lot of it, I think, will have to do more with interest than really where the cash is coming from. So like institutional buyers, what we saw at least was any deal over $10 million was incredibly difficult because there was a ton of institutional money to your point, and they didn't care about the returns in the same way that we did. So they'd say, okay, fine, we'll pay a 3 cap because we'll get 3% on our return on our money, which is fine. It's better than a bank.

Mm-hmm.

And it's sort of a similar, it's sort of a small hedge against inflation because it's leveraged money. But, you know, for us, I think for our sort of market, a little bit smaller deals, and by smaller I mean let's say $3 to $9 million, I think there will be some similar decompression, but I think the interest rates are going to cause that really more than anything else because I don't see rents really falling off. So from my perspective, in a recession, lots of people will sort of move from an A-class down to a B-class as an example, or maybe they can't pay their mortgage anymore, so either have to sell or foreclose. They now become renters. And so it's kind of this like semi-shift down of rentals. And so our kind of bread and butter is what we call a B-class market. That's really where we want to be because I think A-class rentals might get hit. I think the luxury market will get hit hard, maybe not hard, but will soften, let's say. And so some tenants will move from an A to a B-class. So in my opinion, the B-class market will do really well as compared to other markets. And so that's really where I want to put my money is that B-class market in the best possible neighborhood you can find. A true perfect buy would be a B-class property in an A-class neighborhood. And so I think I sort of said a lot of stuff without really answering your question, I don't think it's going to be hit terribly hard. I think cap rates will just have to soften and decompress, meaning prices will have to fall just a little. And so what we do as buyers, we project that. So we say, okay, if we're buying now, which we are, we are closing on properties as we speak, 5 years from now we expect the market to be worse. Which when investors say, well, wow, then why would I want to invest with you? The deal still works even if it's worse than it is now. And I think that's really what you have to do with integrity as a buyer, as an operator, if you're offering a passive investment, you know, they say, well, what's the market going to do? What are we going to sell? We'll say, well, the market's going to be worse 5 years from now. We're projecting 1, at least 1% higher cap rate from now to 5 years from now, which is a huge jump. And if it's not so bad, great, then we'll make even more money. But that's sort of what we project and predict over the next 5 years.

Seems that that's what a lot of people are saying. And the other question I have here is we were talking about financing during recessions. Historically, lending has become much tighter because lending institutions are generally very conservative institutions, and it doesn't really make sense to me from a real estate investor why that would be the case, but it generally is the case. So what do you see happening with the lending institutions and lending markets?

Yeah, I mean, we're already seeing it. So I think we're seeing, again, they want to see a little bit more down, right? So that's the immediate trigger they'll pull is say, okay, oh my gosh, we're seeing a little bit of fluctuation in markets. We're seeing a potential recession on the horizon. Let's ask for more down. That's kind of the immediate trigger you'll see. And what they're doing is they're predicting exactly what we just said, is that your property is going to potentially be worth less in the future than it is now. And that's sort of their hedge against it. So I do think, yes, lending will tighten. So kind of back to the original question that we started the show with was, I think the people that will get ahead will be people who are creative without financing, willing to ask the question and sell why owner financing is good for both parties. And so you mentioned it comes with pros and cons. I agree. And with every loan, there's a pro and a con, but a very good, well-thought-out owner financing product, that in my opinion could be the best possible purchase potential for the next 5 years. And, you know, again, if you can kind of sell that to the seller as to why it works for them, I think that's a pretty cool way to get creative. And so, you know, that's the tip I would say is really try and understand really fully what it means to have an owner finance situation. kind of go after those potential opportunities. The other thing is, you know, people might get scared and have to sell or need to sell or want to sell. And if they have that opportunity, maybe that's one way to get in. So to answer your question, I do think lending environment will tighten. You're right. They're super conservative. I think we've already seen it. Rates are going up. They want more down. You know, they're going to scrutinize your underwriting a little bit more. They're going to ask those questions that we just talked about. What does your exit cap rate look like versus your entrance? Those type of things. So I agree with you. It'll be harder to find lending as a potential recession comes.

Well, and as lending becomes more of a problem, it becomes a difficulty in selling properties. So actually owner financing opportunities will probably increase along with the tightening lending markets there. Enlightened Investors, what a delightful conversation we've had with Eric today. Very enlightening. Thanks for being with us. I look forward to being with you in our next episode. And Eric, thank you for being our guest today.

Yeah, thanks, Alan. It's my pleasure.

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