Federal Banking Insider Tells All With Don Pelgrim

What's up everybody? Welcome back to the New and Experienced Investor Podcast. Uh, today we have an amazing guest here with us. I'm gonna bring him on in just a second. Um, I'm Alex Barnett. I'm one of your hosts. I'm the new guy, and that's gonna make Don the experienced one.

Thank you very much.

Absolutely. Uh, yeah, Joe is on a cruise per usual. He's stuck out at sea for an extra day. So, um, we are super excited to have Don here on the program. Don, I'm just gonna read your bio really quick because—

Sure.

This is, this is absolutely insane and I want people to kind of grasp, um, exactly who you are and then we'll get right into it. Um, Don Pelgrim is a licensed attorney in the state of California and has been chief level executive officer in the banking and financial services industry. He holds a Juris Doctorate from Loyola Law School in Los Angeles and a Bachelor's of Business Administration from Hofstra University. And has maintained his California real estate license since 1986. Crazy, huh? In addition to bank—it's unbelievable. I was like just blown away. In addition to—in addition to banking, Mr. Pelgrim has engaged in real estate finance, the acquisition and disposition of real estate, loan workouts, and the resolution of problem assets. From a broader perspective, his experience also extends to finance. mergers and acquisitions, capital markets, corporate governance, and regulatory issues affecting public and privately held financial institutions. In connection with his banking and bank advisory experience, Mr. Pelgrim has received regulatory non-disapproval from the Office of Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Office of Thrift Supervision to serve as chief-level member of executive management teams in federally insured financial Institutions. He joined the manager as its chief executive officer, secretary and director, and principal in March 2011 and is the manager of the Wilshire Finance Partners Income Fund, WFP Income Fund REIT, and WFP Opportunity Fund. Mr. Pelgrim is also the chief executive officer and securities principal of A1A Securities LLC, a real estate-focused investment banking firm. If that's not experience, I don't know what is. Don, thank you so much for being here.

Thank you for inviting me. We appreciate it.

Yeah, absolutely. Um, just a personal question. So I just celebrated, um, my first Father's Day. I see that you are Don Pelgrim Jr. Does Don Pelgrim Sr. have anything to do with how ambitious, how ambitious you have been and any of these achievements as far as like getting you set up for what you've Well, you know, fathers always do have that influence, right? Okay.

You know, so growing up, he was a big influence on me, but he passed away many years ago.

Okay.

So before any of the things that you're reading actually came to fruition.

Okay.

But, you know, that baseline as a new dad, that's important.

Okay, so where does this drive come from? Lead us back to the beginning. What leads you here?

Well, you know what? Well, becoming an attorney was something that was always in me as a child. And I think that talking about a father's influence, my father was in the real estate business back in New York. And when I was growing up, we went to the courthouse because he had to do some filings. And I was probably about 8 or 9 years old. And we went in and sat in on a case. And it was a murder case, of all things. And the attorneys were arguing. And they saw me in the back of the room, brought me up to the, uh, the dais basically. And the 2 attorneys started to argue the case in front of this little kid.

Wow.

I was hooked.

Yeah.

So long story short, uh, went to Hofstra University, as you said, got into the banking business, uh, went to law school at night at Loyola, uh, graduated, uh, from there, went to work for a big white shoe law firm. We had over 1,300 lawyers at that firm and started to practice real estate and corporate law. And then the rest just sort of progressed from there.

Oh my God. Okay.

Interesting stuff.

Yeah, absolutely. I mean, and now your main focus is on the lending side.

Yes. So, you know, throughout my career, I was always either in banks running banks or outside banks representing banks. Always involved on the finance side of things. And real estate lending and real estate investing was always a big part of that. So it was sort of a natural progression as I became the CEO of Wilshire Finance Partners and then ultimately forming our funds to stay focused not only in the real estate sector, but on the real estate finance side of the real estate sector.

Absolutely. Okay. I mean, and, you know, we have a lot of, Newer investors that, that watch this show, listen to the show. Mm-hmm. I mean, they know what, you know, hard money lender is, but, you know, very few people have actually been approved by 3 separate arms of the federal government. Um, how does that even happen?

Well, you know what, when you're an executive at an insured financial institution, you've gotta go through a vetting process. And, uh, part of that is an FBI background check. And then they look at your bona fides. Do you have the experience? To sit in that seat because, frankly, you're dealing with people's money and you're dealing with FDIC insurance. So they want to make sure that, you know, the people that are in that position have the capability to do that work and be entrusted with that kind of position. So it's that type of process that you go through with each one of those different agencies. Now, the Office of Thrift Supervision, was actually merged into the Office of the Comptroller of the Currency. So at the end of the day, I had that regulatory nondisapproval. In other words, they don't actually approve you, but they don't disapprove you from sitting in that seat.

Okay.

Because they don't want to put a Good Housekeeping seal of approval on anybody in case there is an issue. But so it was the Office of the Comptroller of the Currency, the Federal Reserve, and then the FDIC, which is where I got those sort of the, those non-disapproval acknowledgments. And then from there, I sat as the chief administrative officer for a couple of multibillion-dollar banks. And in that role, I was sort of de facto general counsel, but was involved in a lot of different things, including special assets, which is where you do the workouts on probate loans that are on the bank's portfolio. And in addition to that, did mergers and acquisitions. And during the financial downturn, where we saw a lot of blowups, right between 2007 and 2009, I became part of a platform bank where we were acquiring failed banks through the FDIC receivership process, which was another level of approval. Because you're now looking into the books and records of basically your competitors who are failing. And during that process, I got to look under the hood and see what worked and what didn't work in those portfolios and on those balance sheets and what was happening with those loans. And that was an education, frankly, on somebody else's nickel, right, when you're going through that process. So all of that kind of rolls forward into the formation of Wilshire Finance Partners and providing private credit into the marketplace. Now, for the people who are new, when you talk about hard money lending and you talk about private credit, hard money lending many, many years ago was the money at the, you know, the last guy at the end of the block. And you didn't really have any other options but to go there and get that kind of financing. But over the last couple of decades, and it really started with the financial downturn in that 2020, 2007 through about that 2009 timeframe, the capital markets were seized up. So mortgage bonds weren't available, or it wasn't a very efficient process. And banks really shut down their lending because they were working the problem assets off of their balance sheet. So private capital, guys like Wilshire, stepped in and we filled the void because there wasn't really any debt capital out there. So I, I like to say that we were private credit before private credit became sexy.

Mm-hmm.

Right? Because right now you start to hear about all these different private credit platforms in the marketplace, and we were doing that before it actually, you know, became what it is. So it really grew up over the last couple of decades. So when I think of hard money, or if I think of private credit or bridge lending, there's really a spectrum there.

Absolutely.

Of what's in the marketplace. So, For the new guys that are out there, if you think of, you know, the traditional hard money where it's just completely collateral-based and you're going to be sort of back against the wall, really high rates, really high, you know, fees and points and things like that, that money's still out there. But as the marketplace grew up and as, for example, debt funds like us started to mature and do more of that, It's a little bit of a different type of credit. Now, the distinction between what we do now and bank credit is still very— using that word distinct— very distinctive, because when you go to a bank, they're subject to a whole bunch of different regulatory requirements, and you have to go through the rigors of getting a loan and getting approved at a bank. It's almost like going to Fannie Mae or Freddie Mac, where you've got these very hard and fast rules and guidelines. As a debt fund and as a capital provider, we don't have those same level of restrictions. And as a result of that, it gives us the capability to be a little bit more flexible and a little bit more creative with the types of financing and the structures that we can provide to the marketplace. So that's probably the biggest differentiator or biggest distinction between going to your traditional lender and your private credit or your bridge lenders.

Absolutely. And I think one thing to highlight is your education, as you put it, looking at what deals worked, what deals didn't work back then. Because what we've kind of seen since sort of the uptick in private credit is, and sort of the crossroads with social media is guys being able to start funds that maybe they don't have the experience. Maybe they don't know exactly what deals work and what, what don't, um, what deals don't work. We just covered, um, the guy that used to be on BiggerPockets, Brandon Turner. Um, he started a fund and he used his social media to like raise a, you know, a bunch of money. And he now he's coming out, he lost like $15 million for all his investors. And, um, it's just sort of interesting, you know, I guess people, they, they just think a fund is a fund is a fund, but you have to kind of know You know, who's running it, who's at the top. Do you see more regulatory, I guess, issues coming up with that sort of thing?

Yeah, there's all different types of rules and regulations that come into play here. And, you know, you gotta think of it like a pendulum. And what happens is you might have this environment where it's a lot looser, right, in terms of, how things might occur or the regulations that might be in place. And then when bad things happen, that pendulum swings in a different direction, and you've got a lot of additional regulation that comes into play, which may be overregulated. And I'll give you an example of that. There's a regulation that came into play in the state of California involving second mortgages, and specifically second mortgages against residential properties.

Okay.

And it's now very, very difficult, almost impossible for a lender to foreclose on a second mortgage without going through a series of steps, including preparing a declaration under penalty of perjury that they followed all the rules and regulations before they can actually foreclose on that second lien. Well, that's overregulation because of what was occurring with, you know, some of the lenders that were making those second liens. And really sort of abusing the process, if you will. Now you've got this environment where it's overregulated, and at some point that'll go back to the middle again. But that's an example of, you know, how that regulation may impact what's going on in the business. For us, when we formed the fund, the biggest thing that was in the headlines at that point was Bernie Madoff.

Mm-hmm.

And if you recall, Bernie Madoff, one of the biggest Ponzi schemes that happened in the United States. So When you form a debt fund like we have, you really are a little bit more bank-like because on the one hand of your business, you're going out and you're raising capital from investors and they're entrusting you with that capital that you're going to go ahead and invest that and protect their principal and give them a return. Then on the other side of your business, that capital becomes the raw material for the lending or the investments that you're making. So it's really your, your, your bifurcating ad. So you've got to look at it from the investor standpoint that's bringing you that money, but also the people that are users of that money. So when all of that was occurring, we put a number of different protocols in place for our fund to make sure that we can protect our investors' principal investments. So for example, we've got separation and segregation of duties internally as well as externally. So when I close and distribute, for example, at the end of the month or the end of the quarter to my investors, there are 3 parties that are involved in that. I've got a third-party fund administrator, uh, so that, that way I'm not pushing the statements out to my investors, right? And that was one of the things that was happening with Madoff was that everything was internal and they were cooking the books and pushing out false statements. Well, I can't do that because I've got a third party that's looking over my shoulder. I then have my auditors that are involved and they're looking at the books and records at the same time that I am with the third-party fund administrator. And then I'm looking at the numbers and all of our numbers have got to reconcile before I do distribution. So that's an example on the investment side. On the lending side of the business, obviously we want to make good loans and we want to make good investments. So, you know, unlike the freewheeling, you know, hard money days where I'm just going to be, you know, going out, kicking the tires and figuring out, hey, is that the right value? And I'm going to, you know, put 40% or 50% against the property. As your leverage increases and as your returns go down because of the competition, you've got to make sure that you're doing your underwriting a little bit differently. So when we approach the investments that we do and the lending that we do, we go through a process to make sure that we're checking the boxes and doing the due diligence that we need to do, and then that we're structuring these deals So that frankly, we want to see the people that we're lending that money to be successful. So when we're structuring something, it's not only for our benefit, but it's for their benefit. So for example, if they're short on a budget or they're not thinking of certain things that might be a part of that transaction, we feel it's our responsibility to call that out. And whether we get the deal or we don't get the deal, at least we're being transparent and saying, hey, here are the things that we're seeing in the transaction If we can do this, it might be something that we can do. But if it doesn't work for you, no harm, no foul. You know, it's okay, right? And, you know, I think over the years what that's done for us, it's created sort of that relationship-type environment between the people that are using our capital and our capital. And to put it in a very short, sort of memorable way, it's smart money, right? We're trying to be that capital partner where we can come in, hopefully be a little bit programmatic with the people that we're doing business with so that we can, you know, get the, you know, the nuts and bolts stuff out of the way, you know, the due diligence and figuring out who these people are, so on and so forth, so that we can really get down to the deals. And that's where it gets fun.

Absolutely. I mean, yeah, the lender is, is, is, is a partner in the deal, you know, and that's, I think, I think that's a, that's a great way to approach it. Um, so you've had your, your real estate license since 1986. That's, you know, 4 decades we're going on here. Um, what has, what does real estate look like today compared to when you started?

Oh my goodness. Well, You know, when I started out, I was a loan officer in the street and, you know, working for banks and then, you know, just really shagging loans against single-family homes. And, you know, at one point in my career, I was doing loans against luxury homes. Minimum size loan, and this was back in the '80s, had to be over $2 million.

Mm.

So these were, you know, very, very big homes. You know, conversely, when you pivot and you go into commercial real estate and, you know, niches like senior housing, which is what we do, very, very different types of properties, different metrics, if you will, you know, different dynamics associated with that kind of property. So as a result, you're shifting and moving. And as you know, real estate is also very cyclical.

Mm-hmm.

So it depends on the market cycle that you're in and, you know, how you might approach a particular deal or a particular asset class. You know, so for example, a real good real-life example of sort of a shift in the marketplace is office, right?

Mm-hmm.

Rolling into COVID, office, specifically in larger cities, was a pretty good bet, right? But when COVID rolled around, you had people who were social distancing, not going into offices. And you had big companies saying, all right, well, you can work from— wherever you are remotely, which then translated into we don't need as much office space. So, you know, that's an asset class that I think fundamentally changed, you know, as a result of, you know, that particular event.

Absolutely.

You know, conversely, look at what's now happening with data centers, right? And with data centers, you've got this big demand for those types of properties because of all the infrastructure that's needed for, AI, right? Another example would be warehouse and industrial. And there's something called the last mile theory, which is where, for example, if you bought something from Amazon 5 years ago and you got it in a couple of days, you were happy. Roll forward a couple of years and you were expecting to get it overnight. Today, you've got to get it within a couple of hours. What that means is that you've got to truncate your distribution system. So you've got these big warehouse properties, and then you've got these smaller warehouse properties that are closer to where that product is going to be distributed, right? So you've got this demand for different types of warehouse facilities, you know, in different parts of the country. Well, if you drop a pebble into a pool of water, you see the ripples that go out from there, right? So If Amazon needs that warehouse space and they're buying up warehouse space, but you've got other businesses that still need warehouse space, that's that ripple, right?

Mm-hmm.

So again, it depends on what asset class you're looking at, where you are in the cycle, frankly, where you are in the country as well. We're lending across the United States and investing across the United States. So if I'm looking at a— call it a secondary market versus a rural market, dynamics are very different. For example, if I'm looking at a senior housing facility and that's in a rural marketplace, I might not have enough seniors as a cohort to be able to fill the beds for that facility. And I may not have enough caregivers there as well, right? The employee pool is not big enough. Conversely, you take that same property and you drop it into, you know, a, a growing tertiary market or a secondary market, that might be a better deal. So it just depends on, on what it is, where it is, the time, so on and so forth.

Absolutely. And you mentioned kind of before that Wilshire started off mostly residential, smaller multifamily, and then you guys pivoted to multifamily and commercial. And now, now you're coming back around to the residential.

We are.

Yeah. What, what kind of, uh, or I guess what did you see that led you that way?

Well, you know what, um, when we were doing the residential lending, uh, and it was just lending at the time, um, we started to see actually some Wall Street money come into the private, uh, capital sector. And we saw loan-to-values ratchet up and we saw yields go down. So that was part of the pivot to go into the small balance commercial real estate space because I was able to not increase my risk, but get, you know, a comparable or better return by looking at different asset classes. However, as I mentioned to you, we operate another fund, which is our opportunity fund. And as opposed to debt, it's doing all different sorts of things. I've done A/B note splits, I've done mezzanine financing, I've done JVs, I've done preferred equity. I've done a lot of things out of that particular fund. particular fund. And when you manage a fund like ours, part of what you're looking to do is diversify into different asset classes, different borrowers or sponsorship, different deal structures, different investment durations, things like that. And, you know, as I looked at our portfolio, I started to think about, you know, the residential side of the business and said, hey, that was our roots. Let's get back to some of that and let's start to create those partnerships with good sponsors in the marketplace where we might be able to create some, some programmatic relationships. So as a result of that, we are inking a transaction this week for a new relationship within the fund. It's an individual in Los Angeles. He's got a couple of decades of experience buying, rehabbing, and stabilizing smaller multifamily. And we're going to be doing a $1.5— excuse me, $1.2 million initial joint venture investment with him on a property in Los Angeles, which has about a 4-year horizon. So again, getting out of the gate, we see that as being a relationship that we can grow and expand. And hopefully be that smart capital provider for them.

Yeah, no, I think that's I think that's really exciting. And I mean, I on the page you brought me, and we'll I guess we could bring it up right now, and we can kind of go over this. Is that is that a good?

Sure, that's fair enough. Okay, yeah, yeah.

You're looking these are for fix and flips as well.

Yeah, yeah. We'll we'll finance the fix and flips. And again, you know, when I look at the different types of investments that we'll make on the residential side. You know, the fix and flip back in the day— sound like an old man, but, you know, back in the day, the fix and flips, if somebody was buying, rehabbing, and turning over property in 90 to 120 days, that was pretty quick. And, you know, if you think about it, you'd be able to roll your balance sheet or roll your capital over a couple of times a year. And if you were getting, you know, call it 8 to 9% on a cash-on-cash return, um, on a real, real-time basis for those types of properties, well, you know, you're in the high double digits on your returns. Um, now it, it really depends on the deal, whether or not you can get in and out of it that quickly, the amount of rehab that's involved, and the amount of, um, uh, margin, you know, in the deal. And what was interesting about the deal that we just recently signed, again, being a multifamily property, I, I looked at it and I modeled it a couple of different ways, both as debt and equity. And really it was about finding a, you know, a sweet spot with the sponsor that brought us the deal and, you know, where the metrics needed to be for our fund to, to get there. But getting back to your question, yeah, the single-family fix and flip, you know, that would be a, a much shorter duration than say, You know, maybe a multifamily stabilization play. Sure. You know, that might be a little bit longer. And for me, I'm looking at a mix of those different types of investments and those different types of properties within the fund itself. Mm-hmm. So that I can create the, you know, the economics, if you will, and the dynamic I want to see within the fund.

Absolutely. Okay. And, and you're looking at sort of a JV situation. Can you kind of explain to maybe like a newer investor what that would look like?

Sure. Well, you know, there's— it's, it's almost like saying, you know, what flavor of ice cream, right? There's all different kinds that are out there. And I'm going to start real basic. And, and when you think of the capital stack on real estate, think of it like a layer cake, right? Because you can have these different layers of capital that can come in on a transaction. So for example, you can have a first lien on the property, right, which is going to be in that senior position. So that's the bottom of the cake. Then you might have a subordinate lien, second position, third position, so on and so forth. You can have something called mezzanine financing, which is not secured by the real estate, but might be secured by, for example, the LLC membership interests.

Hmm.

And that could be useful when you've got a first lien that doesn't permit a second lien to come in behind you. So think of Fannie or Freddie, right? You can have participating debt, which is structured as debt but has equity-like returns. So you might see a participating— excuse me, a preferred interest rate and then a participating return. What's interesting about that form of capital as compared to equity, and we'll get to that in a second, is that once that debt is repaid, there's no tail or trail.

Right.

Right? The capital provider doesn't continue to participate in the deal. So for example, if you think about a multifamily property, they're able to get to a point of stabilization where they can refinance out that participating debt. And let's say it's year 2, but they're going to hold it to year 5 and there's more juice over that next 3 years. Well, they get 100% of that. So that participating debt might be the most effective piece of capital. Conversely, then you might have preferred equity, and preferred equity has rights, preferences, and privileges, which is ahead of common. And usually you'll have some sort of preferred return. And then in a waterfall, you'll have a distribution. So usually the preferred capital is returned first. They're participating interest in the upside. gets paid, then common may have a catch-up, and then they start to split. So that might be a fairly common waterfall. With a JV, it actually is a little bit more simple.

Hmm.

You might go in and say, you know what, we are going to put up most of the capital. You're going to come in with a little capital on your own, and then we're going to split profits. Now, the easiest way to think of it would be, you know, you're going to bring in 50% and I'm going to bring in 50%, split, you know, 50/50 of the profits and the income that come out of that property. Now, um, that might be okay, but, you know, for us, sometimes we want to go ahead and give a little bit more to, uh, the guys that are actually running the deal, right? Because we're relying on you. I'm not going in and banging nails. I'm not going in and managing that project day to day. So there's value in that to me.

Hmm.

So as opposed to that 50/50 split, you might bring in less capital but get a higher split, right?

Mm-hmm.

As a result of that. So it's really all dependent on the deal. It's dependent on the sponsorship. And again, it's, it's finding that, that point where it makes sense for both parties. So for example, in the transaction that I was talking about a little bit earlier on that multifamily property, I ran the models on all different kinds of, structures because it came to me where there was preferred equity. And in that preferred position, I was ahead of common, right? So I sit here in the cap, in the layer cake, and they were going to get a promote. And for the people that are listening in, a promote is basically an additional percentage that the sponsorship is going to receive but not necessarily tied to capital that they would bring in. So for example, let's say they bring in, you know, 10% of the, of the money, and they'll get an equal return based on the, the 90/10 split, but then they might get an additional 20%, for example. So the 20% would be the promote in that kind of transaction. And we ran the different model. We ran the participating debt, we ran, you know, the, the JV, excuse me, preferred with a waterfall. And ultimately, the thing that worked for everybody was just a straight up, you know, JV with a disparate split. And, you know, the sponsor's gonna get a little bit more, but when you run the math and you look at the duration and you look at the internal rate of return, it's fine. Let's move on.

Right.

Yeah.

Yeah, no, I think it's a great model. I mean, that's kind of how I've been doing My fix and flips right now is, you know, some people want to get started in real estate. They don't really know anything, but they have some money sitting on the side. So they come in as a capital partner. We run the flip and then we just split it. Yeah, that way. And it's, it's easy, it's simple. And, you know, I think it's just tried and true.

Yeah. Yeah. I mean, there's not a lot of brain damage and, you know, and I think that there's something to be said for that, right? Especially if you've got, you know, a bunch of stuff in your pipeline. Right. What you want is you want the ability to focus on the deal. You know, you don't want to have to focus on the financing, but you want that financing to be there and consistent for you. You know, so we've done some stuff where we've put together basically a programmatic platform for a couple of people where You spend a little more time on the front end, but you create almost like a line of credit, if you will.

OK.

And you say, you know what? If the deal meets this criteria, then it's going to fit the eligible collateral— call it that, right? The eligible collateral under that line of credit. And draw on it, man. Go for it. And it's— again, you get all of the relationship stuff, the background stuff, the due diligence stuff out of the way. And by structuring something that way, you're just looking at the deal. And going back a few years, there was a guy who was just an animal. He was doing 30 to 40 acquisitions at the courthouse steps a month.

Mm-hmm.

A month.

Mm-hmm.

So he didn't really care about rate or term or anything else. What he cared about was volume and velocity. How quickly can I turn this So that I can reload my gun with money and go back out and buy something else. So that's when you get creative as a capital partner saying, how do you, how do you do that? And there are ways to do that.

Yeah, no, I think it's great. And, um, you know, you put, you put that at the very top, what you get— reliable capital, you know. And I think that's, that's important, especially out here in Southern California. I mean, it's, it's a competitive market, you know, especially Especially for flips. And so you want to be able to pull the trigger when all the numbers line up and it all makes sense.

100%. So, you know, it's— we used to say you want to act as cash, right? And, you know, there are different ways that you can go into an escrow and get that done. And I think that, you know, one of the ways to get that done is to, you know, have that capital provider, right? That capital partner like you do, right? And you've got these, Investors that now have done probably more than one deal with you. And, you know, it's very easy for you to go in with confidence and say, I can, I can buy this, I can get this done.

Right.

And for the seller, that's what they want, right? The seller wants somebody that they don't have to be concerned that something's going to blow up. It's not going to happen. And if you've got that reputation, that ability in the marketplace, guess what? You see more deals too. Yeah, absolutely.

I mean, this is great. And is this live right now or you're still working on— you said you were still live. Oh yeah, this is live.

Okay. This is something where we're putting capital out. Okay. And again, we've been doing this on the commercial side of things for a decade and a half. Coming back into the residential side of things, there's some changes. Obviously, The rigors of doing, for example, a joint venture in a $20 million assisted living facility where you're talking about the regulatory requirements and the licensing associated with something like that and putting that kind of deal together is very, very different than, you know, putting together a residential fix and flip.

Mm-hmm.

I'm not saying that one is harder or easier than the other.

Mm-hmm.

Differently. Right. And at the end of the day, if you're, if you're talking about a particular type of fix and flip, getting to valuations and getting to exit values and things like that becomes a little bit, a little bit easier to do too.

Yeah, no, absolutely. I mean, and then, okay, so the size of the deal, you're going down to $100,000 to $1.5 million.

Yeah, that's the size of the check that we'll write. Right. Okay. So, You know, we're, we're, can you, can you do a deal for, you know, $400,000 or $500,000 in California? That's tough to find, I think.

Okay.

Right. But, you know, at the same time, again, a little bit of gray hair. I've been involved in much, much bigger homes.

Mm-hmm.

Luxury homes where, you know, we wrote checks in multimillion dollars. And frankly, the air is thin, right, where somebody can come in and go ahead and buy that property, right? Because it's really a personalized type of asset at that point, as opposed to being a, you know, sort of a standard home.

Mm-hmm.

So by capping it at those levels, we want to be in that middle market or lower middle market home where you've got a lot more buyers, you've got a lot more velocity. And again, the ability to figure out values is easier to do.

I love that. One thing that I've kind of— it's a niche I've fallen into is mobile homes, manufactured homes on owned land. And then, you know, you tie it to it with the permanent foundation. Is that something you guys would, would look at?

You know what? Not at this point.

Okay.

And, you know, actually, a good buddy of mine who I just recently reconnected with out in the Inland Empire, was again one of these guys that was doing a lot of fix-and-flip financing, and he pivoted to mobile homes. And he's, he's doing a number of them, and there's some pretty good upside there. But at this point, we haven't really looked at that asset class or analyzed that asset class.

Sure.

And what you'll find with us is that we like to know and understand the asset class Right. We want to make sure that we're partnering with people that we know and trust, right? Because we're going to be basically giving them millions of dollars. And where I've seen people go sideways, including us, right? I'm the first one to say I've made a lot of mistakes, is to, you know, get off your footing and start to get into things that you really don't know a lot about. So for the guys that are new out there, What does that tell you? Get a lot of education, couple and partner yourself with people who are a little bit more experienced than you, right? Work with guys like you.

Oh yeah.

You know, become a, you know, get your feet wet working with people that have been there, done that, and stay with what you know.

Absolutely.

So for us, it could be, but, you know, out of the gate right now, no, it's not something that we're doing.

Understandable. You know, I do see a lot of pushback in that space before that reason. It's, it's just knowing how to value a manufactured home.

Mm-hmm.

Um, it's one of the reasons why I've kind of doubled down on it is just there's less competition because, you know, people look at these mobile homes, they're like, what? That's worth $10,000. But when you actually put it on the land and then you resell it, I mean, they're going up, Upwards of you know six hundred thousand to a million depending on how much land there is, you know. So and where it is. Yeah, and where it is exactly.

And staring at the ocean, man. You know.

Oh yeah, yeah, for sure. Yeah, down in San Clemente, all that stuff. But um, it's just an interesting sort of niche, and I would love for you guys to look at that.

Sure. Well, educate educate me on it. You know, I'm open to it. Yeah. You know again, it's um it's. Again, it's about the relationship, it's about the deal. It's, you know, again, understanding that particular asset class. Our last exposure to mobile homes, and this is an unfortunate story, was in Texas. And I frankly inherited this deal. And I'm going to withhold names even though it's public. But this was an individual that was buying used mobile homes and then selling the mobile homes to the buyers on a basically a lease option.

Right.

The problem was that she didn't really own them.

Mm-hmm. Right.

And, you know, the— and at that point, they had to go through the DMV to get, you know, title to the properties and so on and so forth. And it became a big mess. We got out of it cleanly, but That person ended up going to jail and was bankrupt and all sorts of stuff.

Sure.

But again, you know, with what you're doing, if you've got, if you own the land, right? And you've got these mobile homes, I'm assuming that you're either owning them or you're releasing the land and the home is owned by somebody else?

No. So what we do is there's a 433A designation. And essentially once you move the manufactured home to there you put it on permanent foundation, that's what they call it, it becomes like real property. Okay. And so you kind of take the HCD, which Housing Community Development, which is the DMV of the mobile homes, you take them out of it and it's like, thank God, you know, because it is like dealing with the DMV.

So basically at that point it's like a manufactured home.

Right, right. And it's, yeah, it just becomes real property. And then it's good because then the end buyer, can get the FHA loan, they can get the VA loan, which is a lot of, you know, those buyers.

Got it.

So that's the reason why we've chosen to go that route. And then just being in the space, you see the nightmare situations with on-leased land, dealing with HCD, the title nightmares, the other person being the legal owner, even though, you know, you've been making payments on it, you know, it's pretty much like a car at that point. So So it gets pretty annoying and the value isn't necessarily in the home. It's when you tie it to the land, that's when it really becomes like an actual asset that makes sense.

Yeah, and that would make more sense for us, you know, that kind of structure where, you know, again, you've got the fee interest in the land and the structure becomes part of the real property. I mean, that to me is a, more in the lines of what we would consider than, you know, the alternative that I described.

Yeah, absolutely. Well, I mean, that's kind of when you, I guess, learn your lessons. And I'm glad you got out of that deal cleanly.

Yeah, me too. Yeah. Yeah. You know, it's interesting. It's on the lending side of the business. It's not a matter of if, it's a matter of when, right? Something is going to go sideways and You know, when we look at deals, it's all about, again, you know, how do you, how do you look at the deal so that you can, number one, identify what the risks are? And then there's different ways you can handle the risk, right? You can walk away from the risk, right? You can jump right in and just take 100% of the risk. You can insure against some of the risk, title insurance or, you know, hazard insurance. Or you can mitigate the risk, and you know where you make money is in risk mitigation. So it's understanding that risk and then looking at the deal and saying, "All right, well, how do we go about this and how do we mitigate that risk so that we can minimize it to the best we can?" You can't wring out 100% of it, but you know how do you how do you reduce it? You know, and then you look at that and you go, "Oh, you know, based on what I'm seeing on the risk, what is my potential return there?" And you want to have that. That, you know, frankly, an imbalance where you're going to get an outsized return based on the risk that you're taking. And that's, you know, why people are listening to this podcast and that's why they're in the, you know, the business that you're in.

Yeah, absolutely. And I mean, I'm glad to hear you say that because, I mean, you just hear stories and we've had actually people on here that have gotten into private money lending. They'll join some Facebook group or mentorship And, you know, one of the mentors of the group will bring a deal in and they think that it's a vetted deal and they're going to dump their inheritance into this fix and flip on the East Coast in a historical part of town. And then it just goes sideways and all the money's gone.

Mm-hmm.

And, and you hear that, you know, just too often. And I don't know, I don't know if more regulation— I hate saying that. I don't even think that that's the answer. I think it's people educating themselves. themselves on if they're going to be stuck holding the bag or not. I mean, what is your remedy to that?

Yeah, it's education. It's due diligence. It's understanding what the issues are and then being able to spot those issues in a deal. Right. And again, When we were doing— before we formed our funds, we were doing trust deed sales, right? So we would make a loan, hold it on our balance sheet, and then sell it off to individual investors, kind of like what you're talking about. And the way that we approached it was that if I didn't like the deal, I wouldn't put it on my balance sheet because I didn't know if I had a buyer for that loan, right? And I wouldn't be able to recirculate my capital. And because I'm an attorney, I always stayed in those deals. And, you know, if there was a problem, we would step in and we would help with the workout of, of those transactions. So I think that, you know, some of that is the due diligence, but it's also the counterparty.

Mm-hmm.

And even though I'm an attorney, um, you know, you can say that if it's not in writing, it doesn't exist.

Mm-hmm.

But, you know, in the same breath, you can also say, It doesn't matter if it's in writing if the counterparty is not going to live up to the deal, right? So I think it's about the people, and it's also about the deal. So people have got to look at all of those different elements before they get into something. And like we said earlier, stay in your lane.

Mm-hmm.

If you know something very, very well and you're being asked to deviate into something else, well, get educated very, very quickly on it. Bring the advisors in that can— assist you with that, make sure you're doing your due diligence. And, you know, I think where a lot of mistakes are made, and it doesn't necessarily mean real estate, but just generally, is where people rush into something because they're being pressured to rush into something. And there's typically a reason for that, right?

Right.

You know, and sometimes it's okay to pause and say, hey, timeout, I need a little bit more time, or, Hey man, if that's how quickly you need to move, I'm not your guy.

Mm-hmm.

Right? And just walk away from the deal. There'll be others.

Yeah. Oh, that, that's one of the biggest lessons. And I think, I mean, that Joe's taught me is, you know, you, you'd rather say no to a bad deal than get stuck in something, you know, that because you were, had a fear of missing out or because someone promised you these returns that are just, you know, unrealistic.

100%. And, and there's an old banker's axiom, right? One is which you don't get sued on the loans you don't make, right? There you go. Yeah, yeah. And the other one is that you can't make up for a bad deal through yield, right? Because, you know, think about it for a moment. If I make a loan to somebody and they're not paying me, what's my return? Zero, right? So you might say, hey, I'll pay you 18% or 20% or whatever it is. It's going back to your example of the, guy buying into that property on the East Coast with no due diligence. Well, you know, their eyes get big because of the returns that, you know, they're being promised. But at the end of the day, it ain't there.

Yeah.

So, you know, sometimes it's, again, pausing, looking at the transaction and, hey, if they're promising you 15 or 20%, you know, pause for a moment and, and say, you know, there's gotta be a reason why, you know, that's being promised. And is, is it real? Is it viable? And sometimes it doesn't take too much to figure out that it ain't.

I mean, chances are that it's not. I, I, I, uh, when my wife was pregnant, we were kind of hunkered down. I got into like the old Charlie Munger speeches, and it's just good to hear. And he's just like, these guys are promising returns, it's probably, you know, snake oil. It probably is, you know. And that's— I mean, and he's talking about from investing since the Depression.

Right.

And not, not much has changed. You know, it's like people feed on your fear of missing out. You get rich quick. There's a lot of that out there. And I— one thing that real estate has taught me is that it's a long game. So, you know, maybe if you got to pass a deal and you got to take your time and, and build slowly, that's the actual wealth rather than you jumping on some deal and losing everything that you built in your retirement plan.

100%. And I think that, um, you know, getting to your point It's not get rich quick. You know, the guys that are successful, the guys that do what you do that are successful, they're at it every day. You know, they're heads down, they're looking at stuff. You probably, if you're like us, you've probably looked at, you know, 500 or 600 different deals and you'll pick up 4.

Mm-hmm.

Right? Or 5. Yeah, because all the other ones that you saw were just not there, right? But when you see that 4 or 5, you're on it.

Mm-hmm.

You know, you're, you're just, you're all in and you're moving quick. And, you know, at that point you, you're committed and you're getting that deal done, right? So I think that's, that, you know, that's part of the lesson is, um, it's, it's, if, if you're looking for an easy path, I don't know if there necessarily is one. I mean, at least if there is, tell me about it because I haven't seen it yet.

I would say the only cheat code is getting a mentor. When I teamed up with Joe and I just kind of was like a sponge around him, I mean, he's got 5 decades of experience. So when I first started out and I didn't have that pattern recognition, I was like, Joe, Joe, here's the deal. He's like, no, no, that's not a deal. That's not— he's And that experience kept me out of some really bad ones just because, you know, I didn't know what I didn't know. So that right there is an amazing cheat code. Get a mentor, especially someone with decades of experience. And if you could just learn from them.

I think that's right. I think that's right. And I— as you're— the reason I was laughing was that it brought me back to one of the— probably the first week or two when I was just out of school as a newly minted lawyer. I remember going to work for this big firm and, you know, one of the partners asked me to write a document for him. And I think the only thing he didn't cross out or correct was my name. So, but that's how you learn, right? I mean, it's, you make those mistakes and, you know, you have somebody that's looking over your shoulder and, you know, say, hey man, this is, you know, think of it this way. So yeah, I agree with you.

Okay, I love that. Are you mentoring anybody? Are there any new people at Wilshire that you got your eye on, or how does that work in your life today?

You know what? No. I'm bringing on, or I'm in the process of bringing on, another person, which is going to be sort of like a transaction coordinator for us.

Okay, perfect.

Because we have a need. And yeah, we'll do some mentoring and some training for that particular person. Nobody comes out of the womb doing what we do.

Sure, yeah.

So they're going to need some assistance and some guidance. But, you know, we don't have, for example, like, you know, a Wells Fargo or a, you know, a Goldman Sachs where you've got, you know, a summer internship or anything. We don't have that kind of stuff.

Okay, good.

But, you know, for us, that training never stops, really. You know, at the end of the day, because of everything that's moving around and things that are happening around you, You got to be a student still. And I'm going to use artificial intelligence as the next thing where, I mean, man, I don't know enough about it. All I know is that the things that it's been able to do and the efficiencies that we've been able to gain so far are tremendous.

I know.

So we've hired one developer, and we're in the process of hiring another group of developers to assist us with developing some proprietary systems that we're going to bring in-house, you know, for some of the things that we do. And, you know, again, it's going to take a little bit of education because we have to be proficient enough to provide guidance to the people who are doing the development. Because they might be smart on the coding and everything else, but they don't know my business.

Right.

So we're going to have to be able to train them up on what our business looks like. looks like, and vice versa. We need to be able to be trained up on how to use that tool that is now being developed. And that's just a very simple example.

Yeah.

And then getting back to your point about mentorship, find those people that you can put around you. And it may not be an everyday kind of thing, but having that ability to pick up the phone and ask somebody a question or bounce around a concept or an idea, I think is invaluable.

Absolutely. Just another pair of eyes on whatever you're working on is great. Yes. I mean, speaking of the AI thing, it's when technology and real estate kind of are starting to intersect, it's becoming pretty interesting. What are your thoughts on, I don't know if you've heard of fractional, it's like a lending platform where basically you can put a deal on there and then you can raise capital as low as $1,000. $1,000 a person and people can buy fractions of this deal. Now it doesn't have to go through the SEC or anything. You basically just create an LLC with each member on there and then you're able to buy property that way. And I've seen some other ones where you're able to buy fractions of a fix and flip. I mean, what are your thoughts on that?

Well, I'm not so sure it's not a security.

No, yeah, exactly, exactly.

Okay, so I would look into that side of it, especially if you were going to be using it, because effectively what somebody is doing is they're giving you money that you're going to be managing with the expectation of a return.

Right.

That's sort of the definition of a security.

Yeah.

So then you've got compliance with the '33 Act and the '34 Act. Act. And the different platforms that were out there used different rules and regulations for that capital raising. So for example, we operate under Rule 506 of Regulation D of the Securities Act. And what that is, is basically a private placement. And We have to follow the rules in order to use general solicitation. So general solicitation means that I can use the web or I can use advertising in any real form I want, as long as 100% of the investors are what they call accredited investors. And an accredited investor for an individual earns either $200,000 a year individually or $300,000 a year jointly with the expectation of earning that same amount this year, or has $1 million in net worth excluding their home. Under the prior rule, which is 506, which is still in place, you can have a certain amount of non-accredited investors come to you, but you could not use general solicitation. And under the JOBS Act, under the Obama administration, they opened that up so that you can go out and raise capital a little bit more efficiently. But the trade-off is that There's no longer the check-the-box rule, which somebody would check a box and say, yeah, I'm accredited. You now need to go through the process of using reasonableness in determining whether or not that person's an accredited investor.

Hmm.

So, you know, all of those different things, as soon as you said platform and you don't have to be worried about this, all of that stuff comes flooding in with me. Now, if you were selling to non-accredited individuals, and again, this is not legal accounting advice, you know, blah, blah, blah, go out and, you know, talk to your attorneys about this stuff. But, you know, if you're dealing with non-accredited investors, and that's very likely if somebody's just putting $1,000 into something.

Yeah.

Okay. You're going to need to either be offering an exempt security or involved in an exempt transaction. And that 506 Regulation D is an exempt transaction. It's not an exempt security. My— what I'm selling, my fund share, that LLC share, is a security.

Okay.

But I'm involved in an exempt transaction based on how we structured it. There's also the ability to work with non-accredited investors through, you know, the crowdfunding rules, right?

Mm-hmm.

So Regulation A, Regulation A+, but that's like a mini securitization. So there's a bunch of money that needs to go into that to, you know, make sure that you're complying. Now, part of this too is the liability and the exposure that you might be putting yourself into, because what is being disclosed to the people that are coming in and putting that money with you? Is there an offering document or is there a private placement memorandum that describes the deal itself, but also the risks associated with that deal and the fact that these people might lose their money?

Mm-hmm.

Okay, so again, for the people that are out there, take a closer look at that kind of stuff. Make sure that, you know, there's going to be compliance, there's going to be protections for you. working across those platforms if you're trying to raise capital that way. There are also things that a smart lawyer will put into your offering documents to help indemnify you against certain things that might happen in the course of that type of capital raise. So again, just be cautious.

Yeah.

I mean, there's a lot of stuff that's coming out fast and furious. You know, one of the things that's, A real challenge right now is that, at least for us, is that there are AI platforms that are being developed. And they're coming at it at such a velocity where they are trying to do this matchmaking, but they're not very good at it. And it's, you know, they're just throwing stuff, spaghetti against the wall.

Yeah.

And frankly, over the last probably 3 or 4 months, we've cut off platforms from sending us stuff because they're just wasting our time.

Yeah.

And as a capital provider, am I going to go to that kind of platform and look for you? No, I'm not, right? Better would be to get an introduction or a relationship from somebody that can come to us and say, hey, I heard you on the podcast. Here are my bona fides. This is what I'm doing. And just lay the cards out. And maybe we're a capital provider or maybe we're not, but So again, just different approaches to this stuff.

Yeah.

And getting to your point, you know, there was, oh my God, what was, I'm trying to remember the name of the company that went bankrupt and they were doing fractionalized deeds of trust, raising capital the way that you're describing. And what they did was what they called a linked note. promissory note that would be created, secured by the property, and then that note would sit inside sort of like a trust, if you will.

Hmm.

And then that trust would issue the note that would be linked to that particular loan. So you didn't actually own the loan. You owned a certificate from the trust, which was basically an evidence of debt that was collateralized, if you will, by this other loan, which was owned by this entity. Well, when that entity went bankrupt, you didn't own the actual note or own the actual property. You just owned a certificate and became one of the people that was in line in the bankruptcy case trying to collect.

Right.

So again, the structure and the form of the investment becomes important too. So again, getting to your very point, for people who are new and starting out, get mentors, get smart people around you, you know, so that when you're looking at either stepping out and doing it on your own or, if you're going to be investing in another platform that you got some smart people around that can help.

Yeah. Well, and the issue is with this particular platform, there are online mentors that are pushing it. And I mean, these are non-accredited investors and the operators are, they're pretty You know, they're pretty sketch. So, I mean, I've seen a few deals that have just gone south already and everyone's like, how do we get our money back? And I'm like, you're not going to.

You're not going to get your money back. Well, you know, again, it, you know, all the things that I just described to you, you know, frankly are the basics, right? You know, what is the structure? Are they complying with the rules? What are the disclosures? You know, how is your money as an investor being protected? You know, all of those things are things that, somebody should consider. And even the ones that are, call it, structured correctly, you got to look under the hood at the fundamentals of the deal itself. So for example, in the private credit space, which is where we are, right? Or in the alternative investment space, which is where we are and where you sit, right? There are different types of investment. You can have a direct real estate investment where there are JV partner and own a piece of the real estate itself. You can have a piece of a fund which is invested in debt, right? And we are backed by a hard asset, which is a first lien against the real estate. And then you can go all the way down and you can have unsecured mezzanine corporate debt. And yeah, you'll get a very high promise of a coupon, but when the chips are down, what do you really own?

Yeah.

Right? And, you know, again, if you're subordinated, you know, debt on a corporate level and that corporation goes bankrupt, unlike owning the real estate directly or unlike having a first lien against the property where, you know, you can go in and go to court and, you know, foreclose on that real estate once you get your relief from stay, you know, that corporate debt is gone, right? it's blown up. And there are good platforms, and there are bad platforms, and there are big platforms and small platforms. And, you know, what I like to say is that bigger's not better. Better's better.

Mm.

Right? So, you know, you could be competing with somebody that has, you know, this gigantic national balance sheet and national portfolio, but you might be beating them on a deal-by-deal basis, right? Or within your own portfolio. And the investor should probably give you a harder look Than that national platform.

Yeah.

For example, in the private credit space, BlackRock came out with a bunch of stuff, and I'm not barraging or beating up BlackRock. They're a great company.

Okay.

But at one point they curtailed and stomped the ability to get redemptions out of one of their platforms because of the defaults that they were experiencing. You know, one of the risks in going into any of these things. And again, BlackRock is a great company.

Okay.

They, you know, have some really, really good investments that people can consider. But, you know, even the big guys have challenges here and there.

Oh, yeah. I mean, I just remember 2021, 2022, like Zillow, all the iBuyers that were coming into the fix and flip space. They were just overpaying for every property, and then you go and look at it, they made no money. They lost, you know, what seemed like billions, and then that's it. They just write it off, I guess, and keep going.

Yeah, you know, it's— is it their money?

Yeah, no, exactly. That's what I was going to bring up. Or even with BlackRock, it's like they might be playing with, uh, the house money.

And then, well, it's a transfer of risk, right? And, you know, when we saw those subprime loans being securitized, you know, back in the day, and, you know, They were going into, you know, widow and orphan portfolios, right?

Mm-hmm.

And then those deals blew up and people were not getting paid on them. And people were walking away from those homes because they were upside down on those mortgages, you know, getting 125%, you know, on a property that, you know, you're really betting on the come that it was gonna continue to appreciate. I remember being interviewed by a local newspaper when I was working at the bank. And they were saying, well, you know, doesn't that family— do they have an obligation, a moral obligation to continue to pay, you know, or should they walk away from their home? And I didn't answer the question. I answered the question with a question and said, well, was there a moral obligation to make their payments so that the lady that's got that in her IRA doesn't have to eat cat food?

Hmm.

Okay, there's no straight answer to that, right? There's no good answer to that other than Again, getting back to that fundamental premise, look at the deal, look under the hood. If you're getting involved in a platform type of investment, understand the structure, understand how that investment operates. And is the investment being offered up with full transparency? So for example, if I'm going to invest in a property, somebody might be telling me about the ARV, the ARV, the ARV, right?

Mm-hmm.

know, I'm looking at the after-renovated value, but, you know, go— what's my going-in leverage? What is the basis on that property? That basis being the, you know, the purchase price of the property, and then, you know, the rehab that might go into that property and the other costs and expenses of acquiring that property. And, you know, what's my leverage point based on that? Okay, because that ARV may or may not be there.

Mhm.

Um, once I look at that basis, then I'm going to be looking at the viability of being able to get to that ARV. number. Yeah, right. So, you know, it's, it's a holistic view of the deal, I guess.

Yeah, absolutely. Especially right now. I mean, I still, I still see people that are, um, they're projecting the ARV like it's, you know, 2022 or whatever, and I'm just like, dude, you do not want to get caught with your pants down. It's, it's a long game and it's, it's a marathon. So, you know, in one deal can just wipe out all your capital, and then where are you left them with there, you know? Yeah.

You know, and again, it gets down to the modeling, right? So, you know, for example, you know, are you modeling a, um, an increase in rents that, you know, doesn't make any sense? I mean, are you, are you trying to set a new high in the marketplace, you know, uh, when people really can't afford what they're, what they're paying right now? Yeah. And then when you're modeling your expenses, You know, are you doing something that's ridiculously below, you know, CPI or something like that? So again, I think that it boils down to reasonableness. Now, the difference, though, when you're looking at an income-producing property versus single-family home on a fix-and-flip, you know, you've got different potential exits on that single-family home as opposed to, say, that multifamily property where somebody is really going to be looking at the cash flow.

Oh, yeah.

And looking at the cap rate when they're buying it, as well as the current interest rate environment. You know, conversely, you might have a little bit of squeeze based on the interest rate environment and affordability, right, on that single-family home. But the dynamic and the impact's a little different.

Absolutely. That's a good segue. I have a few videos that I want to play for you. There's some topical things I'd love to get your take on it because, yeah, you just have so much experience.

Sure. Thank you.

I'd love to see exactly you think. Uh, so we're gonna need to put the headphones on.

Oh, okay.

Just grab any one of these. Yeah, just grab that one right there. Okay, perfect. Okay, the first one is, um, Federal Reserve leaves interest rates unchanged under new chairman.

The Federal Reserve deciding to hold interest rates steady as we expected. This is the first move under newly minted Federal Reserve Chairman Kevin They described the economy as expanding at a solid pace. They said the job gains have kept pace with the workforce. And they do say that inflation remains elevated. And they say that owes in part to the conflict in the Middle East. I think the big surprise here is the statement and how short it was. The Jerome Powell-led Fed in their last meeting in April had a 340-word statement. This statement is just half a page.

Kevin Walsh has dramatically shortened this particular So thoughts on the whole interest rate thing? Because it was supposed to be Trump's going to fix everything, interest rates are coming down, the world will be saved.

Well, first thing is that I don't know about you, but I don't have a crystal ball to predict interest rates. Okay? And I think trying to predict interest rates is a little bit of a fool's errand. And, you know, Over the years, you can look at the guidance from the Federal Reserve, and usually they're pretty good about giving you an idea of what they're thinking and, you know, how they're approaching it. I think higher for longer is what we've been living in for the last several years.

Mm-hmm.

And when we saw those bumps by the Fed, in our business at least, we saw a lag of somewhere between 6 and 9 months between buyers and sellers, right? Where the bid and the ask, right? What people were willing to pay and what people were willing to sell for. It was very wide because of the expectation of, you know, the interest rates and also capitalization rates. And it took a while for sellers to start to realize that, you know, the value that they had when rates were in the 3s, And cap rates were ridiculously low, right? We saw some cap rates on multifamily that were, you know, high 3s. My goodness, you know, when that changes, you've got all that compression and, you know, you started to see that narrowing and you started to see more deals done. We saw a tremendous pickup in Q3 and actually Q4.

Yeah.

to this point, you know, in deals and deal inquiries, uh, because I think that people started to realize that, you know, this is the new norm. This is where deals are going to get done. Um, so, you know, I think that if the Fed holds firm, um, that's probably okay. I, you know, people are predicting that there might be a quarter of a point bump by year end.

Mm-hmm.

Um, you know, in some respects that's material, but Hey, when I started lending in the business, rates were at 18%.

Yeah.

So, you know, something at 6% or, you know, 6.5% is still pretty reasonable. I think what was an unrealistic expectation was that rates were going to remain at 3%.

Yeah.

Okay. So I think you can make money in any environment.

Absolutely.

But again, I wouldn't get too over my skis on trying to predict where rates are going to go. Look for those better deals and, you know, do the math and, you know, anticipate that you may have, a change in rates, you know, over the next couple of months. But getting to your point, it's a long game, right? So, you know, stress it a little bit and, and if the math works, do the deal. If it doesn't, move on.

Amen to that. This next one is $162 billion in multifamily loans come due between July and December 2026.

8 seconds. That's all it took me last night to pull every multifamily loan in the country coming due between July and December 2026. $162 billion. 60% of every 2026 multifamily maturity hits inside that 6-month window. The math nobody else is running yet.

Average rate locked in at 3.6%.

Average refi quote today, 6.3%. The gap, 270 basis points. Then I Overlaid the markets posting negative rent growth: Austin, Nashville, Atlanta. Those are the panic calls landing in 90 days. If you're sitting around waiting for a broker to call you, you're already third in line behind the listing agent and the workout desk. I'm not waiting; I'm pulling the list right now. Comment list, and I'll send you those submarkets I'm tracking.

Okay, and he's pushing his list. But you know, the sentiment is there. What are your thoughts on this? Loan coming due, multifamily meltdown?

I think you're going to see some buying opportunities, you know, because again, getting to his points, the math is what the math is. If you have to refinance, you know, a loan that is 270 basis points or 300 basis points above where your current loan is, and you've got a capitalization rate which kind of tracked what went with interest rates. Now, they're not in lockstep, but usually when you see an increase in interest rates, you're going to see an interest— an increase in cap rates because the cap rate is your theoretical, you know, return that you need to get on that investment as opposed to a risk-free rate. So if Treasuries are going up, your cap rates are going to go up, all of that fun stuff. So you're going to see compression. You're going to see compression in both the net operating— excuse me, not necessarily net operating income, but the ability to cover debt service based on that all things being equal, that current net operating income. And then you're gonna have valuation issues based on that capitalization rate. Now, there are gonna be guys that are gonna be able to make it through, and there are gonna be guys who are not. So I think for people who are well positioned in the marketplace, there may be some buying opportunities. And I think that, you know, for people who, just think of it logically, right? If you are hemorrhaging and you own a property, How long are you going to continue to write checks to cover that debt service before you go, you know what, I got to rip the Band-Aid off, take my loss, and move on, right? So we're going to see some of that. Now, have I been saying that for a little while? Yeah, I've been saying that for a little while, but there hasn't been blood in the street necessarily, right?

Right.

So, you know, it's very possible that, you know, other, other forms of capital are going to come in, you know, on those properties. Again, getting to your point, the long view. You know, you may see some rescue capital come in in the form of equity. You may see capital calls, you know, from the partners if they're, you know, all in and believe in that, in that particular piece of real estate. They might bring the additional capital in. You might see some sort of cash-in refinances, if you will.

Yeah.

You know, on those deals. And several years ago, we, we were doing a couple of those as well. So Again, it, it's, it doesn't initially mean that there's again gonna be blood in the streets.

Right.

But I, I think that there's going to be some, some opportunities for guys like yourself to go out and, and acquire some stuff.

Yeah, no, exactly. And one thing I love, I mean, even with all this technology and the AI, it's like with real estate, the fundamentals are the fundamentals. And if you could grasp those concepts, you're gonna weather the storms through all these ups and downs. That's really where I, I mentioned we kind of covered, Brandon's story, the BiggerPockets guy, where I mean he was his whole thing was like he was like the burr, a refinance guy just doing regular fix and flips. He built this fund and then he got into the multifamily space. And on paper, I mean he did everything right. He stabilized, he got rents up, he he did everything right except he was counting on the rates coming down. And when they didn't, he had to go for a capital call and then he just couldn't make it happen. And so he had to sell at a loss and then lost all the investors' money. So I think it's twofold. He stepped out of his lane maybe by going into the multifamily too soon. I don't know. Maybe he was a little too optimistic on the rates and tried to, you know, have the crystal ball and unfortunately it didn't work.

Yeah, it could be. And I think that, you know, there are other funds that have cratered, you know, as a result of that. And conversely, there are funds and, you know, the investors in our fund, Obviously, we don't hold 100% of their money, right? We're a sleeve or an allocation that they make to us in their overall portfolio. And some of them are invested in, you know, straight up real estate investment trusts where it's an equity investment and specifically in multifamily and things like lengthening the duration of the overall investment because they don't have the ability to sell. or they don't have the ability to refinance are things that are occurring. And what that does, it affects the liquidity of the investor within that fund. Now, worst-case fund creators, they don't get their money, right? Or there's a loss to their money. You know, potentially better scenario might be that capital call, or it might be just being able to ride it out and see what happens over the next couple of years. And I liken that to you know, the, the real discounts that we were seeing in 2008 and 2009, specifically in single-family, right?

Mm-hmm.

So if you were a bank, and banks had a little bit of a different obligation, right? They can hold a loan on their balance sheet for 2 years, as long as they can demonstrate to the regulators that they had sufficient capital to do it and they were actively looking to work that loan off their balance sheet. If they move that up to their holding company, they can hold it 3 years. But, you know, banks were ripping the Band-Aid out and blowing out those properties. Imagine if you had, you know, enough money in your pocket to buy all of those different properties or buy a significant amount of those properties. And then as, uh, you know, an investor in 2012, 2013, or even today, you were blowing it out, right, over the, over the next 10 years, you would be living on an island someplace, right? So again, some of this is duration.

Mm-hmm.

Some of this is, you know, is the best loss your first loss and blowing it out now? Or, you know, do you believe that there's gonna be a comeback and rates will come down and, you know, you'll be able to realize that gain or claw back some of that gain, you know, over that period of time? It's that crystal ball. And some of that, you know, if especially if you've got third-party money with you, is going to be, you know, how that third-party money is, is reacting. Does it believe in you? And is it patient?

Right.

Right? Or are they getting happy feet and needing to move on?

Right.

And, you know, that may force your hand as a, you know, a manager of that people's money.

Yeah, absolutely. Okay. That's a great take. Last one is Trump signs order easing path for private assets in 401.

U.S. President Donald Trump has signed an executive order that allows employees to invest in private assets through their 401 retirement plans. What does this move mean for how you should manage your retirement savings? Here's what you need to know. The industry has argued that opening 401s to private assets would give ordinary retirement savers access to bigger returns and more investment options. To give you some numbers, BlackRock recently estimated that adding private market assets could bump up returns by about 50 basis points a year and lead to 15% more money in a 401 plan over 40 years. While generating higher returns is important, you should note that financial experts caution that the potential of higher returns can also come with downsides. First off, private equity's entrance into retirement accounts could push costs higher for investors. Another concern is that private assets tend to be less liquid Than the publicly listed stocks and bonds found in a typical employer-sponsored retirement plan. This means it could be harder for Americans to take out money from their plans before retirement should they need to access their savings quickly. Finally, there is greater risk involved. Advisors point out that it is often harder to assess and value private assets because there is less information publicly available. US private— Yeah, I think that, um, The reporter there covered, you know, the high points, right? And you're going to have thieves and charlatans in anything that's going on. And, you know, there's a fair number of that in regulated assets as well as non-regulated assets. When you— and this gets back to a little bit of the earlier points that we made where, you know, investors really need to understand the nature of the investment and the structure in the investment.

Right.

And not only the returns, but the risks that they're taking to, you know, to get into that investment. So for example, we have a WFP Income Fund, which is first trust deeds, low leverage, clipping a coupon of between 8.5% and 9% net to investors, net of fees, costs, and expenses, all that stuff. We've been able to maintain a stable net asset value Since the inception of the fund almost 15 years ago. Okay. So we're on the Schwab, Fidelity, we're on SEI, we're on a variety of different platforms, and people can put their IRA money in our fund. Obviously, the disclosure of past performance is not indicative of future results, all that. So investors still would need to to take a look at that. But, you know, when I talk to people and, you know, they're, they're looking at us or they're looking at not only the income fund but our opportunity fund, which is more aggressive, um, you know, frankly, we just retooled our opportunity fund in Q4 of 2025. And, um, we had Arista money in there, but we said, you know what, we're kicking you out. Not necessarily kicking you out, we're inviting you out.

Mm-hmm.

And the reason that we invited them out was that We wanted to get more involved in the equity investments, like the things that we were talking about. And when you have equity inside an ERISA plan, you would create something called UBTI, or unrelated business taxable income, which is where the income that you receive from that type of investment could be taxable inside your IRA before you start pulling that money out.

Hmm.

So the point is that, again, it's not only structure, of the investment, the type of investment that's going in there. It's the attributes of the investment and then the fundamentals. Okay? We've got a fair amount of ERISA money in our fund. We've got a 1-year hard lock in our fund, which means that you cannot pull your money out for a full year. And then after that, you can redeem by providing notice to us. So it's semi-liquid. It's not fully illiquid like going into a REIT where you're, you know, in there for 5 to 10 years.

Mm-hmm.

And unlike a direct real estate investment, we create liquidity because we have the ability to go ahead and push out capital within the fund and not having to wait for a loan to pay off, for example. So it's a little bit of a different dynamic than some of the other stuff. If somebody's going to be putting an alternative investment in their IRA, I think it's a good idea. But again, I think they have to do their due diligence. Now, going back, shoot, this is probably at least 7 or 8 years, if not 10 years. The guys at Goldman Sachs said that the old allocation, the, you know, the 60/40 split, 60% being stocks and 40% being bonds, if you want to be aggressive, or flipping that if you want to be conservative, is gone. And people can't just check the box on alternatives. They need to have a fair amount of alternatives on their balance sheet. And what they were saying back at that time was somewhere between 15% and 20% of the overall portfolio should be in alternative investments.

Hmm.

Now, there was also another study that was done a couple years back by Capgemini, and they were looking at ultra-high net worth individuals, and they were looking at a variety of different attributes over different geographic locations, the United States, North America, Europe, so on and so forth. And they came to the conclusion that when you add back real estate investments and you add back other types of alternative investments, high-net-worth individuals and ultra-high-net-worth individuals actually have a much higher percentage in alternative investments. You start to look at university endowments, Mm-hmm. And you start to see them with very, very high levels of alternative investments. So do I think that individuals and even non-accredited individuals should have some exposure to alternatives? I do. I believe that you've got to look at suitability of that investment for that particular individual. And that involves looking at their risk tolerance and their, income needs, their capital needs. So for example, somebody who's in their 20s or 30s that's putting alternatives in their 401 or their IRA has the ability to take on a little bit more risk, you know, that as compared to somebody that might be in their 60s or 70s who's nearing retirement.

Mm-hmm.

Right? So again, it's very personal and it's a function of the individual and a function of, their risk tolerance, what they're looking for in terms of the rewards, and then tying that back to the individual investment. So I think the reporter there hit a lot of those high points.

Sure. Okay. Overall, it's a good move by Trump?

Yeah, I think so. Again, you know, when you look at the investment mix, you know, that you can put into an IRA, Um, I think that adding alternatives to that mix makes a lot of sense. Um, there are a lot of platforms out there. Actually, I'm on 2 myself personally, um, where, you know, I'm investing my retirement money through those self-directed platforms into alternative investments. So, um, I think that people should give it a look. Um, they should, you know, again, weigh the risks and rewards, but There's, I think there's a lot to be said about having some alternative investments, you know, in your portfolio. Now, also when you're looking at the platforms, one of the big things is certain platforms allow certain types of alternatives across their platform. So when you're looking at a custodian or a provider, you want to make sure that the, the anticipated alternatives that you want to invest in would be permissible across their platform. Okay. And then the other piece would be obviously fees, right? You know, what are they charging you for, you know, that self-directed, um, uh, custodial service that they're providing? And it's not just the annual fee, it's the execution and the other fees that might be involved there, right? But, you know, for example, in a direct real estate investment, maybe through a self-directed IRA into something that you might be doing, given the nature of that investment. You know, if it's a, you know, a one-off kind of deal where you're investing in that property, liquidating that property, returning capital, and they're, you know, they're going back and forth with the return of that capital, that's one way to do it. Another way to do it might be to create other type— another type of vehicle where you're circulating that capital into that next deal a little bit more efficiently. So again, it's just being thoughtful, you know, about how you might be able to structure that for those investors.

Amazing. Don, I could keep you here all night and just talk to you about this. Thank you so much for coming on.

You're welcome.

This has been absolutely wonderful, and we would love to have you back. Next time Joe will be here, and then I think we could do a whole nother couple hours. with, with everything that you know. And I would love to know what you're investing your retirement in.

Well, thanks for having me.

It was a lot of fun. Yeah, absolutely. I appreciate it. How can people reach out to you if they want to know more about Wilshire and, you know, all the products you have?

Sure, sure. Well, you can go to our website, which is wilshirefp.com. So W-I-L-S-H-I-R-E, F as in finance, P as in partners, dot com. You can reach out to me, first initial, last name. So D as in Don, Pelgrim is spelled P as in Peter, E-L-G-R-I-M as in Mary, and the suffix is the same, wilshirefp.com. That's probably the best way to get ahold of us. You can also call us, 866-575-5070. And you can also contact you guys here. Yeah, absolutely. You've got all my contact information.

There you go. Yeah, we're going to have a meetup. Joe's going to be teaching teaching how to fix and flip on Monday over in Irvine. So I'm going to bring these with us and we'll make sure to get people, you know, in your pipeline.

Sounds great.

Yeah. Appreciate it. Thank you so much. Thank you guys for watching and we will be back here next week. Thank you so much.

Take care. If you want some more advice on real estate investing, reach out to us one-on-one.