Unlock Wealth: Master Real Estate Investment with Doug Perry

Hey, what's up you guys? Welcome back to the podcast, the New and Experienced Investor Podcast, the number one live podcast in Laguna Hills.

I love that.

I love it.

And I know you do. That's why I keep it in there.

Yeah, I love it.

Uh, we're a real estate podcast that brings investors from all walks of life together. I'm one of your hosts. I'm Alex Barnett. I'm the new guy.

And I'm Joe Holmes. I'm the experienced guy. And yeah, let's address the elephant in the room right away before all the comments start lighting up. I'm going to a special event. I was ordered to a special event right after this podcast. And that's why I'm dressed like this. If not, you know, I'm usually in a Hawaiian shirt and jeans to match the co-host.

That's right.

I always wear it.

Yeah.

But anyway, that's why you see me like this. Um, if you like it, please let us know. Thumbs up. And, uh, if we have to up our game, I'll get Alex.

There you go. Yeah, maybe we'll be in suits. Put a 1 if you want suits. Put a 2 if you, uh, want to keep it casual.

There's a lot of 1s showing up, just to let you know.

Or 3, or 3, you just don't care.

Yeah.

Yeah.

Okay, maybe we'll be here in suits.

Yeah.

We'll do zoot suits next time. We have a special, special guest in studio with us. I can't wait. I can't wait to bring him in. He's getting ready in the back. He's doing some shadowboxing right now. We're going to get into it. We're talking about predictions. We're talking about the end of the year stuff. How did you guys wrap up your whole 2024 investing year? How are you going to start 2025? We'll get into all that. But first, let's talk about our meetup.

I thought you were talking about the meetup because the meetup is going to be me bringing out the crystal ball again like I did last year and predicting what's going to happen this coming year, 2025. Don't miss it out— miss out. It is December 23rd. I know it's really, really close to Christmas, but if you can, please join us. Hangar 24, 6 o'clock, December 23rd.

Yeah. Joe's—

I'm not gonna say the R word. No, no, no rain.

Oh yeah, no, it'll be fine. It'll be clear. It'll be probably 80 degrees out there.

Okay, great, great. Um, good.

But yeah, Joe has been— he's basically been reading the global markets and, um, sort of channeling all the real estate data. And, you know, and then he's like putting it all in just almost like a Conduit, almost like a ChatGPT in human form, and then he will give you the predictions. I don't know how you do it, but your eyes roll back in your head. You're like, you know, it's pretty crazy.

Kind of an exorcist.

Yeah, and then you're spot on. So I base all my decisions off that day.

Nice.

Yeah.

Okay.

Well, it's pretty cool.

Thank you.

Um, plus you'll meet some people and maybe have some drinks and food.

Yeah.

So it should be worth it. I'll see you guys there December 23rd. Let's stop messing around. Let's go ahead and bring in the man. He is here with us today. He is the founder of QualCap. He knows all about mortgages. He can get your deals funded. He can tell you exactly the route you need to go to make sure that you are making the best decisions when you are leveraging and you're getting debt and you're funding your deals. Doug Perry, thanks for joining us.

Thank you so much for having me. Great to be here, Alex and Joe.

Heck yeah.

Welcome.

Let's go ahead and jump right into it. Why don't you introduce yourselves to the audience? How did you get into mortgages and real estate? And, you know, fantastic.

I'm in my 4th decade of mortgage lending. Got my start at a little company called Countrywide Home Loans where I spent 18 years, got a chance to run some very large production divisions and run basically a very large business and understand how the mortgage business works from the corporate side. From there, I went on to a company, IndyMac, where I did pretty much the same thing, ran a very large production unit originating billions of dollars in mortgages a year. Boom, the financial crisis hits. And it was a real eye-opener for me in terms of seeing that in my adult life and understanding the cyclical nature of real estate and how you could prosper in all phases of the cycle itself. After that, got into some non-qualified mortgage lending, which is where you're making loans based on Bank statements, on personal financial statements, means other than just collecting a W-2 and a pay stub. And from there, got into private money lending, lending that benefits real estate investors. Those are short-term loans to do fix-and-flip projects. We're going to talk about that. What are those loans? How do you qualify for those loans? What are the rates? And then also long-term rental loans, loans that don't qualify on income of the borrower. Loans that qualify in the rental income. So some great things to talk about. And I have a really, really in-depth background that I'm looking to leverage here for the viewers.

Excellent.

Wow.

Okay.

Excellent.

So I always like somebody that's been through, you know, 2008. Did you see it coming or was it like out of nowhere?

Definitely had some signs that it was coming. Interest rates were dropping. Loan guidelines were changing. Some of the things that make loans secure would be making down payments, having high credit standards in terms of maintaining credit scores. And you started to see loans that were available with no down payment. And obviously, you can get a VA loan for veterans. That's a great thing. But we're not talking about a VA loan here. And eventually, that loan turned into a 103% loan where you didn't even have to make a down payment. And although that loan might have originally been made to a 740 credit score, Pretty soon it's a 700, and then it's a 680 and a 640, and then you're doing them for 620s. And next thing you know, you have some borrowers that don't have any skin in the game. They haven't made a down payment, and they have a history of not making their payments on time. So you could really see that coming. Probably how I would identify that era is say it was a great party leading up to it, and like every great party, there's a great hangover. And the financial crisis was an incredible hangover in terms of of property values. And during the financial crisis, I ended up in Las Vegas where I was financing high-rise condominiums. High-rise condominiums were tough to finance even during the good times, let alone in someplace like Las Vegas where it's more or less ground zero for the financial crisis and what it did to real estate.

Um, Countrywide got bought out by Bank of America. IndyMac, I think they just went bankrupt, or were they bought out by somebody else?

It's a unique history, correct. And I wasn't at Countrywide when they were ultimately bought out. Bank of America had made a $1 billion investment in Countrywide. Countrywide became insolvent. Again, I wasn't there at the time. And in what would go down as probably one of the worst financial decisions of all time, they elected to put another billion into Countrywide and purchase the company. What they should have done is walked away, because they inherited a whole lot of problems that cost them a lot of money. IndyMac was a bank, and IndyMac ultimately was taken over by the FDIC and spun off to— Paulson and some of his crew, they really got the better of the US government.

Oh, yeah. Do you think that was a choice that was made by Bank of America? Was that a choice by Paulson and his crew that you guys are going to buy Countrywide?

It's very perceptive, Joe, because there were a lot of backroom dealings, so to speak, with the government. It was a unique time, again, where the government was deciding who we're going to backstop, who we're not going to backstop, and there probably was some pressure put on Bank of America to bail out Countrywide and to purchase the company. I can only assume that there were also some commitments made that they wouldn't go after them, the government wouldn't go after them for some of the things that had gone wrong, which ultimately didn't come true.

To understand, my questions have nothing to do with you, nothing whatsoever. It's really about the situation, the time. I've been through 3 ups and downs. 2008 was probably the worst. But I could see the writing on the wall that, you know, you were talking about 103%. I saw 110% loans. Like, You don't have to be a brain surgeon to figure out that there's something wrong here. What was the thinking? You know, you were at the corporate level, right? What was— I mean, what were your bosses telling you? Like, you know, go out and tell Alex to go buy a house for 110%, and his FICO score is down at 620, because we need to, you know, generate some business here. Is that what was going on?

Well, it's, you know, we have— there's loans that we make today where they might have large down payments. And behind the scenes, as a lender, you say, I dare you to walk away. You've got 25% equity in the property, 35% equity in the property. The exact opposite is true with these loans where people had no equity in the property, and there was a huge incentive to walk away.

Mm-hmm.

I think that the real problem was that people forgot real estate's cyclical. You said it, Joe, which is you've been through a lot of cycles. And if we just take a little bit of a step back, we can see these cycles in a graph and we can understand relatively where we are. The cycles average about 5 years each. No one can predict that exactly except Joe at his, uh, his meetup on Monday.

Yeah.

He's gonna give you an exact prediction of where we are in that. Uh, but I think that people forgot that. They forgot that things were cyclical. And, uh, hey, we're putting this marginal credit quality borrower into a home with no down payment, and, uh, don't worry if they don't make the payment, the property value will be higher and we'll be fine. Well, the reality was the bottom fell out of the market and lenders weren't fine, and especially the people that invested in these loans as mortgage-backed securities behind the scenes weren't fine. And it forever changed the way that those loans were purchased and, and, and looking at credit quality And thinking that a mortgage is always going to be secure if you invest in it. That's just not the case. And you have to look at the underwriting, what the criteria are. And some of the loans that were available at that time never ever came back. They're gone.

I could really use—

So what are you looking at today? I mean, if you had the crystal ball, which I encourage you to come to the meetup if you would like to speak on crystal ball issues. You have a crystal ball. Where are we today? You know, it's been, Since 2008, we have been going up. We haven't been going down. We've been going up. You know that? Yes, COVID hit and everything stopped at that point in time. But still, it's like if anything, prices continued to rise after COVID. So where what is your prediction as to the mortgage industry and where the market's going? Really, are you guys being More cautious, less cautious? Are we going to see those 110% loans back pretty soon?

Really good question, Joe. And a little sidebar here to promote Joe's meetup. It's a really good meetup. If you're in the area on the 23rd, please attend. It's always a lot of fun. There's a lot of people there, good networking. In terms of where we are right now, there's a little bit of a disconnect. We're past the high points of the interest rate cycle. the most painful parts of that. The Federal Reserve has started a decreasing cycle, but we're also met with some unique signs in the economy. Employment is uniquely strong, although it's a little bit choppy. And recently, we've seen some signs of pain in the economy. We're starting to see an uptick in foreclosures. I was reading a report the other day on foreclosures for borrowers that made more than $150,000 a year. Now, in a lot of parts of the country, especially where we're doing this podcast from, you might say, Well, that's not a whole lot. You need 2 people making that to exist here. But the reality is, statistically speaking, that's an upper-income borrower. And for that borrower to be delinquent— and when I talk about delinquencies here, this isn't a 30-day late. This is a 60-plus, a 60, a 90, a 120. Most 30-day delinquencies, that might be a mistake. It's a phone call or an email. Hey, Doug, you didn't pay your mortgage. Oops, I forgot. Sorry, I'll pay it right now. When you're 60 days down, Something's going drastically wrong. Okay? You've lost a job. There's a health problem. You're getting a divorce. Something's going on that's not going to be easily cured. And it's a real warning sign. So I think that from that standpoint, you're going to see pressure to decrease rates, which will be good for homeowners, potential homebuyers, and investors also. But I also think that we're at a really unique point where we haven't seen any softening in home values. Home values have really kept going. And it's news when you say, hey, if I annualize the monthly number, home values are only going up 5%. And that's down from the pace it was at before. So I think that we know from going through these cycles, first off, if you're a long-term investor, you're gonna be fine in real estate, okay? Learn how to use leverage wisely. You don't wanna be overleveraged so you can survive one of those down cycles. But you also wanna be able to take advantage of acquiring properties. And that's how you really build generational wealth. So I think that there's no sign here that we're going to see any softening in terms of home values. I think we're going to get some relief in terms of rates. I think you see rates come down. And one other thing that's been unique in this cycle, normally there are fixed-rate loans and adjustable-rate loans. And for some reason in this cycle, adjustable-rate loans haven't come down. I can get you a 30-year fixed-rate loan cheaper than an adjustable. Nobody's selling those adjustables. And when that changes and adjustables come back in the market, it's going to really open up another wave of people that can buy homes and they can increase their purchasing power, which means lower rates. A lot of ways you can increase your purchasing power, make a bigger down payment, get a loan with a lower interest rate is a big way to do it, 'cause it just allows you to afford more mortgage. And when rates come down, that's going to really put some upward pressure on home prices. I just don't see home prices coming down here in the short run, even with more supply, even with rates dropping. I think there's also a lot of money on the sidelines. A lot of people, when you go to the meetups, when you talk to people and you say, hey, you thinking of buying a house or upgrading a house, getting your first house? There's a lot of people on the sidelines saying, yes, I am. They're busy saving and they're ready to go. They're just waiting for rates to drop. It's kind of an individual decision of what rate level gets that going. But within the mortgage industry itself, We're kind of at 6%. We say, if you can get a 5-handle rate, a rate that starts with a 5, that's going to get people off the fence. And we're really right about there right now. You can get that loan on an owner-occupied 30-year fixed-rate loan. So I'm pretty bullish in terms of real estate and what's going to happen as we head into a lower rate cycle. There are some variables, some things going on in the world, wars, if you will, conflicts, call them what you want, that creates uncertainty. And then just a new administration. And what I mean by that is saying, well, if you're lowering taxes, where's that money going to come from to run the government? And it might be that you decrease the size of the government. There might be some things to do it, but it's just an unknown. I think as that sorts out, that's also going to add pressure to lower rates. And we've seen that in the equity markets, the stock markets, a pretty good reaction to this administration coming in.

So, hmm, I think you said it. Lowering rates is going to continue to put upward pressure on prices. So normally when you have a downturn, you have like a 3-legged stool, and, and one is, uh, rates. And 2, you have, um, sometimes banks that get a little bit crazy and they do their 110%, uh, the loans out there. Uh, 3 is jobs, because without a job, you're not going to be able to pay your mortgage. Um, so is that— do you think that's the leg that's missing right now, is if the job market blows up like it did in 2008? What do you foresee, or do you even see that in the horizon right now?

You know, the employment market is cyclical also, and it's been on such a tear. And some of the statistics we see coming out, there's not as many people that are willing to change jobs, indicates a softening in the job market. And flat out, just some disinflationary pressures. When the job market's really tight, you have to pay new employees more money. That just creates inflation. And some of the things that the Fed has done to combat inflation, namely raising rates, has really helped. And I don't think we're going to see as robust a job market. And I honestly think that some of the figures we've seen in the job market overstate how good it is. And I think it's a lot worse than people really think it is in terms of the job market, much like the housing market. People think, oh, the housing's fine. No one's— home prices have gone up so much over the last 3 years, the last 5 years. If someone can't make their payment, just walk away, right? Or excuse me, don't just walk away, but just go ahead and sell your house. You don't have to walk away. You can sell it and you could make a couple hundred thousand dollars. But the reality is, again, when you look at these delinquency numbers and delinquencies increasing, something's missing there a little bit where these people have potentially overleveraged or something else is going on because they shouldn't be delinquent. And if something's happened in their life where they can't make their payment, Put the house in the market, make a couple hundred thousand when you sell it, and just go buy a smaller house. But that's not happening. They're going delinquent on their mortgage and what we call a serious delinquency, about 60-plus delinquency, which again is a little bit of a frogs are dying in terms of the housing market and the economy, which does create an opportunity for real estate investors.

Yeah, I see that all the time when I'm, I'm talking to sellers. They'll have bought their house in 2022 and whatever reason they want to move now. And it's gone up a little bit, but not enough to even cover the costs of them selling the property to where they'll pretty much break even or have to come out of pocket. But in their minds, they're like, no, I bought the real estate. I should be up $100,000, $200,000. I think it's a longer play. And to what you were saying earlier about being bullish on real estate, if you can buy something now, When we look back in 10 years, 15 years, you're gonna be like, oh, it was only $1 million. It was only $1.5 million. Now it's, you know, X amount. But you gotta give it that time. I think, you know, I think that's really what it is. And some people are expecting the quick return, which—

One of the great things about being in the mortgage business is you get to understand wealth. And, uh, within the first couple minutes of meeting someone, I get to ask questions that their best friend or their parent wouldn't ask. How much money do you make? How much money do you have in the bank? Have you been paying your bills on time? And the interesting perspective it gives you upon talking to hundreds and thousands of people— sometimes people make a whole lot of money and they just don't have a lot of money in the bank. They don't have a lot of wealth. They might even be living paycheck to paycheck even though every single month they're making a ton of money, relatively speaking. There's also people that on paper I count on— that I encountered that didn't make a whole lot of money every month, every year, but they had this incredible wealth. And the common theme was real estate. And it just really taught me that if you want to have true generational wealth, be a long-term real estate holder, especially also even when you look at retirement. If I put all my retirement funds and then all my eggs into stocks and equities, at some point I'm gonna have to look at my statistical death age A chart that the government puts out that says, based on my birth date and how old I am now, I'm going to die at this exact age. And then I have to calculate, well, shoot, how much can I spend? And it's almost like a disincentive, I think, to live longer. I want to live a long, healthy life and see a whole lot of things with my kids and grandkids and everything else. But it's this disincentive versus if I have rental properties, not only is my income coming in in perpetuity, it's going up every year. Rents are going up. And then when I do pass away, I'm going to have an asset to give to my heirs. And it just became very clear-cut to me as I, being a new person in the mortgage business, uh, in terms of who really had generational wealth. Lastly, on real estate, the thing I'd say is you can always leverage it. You can always get a loan against real estate, right? If I go out and buy a fancy car and all this other stuff and a really nice handbag or something, uh, you know, virtually all those things depreciate. They really do, versus real estate's about the only hard asset that appreciates over time. Again, you don't want to be overleveraged, right? Because then you can't survive a downturn. We've talked about the fact that it absolutely is cyclical, but you do want to use leverage wisely so you can take advantage of opportunities to build a truly— a real estate portfolio and build generational wealth.

You're in the trenches. I, I need a prediction from you. Where are we at in the real estate cycle?

I think, uh, you know, in terms of the going up, going down, and this would be high rates where things are really slowing down, we're here in that low-rate cycle, which is going to stimulate the economy, which is going to, uh, be a good time and to acquire real estate, to finance real estate. So I think we're to a boom part of the cycle as rates drop, and, uh, you're going to see that that's going to increase value still. I'm— again, I'm bullish on it. This is a time you should be acquiring real estate and, and either positioning that to sell so that on a fix-and-flip type of a project where you can take advantage of this— all these people on the sidelines are going to be buying these for owner-occupied properties— or buy it as a rental property, right? Pick a property, doesn't need a whole lot of rehab, finance this. You can use the rents to finance it. You don't need your income to finance it. It's the rents themselves for a long-term hold. And it's something that, hey, Joe, if you said a year from now, where are you gonna be? I'd say, well, I think you're gonna be a little bit better than you are now. If you said, Doug, where are you gonna be 5 years from now? I'd say just about everyone who does that is gonna be better off 5 years from now. They are. They're gonna have increased rents. They're gonna have paid down that house a lot and have a lot of equity. And quite frankly, if they're really smart, they would've done it again during that time. What's that BRRRR method where you're leveraging those assets? Goes back to what I said about real estate being something you can always get a loan against. you could leverage that and use that to build your real estate portfolio. But I think this is a great time to acquire real estate. I'd also say it's so hard to market time. And we can take a different example. You know, when do I buy a stock? When do I buy— when's the right time to buy something? And quite frankly, it's virtually impossible to predict that unless you're looking backwards. But if you look at the— in the long run, you're taking a long-term approach, you're gonna be fine. So to someone who's saying, I'm gonna wait 6 months to buy 'cause I think values are gonna be less, I would just describe that strategy as very risky. You might get priced out of the market. I've seen people, they do that. I'm going to sell my house. I'm going to rent for a year because value is going to be much lower. And then a year from now, values have gone through the roof and they're priced out of the market and they don't have enough to go back into even the home they had.

Mm-hmm.

Yeah.

So there you go.

Yeah.

We're going to be richer.

So talk to us. Specifically about how you work with investors and investor loans?

Real estate investors are very unique, simply because the typical real estate investor isn't going to be able to qualify the same way that an owner-occupant would. If you're buying an owner-occupied house, I'm going to ask you for your pay stubs, your W-2s, your bank statements, things of that nature. I'm going to calculate a debt-to-income ratio, just your total debt load, including your housing payment, against your monthly gross income. Most investors I work with, if I said, show me your pay stubs, they'd say, I don't have a pay stub, I'm self-employed, what are you talking about? If I said, show me your tax returns, they'd say, I'm taking legal advantage of every opportunity to minimize my taxable income. They're not breaking any laws, but you can write off a whole lot of things when you're self-employed. You can run a whole lot of things through the business. On paper, they're not making a whole lot of money. So that kind of loan doesn't work for a real estate investor. It doesn't at all. You need a different kind of loan that's really taking a look at what they're doing. So let's take a look at the rental property, a long-term rental. A debt service coverage ratio loan, that's a loan where you take the rental income from the property and you divide into that the monthly payment for this property. And it's called a debt service. And as simple as it sounds, if my— I was collecting $1,000 a month for rent and my mortgage payment including taxes and insurance was $1,000, That'd be a 1 debt service coverage ratio. And the higher the ratio, that means I'm collecting more than my rent. If I'm doing a 1.25, that means I'm collecting 25% more than my monthly payment. If I'm collecting less, you can actually get these loans with less than 1 DSCR. A lot of them go down to 0.75. You have to make a little bit larger down payment. But the qualification is the rental income on the home. That's what I'm asking for, is documentation on that, even if it's not rented. We can use projected rents. The property is appraised. The property value is critically important. And your personal credit is important also. Now, we can do these loans down to 620, sometimes 580, but the higher the credit score that you have on a personal basis, the better terms you're going to get. The loans themselves are not made to individuals. They're made to LLCs, 123 Main Street LLC, and then there's a personal guarantor behind that loan, the person who is, is actually applying for the loan. but it's not even in your name. It's made to an LLC. So loans are much more conducive to how a real estate investor would work. Again, you do have to have decent credit. You can't be a bad operator. And there's also usually a background check involved also. If you're a known criminal or money launderer, drug dealer, you like to do lawsuits against lenders, that's probably going to be an issue for us. But outside of that, again, you get a property with rental income, We can qualify you for a loan. It also works on short-term rentals. If you're in a market where you're doing short-term rentals, the great thing about short-term rentals, man, those rents are nice and high. The bad thing about short-term rentals, the occupancy rate is much, much lower than an owner— than a traditional rental where you're renting to a tenant in there on a long-term lease. But you can still do that. You can still— there are formulas out there where you can calculate that rental income on a short-term rental. But you can do that type of property also. The other part would be a fix and flip. So on a fix and flip, generally speaking, you can get a 90% of the purchase price loan. So only a 10% down payment, and then 100% of the rehab. It wasn't that many years ago that those loans just weren't available unless you're heavily experienced. But Wall Street's gotten involved in these loans. It's made the guidelines much more clear. It's put— brought a lot more money to this asset class. and made things much more consistent. And you can get that loan right now, even if you don't have any experience. It can't be something where you're going out and getting a $5 million loan to do it. It has to be a reasonable project. And generally speaking, the rehab needs to be 50% or less of the purchase price. But even with no experience, you get a 9100 loan on those. Those loans are typically 12-month loans. They're interest only. And again, you get 90% of the purchase price. And then you get 100% of the rehab funds. Something borrowers don't always understand— let me just take a second to explain how the rehab works. It's a reimbursement system. So let's say that I was going to go spend $100,000 on rehab, and I have to decide how many draws I'm going to get. Well, I'm going to get 5 draws of $20,000 each. So for that first draw of $20,000, I'm going to be doing some demo and installing some drywall and doing some other things to get things going. Well, I have to spend the $20,000 first, then an inspector comes out, looks. Yep, everything's installed, everything's ready to go. Then I get reimbursed for the $20,000. So you do have to have enough money to keep the project going, have a little skin in the game, as lenders like to say. But there's some— also some strategies you can use if you're a little bit tight on assets there. You can make more draws. In that example, you could say, well, let's do 10 draws. It just— you don't want to have too many draws because it's a little bit of a pain in the neck in terms of getting the inspections and everything else. But there is a way to do it also where you just don't need a whole lot of capital to do a flip. And probably the exclamation point I'd put on that, if you are a first-timer, you can get these loans. Again, pick something that you're familiar with. Go to a location you're familiar with. Don't do a major rehab. Do a light rehab to get your feet wet on that. Your first project's not going to be your last project, but you do want your first project to be successful.

Great advice.

That's amazing. Yeah, it's all about getting the reps. I think when people, you know, you get so excited with the flip, you're like, oh, we're gonna do triple-digit flip. Okay, I'm gonna get rich off this one. But it's really once you get better and better and better, you get your systems down working with a lender, you start, you know, getting the draw schedule down so then you can really get in and get out, your numbers are all right. And then, you know, that's kind of when you start making the big bucks.

Exactly right. It's, you know, I think that we've all seen it, but people can get very rich off singles and doubles here. Your first one does not need to be a home run. It sure as heck doesn't need to be a grand slam. And quite frankly, when you're swinging for the fences like that, a lot of times you're going to strike out. And it's just not a wise strategy to start that way. Start with something that you can master, build a nest egg, and then build on that income to your next project and your next project, your next project. And as you said, Alex, At that point, you're going to have your suppliers down, you're going to have your system down. One other bit of advice on fix and flip projects, virtually any project that's in the rehab stage, even if it's a long-term rental, make a point to show up every day. The single most important thing you can do is show up at the project every day and make sure people are working. If you're not there, if you're not there busting heads, so to speak, I say that nicely, getting people to work hard, they just don't work hard and things get delayed. And time is the enemy on these. A lot of times these, these short-term loans, fix-and-flip loans, they range anywhere from 8% to 12%. Let's just pick on 10%. And people might say, oh, 10%, that's so much money. First thing I'd say is, well, now you're thinking like an owner-occupant. Okay, this isn't a 30-year loan. And really, if it's a 12-month loan, hey, can you be done on this project in 6 months? Wow, you've really saved some money. Can you be done in 9 months? And worst-case scenario, at the end of the loan term at 12 months, can you at least be done then and, and have it paid off? Otherwise, you're gonna need an extension. That's gonna get expensive. I think people forget that once that fix-and-flip project's done, they have to go out and market the property, and owner-occupant's gonna buy it. And they're gonna need— you're gonna have to market it for 30 days. They're gonna need a 30 or 45-day escrow. There's a lot of time at the end when you're done that you need to market this property to get a market purchase price and really make a profit here. And people don't always adequately account for that, and they get behind right at the start. So again, the advice is show up, manage this project like your job, because it is. And it's not easy money. If it was easy money, everyone would do it. But if you like it and you have a passion for it, there's a way to do it, and you can create generational wealth.

Really quick, sorry. What do you think about this? So we just got this camera. I just ordered this camera. Um, so we could watch the property. Um, it, it has a 2-way, like I can talk through it. So it's like a cellular device. It's a camera. So I'm thinking maybe instead of having to show up every day when the guys are working, I'll stick it inside while they're working and then just, hey, you guys, uh, just wanna let you know, uh, yeah, we, we gotta pick it up on today. Come on, let's get this done. Does that count as showing up every day?

Better than nothing.

There we go.

Better than nothing. You know, Alex, I didn't ask you if you have any kids, but in the modern-day baby monitoring, when we raised our kids, you had a two-way. You had a one-way radio. Take that by. Wasn't even two-way, and you thought it was men on Mars stuff. You thought it was Elon Musk. You know, Starlink.

Wow!

I can. I can listen in. You know, these days you've got a two-way monitor. You know the temperature. You know everything.

Yeah.

So true.

It's. Yeah, you can do that, and it's better than nothing. Certainly a plus. But, and I think where I'm going with this is, if people are doing this as a second job or just on the side, they have to work. They're not there, and that's a problem, right? You gotta really want this. You have to really make this your job. But again, on days like this where, you know, hey, like Joe's going to his party after the podcast here, he could use the camera to check on things, make sure nobody left early.

Yeah, no, but you're totally right. If you're not pushing them, Joe is always like, you got to push them, you got to push them, you got to push them.

You got to. I want you to comment about how you underwrite fix and flippers. Is it the property? Or is it the person or a little bit of both? But before you do that, let me go back to this camera issue. Okay. When my dad was getting older, we decided, well, we're gonna put a camera in his house to monitor him. Perfect. Make sure he doesn't fall or anything, or him or my mom. And so I put a camera there. He found it. He takes the picture of me and my wife and puts it in front of the camera. And I think that's what you'll see if you do that in one of the rehabs.

Put a Modelo bottle like that.

Yeah, exactly. It's like, yeah, I don't think that's gonna work. I think you need to be there.

But anyway, who put the camera in the porta-potty?

Yeah. Yeah.

Underwriting.

On these short-term loans, the underwriting, it is a little bit of both. It's primarily the project. Does the project make sense? Right off the bat, we're going to run the numbers. Ideally, you're acquiring this property below market. We get a little bit of an edge there. One of the things that's important to realize from a lending standpoint, when you buy a property and then you start to tear it apart, it actually goes down a little bit in value. So that's why the lender wants you to have a little bit of a down payment here. That's why the lender wants you to get going on this, wants you to keep going, wants you to get done quickly, because as you start to improve it, the value of that property goes up. But we do want to run the numbers, and, and those numbers are easy to run up front. Make sure that you know what you want to do. I've worked with borrowers where the rehab budget's all over the map, and, and so hard to quickly get this done. Nail down what you want to do. Have your stuff together. In terms of that, it's real easy to get a bid or 2 from a contractor. What you want to do, narrow that down, but run the numbers. Does the project make sense? There's a couple of numbers that get run upfront. You have that loan-to-purchase price, which is just the loan amount divided by the purchase price. We also calculate a loan-to-value, and ideally that loan-to-value is a little bit lower, meaning that you acquired that property below market. Maybe you got it yourself, maybe it was wholesaled to you. but you acquired that property below market. We also run a loan-to-cost, which is the total cost of the project divided by the loan amount. Generally speaking, you want to make sure that the borrower has 10% equity in the total cost of the project. Although again, these days I'm starting to see loans that are 92%, 93% loan-to-cost, some real good terms coming out of that. And then lastly, the after-repaired value. And this is something that an appraiser is going to go out to the property, appraise it as is, what's the as-is value, And then also they're going to take a look at that budget you had. How much are you spending? What are you doing? And based on that, they're going to come up with an after-repaired value. And generally speaking, you want that after-repaired value to be more— no, that ratio of the loan amount to the after-repaired value to be no more than 75%. So the project itself is being underwritten. And then the borrower, the guarantor, really, because the borrower is an LLC, the guarantor is being underwritten too, looking at personal credit and again, looking at background. Are you a successful operator? Are you someone that in your life, when things haven't gone right, did you bail out? Well, that's going to be— the lender's going to be able to see that. That's going to be detectable in terms of your history. There might be lawsuits, there might be defaults on your credit, there might be other things that pop up in a background check. And typically in an owner-occupied loan, there's not a background check. No one's running a criminal check when you're buying a primary residence. But there— these kinds of background checks do get run on these loans because, again, they want to make sure that you're a good operator. And inevitably, when you hit a speed bump on the project, you're going to see it through. I think that a lot of people get so wrapped up in these TV shows, as we like to say in the business, when you buy a property, believe it or not, 2 good-looking guys in plaid shirts don't show up and a half hour later the project's done, despite the fact that halfway through the project you discover the foundation was cracked. We don't know why you didn't discover that up front. That would really bother us. And 2, how did you pay for that? You didn't have it budgeted. You didn't know about it. But somehow at the end of it, everything's fine, everyone's happy. That's just not real life. That's not the way it works.

Yeah, true.

Yeah, damn Property Brothers.

Yeah.

Okay, well, there you have it, folks. I mean, you could get started today if you want to— wanted, but you know, you should find a local mentor who can show you the ropes. You know, don't just dive into it without knowing anything. And reading the books and watching the YouTube videos are fine, but you really got to get the hands-on experience and there's no other way to do it besides mentoring under someone who's got 40+ years flipping properties.

Yeah. Oh, me?

That's the experience right there. So it definitely, I don't know, you kind of have a safety net when you do that because we partnered on our first one. And you basically just like held her hand through it.

I'm still holding your hand.

Yeah, got a camera on you.

Yeah, still holding your hand.

Yeah, so yeah, you know, and there's a lot of stuff that pops up that we're just like, I don't know, I don't know what to do. But lenders don't want you to say that.

Is that why, is that why Lauren calls me all the time instead of you?

You know, Exactly.

Yeah, I'll treat her nice.

Yeah, exactly. It's easier to— yeah, it's easier to like soften them up.

I've seen him. He puts you up to the hard test. He does.

I know.

Yeah, people react differently to her than to me, so it's just the way it is. That's why she was the singer of the band and I was playing guitar. So yeah, it's all, it's all thought through. Full circle.

Yeah, exactly. You know, the lending business, when you partner up with someone, we say that you're going to get a PhD in flipping. And it's a really great way to start. I, I just can't put a big enough exclamation point on that. Um, partner up on your first deal or 2. It's going to save you a lot of money. It's going to really increase the chances of success on that project. And then you're going to have some profits you can parlay to your next project if you want to do that on your own. A lot of times these partnerships End up going for a lot of deals. But that's some really sound advice for someone who's never done it. And like you said, they've watched the TV shows, they've watched the videos, they've read the books. There's a reason people are writing those books, because they can make more money doing that than flipping homes. They weren't that great at it. And ask ChatGPT, how do I flip a house? It's probably the same thing as the book.

That's a great point.

Speaking of videos, shall we See some videos.

Yeah, see some videos. So yeah, this is the part of the show where we, uh, I, I, I brought some clips up and I just want to get your honest reaction to these, Doug.

We have a house that is better for a post-pandemic world, but that's not a need to have when we have these kind of supply and demand problems. So I suspect that that number will shrink back to 1.6, 1.5 million. As we approach $300,000 to $400,000 of inventory and demand, that is probably when it's going to be selling all the most homes. That's going to be easy when we get to where it's literally over $400,000 plus a couple of offers. We're probably going to start that elimination process 1 or 2 years prior to that.

Do you think that pause on your investment will be 2025?

By then it will have happened. I think that we've got 5 years to clear out that 2 million if we are moving as fast as humanly possible. It could be 7 years. 2025.

What do you think of that prediction?

It's pretty long-term prediction, right? First off, I, I like the energy. Really like the energy.

Just say it with confidence and people are like, yeah, that's true.

He's saying 5 to 7 years from now he's going to dump the portfolio. A little bit of market timing. I, I, for me personally, I'd say position your portfolio correctly during the low rate cycle. Refinance, get rates low, get your, your, your debt service low, and you can survive this. Why do you want to get rid of it? And maybe let's hear the second half of it. Well, okay, you sold it all. What'd you do with that money? Did you pay capital gains? What, what happened? Where'd you put the money?

Mm-hmm.

And when are you going to buy back into the market? Again, it goes back to, to something I learned firsthand. The wealthiest people in the country have real estate portfolios. And if that individual executes his strategy, there's going to be a point in time that he's— he's— he has no real estate. He's going to sell it all. Uh, if he times it right, great. But like I was saying earlier, um, it's very hard to get that exact time unless you're looking backwards. So I would, I would call that risky. And also that timeframe, 5 to 7 years, that's a long time.

Right.

That is, when we're doing mortgage evaluations, especially for owner-occupied, you can run a real simple break-even analysis. Hey, how much money are you saving? And how long is it going to take you to break even? How much longer is the lower monthly payment going to take to offset the costs? And we generally want that to be 3 years or less, not because we think you won't be there in 3 years. Simply because it's so hard to predict that far out. Life changes, things happen, things change. Things change in the economy, things change in the world. So I would call that a really long-term prediction. I don't think he's really going out on a limb there. That's kind of a toe in the water.

Yeah, exactly.

He is too young. That's his— he just doesn't remember 2008. He just didn't have time to do his plan. He didn't have time to say, You know, um, yeah, I'm gonna start selling because I see what's happening in the market. It just went down so fast. So if you're a real investor, let me tell you what you should be doing. Okay.

All right.

You should be socking all that money away and waiting for it to hit bottom. Example, I own several condos in San Juan Capistrano that I've purchased over the last 40 years, and I've gone through 3 up and down cycles. The last one, 2008, was probably the the most painful in that these homes were literally selling, and I looked at the market like yesterday, and these homes are now back up. They're selling for $600,000. For a 3-bedroom condo in San Juan, 40 years old. I mean, these are old condos. Um, and during 2008, they went down to $100,000.

Oh yeah.

But yeah, that's— yeah, that's how, how bad it was. That's how much they were.

So I feel like we, as an investor, what do you think I did? Yeah, you bought 10 more.

10 more. Absolutely. Yeah. 'Cause I had already been through 2 of these downturns. This is the 3rd one. I know it's gonna go back up.

Yeah.

You know? So that's what he should be thinking. Not like you said, not getting rid of the portfolio that he has.

Well.

Is getting ready to buy more.

Oh, exactly. Yeah, buy more. I think we've hit what we would call the bottom with when the rates went up. It didn't go down. It went like flat for 3 years. 6 months and that was the bottom.

You're young.

Well, I'm just saying, because if the rates start coming down— It's not the bottom.

The last 3 cycles, you have lost 50% or more of the value.

Well, yeah, but that's— I don't think that would happen again.

Why?

What?

What? Be wary of always and nevers. Yeah.

Why?

Okay.

Why don't you think that would happen again?

Because if it does, like, I'm not saying like I want that to happen, but I'm saying if it does, then I am going to buy a lot during that time.

Okay. So you'd be ready.

I just don't see that happening because there's too many factors that are different than those times. You know what I mean? Like, there's not going to be another 2008. We already said that because they were predicting that last year. They were saying, oh, it's going to— once their interest rates go up, it's going to tank. It didn't even really make a blip.

I would say this, that one of the factors in 2008 were some risky loans we've talked about in the podcast. We had people that had very little equity and low credit that had loans. This cycle, those got cleared out and those loans haven't been made. So there's a much stronger borrower behind this. And I think, you know, Joe really said it there, which is, you know, hey, what did he do when those condos appeared to be worthless and everyone said, who would buy one of those condos in San Clemente? He bought more, right? And be aware of that. Be wary of something when you look at an investment and everyone says, oh, this is a grand slam, this is the best, right? That's probably a reason to be cautious. Don't be deterred by someone saying this is a horrible investment. Just do your research. It might be a horrible investment. In the long run, it might be a great investment. But, uh, you do— you just don't want to be overleveraged going into a down cycle because then you can't survive it. And you do want to have that cash. That's typically one of the problems for people is, you know, you look at Joe and say, Joe, you bought 10, why didn't you buy 30? Well, because I didn't have enough money to buy 30 and no one would loan me the money because it's a tight part of the cycle. So you want to have a little nest egg there. You want to be able to take advantage of that. And again, the long run too. When he said you're too young, it made me think, get a job and cut your hair. But, but, but in the long run, I, I was at this investor presentation by Tariq from the Flipping Homes, that guy, and he said the odd— and he was pitching a, uh, like a mentor storage investment. Oh, okay. It was something like that, but a very engaging guy. And but he led off by saying, I should have held on to all those homes. I, I sold them and I made money. But I would be so much wealthier now if I'd held them. And that's that buy and hold. Really try to get that ingrained. And that's where Joe's talking about here, saying, hey, I, you know, probably for a few years people pointed at me and laughed and said I wasn't such a smart guy. They don't laugh anymore. They look at that and say, wow, this is, this is great.

I will say—

Thank you.

I will say I've been in real estate for 3 and a half years.

Yeah, youngster.

Oh yeah.

Don't listen to me, actually.

Okay, what's next?

What's the next video?

Let's see, we got more predictions. Mortgage rate predictions.

This is your wheelhouse.

Um, didn't work. Still no sound.

The mortgage man. He's never wrong, by the way.

Bold predictions. You know, being a mortgage guy, well, what down payment was that? How did you come up with that payment? Sure.

Right.

Is it 20% down?

Is it cleverly left out?

I don't know exactly when that clip was, but, you know, the 6.75% to me was almost one of the high points. And where he said some of these were going, we're already there. You can, you can get a loan below 6%. right now. So I think that he's— if you're asking my prediction there, I think he's a little high on rates there, pun intended. I think that rates are going to be lower than that. We talked about the fact that adjustable rate mortgages right now are right where 30-year fixed rates are. When they come into play, that's going to even create lower rates, which increase buying power. And he did say something I thought was really smart, which has to do with the spread, the spread between the 10-year Treasury rate and where mortgage-backed securities are. Right now, that's inflated by somewhere in the neighborhood of about 75 to 100 basis points, about 3/4 to 1%. And that's going to tighten up as rates go down. And because that's a premium that you put on getting something that's a house versus a 10-year Treasury, which is guaranteed by the U.S. government. In theory, the U.S. government would never default, never has, never will. It's the most secure thing out there versus a home. There might be a little problem. with it, but it's also a very secure investment. But I think you'll see that spread tighten up. And my prediction would be, I think in this interest rate cycle, you're going to see 4-handle interest rates.

Ooh-wee.

And prices are going to go up.

Yes.

But give it a little longer, it may bottom out. Is that what we're saying?

No, I think, I think there has to be a major event Before you see a bottoming.

Gotcha.

Just be ready when it happens. It has to be, um, worker-related.

The robots.

Yeah. Doge.

Doge. Yeah, all that. First colony on Mars.

You used to work at the IRS.

Yeah, yeah, exactly.

But now you're not here anymore.

Sorry.

Go get a real job.

Yeah, yeah, exactly.

All the IRS agents lose their homes.

Yeah, I know. Oh wow, wow. I didn't think about that.

Yeah.

Um, Doug, how can people, if they have questions, and you know, you're, you're obviously very knowledgeable, so thank you so much for being here, but I know people are going to have more questions about their specific situations. What's the best way to start that process with you?

2 ways you can do it. Visit my website, it's qual-cap.com. You can also give me a call, 650-273-0947. I love talking about this stuff and running the numbers with you. I'm here to help. It's one of the things that makes QualCap a bit different here. We're about borrower education, empowering borrowers to make the right financial decisions.

Excellent.

Wow.

Okay. Do you fund mobile homes?

We can.

Oh, Okay, for flips or just in general?

Both.

Okay.

Both we can. A mobile home tends to be a property that, statistically speaking, is the last to appreciate, the first to depreciate. So it might be a little bit tight, but you also see them in some resort areas. There's, in our neck of the woods, some of these mobile home parks are right by the ocean, and they're really nice.

Ooh la la.

And gives you a way to, To get into a property relatively inexpensively, just make sure it's eyes wide open, whether it's a ground lease that you're paying, HOAs. Oftentimes the amount for the mobile home itself doesn't include that, which is oftentimes a lot of money. And also just the demand. Not everyone wants to live in a mobile home versus a single-family residence. In theory, a nice single-family everyone wants to live in. Not everyone wants to live in a mobile home.

Gotcha. That's good to know.

I'm actually helping a buyer right now looking at one of the mobile home parks in San Clemente. There's some ocean views up there. It's shocking.

Yeah, they're really close to the water. Really nice.

That's incredible.

In a mobile home park with space rent or you own the land?

This one is actually you own the land.

Oh, nice.

So it's got a I mean, for being that close to the beach, it's 55+, so it is like a retirement community. But I believe their HOA is somewhere around like $275 a month.

Wow.

So, and then the home prices in there range from $500,000 to maybe $800,000. And those $800,000 ones are all the ones with like the sweeping ocean views and everything.

So, yeah.

Nice.

Yeah.

Excellent.

Nothing like an ocean view to add to property value.

Yeah, really. Yeah, though. Yeah, well, the ones that had like the really amazing view, it was going for like almost $800 grand for a mobile home. Like, okay, makes sense. Um, so, uh, yeah, you guys, if you want to, you know, uh, take, you know, keep your education going as far as lending and, um, you know, starting 2025 right, reach out to Doug. You know, um, he's been coming to the meetups pretty regularly. So if you wanna meet him in person there, show up at the meetups. Our next one is December 23rd. So December 23rd, we are looking forward to it. And with that, we will see you guys next week. Thank you so much again for, for coming.

Thanks for inviting me.

Yeah, absolutely. We'll definitely do it again.

Thank you.

And, uh, we'll see you guys next week.

We'll see you.

Thank you so much.

Take care.

Bye.

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