Episode 704 | Navigating The Commercial And Residential Lending Markets With Mortgage Experts, Krystle Moore And Kenny Simpson

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Get educated and entertained by someone who has closed thousands of deals and lives to support you in achieving the same. Now here's your host, CEO of We Close Nodes, Scott Carson.

Hi, everyone. This is K and K. And on this episode of the Note Closer Show, Kenny and I are going to talk about all things lending, financing and this crazy market we're in.

All right, everybody. Hey, welcome, good morning, good afternoon, good evening. Welcome to this episode of the no Closer show. Everybody. We have got a and I will tell you this, it's probably not an episode more relevant with the craziness in the real estate market, specifically the mortgage markets. And we've got some of the best of the best when it comes to residential and commercial finance here on the no Closure show. Today I'm really excited to have Crystal Moore. She is the founder of Pacific Shore Capital in San Diego, leading expert in commercial financing and real estate investing. She's been in a career of over 19 years. And then opposite of her, we've got Kenny Simpson. He's the head of the Simpson team at San Diego's premier residential financier and real estate investor. He's worked with over a thousand clients on all sorts of stuff. So got two experts that have their thumbs on the pulse of the craziness of the market. We've risen a little bit beforehand, but we are so honored to have you guys, Kenny and Crystal, K and K. We have a double barrel of financial questions today for you. Welcome to the Nutcloser show.

Ya'll too, thanks for having us.

Nice intro. Thanks for having us. Appreciate it.

I'm available for Barbara's birthdays and weddings if you ever need me to introduce you somewhere.

Well, you know, if this doesn't work out, we know where you'll be.

Exactly. So I mean, it's a crazy market that the rates are going through. Let's talk about some of the changes that you guys have kind of seen because it used to be, oh, cheap interest rates. And you know, and I won't say anybody could fog a mirror. It wasn't like it was back 15 years ago. But let's talk about it and let's do the commercial market first. Chris, let's talk with you how that's kind of changed in the last recent days.

So it's interesting, right, because most of our commercial rates haven't really changed much over the last few years, a lot of our lenders are banks in Southern California. We just have really good financing, so we're not really doing a lot of agency debt. And our lenders kind of just change rates maybe once a week. Some didn't even change for two years. And now it's like daily, sometimes multiple times a day. So it's been super volatile in terms of rates recently. So we're seeing things. Rates are going up even as Treasuries are going down. Lenders are increasing their spreads. So that's a big question. I'm getting all the time from clients. Oh, the treasury dropped. Did my rates go down? No. In fact, they just went up a little. That's what I'm seeing right now in the market. And it's just causing a lot of price negotiations on deals that are already in escrow and people backing out sellers. Some sellers are realistic, other ones aren't. So there's just definitely been a lot more change than we've been used to over the last few years.

Let's talk a little bit because I think most folks that haven't ever taken out a commercial loan, it's a different process than a residential loan, right?

Yes.

You're looking really heavily at the cash flows. You're looking at credit, which is always a big thing. But what are some things that you guys are, you're looking at on the commercial side for a good borrower hoping that a bar can qualify.

So in terms of like qualifications for borrowers. So I always say my business is so much easier. I mean, when you get a commercial loan, we're assuming that you're a savvy business person. So these are technically business loans. So the kind of key three things that I ask for when I'm qualifying someone is I'll have them give me their personal financial statement and their real estate schedule. But I'm going to look at what's their net worth. So their net worth needs to be at least equal to the loan amount or greater. And then I look at post close liquidity. So after your down payment, after your closing costs, most of us lenders want to see about 10 to 15% of the loan amount in liquidity. So if you come to Me For a $1 million loan, you need to have about 100 to 150,000 of cash or cash equivalents. That does not include your retirement most times. If you have some mitigating factors. I like to say that we're common sense lenders, not so much like residential.

I got the look.

Yeah.

If you're listening to this, she just gave him the look. Exactly. But we all understand that. But. Sorry, go ahead, Crystal. It was.

And honestly, credit wise, we don't even really have like a minimum fico. Like residential, you might have a different rate if you have a 720 score or 740 score. We don't really look at that. Again, we kind of use our common sense. Like some of our real estate investors are super active and they might have like a tenant eviction or some like kind of thing on their credit that's giving them a ding or like some little thing here or there. So we just look at your credit and the overall like credit worthiness is more determined on what your credit looks like, not just a number on a page. That's mainly what we look for in terms of qualifying.

And you're looking for what, 1.25 and debt service coverage.

So multifamily it's 1.15 to 1.2. And then if you're going commercial, like office, retail, industrial, it's usually like 1.25 to 1.3. And I think that's the biggest kind of crossover that people need to make when they're trying to go from residential to commercials. They call me and they go like, well, what LTV can I get? And I'm like, well, you can get 75, but if you're in Southern California, good luck. This is all debt coverage constrained for the most part. So I usually tell people the lower the cap rate, the more money you have to put down. So if you want to buy by the beach at like a 3 cap, you're probably putting like 60% down. That's all it cash flows for. But the good news is the bank's not going to let you fail because they're making sure that the property covers the debt. They're buffering it with vacancy factors and management fees. Even if you self manage and replacement reserves, like they have all these little buffers to make sure that you're safe, which is not something that you get with a residential loan.

Yeah, exactly. And I want to come back to that point where you said you've got great credit and a lot of stuff, you could get 70, 75%. But most of the time you're probably seeing what something banks usually want to be in 60s of value or less. Correct.

It's all debt coverage constrained. And so. But it's kind of interesting though because we're part of some groups that invest nationally and we also lend in other states. And so some of these Other like midwestern states and things like that. You used to be able to get 80% LTV all day long. But cap rates are compressed everywhere. So we're kind of seeing like 60, 65% loan to value is all anything's qualifying for these days.

Yeah, such a direct relationship when your rents go down or the interest rates go up, your cap rates go down and reduces the value of the property. And that's where the banks don't want to be leveraged above that. We see that a lot with the debt that we're looking at in buying is that it's usually they may have been at 70, 75, but with vacancy and things like that, now they're calling due on the bank or the bar to come to the table with 10 grand or 10% cash or 20% to write down that loan to stay that percentage. So I don't know if you're seeing a lot of that with any of the loans that you've done in the past two, three years or anything like that, or heard about any of that.

It's mainly flippers and syndicators because they're doing all these like bridge loans and stuff like that, which have been very popular. We've done a ton of them and that market is like, it's not really that attractive anymore. I mean you can just put a little extra money down and get a much better rate. Nowadays I'm actually seeing those guys doing more like a three year fixed type of deal. And that's sort of like your bridge financing now. But those guys are having to come in with cash because they get really good reputations. Right. So they're super active and then they have like these private money lenders that are lending them 80, 90% loan to value and then they go to refi and they can't qualify or the lender wants seasoning, which is a whole other thing lenders are looking for. So if you bought a property six months ago, you can't get new value even if you've increased the value 50% or something, they might say, hey, we want you to keep some skin in the game. So we're willing to lend you 85% of your cost plus plus any renovations you've done. So that's when we see people having to come in with extra cash.

Yeah, that makes a lot of sense. Now let's flip it over to the crazy world of residential stuff there for you.

Here we go. Hold on tight.

Yeah, exactly. Hold on tight. You much more of a roller coaster a little bit. It's Both sides, residential, commercial. But what are you seeing on the rates and mortgages and cancellations? Is it as bad as social media and the media portraying it these days?

I did read that statistic about the cancellations, and I just think that's just the psyche of the buyer, right? And I think the problem is, I think a lot of us are learning, like if we didn't really understand how markets worked and how money worked and what inflation means and how fast things can go up and down, I think we're realizing like what that really means to the stock market or crypto market or housing market or all this stuff, right? And I think I tell people we have the R word saying recession, right? And I said, everything lags. I feel like when rates kind of went up, most people, we feel in our business because it's boom affecting right now, but a lot of people, general public, they might not really feel it. And now you're starting to see the effect right now. They didn't just go up yesterday, they went up months ago. And we're starting to feel that effect. And I kind of explain it now because we're getting asked this question. It's like we all know it's like when they want to lower rates, give money to people, it's money in the system or money out of the system. And they are just yanking money out of the system and nobody's getting the free hamburgers, the free rents, the free massages, whatever you want to say, like joking, right? It's over. You got to pay your bills. And then they're raising rates. And so of course I told Crystal and then I said, you know, 2022 is going to be the challenging year because I knew this was going to come, but nobody predicted this high. And so we do month over month webinars in the beginning of the year, like, I think it was the NAR predicted the highest at 4% rate by the end of the year. Well, we hit that like the second month of 2022. So here we are. Yeah, I mean, I'm not really seeing the cancellations here, but I'm hearing about them all over. I think a lot of them too might be at the builder level too, where people are like, you know what, I'm out. But what I am hearing is a lot of people saying, I'm not going to do this remodel, I'm not going to buy this. I'm starting to hear a lot of things in life where people are like, I'm going to wait. And so I can imagine if the biggest thing you're going to purchase is a house. You might wait and wait and see. But just like anything, the refi market, you're only refiing if you have to. It's pretty much a divorce, a breakup, a death, a get a partner out or you're just like, I'm going to go get some capital out. So I know I'm going to pay a higher rate, but I'll refi when it's lower to deploy that capital and make money on it. But otherwise it's pretty much all purchase business. And obviously I think what I tell people now, I don't know if it's like today until when they announce qe, but it's becoming a buyer's market, right? So if a house is listed for 500, used to pay 550 and have a wrestling match to get there, now it's 500. I'm going to offer you 480. And I want to sell our credit. That's kind of what we're seeing. Right?

That's what I was going to ask you because San Diego has been famous for having this disclosure in the listings that appraised value will not dictate final sales price. You got to bring 25, 50, 100 grand to win the bid. And that's cash out of pocket in a lot of cases. And we've seen that here in Austin with a lot of California folks cashing out, moving to Texas, buying three times the size of house for a third of the cost, you know what I mean, over the last several years. Here in Austin, we call it Austin's California East. You know what I mean?

That's what I heard you. It's like San Diego in Texas.

Well, it's funny because there's an article, I don't know if it's the real deal, whatever that came out. They're saying Austin is so many people went in there and overpaid, they're expecting a bigger correction. And I tell people it's because somebody went in and the house is listed for 2 million. And they're like, look at what you get. This is a deal. I'll give you a 2, 8. They don't even care they came from California with. Right. I mean, you know what, you're living there.

Yeah, we've seen our house just skyrocket like 35, 40% in the last few years. Appreciate. I'm like, okay, this is just stupid. Now you guys have both been around in lending for since the last time, since before the last gone 6% interest. Rates that's actually pretty good compared what it was before 2007 and stuff like that. And you think about this stuff, people are all flipping out. Oh my God, it's not 2%, it's 4% like you said. Well, it's still cheap money when you figure out how everything works out, right?

Yeah, it's absolutely. It's still cheap. I remember 2005, six, like I was doing six and a half percent loans all day and those were good rates. I mean that was a good rate. We just got used to things being pretty much free for the last few years. So expensive.

Yeah. The first loan I did was my parents and they had like 11 and a half 12% back in early 2001. And I was like, you haven't refinanced yet. Like we can. I was like, oh, let's do a cash out. We got equity. Let's roll everything in there and save you a million bucks on there. So let me ask you on this. Are you seeing and this will probably be a little bit different, Kenny and Crystal, I'll keep this to you, Crystal. Are you seeing any portfolio lenders out there? You probably see this more on specific asset classes like apartments or self storage or things like that. Are you seeing any portfolio lenders that had different requirements than what you're like your true Brick and Mort are offering up these days?

Yeah. So we've got a couple like relationship type banks that will do a lot more for you. If you're a very well established owner and you've got deposits with them, they'll still do more for you. It's probably more conservative than it was. That's one of the things I love Southern California about Southern California is we're kind of like a small business relationship type community. So if you have a good track record, you're going to get something better terms from a private bank. If they more understand your story, they believe in you, they know your track record record. You're going to get something more than just like somebody off the street or somebody just buying their first deal for sure.

Right now Kenny, on the opposite side, are you seeing a lot of alt A? I wouldn't say subprime. Call those non qm. Yeah, non qm, Non prime loans. They got rid of the subprime loans, but we all know they've been around there for you. You've seen a lot of changes in that take place. A lot of lenders really tightening up their product packages for that stuff.

I don't think they even have to do that because the rates are so high. Literally funding a deal right now. Crystal knows the deal. It should have been non trim. Great 6 months ago he got a screaming rate. I was better for him to go private money. It's getting to the point where depending on your deal we have like so this is kind of what's going on. And just to kind of like in this industry it's like what Crystal said. The banks are her, they get to hold the paper they put on the balance sheet they can sell at a later time. For us, you got the Fannie and Freddie and those rates have come down a little bit. But then the non QM space primarily everybody just takes it and sells it on the secondary market. Right. And I even went to them when rates started taking up with Fannie and Freddie there is this little gap between non human and I remember going to Crystal and I said, I call, I go, how are you guys so close to Fannie and Freddie? Like you're buying notes. If you're going to buy a note, I'd rather buy the full doc than this thing if it's as close. Well, when rates came up, Fannie really quick the non QM was like, I don't know if they're sleeping or on vacation but they let it sit there for a couple of weeks and all of a sudden somebody went out to the market to sell like a hundred million dollars. They do and they went there and everybody's like, we're not buying this. There's no buyers. And that sends shockwaves. Literally the rates went like 2% within a month and it killed everything. So the high rates with non QM are really killing it because it's making it harder to qualify and this and that. I would say they're getting a little bit more aggressive in areas like they're starting to accept vacation rental income. So if you're buying a property before, like we don't care, we want to see a history. Now they're like, okay, there's a lot of people coming for vacation rentals. So if you can go get a rent survey on the property to show vacation rental, they'll use that. But I think what we're seeing for me is luckily we're a broker. We have some really good relationships with banks that can portfolio the product. So I'm able to do for investment properties have some really competitive two to four financing. That's arms and stuff that's really helping clients keep way below market. But like I mentioned, we have other like DSCR lenders that are banks and they're balance sheeting it. So if you qualify we're seeing significant lower in the rate. But otherwise if they have to sell it that market, nobody wants to buy cheap money paper. And everybody's gotta understand. I said look, there's just no buyers at 6% they want 7 or 8 yield. It's crazy. But until things change, that's where they're comfortable.

That's pretty much the minimum aspect of it we want to see. Make it an 8% because it costs us to raise capital to buy that stuff. And that's usually a break even point unless it's a hugely distressed asset that we can pick up at 50 cents of the dollar, make our money on the back end. I love the mortgage markets. It's such an interesting. It's almost like General Hospital or as the soap opera in a lot of cases. You know what I mean? I'm going to throw this to you Crystal. Where do you think in the next 24 months what area of your lending or what area of the clients that you work with are going to be the most impacted in a derogatory fashion?

That's easy. Retail and office, I think those are the two spots that we're already seeing and I think there's opportunity at least here like in Southern California where there's no land to build. So what are you doing? We're starting to see more people converting office to living spaces. It's such a genius thing to do because we're notorious for being so difficult to get plans and permits and build. It's so expensive. So why not take an existing structure and convert it into residential? And I think that's where the opportunity is. But for sure I think industrial, super strong, multifamily is always strong. It's office and retail that really get hit the hardest.

Especially we saw some deals that we're looking at was office like executive office turned into self storage. It was just full of office furniture from other offices that were closing down. You know what I mean?

Yeah. You know I also think too that like these class A apartment buildings, like these luxury apartment buildings, I mean it seems like fancy and fabulous to own these things but they operate at a higher vacancy and like you can't get a two bedroom here for less than four grand a month. I mean you know what's going to happen when the economy turns. People aren't going to be able to afford to stay there. So I'd be really nervous if I owned some of those luxury buildings, big box stores.

With retail officer, you're seeing a lot of conversions of that to self storage facilities in a lot of cases or the pods. Yeah.

Smart storage is another super strong sector of real estate for sure. It's like people pay tons of money just to store their stuff that they never look at for years.

It's. And then they walk away from it. Then you just sell it all. It's like, it's honestly like an unbelievable business.

Yeah. With only roughly a 30% expense ratio compared to 45, 55% in multifamily. Yeah. We've got a friend that owns a couple thousand units and she doesn't even have any on site management. It's all done like ATMs and virtual these days.

Smart woman.

Smart woman. Exactly. Now where do you think you're going to see the biggest impact on the residential side for you, Kenny? Is it more of a. Probably a price range or areas out there? I mean San Diego has always been hot. But are you going to see more stuff in outer areas because people want to live downtown or live in San Diego? There's San Diego still going to be the demand for it.

It's a great question. So since I studied the data now and because everybody's like, we're always go back to where we were scarred and we were scarred from the 08. I think everybody. Right. We always, whether it's a relationship or this is like, remember the time you screwed me over? It's like that. And so you knew that. So when I go back and I just look at the data and I'm like, everybody's like well how is it different than then? And I was just curious. So it's great. We can go look at data. So if you take San Diego like before the last crash, let's just talk numbers. Right. There's 27,000 active listings on the market today. I think we looked, there's 5,000. So we're still, you know, lacking inventory. The profile of the borrower is the heartbeat and pen loan. You just had a heartbeat and pen. We'll give you a loan today. That's not the case. So we're making better loans. The average credit score is much higher. And then right now I know it's because Covid and they're doing the workouts. But I always tell people I really believe that banks are working things out more these days. They're not in the business of foreclosure and short sale. That was a disaster for them. And the other thing that nobody talks about that I really believe is when somebody can't make a payment on their car. This or that, their credit gets ruined. They're just like, they're not a consumer for a year or two. They can't get credit, they can't spend. And most people, when they buy anything, they use credit. And I think we learned from that saying, isn't it better to try to work them out or say go sell your house? And I think one thing I think they did with the pandemic, I know it sucks, but they did go back to the banks. It's like we bailed you out. It's time to kind of like this did help. Cause you would have had a nightmare of a situation. So the point of that was, is just take 2012. When I was looking at data, the foreclosures and short sales were 35% of the market. Today it's 1%. People have more money, they're more prepared and stuff. So when I look at the borrower and I'm like, okay, where is this going to be? But I do think again, like you said, is I think people went and they bought outlining areas and the market was really hot and they probably overpaid. And you're like, who would buy a house out here for $750,000? There's nothing here. Those people will probably get hit first if it goes down and then it trickles in. But otherwise it's really, I think going to be a matter of inventory. Like is there going to be more where you guys are, you're going to get a bunch of inventory. And I think the sellers today are, I want to try to capture before if there is more of a correction or I just want to get out and maybe cash out or move somewhere else or the third is like I have to sell because of some situation. But I see the people that might have got hurt that put minimal down, that went out in the outlining areas, but hopefully they locked in on a good 30 year fix. That's the thing is 75% of people have a 4% or less rate. And the ARM rates, the ARM products, I think around 2 million, 3 million people have arms. Last time there was 13, 14 million arms. So when you look at the data you're like, people are in a better position. But you and I know like if people lose their jobs and stuff, they're going to walk away, but I think it's going to be smaller. So I think certain markets are going to be worse. But I think the outlining areas are going to be like where they're going to have problems, where people went too far out to Buy overpay for a house.

Well, and I think you also two people don't necessarily want to sell their house to cash out, especially if it's not a huge cash. They can't go anywhere. They can't go get a lease because they've got bad credit, they don't have the extra to put down and they can't qualify for 24 to 36 months for a traditional loan at that point. So people ask, well, they'll just sell their house. Well, that's not always the case. They may not have a place to go. But you're right, I mean with so many of the forbearance agreements and we see that as note investors, banks don't want to end up going to real estate. They would rather sell it off to somebody else and go out and rinse and repeat Velocity Capital, go out, make loans again on that stuff. It's fresh, clean paper and let somebody like me be the bad guy having to foreclose or evict. And I don't mind it because we're seeing deals six to 12 months when most investors are buying the REOs or the hopefully the short sales. That's why you don't see that much stuff because it's already been worked out because somebody stepped in and gave the bars an opportunity.

So kind of towards the end of the last recession, you started seeing especially in apartments. Like people would always ask me, how did apartments do? And I'm like, honestly, we're fine. Like rents didn't really go down that much. I saw a lot more people like bunking up, like family members living together and somebody sleeping in the living room and two people are sharing the bedroom and all that kind of stuff. So I feel like things get tough here that people are so much smarter and there's so many more things now. Like you can vacation, rent a part of your house. Like you can get a roommate. Like you said, if you locked in a 3% interest rate, you're like, well, I'm stuck here. So now I'm basically the person in the family who everybody comes to move in with because I got the good rate and I need the cash. And so I think people are a lot more prepared and smarter and got good rates and good loans and they're just going to be safe, stuck. But that's not the worst case scenario.

Well, that's a great thing. You got a low interest rate. It being stuck right now in a volatile time frame where you're still able to afford things versus somebody who's got an Interest rate that's quite a bit higher, three times higher. By the end of the year, who knows? You're in a much better position. Even if you lose out on some of that equity prices coming down, you're still sitting in a great position to write it all. I mean, that's what we love as investors is to write stuff out and cash flow as best you can.

Exactly.

So let's take that. Let's talk about your investments, let's talk about what you like, what lights your fire as investors. And then we started first and Chris, we'll go to Kenny this time. Kenny, what's favorite thing to invest in and where at?

Honestly, I think we're just like the bread and butter is multifamily. As Grant Cardone would say, it's not a get rich quick, it's a get rich for sure. Long term. We've been really fortunate here, I mean, because Crystal does the commercial financing. But we know a lot of people that over time they just built a portfolio and it's just, it's not sexy, it's not fun, it's not shiny and flashy, but it's consistent. But obviously I think there's that opportunity. We'll see what the market presents too. Like there might be opportunity to buy some distressed homes or stuff and flip them. I mean, I definitely think crypto and stock market is very much on sale. I think we just have to see how much carnage there is. I think the feds will hike one more time and then we'll have the recession. But I think there's going to be a lot of opportunity. If you have cash to deploy it in the next 12 months for sure and make a lot of money, then they're going to hit the QE button and we're going to be right back at where we were.

Sure. Crystal, what about yourself? Very similar.

I have had the privilege of looking at a lot of very successful people's tax returns and I always joke that like apartment investors look like they should be living under a bridge somewhere because like somehow they like don't have any money on their tax returns, it looks like. So I saw like their lifestyle and how they live. And multifamily has always been my bread and butter. Like Kenny mentioned, we kind of shift within that industry for sure. So flips and rehabs renovations were all the rage. We were doing that when it was hot and it was super safe. Like we were doing that and kind of trading up to build our portfolio. And then Southern California right now, 80 use are the big thing like an accessory dwelling unit. Now, on multifamily, you can add multiple. So we look at those as opportunities for us to add units to our buildings, like with fairly low building costs and not as much red tape and all that. So within the industry, we just look at where we can maximize. Because I will say, I think multifamily used to be more profitable, but now it's become like the super safe vehicle. And the more safe you are, the lower your return is. So we have to get more creative to increase our returns through adding use or renovating or adding other streams of income, cutting expenses. So that's what I love to do. And then, of course, Kenny dabbles in the stock market. It's not my thing. We've invested in some other businesses through some of the other groups that he does. But I would say, like, the majority of our investments are multifamily. And that's where I know it's safe. I'm never going to lose. And I feel super comfortable and very confident in that space.

Now, are you guys buying there in San Diego or are you looking at other parts of the country?

Yeah, so we started looking about a year ago, like, out of state, because I was looking for higher returns. But in doing that, like, maybe if I was from a small town and I knew of, like some niche space, like, I looked in Florida and I looked in Texas and we went to Florida for a month and I drove every single listing up and down, like the east side, the east coast, and most of the west coast. And I found that the cap rates were super compressed. I was like, I can just invest in my backyard. If I have a bad management company or something, I can take the property back. I can search for other people. Like, it's so much easier for me. And the one thing that I've learned is as much as people who are out of state, like, stay away from California, it's not landlord friendly. It take forever for you to get a tenant. You'll lose all your money. That is not the case. We have much higher appreciation than most major metros and areas. So our appreciation alone is huge compared to investing out of state. And if you do it right, you can actually get really good returns. I know some of the investment groups I'm part of are always shocked. Like, I'm getting a 9% return on a property we bought a few years ago. I'm like, yeah, it's actually possible. So I love California.

What you would say your average unit number is on the stuff that you're buying?

15 to 30 units because it's gotten more expensive. And the one thing is, what we learned is we went to these states, we were kind of like talking to brokers like, so how many offers? Who's the buyer? And what we learned is they're like, oh, the buyers are international, all over the state is that you're like, what? So they're like, and who's your buyers there? We're like, well, there's a listing. We can probably tell you who's going to buy it here because we don't have the outside competition, so we're kind of shielded here. We talk to these syndicators, interview them, and they're just kind of like, you might just stay there too. I might do the same thing. Like, if it's not broken, don't fix it.

Right.

Like you might have on a super competitive deal, like the last few years when it's been really hot, you might have 8 to 10 offers on a deal. Whereas out of state I was hearing like 30, 40, 50 offers.

And you're like, on a massive building. Yeah, it's insane.

Well, I think you've got a strong nature because I always say you have everybody chasing 100 plus unit developments, you know what I mean? And I think that small target works, really. And you got a ton of them in San Diego there. One of my first note deals is buying an 8 unit and a 21 unit note deal off a Mansfield. You know what I'm talking about? On the north side of San Diego County. Yeah, north county, exactly. And it's just street, street, streets of it. All that 8 units and 12 units and 15 units and stuff like that. And yeah, the cash look great. Yeah. You're have a higher return on that stuff. And it's also great because you can often have one management person manage multiple assets for you in a lot of cases too. Right.

I would love to take any apartment building, like buy any apartment note here in San Diego because it's like, you're not going to lose no matter what. Not even a chance.

We were buying debt at 50 cents on the dollar with equity 50 cents of the balance. And there was still equity above that back in the day. Here's the thing, I think, and I want to ask you this because you've probably done some. Because a lot of these apartment investors out there that are chasing those 100 and 200 units, their biggest goal is to refinance out in 24 to 36 months. I don't think those loan programs are going to be around that. They're expecting. What do you think, Crystal?

No.

And that's what I'm seeing a lot with syndicators, because, like, kind of thing I joke about now, like, everyone's a syndicator. You're going to a real estate broker to buy your apartment building and he's a syndicator also. So the problem is all these guys are giving these forecasts, their investors, like, hey, within three to five years, you're going to get all your money back through a refi. And I'm like, I don't know that that's going to be the case right now. I mean, also with rates going up, it's just kind of interesting. It's hard for me to fathom where rates are going and then where cap rates might be because I'm like, are we gonna have like today, let's say a 4.75 rate? The cap rates are still at three and a half rates are gonna go up to five, six percent, six and a half percent. Are our cap rates gonna go that high? There's too big of a spread. So I'm like, how are you, quote, pitching this to your investor when as an owner I'm happy to get like a 6 to 8% return and somehow you're gonna give them 8% return and 100% of their cash back in three to five years and you're gonna take a 20% split. It's like, how is this all gonna work out?

Yeah, no, you're speaking my language. You can wish in one hand and actually have it happen the other can happen there for a lot of folks because history does repeat itself in a lot of cases. We've talked about some of the different opportunities, but by the conversion system of stuff there, San Diego is such a unique market compared to other areas out there, too. Growth just exploded in San Diego, too, in a lot of cases out there. What outlying areas do you think are maybe not the overlooked diamonds in the rough? Oceanside used to be just a sleepy little mobile home community a few years back. Now it's different. What areas do you see a lot of opportunity for those up in Southern California that might be opportunities to be investing for folks?

Well, I can tell you we love National City here in San Diego. And it's kind of interesting because I was just talking to somebody about this the other day is in the last recession, Chase, who's like the big apartment lender here, stopped doing apartment loans in National City because that was the only part of San Diego where they took back any properties. And now it's Like National City is like the next up and coming area. I think too, you just have a lot of owners who've never sold their properties. Property taxes are super low. The city's trying to like increase that and they want to encourage building. They're very easy to work with. So I love National City, but there are a lot of outer lying areas like Ramona. And some of those areas you can get the highest cap rate in Ramona, we're doing a few deals over there right now. Like, I saw five and a half cap in Ramona. I'm like, you can get a five plus cap anywhere in San Diego. That's fabulous. You still have high occupancy and all the good things that you get in San Diego, but it's just a little out out there.

San Diego, we say we have the four walls, so we got Pendleton to the north, the ocean to the west, Mexico to the south, and you have the mountains to the east. And so we're really locked in here. But I'd say Crystal kind of nailed it. I would say the core areas are really expensive, but they're all. See if you can get deals. There's a lot of upside opportunity. People that love Southern California, they just stick here and they just, they like regurgitate their money here or something, right? It's like cash out. They. And they just love it. And they know. And if somebody's been here for 20, 30 years or 40 years, investing the amount of appreciation like you said they made, they're not going anywhere. And some of them have dabbled outside. They're like, yeah, I'm not doing that again. It just didn't work. But I would piggyback on Crystal. I agree. Those areas, but also there's the whole 78 corridor where there's Oceanside, Vista, Escondido.

That vista for sure.

Yeah.

And a lot of young families move out there because the bang for your buck is better. But the closer you get to the water, it's like kind of forget about it. But if you can buy a deal and get a license and do vacation or something, you could do well. But it's tougher by the water. We have clients buying there, but I think because there's. They have a lot of money and they're selling out stuff where they don't want to be anymore. And they're like, this is legacy assets for my kids. I don't even need the money. Let's just deploy it and buy near the beach.

And also the thing with San Diego too is like the biggest Comparison is, it's still a pretty good deal here. I mean, even though it's so expensive, people coming from San Francisco and la, they're getting a ton of bang for their buck here in San Diego. They love it. The weather is better. It's not so. Not as much traffic, all that kind of stuff. It's a lot more laid back. Like, I mean, people here come to work in like board shorts and flip flops. Like, this is like a very kind of chill place and it's still very affordable by California standards.

Yeah, it really is. Yeah.

Do you still have the weird. You may not, may or may not know this before. If you're down, like Oceanside or PB or Mission beach, where if it's. We saw a lot of places that they kept one wall up. It was one wall. It was a rebuild or it was a rehab, not a new build. You still have that kind of weird.

We still do it because Coastal Commission is rough. We're in like La Jolla area and they're saying it's like three or four years. Just like, don't even think about it. If you're going to build a house.

If you want to build an ADU there, it's like, everybody give their two cents. It's unbelievable. Like, the Coastal Commission is. We're going through where we are, La Shores. They put the restaurants out there and it makes sense, but they're just, oh, we're just waiting for the Coastal Commission to give us approval. It's like what takes a year. It's. So here we have that. And it's like Crystal says, building in our neighborhood, it's. One guy's been building a house for 10 years. He got two homes. Not literally 10 years. I looked it up, I go, this is an exaggeration. I'm like, no, he bought him in 2010. It's 2022. It's a monstrosity. But it's like, he's building it. Or it's a four or five year project. That's why I tell people, even if you wanted, you couldn't build here. Like, she sat on a panel with a lady. They do $500 million of building multifamily and stuff throughout California. She goes, we do 2 billion. You just can't do it here. It's a joke. Like, we're the best at it. We can't even move fast. So, I mean, it's good for owning apartments because there's rent demand always. But it's bad because rents are high.

It's too much that makes a lot of sense there for you, Chris, are you seeing on a lot of commercial, commercial loans where they're allowing assumable debt to take place, where the loan can be assumed to somebody later on for the most part?

Oh yeah, the majority of our loans are assumable and honestly it's never been a thing. I've very rarely seen assumptions, but I think we're going to see more of them now because people are locking in really good rates and that's probably the best debt they're going to get. So I think right now assumptions are going to be very valuable for people buying properties. But yeah, in the past it has not been because everything's like max leverage, rates are lower. But now it's like I have clients that are doing loans right now that think they might be selling their properties soon and they're like, I'm just going to do the loan with you because if I don't sell it, they can assume the debt. This is the best debt they're ever going to get. So I'm safe either way. I could sell the property, have them assume, or I can just lock in my debt and make sure I'm safe if something happens.

Yeah, that makes a lot of sense. That's common sense there. Makes for folks to take advantage of that stuff there for you. Now there was something I was going to ask you there. Oh, I know what it was. With your focus, what would you say, Would you say the medium home price is roughly there in San Diego right now? If you're looking at it's like a million plus or it's a million.

Between condos and everything it's like 860, but when it comes to houses, it's like over a million.

Wow. And that's a whole different qualification. That's a jumbo loan these days they adjusted jumbo loans just based.

So here's the interesting thing. So there's Fannie Mae, there's conforming and high balance. High balance in LA I think is 950. So you could put 5% down to 950. Here it's 8 60. Yeah, I mean by a million dollar home and just put 14, 15% down and get it if you want. The thing about, like Crystal said, the great thing about California is our lending here. It's better anywhere else. I can't say anywhere but it's like there's so many banks, people love to lend here. They love the property, they know the equity. So there's so many options. It's funny because when she Goes and talks to partner people. They're like doing all Fannie Mae. We're like no, we just do bank debt here. No yield, maintenance, prepay, none of that nonsense.

You know in other states like we see out of state it's like standard for multifamily to do like a 20 or 25 year amortization. And here it's like 30 years all day long. So if you get nothing else, I think you get the lowest rates here and you get the longest amortization. So it just helps you out with cash. Probably what you need here. Unfortunately that's why they do it. But you get the most aggressive financing here for sure and the most options.

Speaking of options, we'll come back to something. But that's why we. I think we started to see such an increase in the birth of the 40 year amortization for residential even 50 year. I saw modified alone for 50 years. I'm like what the hell were they thinking? Takes me back to on the origination days of the product that I think had more impact on the residential markets. The whole chicken pay the option. The pickup pays were great, 1% interest rates, partial interest payments as long as you kept the appreciation side. But when appreciation stopped, the whole dream stop for so many folks out there. Do you see appreciation? I know we touched on briefly slowing down anywhere there in Southern California.

No, for sure, yeah, I think appreciation is definitely slowing down. We're seeing the price reduction so but people are also were like trying to chase a pipe dream price. And so that's. You're seeing a lot of cuts. Where I go people are like well if it's price right you don't need to cut. It's people that say well Mary next door sold it three months ago for this. It's like well that was three months ago. And she got like it was a one kind of random deal. So I think people are starting to accept reality.

But also too, I mean the thing that we've kind of been talking about that we're seeing most is in purchases like seems like a 10% haircut seems to be the thing everybody's getting from the sellers or going back to the sellers for. So those are going to be comps soon enough. And so this is going to kind of perpetuate itself. So I'm seeing not only like price some price reductions, you're just not getting the over list. Like I think brokers are having that tough job of having that conversation. They sold the seller on what a hot market it is and now it's like shifted mid listing and they're having to manage all that. So I think we're seeing the price reductions or like the negotiated price reductions for stuff that's in contract. But it is definitely happening on new purchases because the problem is, and you know it's going to keep going because the higher rates go, the less sense every deal is going to make. So when people are calling me for purchases, I'm like, even now, hey, the next Fed meeting's like in a couple of weeks, so you probably want to lock that in now. Now's not the time to shop around and think about it and wait and see. It's like you got to kind of.

Be ready to move on your typical commercial deal. From the time somebody goes into contract. What are you seeing? Closing 30, 45 days or is a longer process for you to close in a commercial?

60 is pretty much our standard. We are able to close some deals in 30 or 40 days but generally we like a 60 day closing. That's what everyone's comfortable with. It's industry standard here.

Yeah. And you're seeing 30 to 45 on the residential side, Kenny, In a lot.

Of cases or no, I rarely get 30. I mean we're closing as fast as we can. I mean we close deals five, seven days quick. Yeah, I do. We got some great lenders with appraisals, so it's fast. One thing I was going to mention to your audience too, which could be something we could just throw out there is when people are getting debt now, a lot of people, if you know there's going to be a lower rate in the future, which we always probably know, like what goes up is going to come down. One thing I will say, if you're getting like a DSCR loan, a non qm, it has a prepay. One of the things I'm seeing is this product just gets pushed out. A bunch of mortgage brokers and lenders, as you know, they never did the products like oh yeah, we got these new products and nobody ever asked about the prepay. They don't talk about, they don't understand it and I know Crystal's that. So what I would tell people is you really have to factor in if you're buying an investor property or refiing something and you think there's an opportunity to refi in a year or two, make sure you're paying attention. If you're getting a loan with a prepay. I've had people talk about they're going to get a 5% hard prepay and they're they didn't really understand it was a hundred thousand and they can't refi in two years. So I would just say is it might be worth to take a higher rate and just get a shorter prepay. So that window's open. And Crystal might want to elaborate on commercial too, because even the big guys buying the big buildings, the syndicators, they're also figuring out, okay, we're gonna probably get a discount on a building, the product's gonna suck, the pricing, what can we do? And buy down the prepaid. Then they're already having these conversations like, what kind of debt can we get? Because we want to be able to have that opportunity to refi. I don't know. Yeah.

On your side, Kenny. It's interesting, I was just gonna say as I was just telling him this the other day is like his residential lenders are not very clear about their prepays. Ours are like right there on the paper. Everybody knows what it is. It's a discussion like it's expected. But for him, like it'll just say like if it says anything, 5%. And I'm like, 5% of what? 5 years, 10 years, 20 years, like what are we talking about here? So you have to physically like go seek out this information, which I think is probably an area where residential lenders might get in trouble in the future with all these people getting these prepays, their loans, not understanding, but it's standard for us. And I think the biggest thing that we're doing for clients up front is just kind of talking to the lender, hey, if rates go down, like, will you work with me on the prepay? If I come back to you, will you waive half of it? Will you waive all of it? Within what period of time? So we kind of know all this stuff up front, but I also too am like just having people shy away. Like the last cycle, people freaked out and they all wanted a 10 year fix and they thought they were going to keep it forever and rates were never going to go this low ever again. And I'm like, you're going to regret this decision. Nope, I won't. I know better. So they got these loans and like of course less than five years, maybe five, six years later, they're like, hey, Crystal, what can I do about this prepay? I'm like, you remember that conversation we had like five, six years ago, that yield maintenance, we talked about that.

It's a million dollars now. Yeah. Like there's nothing you can do about it.

Great environment where rates are going down your yield. Maintenance prepay is just like the worst thing you can have. I always tell people it's not just about the interest rate. Like people are so rate sensitive. It's like the whole enchilada. Like you need to take that into account. And as an investor, the whole reason we invest is to make money and have some flexibility and stuff. So locking yourself in on a 10 year fixed is just. If you've never even kept a loan for 10 years, let alone five, let's not like throw it all away now. The worst thing is to make decisions based on fear. And so people think I'm crazy, but I'm like, I would still do your five year fixed. I don't think in five years rates are going to be 12% or 14% or whatever. Some of these people are pedaling right now.

Well, if they are, there's a lot of opportunity for us for sure.

Investment properties are meant to be like a fluid. Like they're an investment, they're more fluid, they're more flexible. So there's very few people that have ever kept a mortgage for that long.

Yeah, I just wanted to bring that up because on the residential side, like Kristen said, it's very uneducated and a lot of people got these DSCR loans and they locked in these long prepays. Nobody pays attention until you need to pay attention. Right. So you need to sell or get out. And that margin of, let's say you had a 75% LTV and your value went down, then all of a sudden you got to pay this prepay. You might be thinking you're going to get out of this money and then it's problems. So pay attention to what you're signing.

Yeah, exactly. Because you never know because we've seen increased divorce. People haven't been forced to live at home with their spouse that maybe they never should have been. Increased bankruptcies in a lot of cases. And then you also have a lot of folks that bought, I mean FHA loans were at a 14.6% default rate for first time home buyers a lot of times out there too.

So you got to.

It's crazy out there. So talk about the get the Cash Flow Game podcast. You guys are the host of this podcast. You're doing share a little bit of the. Guys, let's have you a little commercial here for your podcast. What do you guys.

Yeah, no, I appreciate it. So we started our podcast I think was it three years ago. It was actually called Value Add with K and K. And then we really got hyper Focused on real estate. So really we interview entrepreneurs, real estate and entrepreneurs that probably invest in real estate and stuff. And it's just we kind of talk about whether it's financing or investing or we bring different people on that could be a real estate attorney or somebody that's talking about cost segregation or whatever. So really it's just educating people on what's going on. We might just do solo stuff or like, hey, we need to update the audience on like we talked about today, rates and mortgages and how it's changed. And on top of that I might do a solo where I'm talking about like the economy and things like that. And I've really gotten to dive into that. So kind of all the above. And it's just really trying to educate the clients and help out.

Really we talk all things investments, it's all getting the cash flow game. So we all believe in like building cash flow for yourself and all of that. So generational wealth, like that's our big thing. So we like helping people to do that. And we started out like more local and as we've grown we've had more well known guests and people from all over and it's just cool to hear strategy and give people as much information as we can to help them do the same thing we've been able to do.

I love it. What are your guys big goals for the rest of the year on investment wise for you?

We just purchased another building. Hopefully we'll maybe pick up another one here. But honestly for really we're really focused on, I think right now with the industry is a lot of people are pulling back. So I'm really focusing on more content, building the brand, continue to do the podcast. And then with investment, I think really just seeing what the market does and where the opportunity lies. I just keep saying I think there's going to be this short window from where rates are high, people are scared, blood in the water, whatever we call it the Warren Buffett where everybody else is fearful that it's swinging right, the pendulum swinging back. And so I think there'll be an opportunity to where you can buy and get a deal. And then when the Fed comes in and decides we got to lower rates again, they'll probably lower them really low in the beginning to get that stimulus. But then the demand, I think the people coming off the sidelines, it's going to be like a herd of cattle running over each other. And I tell people like you don't want to look back and go that was the opportunity because you Think, like, when you're kind of uncomfortable, sometimes that is the opportunity, right?

Yeah. Now, let me ask you a question. With so many loan officers and banks laying off mortgage staff and stuff like that, are you getting folks to reach out to you, Ask you, hey, how do you invest? Because not a lot of mortgage loan officers are investing. They're usually handing them out. A lot of realtors are the same way. You guys are somewhat unique, but you still do a great job with that and building your portfolio. Stuff like, are you getting folks to reach out to you?

What should I do all the time? We always have, honestly, because we used to have a property management company. I managed over like a thousand units here in San Diego and stuff. So, I mean, it just got to the point where clients would be like, crystal, just do my rehab and let me know how much it costs. Like, we would just do everything A to Z. So from the beginning, it's been a long time we've been doing this and people ask us for advice and how do I get started? And what do you think? And can I just. Do you mind looking at this deal for me? Tell me if you would buy it. So we do a lot of that advisory kind of stuff for our clients. It's something that we're kind of passionate about. I know certain people go, like, hang out with their friends or, like, play baseball or whatever. We, like, look at real estate. We drive properties and like, go to Home Depot and look at things.

So, yeah, and I don't think you're going to need a loan officer or a real estate agent that is not thinking about investing in real estate and having cash flow. I just think it's discipline. It's hard to live. Live below your means. It's hard to sacrifice. And so the ones that do, I think they have an exit at the end of their career. And it's funny, we've met people that are the top producers in San Diego for 30 years, made probably seven figures for majority of it. And they're like, yeah, we're idiots. We didn't buy. And you're just like, what? And you think they're set. They're like, no, I'll be doing this till I die, because my lifestyle and I don't want to give it up. And so we're surrounded by the crew that does what we do, but they're like, we need to invest. We get it. Because like Crystal said, we've seen the lifestyle. You're like, do you really want to be slinging loans at 60 or do you want to be chilling out. If you don't prepare, 60 is going to come like that.

That is the truth. You got to make hay while you making hay's time. You know what I mean? Go out there. What's the best way for our listeners to connect with y'? All?

So you can go to our website. It's getting the cashflow game dot com. And that pretty much leads to Kenny's residential site and then my commercial site and then we're on Instagram. So I'm Crystal Rosemore and he's Kenny B. Simpson. But those are the best places to find us.

Awesome. We'll have those links and the URLs in the description chat. I have to say, thank you so much for coming to the Noclution. This has been a fun episode to pick your brains on where the market's at and where San Diego is going and all that.

Thanks for having us. I'm excited to do the podcast swap here in a couple days.

Oh, yeah. We'll have a good time.

Yeah. I'm excited to learn about what you're doing. Yeah.

Oh, yeah. All right, everyone, that's going to wrap it up. Check it out. Get in the cashflow gang.com to connect with Kenny and Crystal and get your questions answered. Or if you're looking for finance, you guys do just in California. You're doing outside of California as well.

He's California and Florida and I can do all states.

I'm getting Texas in. We're working on getting Texas licensed in Texas. Yeah.

You know what? It used to be you pass your group one and $125. And you were a loan officer here back in the day. Not so much anymore. But anyway, good stuff. Thanks, guys. Appreciate it.

Thank you.

Thank you, Sam.