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It’s been a year since our last episode of Real Estate Investing Unscripted, and so much has changed in the REI market. CEO and Founder Matt Rodak joins us on our Pilot episode to hand off the reigns to Brendan Bennett (VP, Revenue) and David Duggan (Regional Director, Midwest) and talk about the current state of real estate as we see it at Fund That Flip through the experiences of our borrowers and private lenders.
Check out the first episode below, and make sure to subscribe wherever you listen to podcasts to keep up with the guys as we talk shop with investors just like you!
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Matt: Welcome back to Real Estate Investing Unscripted. I'm your host, Matt Rodak, Founder and CEO of Fund That Flip, and we're back after a bit of a hiatus. We're getting the show going once again, and a lot has happened since we recorded our last episode.
We've had two years of some of the most robust real estate markets in recent history.
We've had pretty significant world events from global pandemics to war, which has caused some serious challenges to supply chains.
While at the same time, government policy has helped fuel record demand for everything from the groceries at the supermarket all the way through to housing, all of which has brought us to where we're at today.
Incredible levels of inflation, a very hawkish Federal Reserve, leading to interest rates that we really haven't seen in decades. So, safe to say we're certainly in uncharted territory, leaving even some of the greatest economists confounded with really how things may play out over the coming weeks, months, and years.
So we thought what better time to bring back the show, as the title implies, Real Estate Investing Unscripted. We live in a world where the plot is constantly changing. The rules are being written in real time. And as players in this game of real estate investing, we have to adjust to make the most of what the markets are giving us.
We're getting the show going again so that we can share some of our insights. We can bring on some of the best and brightest minds that we learn from, and share all of that with you so that you can hopefully learn a thing or two to stay ahead of the curve. As part of the show's reboot, I'm excited to be bringing along two gentlemen from the Fund That Flip team that literally live and breathe real estate investing.
They're on the front lines, working with our clients on a daily basis, putting deals together, developing strategies, and sharing info where we can to help our clients. So with that, let's get to it. David, let's go ahead and start with you.
First of all, welcome to the show, but give us the, give us the 30-second intro of just who you are, how long you've been here with Fund That Flip and, generally what you do.
David: Yeah, thanks Matt. So, as Matt said, I am David Duggan. I've been with the company for almost three years now. I actually started right in the beginning of 2020. Super interesting time to start at Fund that Flip or, or I guess any new company, right? Because shortly after, COVID struck the world and everything kind of shut down for a while. And even shortly after that, the real estate market took off like a rocket ship. So it's been a really fun ride since joining the company.
My first role with the company was as a territory manager for the Cleveland and Pittsburgh markets. you know, I was called it the Rust Belt market, right?
You had Western pa, you had Northern Ohio. Right? And a lot of, lot of. Good, strong Midwestern real estate there. since then I've moved into more of a regional director role that requires me to oversee the entire Midwest and manage the fund there. So I've gotten to, be a little bit more familiar with some of the other Midwestern markets and, it's been fun,
Matt: What do we call it? The hardhat lunchbox territory? Is that it?
David: Hard hat and lunch. PA, baby. You got it.
Matt: Awesome. Welcome to the show, Dave. Look forward to hearing some of your insights.
Brendan, let's flip to you. Same deal, 30 seconds. Who you are, how long you've been here, and generally what are you up to on a day to day basis? within the Fund That Flip walls.
Brendan: Yeah. Hey Matt. Hey David. so as Matt said, I'm Brendan Bennett. also been to the company for just over three years. started at the company originally as an underwriter, and then, made my way over to sales probably about six months to nine months after starting as an underwriter. so I, I started as an account executive for the Carolina's Territories.
And then just recently started doing more on the inside sales function, so helping the team with some strategies, some planning and then addition to Fund That Flip. And part of the reason I came to Fund That Flip in the first place, I invest in the west side of Cleveland myself as well. So with a couple partnerships, have about 18 long term rental units, and, just launched a short term rental unit back in March of this year.
So, pretty cool to be able to work at a company, do what I love on the side, but also during the, the nine to five. So appreciate you
Matt: We're gonna have to do an episode on Airbnb rentals. I think at some point, Brendan.
Brendan: I think So. Hot.
Matt: Yeah. Hot topic. Thanks guys. And, you know, you guys are in it, day and night, right? So, um, I'd like to start kind of at a, a somewhat macro level and then, you know, we'll dig in a bit from there.
But, if we think back to even just January of, of this year, right? Just 10 short months ago, we had mortgage rates still in the threes. they started to climb to the fours and then the fives. And now here we are in October, 10 months later, and we're, we're well into the sixes. some markets flirting with the sevens, potential to get to the sevens here before the end of the year.
you know, this obviously has a, a real impact on home buyers, their monthly payments and ultimately, you know, how much house they can afford. So I'd be interested to, to hear from you guys on, on how this is actually showing up. with our customers, right? The, the folks that are out there renovating houses or, or building new homes, as the case may be.
And, and just what are we seeing? Like how's this, this, this rise in interest rates, impacting, you know, their businesses and kind of, you know, what they're doing in terms of taking properties to market. Are you seeing prices come down? Are homes saving on the market longer? Um, so yeah. Brendan, maybe let's, start with you.
What do you, what are you generally seeing in some of the markets or, or
across the board that, that we operate?
Brendan: you know, we've, we've obviously seen, a little bit more of like a leveling or stabilizing of home prices, right? So, 12, 18 months ago, home prices were on a tear up until the right. So every time you looked, it was another five, 10%, 15% increase. So, I think now with interest rates going up, you're seeing a little bit less of a flock of new buyers to the market.
So with that, Leveling off a little bit. if you guys remember 12 months ago, you could make an offer on a house within the first 24 hours of it being on the mls and you might be the 20th offer in line, right? So now it's more so in the first couple weeks of a house being listed, maybe there's three, four or five offers.
It's a little bit less competitive, which I think is what. Normal is, is more so like versus what we saw in the last 12, 18 months being a little bit more, you know, outside of the box. So I think our borrowers are, are seeing that and they're, they're adjusting in real time. So, you know, I, I talked to one of our borrowers outta North Carolina recently who, used to kind of cater to that 700 to 900 K price point, right outside of Charlotte.
So after talking with him and saying, Hey, how, how's the interest rates impacting your business? He's like, I've already spent all this money like marketing to this group and this demographic of buyer. So he is like, now the interest rates have gone up. Their purchase power might have reduced by 150, 200 K, somewhere around there.
So he's like, I'm now building a product that really caters to that same home buyer, but I'm just following them down with their purchase power. So instead of building a 800 to 900 K home, he's kind of adjusted his strategy to be more so in the five 50 to six 50 range where he feels like he can still service that.
Customer base, but still have a better chance of having that, that home sell. I think the other interesting thing to look at is while demand has been coming down, I still think we've been seeing really low supply levels across most of the major markets, in the us. Obviously, some are different than others, right?
There's some areas where the supply has really gone up, which has been the areas we've probably seen the most severe price drops. but I think until we see a, a full stabilization between the supply and demand, I, I think we'll continue to see some strong fundamentals, um, in general from our borrowers and just in the, in the industry
Matt: Got it. So just wanna follow up on one thing you said there, B the, the, the example I think you gave of the guy in North Carolina who's, shifting his product down from a cost perspective, but staying kind of at the same customer cohort. Right? So there's a realization, I think, implied in there is like some expectation that rates are gonna stay up for some time, right?
If he's building new homes, he's expecting rates to kind of be like this, at least for the next nine to 12 months. What's, what's he doing to get to that price point? Is it, kind of a smaller house? Is it lower grade finishes? Are we pushing further out where land is cheaper? Is it some combination of all of those things?
Or what's, what's kind of his, his tactic on, on actually accomplishing that and still making money, obviously, which is, which is the goal
Brendan: Yeah, of course. Yeah, I think at a macro level, it's definitely a mix of the three. So location, finish type, and also size For this particular borrower, what he's doing is he's just compressing the size of the home. He's building a little bit more, you know, instead of a 2,504 bed, three and a half bath, he's compressing more to 2200.
He's doing maybe a little bit. I'd say mid grade finishes instead of some of them, some of the more custom style finishes that are, are gonna drive that price point up, so he's still able to cater to the same demographic. Just a, a slightly smaller, house with
finishes more in that, that middle class area.
Matt: Swiping out the 1520 K Viking range for the the two or three K. You know, LG, that looks almost the same kind of a deal.
Brendan: Exactly. Yeah. And, and for, for that buyer class too, I think, it's what they're looking for, from an affordability standpoint. They're, they're still looking to, they're a buyer. They've committed to buying in the market regardless to where the interest rate's at. So just kind of meeting the borrower where they're at from a price point is super important.
Matt: Got it. Cool. David, over to you. What do you, what are you seeing?
David: Yeah, where to start. So I, I feel like I, this is a constant conversation for me and everybody I meet with, everybody wants, everybody wants my opinion on like, Hey, what's going on with market conditions? Right? Like, what, what should I be looking for? What should I be doing? Like, I, I don't know the answer, right, But I can tell you what I'm seeing.
Um, I still think there's a fundamental lack of housing right there. There's still less houses than there are people. I heard a realtor in Pittsburgh use a, a really, I think, good analogy, right? He said, Midwestern real estate, we never really get invited to the party, but we never have the hangover either, right?
So we didn't see that explosive growth that, you know, the southeast saw, right? Or Texas, here in the Midwest, right? Like we, we saw some, some slow and steady increases and, and property appreciation, but as things start to level off, like I, I don't think you ever see. Dip here in the Midwest, at least not anytime soon.
So I think, um, you know, most of our, most of our clients that are, are borrowing from us are still humming along, right? They built their business around real estate. So they're not gonna slow down just due to market conditions. They might tweak their strategy a little bit, right? They might, tighten up their numbers.
They have to make sure they're more diligent on the buy side and making sure they're buying the property right. Especially if they're doing like the Burr method, right? The, the buy, renovate, rent and refi. it's tougher for those deals to pencil out now on that refinance, you know, if they're not buying it, right?
That being said, I think everything's gonna kind of level off for them, right? And, and here's what I mean by that. So over the past two years, I think you were seeing everybody kind of buy above market value out of necessity most of the time. Right? So even these people that make their living in real estate, they, they may not have necessarily been buying the property, right?
But, With the high tides, you know, the high tide was raising their ship as well. So, so they still were able to make it out on the back end and have an affordable, or rather a profitable deal. Now, as the tide starts to sink, I think they'll be able to buy the property, right? And maybe they won't have the higher outsell or, you know, have, as an attractive of a, a refinance option, but it'll still be a profitable deal because they were able to buy it more affordable.
So, That's kind of what I'm seeing here in the Midwest that I don't know about some other markets, but certainly.
Matt: So I think one of the things that's, that's made kind of where we're at today, particularly challenging is just the, the rate of change. The pace of change, right? So I think everyone was, to some extent expecting, higher interest rate environment, you know, through 2022 and into 2023. I don't think anybody was predicting, the, the pace and the rate of the, of, of the changes.
You know, so that, that's made it, I think, particularly challenging over the last three or four months. Right. So like, I'd be interested in hearing from you guys on like, do we think enough time has passed right? For people to kind of process what's going on, develop the strategies for, you know, for a functioning market that the sellers and buyers have to come to an agreement on what is a fair market price?
Right. So David, I think, you know, to your point, The strategy shifts were like, you gotta buy right now. Whereas before you can maybe pay a little bit more cuz you, you were relatively confident, you're gonna catch some appreciation through the life of the, of the project. Do we think enough time has passed or are we still kind of in the middle of it of, you know, sellers, Right?
the people that our borrowers are buying homes from still have maybe some unrealistic expectations around what their, their house can sell for. Or are we kinda leveling off? Are we getting there? Are we still like bottom of the third, top of the seventh? Like where, where are we at with kind of this market finding its new level and. Y'all's opinion.
Brendan: David, I'd be interesting at your opinion, but, the way that I view this, I feel like it's still very much a developing story. I'd say we're, we're in the fifth inning. We're, we're, we're still kind of waiting to see, um, there's a lot of buyers out there that have just now started to enter the buyer market.
They're looking on the mls, they're trying to see what kind of deals they can get. And a lot of sellers for the first time are putting up these, you know, sky high price points and they're not getting any offers, right? They're, they're listing a property, you know, in that 10 to 15% increase trajectory, expecting the same reception that they got, you know, six to 12 months ago.
And it, it just might not be there. So I think there's still some expectation setting that's going on between buyers and sellers, and I think there's still a little bit more time before that hits equilibrium. Um, when that is. I, I think it's kind of to be seen because it depends on, what's the fed doing, what are the other, how the supply, supply chain issues looking in the next, you know, two to three months.
the good news is I believe that we are down the path. We are starting to see some level of expectations coming back to normal, and then I think we have a, a little waste to go, which I think is always the case with real estate in general, right? Buyers and sellers probably were never on the exact same page, and that's part of the, part of the beauty of it.
David: Yeah, I agree a hundred percent Brendan, the fifth inning. Sure. You know, maybe, maybe a little bit past that, but I still think there's this lag, right? Where buyers, especially investor buyers, they've wised up, they, they know, Hey, look, it's not the same market that we're in. That we were in 6, 9, 12 months ago.
So I'm gonna make sure that I'm buying it right. And I still think there's a lot of sellers and realtors that are, are trying to catch the end of this hot market, right? They still think it's a seller's market. They still think, Hey, let's get it listed now. I can still catch the tail end of this thing.
I think that's why you're starting to see stuff sit on market a little bit longer now, especially, right? Like over the past couple of years we saw stuff that would get put on market that was totally dilapidated and still sell way over market. I think that those people that are trying to jump in and like, hey, I'm gonna sell this.
Property that I inherited from grandma and, get top of market forward or above market, like they're out of touch right now. But I still think there's a lot of, of sellers and, and realtors that are maybe still holding onto that little glimmer of hope that they can get a really good offer for their properties.
Matt: so I think the word to the wise here a little bit is be patient. I think the market moved faster than the market could move, to use the market in two different ways. Right? I think we're seeing a little bit of catch up, I think, in terms of finding the new level.
So it'd be interesting certainly to see how it plays out over the next couple months. Brennan, you mentioned something that I wanna pick that thread up on, which was, supply chain. going all the way back to even before Covid, in 2019, lumber prices were up, we're starting to feel some stress on, just overall availability of everything from lumber to PVC to appliances to copper.
You know, the demand story was picking up momentum and a Global Pandemic happened, a lot of shutdowns happened, which really compounded, the challenges around getting materials for housing, for pretty much everything that goes into a house. And then huge demand spike for housing, right?
Which kind of, you know, made it worse. So, how's that playing out today? And what's been the result of that for folks, and like where have you seen some success with some of the customers that we work with on dealing the realities of the market, particularly as it relates to supply.
Brendan: a couple interesting things there, right? So, like David said, with, the last 12, 18 months of the real estate market being so hot, our developers could afford to pay a little bit more for lumber, for countertops, cabinets, whatever raw materials that they're putting in the house because they were getting that on the outsell.
I think now with rising interest rates, home prices starting to level off a little bit. The chase to the top is is not quite as strong as it what it once was. And also the number of home starts has also leveled off and it's not on a tear as well. So I think, I was actually just at bigger Pockets conference the last couple days in San Diego and they had an economist who got on stage and started talking about the supply chain pressures in general and she was quoting how the 20 year supply chain pressure index has been at a 20 year high and really wasn't showing much signs of relief until recently. So that August and September for the first couple months, we started to see a little bit of a layoff on some of that. Continued increase in raw materials, and I think builders and developers are especially seeing that in lumber already, specifically.
so I think some of those pressures from like a macroeconomic level are starting to let up, which will impact our borrowers a little bit more indirectly as time goes on. But I think our borrowers also, they can't just wait for the market to settle because they have to build the house today.
So they have to make some decisions very purposefully that they can control. So I think what they're doing is, they're starting to try to select fixtures and materials and, now you mentioned level grade appliances instead of a $20,000 appliance, Right? All those things that you could get at a big box store, you can get at multiple vendors in town. It’s gonna result in a lower price, right? So, and also they're gonna have the ability to be able to have those materials readily available. So I think intentionally they're selecting materials that are a little bit more readily available. They're building products that are a little bit more spec build style, and a little bit less on the custom home build side of things.
But I also think, again I'm not an economist, but I think, you know, tracking some of the economic data, we're starting to see a little bit of relief from supply chain, at least in most of the sectors that the developers care about.
Matt: So the, the fed's getting a little bit of what it wants, right, with the rising interest rate environment, which is cooling the demand down to hopefully let supply catch up a bit. Which is always the other side of the coin, right? We have a more expensive house, for an end buyer relative to their overall payment because of a higher interest rate.
But, hopefully the cost of goods that went into that house are also coming down to at least meet it halfway.
Brendan: Yeah, I think so. And I think kind of kills two birds with one stone, right? So it allows them to solve their supply chain issue, which allows them to build quickly. Cuz it's all about, days under construction, holding costs, all these other things that the developer's tracking throughout their project, whether it's with us or just in general.
so it helps them control that variable. And then also with home prices leveling, it's allowing them to also build a more affordable home. So both those things are kind of working to bring that product to.
David: Yeah. to Brendan's point. the people that I'm seeing getting maybe not hurt right now, but their projects aren't looking great. They're not looking as profitable as the people that were doing luxury new builds. I'll give you an example. There's a developer that we work with here in northeast Ohio who had a row of luxury town homes planned here in the Cleveland area.
He actually walked away from the project because his point to me was, Hey, when I first bought the land and designed the project and did the renderings and the build plans, it was a really profitable project several months ago, lumber has more than doubled since then.
He's like, David, I can't, in a market like Cleveland, I can't raise that price point to the point where it's profitable in a different market. Maybe I would just continue to jack up the price and I would get what I'm asking. But something that I was planning to sell for $600,000 here, I can't all of a sudden just sell it for $800,000 because supply chain and lumber issues, right?
So that's kind of a one off extreme example, but I think the people that are building more of the middle class grade, right, more of the economic grade. I think by and large they're okay. because all the, the factors you had mentioned before, like prices are coming down.
And maybe the market's softing a little bit, but it's not gonna crush them to the point where they're trying to offload a luxury product. And, it's a little bit more of an affordable product. The other thing I'm noticing, I talked a little bit before about strategy changes, I'm noticing some of our clients that have previously been doing high end fix and flips, or really heavy lift fix and flips. They don't wanna be in the projects that long anymore. One, because they're seeing these huge shifts in really short periods of time and they don't want that stress and that that potential risk of having a project out for 12 or 18 months.
But two, like the fluctuations in materials and in delays in supply chain. So they're switching to. Hey, instead of doing five to 10 really high end fix and flips a year, let's do double that amount. But we're gonna do really cosmetic in and out fix and flips. Maybe we do 'em turnkey and sell to other investors outta state.
And that's kind of a whole other topic. People, they just don't wanna be in these projects as long and they don't want those really heavy lift, sort of high risk construction jobs.
Brendan: Yeah, and man, I think we, we've seen that out of one of our larger developers in North Carolina as well. So, you know, he does anywhere from 150 to 250 units a year. primarily single family homes. So he has a couple different product lines, one being a pretty economical home between a 275 to 350 price point.
Then he also does a luxury series that's in the million to million five range. So he hasn't shied away from that luxury build altogether, He feels strong that the market will receive that product well, maybe it doesn't sell as fast, maybe it doesn't sell as high as what he was hoping, but what he's done is he's adjusted how much product he puts out in each of those sectors, right?
So if he used to do, you know, 150 of the economic and another hundred of the luxury, he's shifting that to where he is doing 200 of the economic and then 50 of the luxury, right? So, Most of our builders that have developed some specialties in those classes, they're either, again, trimming down how luxury it is, like the example I gave earlier of coming from 850 down to 650, or they're just doing a little bit less of a quantity just to kind of hedge their bets a little bit on what the market's gonna look like.
Matt: Yeah. I think the saying is you can make money in real estate in an up market or a down market, right? You just have to have the right strategy and kind of understand where you're at in the market. And to the point earlier, we're in the fifth inning, like we're kind of stuck in this transition period right?
And the sooner I think we can get to kind of level, the better it's gonna be for the entire market, buyers, sellers, our customers, investors, et cetera. So, fingers crossed that we get there soon. So I wanna shift gears a little bit and kind of talk about the capital market side of things for a bit.
So, for those of you that are listeners that are just getting to know us, in our business we really have two types of capital that we partner with to fund the loans that we originate. So we've gotta an online platform where individuals can invest in as little as, you know, $5,000 into individual deals, individual projects, or as little as a thousand dollars into some of our more diversified fund like products.
And then we also have institutional investors that buy loans. So, like publicly traded REITs, insurance companies, leveraged fund buyers, you know, kind of up and down the spectrum if you will, of Wall Street. And Brendan, I wanna throw this to you first. You're pretty close.
You work with our, particularly our institutional capital partner business, you failed to mention this in your intro, but you had a quick stint in our retail investor business as well for some number of months.
You know, talk to folks on that side of the business too, but love to hear from you of just kind of what are we hearing from particularly institutional buyers?
How are they viewing the space? Kind of how's their posture shifted, you know, over the last couple months, particularly in light of what we talked about earlier on the interest rate side.
Brendan: Yeah, so I think both on the institutional and the accredited investor side, the feedback has still been that there's still very bullish on our space at large. They're obviously tracking the macro data that we've talked about on the show so far, right? So they're tracking, you know, how many housing starts in the new construction industry. They're tracking days on market. They're tracking medium home prices and, and where those are tracking. So they're looking at all the big, big macro level data as well, and adding that into how they're interpreting what's going on in the market. One of the most direct impacts that this is having is similar to the way that our borrowers are modifying their approach. Instead of just shutting the lights off the capital partners and the accredit investors, they very much have the same philosophy as a borrower, ironically, where they're gonna look through different deals, different investment opportunities, maybe with a little bit more of a fine tooth comb.
They're gonna be looking at different leverage metrics, different pricing metrics, and try to make sure that in this new environment that we're in, does the deal still make sense? Are the fundamentals still there? So again, I think by and large we've still seen a big demand. We're still getting accredited investors signed up at pretty strong rates. We have, new capital partners reaching out, you know, asking to look at some of our loan tapes. So I think the demand is definitely still there.
Matt: Yeah, that's what's been encouraging is you talk to the borrowers who are working in the business day to day and, and arguably have the best finger on the pulse of like, what's happening and they're still doing deals, right? They still believe there's a market for whatever product it is that they're bringing to market. and similarly, you know, some folks that have, literally billions of dollars to deploy in entire teams to kind of develop a perspective on this space, continue to believe the same thing we believe, which we talked about earlier. We've got a supply problem. There's not enough housing, relative to the demographics of the millennials and the home ownership rates and just population growth.
While there's maybe some bumps in the road, like the fundamentals are gonna carry this business through, and I think ultimately the creativity of the customers and the capital markets are gonna find a way to make this work.
Brendan: Yeah, I agree. And I think as well the way that they're approaching it so similar to the way the borrowers are really back a little bit on prices, they reel back a little bit on their outsell value. The capital partner has taken a little bit more of a conservative approach from a leverage standpoint.
So, 12 months ago maybe we were doing 90% of cost for an average project. Some of those leverage metrics have dropped a little bit down to like an 85%, and that's industry wide, what we've seen from not only us, but all the other hard money lenders in the space. So it’s just a way for them to kind of still be very much involved in the market, but have a little bit more of a calculated approach. the other thing that's kind of good just to think about as a thought exercise is, you know, with the 30 year residential mortgage rates being at six and a half, 7%, you know, that's an attractive risk profile to a lot these investors now.
Right? So, you know, 12 months ago it was a two to 3% return profile. Relative to our eight or 9%. So now with that, those interest rates rising so quickly. Um, we're now in a place where the residential rates are between six and a half and seven. and by and large the hard money space anywhere from like 10 to 11 and a half.
So, interest rates rising slowly in, in our space, makes sense just from a relativity standpoint, given where commercial or, residential interest rates sit.
Matt: Yep. Great point. And David, I'd be interested in hearing from you, you know, you're in the market every day, meeting with our customers who are meeting with other folks that are putting money out on the street, similar to we are. What are you kind of hearing and seeing and kind of how has the market at large responded?
Brendan hit on it, but how's the market kind of responding, in large to, I'll call it the overall product offering, right? From a pricing, from a leverage perspective, what's changed, I guess, right? In terms of how are how other lenders are showing up and kind of what they're offering to the market
David: The positive news around all this, to Brendan's point, there's still a strong demand for this asset class, right? And especially people that are, are looking to escape that volatility of the stock market. This seems to be a more stable asset class. So there's no shortage of people that are lining up to buy this type of paper right now as loan originators.
I think, and this is what I'm seeing out in market, I think we're all dealing with the same kind of challenges, right? Whether you are, a shop like us. Cycles our money. And we sell our paper to institutional or retail buyers, or if you're a shop that balances all of your loan and kind of holds your paper, you're gonna deal with challenges.
So if you're balance sheeting everything, You're gonna run into capacity issues. There's only so much money you have to lend out. So, you know, over the past few months, we've seen some, some lenders get a little cowboy, right? And say like, Hey, screw what the market's doing. We're gonna keep throwing out, you know, really sexy rates and terms.
but now what they're running into now, it's like, oh man, dry on capital, right? So like, we gotta go on a lending hiatus, With groups like us that cycle our money, we've gotta make sure that we're structuring our loans to the appetite of the paper buyers.
So the challenges that we see, again, to Brendan's point, is, you know, their risk appetite has gone down a bit. They're not as aggressive on wanting to buy loans that are super high leveraged at a really discounted rate. They wanna see stuff that's more in market with today's real estate market.
So we've had to adjust terms a little bit, but I think by and large that's industrywide, right? Leverages. Rate is up a bit. Lenders are gonna be a little bit more diligent about how they underwrite deals and the risk appetite is a little bit less. And I think access to capital is going to be more difficult for the people that are new entrants into real estate investing.
You know, those are all the sort of challenges we're dealing with. But I think, by and large, everybody's kind of sticking to their horses, right? And, and they know who their big players are and who's gonna be good borrowers of their money. And so we're running with those people and it's been treating us well.
Matt: And I think to some extent it's healthy, right? We're hearing it kind of on both sides of the business from a borrower's perspective. Um, De-risking a little bit. Maybe building a house that there's a higher level of comfort of having a market for, from a price point perspective, maybe tackling, you know, slightly less large renovation projects.
So you can get in and out quicker. and same thing on the capital market side, right? As we're bringing down leverage a little bit, repricing risk a little bit. to me that's smart and healthy to make sure that this industry can sustain itself right through this period of uncertainty that we're in and come out and make sure that there's capital for what the market needs, which you know, bringing new houses to market, either through new construction. I think the average age of the house in the America today is 40 years old. So we've got a lot of call it infrastructure investment that has to happen. And we need capital for that, right? So, always challenging when you're in the middle of it. But I think, I am happy to see that the market is responding what I consider to be responsibly. You know, as we work through these things collectively together.
Brendan: Matt, I have a quick question for you on the private lending side of the business. So, you know, around 70 ish percent of our marketplace is still very much dominated by the local private lenders, right? So, the guy or gal that lives down the street that's sitting on a large retirement account or you know, a high W-2 earner that's now retired and wants to put some money on the streets in real estate.
What have you been seeing or hearing from like the private lending space? Do we think it's more competitive now or less competitive? David mentioned that with the stock market being a little volatile probably would make sense for some private money lenders to be really active right now.
On the flip side, maybe a lot of these investors are tracking some of the housing data and they're also in the fifth inning waiting to see how things play out before, you know, they start running home. So curious to get your take on that, just given it's related to our business in a lot of different ways, both on the borrower side and on the lending.
Matt: Yeah, it's a great question. I mean, I think the short answer is it depends on a lot of like that individual investors kind of, time horizon, risk profile and a lot of other things. I mean I dunno if you guys follow Ray Dalio. He used to run one of the largest kind of hedge funds and he was famous for the last, I think, decade, saying that cash is trash, right?
Like you really don't want to have cash cuz you can't really get any type of return on that cash. And you're losing money effectively as a function of inflation. He's recently retracted that statement and now says, “cash isn't all of that trash that maybe it used to be.”
And I think the reason for that is, there's gonna be some opportunities. And I think, really across the entire spectrum of our customers, people are slightly more inclined to be opportunistic and saying, you know what, cash doesn't sound so bad right now.
I'm gonna sit on it, see what happens to the equities market, see what happens to the real estate market. you know, and try to deploy capital either when I've got more certainty around the risk that I'm signing up for, or where there may be some opportunities, because of some disruptions or dislocation in the market.
So, then again, there's other people that like, have to generate passive income. And they need it to support the lifestyle they've lived or just their horizon from an investment time perspective. And, to David's point, they don't wanna be in equity markets, but they gotta generate some type of real return.
So, um, This asset class looks super attractive to them. So a lot of it depends, but I would say that I think more so than in the last couple years, cash looks a little bit better than maybe it has, just as a function of, either, not sure really what risk I'm signing up for because of just all the fluidity in the market, or, I want to have a war chest, right? For when things settle in.
Brendan: Yeah, makes sense. And I think we've seen that from some of our borrowers too, right? So the borrowers in the really hot areas that still have really low supply, private money's still there. It's still really, really plentiful. Some of the areas that maybe over appreciated during the last 12, 18 months that are now kind of facing some of that correction a little bit more steeply.
Private money's a little bit harder to come by. Some private are just deal junkies, right? They just wanna continue to invest and see new deal flow. So, yeah, definitely depends. It's interesting to kind of watch how that class moves, in addition to our competion.
Matt: Yeah, it'll be an interesting, I think, you know, next, certainly a couple quarters, but maybe a year or more, and in a lot of ways reminds me of the times when I started the company circa 2014, 2015, where we had interest rates that looked more like this and a little bit less liquidity and more uncertainty around housing.
So, arguably one of the best times to start investing 2014, 2015. So, I'm excited. I think we've got some really great partners that we lend money to. We've got some great partners on the capital market side and I think we're all trying to keep our head screwed on straight and be smart and strategic and work together and share information.
And that's what this podcast is all about. So, look, in the interest of time, I'm sure we could jam out here for another couple of hours just talking about all things real estate. to bring us to a close, first of all, I'm super excited that we're back at it and, look forward to having you two kind of carry the torch forward on, keeping this going.
And before we wrap up, you know, I'd love to just hear from you guys on, you know, what you're excited about. What y'all have plans, you know, for future episodes here, on real estate investing unscripted so that those that are listening in have something to to look forward to next.
Brendan: We've started assembling the roster of who we're bringing on and pretty excited about how that's shaping up. So, in the next couple of episodes we're looking to bring on an economist to be able to speak to some of the things that we've touched on here, someone that's, an expert in the field to really kind of dig deep and teach us a couple things would be awesome.
We're also looking to bring on one of our Fund That Flip borrowers that is, very productive in the North Carolina market. He's a younger gentleman who's really gotten a hot start in real estate, primarily off of wholesaling and now developing the business. And then, we're also looking to bring an investor on the podcast as well, just to kind of hear that side of the business.
Then David, one of the more exciting ones, I think, is product manager of Flipper Force and kind of they bring to the table from a deal analyzer and also construction management side of things. So he's gonna come on and speak about the product and, and different ways that investors, whether you're doing one deal a year or a hundred, how they're leveraging that software, to be able to run their business.
Matt: Yeah. FlipperForce, That'd be a good one. Particularly as we're transitioning out of the days of like doing your ARV calculations and profitability on the back of a napkin, cuz like Yeah. To maybe having to sharpen the pencil and having some of those tools available to, make good decisions.
What was it guys? Thanks. Thanks again. This was, a lot of fun. I'm looking forward to tuning in to the, the next episode and, and joining y'all when, when you'll have me back. for those, listening, thank you all for tuning in and look forward to, to having you back for the next one as well.
be sure to check out more great content on Fund That flip.com. Follow us on Instagram, Facebook, and LinkedIn. also if you have any ideas for the show or any topics that you'd love for us to, to get into and cover. Feel free to send those on over to info Fund That Flip.com and we'll get 'em picked up and see if we can get 'em worked into the agenda.
Otherwise, for Brendan and David, this is Matt signing off. Talk again soon.
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