Financing – The Key to Real Estate Investor Growth

Mike: This is the flipnerd.com Expert Real Estate Investing Show, the show for real estate investors, whether you’re a veteran or brand new. I’m your host, Mike Hambright and each week I bring you a new expert guest that will share their knowledge and lessons with you. If you’re excited about real estate investing, believe in personal responsibility, and taking control of your life and financial destiny, you’re in the right place.

This is episode number 318 and my guest today is Joakim Mortensen from Colony American, a large national lender that just surpassed more than $2 billion in loans against real estate. Now, financing is the key to growth for every real estate investor. Today we talk about a number of things that will help you get access to more capital to either start or grow your real estate investing business.

We talk about how lenders will evaluate you personally or if they will at all, how they look at your experience or lack thereof and how they’ll evaluate the asset or deals that you’re trying to fund. We also discuss what you should look for in terms of evaluating what lender is right for you as well as where Joakim sees the market going from here. Not every lender is equal and not every lender is someone that you want to work with. Can they serve your needs?

So if you’re looking to get more access to funding to do deals, to grow your business or start your business, you don’t want to miss today’s episode. Please help me welcome Joakim Mortensen to the show.

Joakim, welcome to the show.

Joakim: Thank you very much, Mike. Great to be back.

Mike: Yeah. Glad to have you. So you were on about a year ago, which for us was like 80 episodes ago or so. So that’s like dog years. That’s like seven years ago dog years.

Joakim: That’s right.

Mike: So glad to have you back. Financing is such an important part for every real estate investor. In fact, before we started recording here, you and I had a discussion about my situation personally talking about some financial options and stuff like that. So we know the financing is the key for any investor to grow their business. Leverage is a huge part of this. I don’t want to say it’s everything, but it’s a huge part of this industry, right?

Joakim: Yeah. Absolutely. We exist obviously to amplify people’s buying power, but also boost the return on equity. So I think we are a key component and key partner in helping people grow their business.

Mike: Awesome. Before we get started, for those that don’t know you and didn’t see the last show, give us your background, tell us a little bit about you.

Joakim: Yeah. So I am with Colony American Finance. We started this venture about two and a half years ago. I’m proud to say that last week we hit that $2 billion mark, financed more than 20,000 homes and done business in 42 states and I am the Chief Client Officer and we have a fantastic organization. I was employee number 6, now we’re up to 62. So it’s been very busy and very fast and it’s been very exciting to be part of.

Mike: It’s an interesting industry the way that it’s evolved over the past few years. It has more kind of institutional flare, right? It used to just be mom and pop hard money lenders in every town in America that only operated in their small bubble. Maybe take a couple of minutes and share where things have gone over the past few years.

Joakim: Yeah. So we talk about this asset class being institutionalized. That obviously kind of the catalyst was all the big funds buying up rental properties, but the reality is the mom and pop investors have been in this segment for many, many years. Moody, the rating agency did a study and identified that there are 15.4 million rented residential assets in the US and if you think about that, the institutional buyers maybe bought a few hundred thousand.

It’s incredible to think that this market, how big it is and how we’re now getting resources, capital technology attracted to the industry and we’re kind of becoming a household name within the commercial real estate space.

Mike: Yeah. It’s interesting because I think you’ll know the stats better, but around one in three homes in America is owned by an investor, right? It’s not their primary residence. It’s probably something they rent out. That probably includes multi-family. Does that sound about right?

Joakim: Yeah. I think that’s in line with what I’ve heard as well. It is incredible because as we see, homeownership is still a challenge for many people. That gives people who rent residential assets an opportunity to provide a home for a family who wants to rent and to the extent, rents are comparable if you live in an apartment or if you want to rent a house. Often times a young family probably prefer a single-family over living in an apartment complex.

Mike: Sure. I think that’s what we saw in the last kind of downturn was a lot of people that maybe lost their home when they had to go back to being a renter, they didn’t necessarily want to go back to an apartment, right? They kind of made single-family homes more appealing as rental properties than maybe in the past.

Joakim: Yes. Listen, I also hear this story that a lot of time if a family is unfortunate enough to lose a home, that whoever’s buying this would prefer to keep them in as a tenant and they can still have that home owner’s feel to it. So we hear stories that there’s a good match under that scenario.

Mike: Yeah. Let’s talk about what a lender like you guys, a national lender, everybody probably would have a similar answer that’s a national lender or even hard money lenders, but what are you typically looking for in a borrower?

Joakim: Yeah. So we obviously want someone who we consider a worthy borrower, someone with a good credit profile who has paid their bills on time, who have an income and they can demonstrate that they have experience in this field. Now, there are obviously a couple of nuances to that.

A lot of people are worried that we did have a major, major crisis starting in ’08. So it’s very natural that if you’ve been in real estate during that period, that there can be, I call them scratches and dents on your credit, whether it’s a foreclosure or short sale, it was something that the bar didn’t have any control over.

So rather than just saying if you have anything or a dent in your credit, then you’re not credit worthy. So we take a very careful look and look for a reasonable explanation. It doesn’t mean the borrower didn’t qualify to get a loan or qualify but it’s certainly something that they should be cognizant of and have a good explanation of why that would appear in their credit.

Mike: Yeah. I guess there’s always some lenders say, “We’re purely asset-based,” especially some local hard money lenders in any market, they’ll say, “We don’t even pull your credit. We don’t care. We care more about the asset.” Talk about how some lenders care about you, your credit personally or your financial history versus those that are purely asset-based.

Joakim: Yeah. So if we use Colony as an example, we certainly want to understand, it’s kind of part of know your borrower. If you deal with deposit institutions such as banks, they certainly are very cognizant of that as well. And then you look to the private lender who is obviously non-regulated and it’s typically with people with their own money or they manage other people’s money, they certainly could be indifferent and say we are purely asset-based. But then you’ve also got to look at the cost of capital, the rates that they’re charging is obviously reflective of the risk that they take.

Mike: Sure. And I guess the traditional hard money lender is probably a little different than the way I think you guys are structured where they don’t typically offer a line of credit. It’s usually transaction to transaction.

Joakim: Correct.

Mike: You can make those decisions to say, “If the asset fits this, I’ll do it,” where you guys would tend to give somebody maybe a large line of credit that says you can do five or ten deals at a time or more.

Joakim: Absolutely. That’s also where we are giving a minimum line of credit as $1 million and I think it’s very important for us to understand notably what is your experience, also pull your credit to see if you’ve been a good counterpart with other financial institutions. It’s just up to us probably can offer better or maybe cheaper term that the pure private lender is just looking asset based, it’s part of the process.

Mike: Right. In terms of maybe talking a little bit about the asset side, what are you guys looking for there? Loan to value could be one. Two could be other things like you may not want to finance major burnouts or things that are really heavy rehabs. Of course paint and carpet has less risk than a major rebuild, right? But in terms of the asset, what do you guys look at and what are some of the criteria you evaluate?

Joakim: So if we start with our lines of credit, the majority of those assets are what we call transitional, meaning there is a fixup that could be a construction component or it could be it’s a good buy so they need to close immediately. But obviously we understand that certain properties come with some hair on it or there is a need to reposition that asset.

We take that into consideration where we typically would say what is it worth today and that’s we lend off, not necessarily a future value. It’s just to simplify process because the only two things that really drive the line of credit is the valuation, which is either BPO or appraisal and then it’s clean title. Those are the only two things that would drive us funding the loan.

Mike: Okay. How have things evolved over the past few years? It feels like all of a sudden Uncle Joey’s a lender. All the lenders are people coming out of the woodwork. It’s just part of the cycle, right? I think we saw that in the last downturn a year or two before, lots of new lenders that are coming in. They’re typically the local guys, not national scope like you.

But they’re saying they’re willing to lend . . . you see things crazy, like they’ll lend a certain percentage of the tax value. What does that have to do with anything? Just weird kinds of things start to happen. I’ve seen some loans that come out. These are more on the owner side that say stated income, again, there’s some weird stuff starting to happen again. Where do you think we’re at in the evolution of this industry on the financial side?

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Where do you think we’re at in the evolution of this industry on the financial side?

Joakim: I think we welcome new players because obviously competition is great but it also creates liquidity in this segment, which is going to be key for us to keep on growing. I think lenders are actively looking to partner up or find good borrowers who are going to be coming back because again, it will go back to the line of credit. Those loan durations tend to be very short. So we need to keep on putting out loans because we get paid back a lot of the times.

Now, if you go to the rental, the stabilized portfolio loans that we do, that’s obviously a five or ten-year duration we look at. We’re looking much closer to them because we need to have a good tenant in there. If they don’t have a tenant, you need deferred maintenance. So it really just depends on your loan product. I think the more creative financing tend to be local or more regional for the more creative lenders out there.

Mike: Okay. And did I hear you right? I think we maybe have talked about this before. When you guys typically lend, do you lend for repairs as well or you’re lending based on the purchase price of the property?

Joakim: We are one of those lenders that just lend on acquisition. The reason is it’s, again, the very short loan duration. I think our pricing is also reflecting that we’re typically inside and what I mean by that is our rates are lower than the guys who also do the construction component or the rehab dollars. So it’s just we have more than $1 billion of these lines of credit. So the only way we really can scale it without a massive, massive infrastructure is to kind of keep it simple. So everything we do is just in that acquisition.

Mike: Sure. Yeah. I know there are a lot of folks that would traditionally borrow hard money or things like that anyway and they tend to try to fund the repairs themselves. The big reason is to eliminate the hassles of repair draws and paying contractors on time and some of those things that are a little more complicated than just the purchase side of it.

Joakim: Absolutely. My point to them is also if their three, four percent is wider on pricing, if you look at what it costs you to get that additional construction draw in terms of cost compared to us, the rate is not very favorable to the borrower.

Mike: Right. Well, Joakim, I have a kind of question of the week that I wanted to ask you, which actually falls in line with what we talked about a few minutes ago, which was how does . . . you probably get asked this question all the time. How does bad credit impact a borrower’s ability to borrow for a loan through you guys or those that you know that are at your level?

There are always some people that have maybe filed bankruptcy. They maybe have some foreclosures, they had like you said, some scratches and dents. How bad does the credit portion of that impact their ability to even get a loan?

Joakim: I think the key is, and we run into this very often, is talk to the lender up front if there is something in your credit background. If you flush it out immediately and just say, “Hey, when you pull my credit, this is going to come up,” a lot of the lenders, not only do they appreciate it, but they can very quickly say it’s a no or they say, “What happened?” And if they present a reasonable explanation, I know from our perspective, we can certainly get comfortable.

But if we get into it and we’ve spent money allocated resources and then oh by the way, I forgot to tell you, that presents a different scenario and a different challenge. My advice to any borrower is just be upfront because the lender is going to find out one way or another unless you’re the asset-based lender who doesn’t care about credit profile, etc.

Mike: Right. And for guys like you that are looking a little bit more at the person themselves, do you then start to weigh the asset as well to say, “You’ve got some issues here but they’re buying this at such a good value there’s less risk.” Do you start to weigh the person versus the asset or do you have to get past how you evaluate the person before you consider looking at an asset?

Joakim: I think we take a very hard look at the borrower before we look at the asset because not only does it reflect if the borrower is upfront and honest about it, that’s not to say just because people don’t disclose it doesn’t mean they’re trying to hide something, it’s that they think it doesn’t make a difference to us.

We’ve certainly run into this. A lot of times when people have been up front, I’ve just said we probably can’t get comfortable or talk to this lender or we say hey, give us good explanation. We’ll run it by credit and we’ll get a signoff. A lot of the times it turns out in the favor of the borrower because they disclosed it upfront.

Mike: Sure. I think with some of the more traditional kind of local hard money lenders, what they might do is just offset risk by increasing rate. Do you do anything like that to say you’re kind of on the fence here, but we’re comfortable if we lend at a higher rate? Is that something you consider?

Joakim: Yeah. I think if we feel strong enough about the deal, we put what we call credit enhancements around it. That might be a low LTV, a slightly higher rate or maybe there’s another partner with better credit that we can say maybe we’ll involve them in the transaction. So it really depends. Again, in my experience there are just so many different scenarios that exist that it’s very hard to setup a cookie cutter process around people to know your customer or their credit background.

Mike: Right. So in this kind of climate where we are in the cycle, it feels like people are, even for ourselves, we feel like generally speaking we’re having to pay a little bit more for deals and people are starting to justify the market’s going up, especially on the retail side. It feels like there’s no end in sight. From the way that you guys evaluate assets now, kind of individual loans you’re willing to do on assets, what do you see going on there? Do you feel like it’s creeping up to the point where it starts to get less comfortable than maybe it did a couple of years ago?

Joakim: I’m still bullish on the overall residential industry. A couple things. It’s still very hard to qualify for owner occupant homes to get actual mortgages. So that suggests that you don’t have the income stated asset, where people are getting in over their head in terms of being able to service debt or pay the monthly mortgage.

But then also it really depends on people’s return expectation. I am located in Florida where we obviously have had a very, very steep appreciation curve. It really just depends on what kind of returns are people looking for. If they’re reasonable, if they believe in meaningful appreciation, then I think they’re going to be fine. But certainly there are pockets all over the country that people feel like it’s overheated, but I certainly see a lot of other markets where there’s still plenty of opportunity for investors.

Mike: Sure. Joakim, I want to jump into the next part of the show, which is the taking action segment. Specifically I want to talk a little bit more about, in line with the name taking action, I want to talk about how people can take action. I think there are probably some people listening right now that don’t know exactly where to get started or they’re afraid to get started or they’ve relied on family money or other things to do a few deals here and there.

But there are very few that get in this business that are comfortable with just doing a couple deals here and there. Not everybody, but most people aspire to ramp up their business and financing is a key portion of that.

Joakim: Absolutely.

Mike: Let’s talk a little bit about what a borrower should do to get started.

Joakim: Yeah. I would obviously encourage . . . there’s a bunch of research going into that. What is your objective, right? Are you a fix and flip? Are you a buy and hold? What do you want to accomplish? And also be realistic. Everybody would love to buy 1,000 homes a month, but that’s probably not realistic. So what are your short-term, medium, and long-term goals? Then find out what kind of capital is available in that market, whether it’s a national lender like us or it’s a local bank or it’s a local hard money guy.

Mike: Sure.

Joakim: So I think there’s a tremendous amount of information available. One of the things I do think that FlipNerd is doing, is they’re a great content provider. So there’s a tremendous amount of information available on social media such as the FlipNerd. So I think there’s . . .

Mike: We’ve got the best information.

Joakim: Absolutely.

Mike: Cream of the crop.

Joakim: That’s right. But it is true that where you educate yourself is where these sites exist to provide good content, whether it’s lenders, whether it’s vendors, whatever you’re looking for, but there’s research going into it and then call the people, all of them have loan officers, salespeople who can answer questions.

Obviously be comfortable, if there’s something you’re not clear about, there are great chatrooms you can ask people about people’s experience. Again, we all have different experience with different lenders. So it’s important that if you’re going to partner up . . . I view it as a partnership. The lender takes as much risk as the borrower. So it is partnerships that you are forming. Then identify the partner that you think can help you grow the business.

Mike: So I know in the past, one thing a lot of people learned during the last downturn was to not have all your eggs in one basket with too few lenders. There are some people that had a $2 million, $3 million, $4 million line of credit which was more than what they needed. That one lender made a call and said, “We’re sorry, we’re pulling your line of credit. We need you to sell your assets because we’re going to call these,” or whatever.

Then there’s always this balance of it’s pretty easy to get financing right now, more so than it’s been in many years past. But you don’t want to have so many lenders that you’re not utilizing your line with them to where you’re not that important to them and they’re not important to you. What’s the right balance of not having all your eggs in one basket but also not disappointing that person to where they don’t want to renew your line when it’s up because you’re not using it anyway?

Joakim: That’s also from a lender’s perspective a matter of resources because it’s not just putting a line in place. It’s actually the infrastructure, having the ability to fund. Lenders vary in terms of their ability to execute and at least in the fix and flip space where people get great buys, it is very important that they can deliver on time. So it’s almost like even if you were having an equity partner, that you pick the right lender you’re comfortable with and believe you can execute.

Mike: Sure. How about lenders with . . . a traditional hard money lender isn’t funding long term holds. They’re just a bridge line, short-term fix and flip. I know you guys do both, right?

Joakim: Yes.

Mike: I guess with you or some of the larger lenders like you, are they typically dealing with one person? Will somebody have a representative that, “Hey, I need to fund this fix and flip,” or, “I need to keep this one as a rental?” Is that typically how you’re setup?

Joakim: Yeah. You typically have one point of contact which I think you should if you’re dealing with the same lender just because they know you, they know how you execute. They can typically solve issues. But from our perspective, we have a bridge team. We have a perm team. And then we recently launched what we call our single asset program, meaning we actually finance one rental home and it’s 30-year term. It just depends on what bucket.

Obviously as lenders we almost become advisors as well because as people are growing that business, I think a lot of at least within our organization is these guys have dealt with multiple borrowers on all different sides. So we can likely offer very good advice on how to help to grow that business, make meaningful introductions to other vendors or property managers. So again, I view lenders often times as partners as well.

Mike: Yeah. I think that’s one thing that I’ve learned over the years is historically some people looked at their lender as a necessary evil. But I think the one thing that you know is generally speaking your lender wants to do deals. So if they’re telling you not to do something, you probably should listen.

Joakim: Again, we’re all motivated to lend money but also as you said, if somebody says that doesn’t make a lot of sense, at least pay attention because there might be something to it, not that lenders are always right.

Mike: Yeah.

Joakim: It’s something you should pay attention to.

Mike: Along those lines, what should a borrower look for in a lender? You said on one hand you consider that person a partner that’s going to help keep you safe and give you some guidance. There are other things a lender can provide to you, but what are some things that a borrower . . . I’m in Dallas or let’s say you’re in Anytown, USA and you want to do some deals. What should you be looking for in terms of a lender partner.

Joakim: A thing to think about is how long have they been around. We pride ourselves at colony to be 100% transparent, whether it’s good news or bad news, we deliver it upfront because again, I keep on going back to the word partnership. We take as much risk and therefore there are certain things we can and cannot accommodate and then we should be upfront telling the borrower we can do it, just like I said with the credit issue is if there’s an issue, if we can’t close the loan, why keep the borrower around. And say we can’t do this, a much better lender or just be open and honest like we would expect in any good partnership.

Mike: Sure. What do you think . . . so, in the time you’ve been doing this, do you see more people . . . this is a totally random question, I’m meeting more and more people investing in multiple markets. They used to just operate in one market. Now they’re in other markets. Some of what’s maybe facilitated that is technology. Technology, you can be somewhere without being there. We’re thousands of miles apart right now when we’re talking. You can just as well be walking me around the house showing me plumbing issues or whatever.

But there’s also the rise of institutional or national lenders that are a little bit more agnostic to where you’re doing deals more so than like a local hard money lender. Are you seeing more of that, that national partners, lending partners and things like that are helping facilitate investors being more agnostic to where they invest at.

Joakim: Yes. We do see that. A couple of things. I think from an investment perspective, diversification is always good. Then as we touched on earlier where there’s just not a lot of good buying opportunities. There are foreign investors.

The US is a very, very large country, so there are other cities or states where people are seeing attractive returns where they can get great returns but most lenders, especially the national guys like us, want to know what infrastructure you have, how do you source your deal, what do you intend to do with a property, not just let someone run into a new market just because they hear there’s great returns. So we want to do our homework and get a comfort level that these guys are going to be able to execute.

Mike: Yeah. I think I’ve seen some people that probably get into trouble too. They assume, “I’ve been doing it here for a long time. I’m going to pick up and do it over there.” There are some complications with that, for sure.

Joakim: One of the things that I think is also interesting is you talk about kind of buying on the [inaudible 00:;27:41] we differentiate between different states where it’s a judicial foreclosure state or non-judicial foreclosure state and it’s certainly something where you have local law or legislation that you’re not necessarily cognizant of in your local market but if you go into a new market, it’s a completely different animal that you have to know how to tackle.

Mike: Yeah. Joakim, what have we missed today? We talked about a lot of stuff here. What did miss that listeners that are looking to borrow should consider that maybe we haven’t covered yet?

Joakim: I don’t know. My view is that as people get smart about not only real estate and financing is truly utilize the tools that’s online because I think people can educate themselves very, very well.

By the time they call a couple of lenders to kind of feel them out, they have a bunch of good questions to ask to get them to get a comfort level with that lender and see if they fulfill their investment needs and objectives that investor has set out for themselves. It’s hard to tell. Like anything else, people have different trigger points that are important to them. So research is going to be key to me to pick the right lender.

Mike: Sure. Thank you. And you kind of mentioned earlier that you’re pretty bullish on where the market is at still. Do you want to kind of elaborate on that a little bit, where you see things going over the next few years even?

Joakim: If you look at the household formation, I do believe the US still has a positive population growth of about 125,000 people a month. So if you look at that, the housing shortage and just overall population growth economic growth, I think the future looks pretty bright, at least for residential real estate investors.

Also to that point is that if you’re talking about liquidity, which is important to most investors is single family homes or residential assets still is considered the most liquid real estate asset that you can actually own.

Mike: Yeah. And do you think . . . like obviously there’s been a growth, obviously the vacancy rates or home ownership rates have declined, which it kind of is taking more and more houses off the market and kind of putting pressure on demand for those that are looking to resell, right?

Joakim: Absolutely. Again, I’m in South Florida. It’s a sellers’ market right now. That’s for sure. Everybody wants to buy. Rates are still a very attractive low, which makes for an affordability component to owner/occupant, but I think in investment communities, rates are still attractive from a historical perspective.

Mike: Sure. Awesome. Well, Joakim, if folks want to learn more about you or about Colony, where do they go?

Joakim: Yeah. So online, ColonyAmericanFinance.com, you can either reach out to us via the internet or there are 800-numbers. We’ve got a very dedicated staff and expect either to pick up the phone when you call or within a few hours you should get a call back or as I said, people are always willing to reach out to me directly if they want to chat. So we would welcome any questions if people want to learn about us, we’re here and we’re ready to talk to anybody.

Mike: Sounds good. Thanks so much for your time today. Great to see you again.

Joakim: Mike, it was great to see you as well. I really appreciate you inviting me back.

Mike: Absolutely. Thanks for being here. Everybody that’s listening in, thanks for joining us today. This is, I have to look it up, it’s been so many, show number 318. So if you have not watched all 318 yet, you’re going to have a busy week ahead. So hopefully you go check out some more shows.

Everybody thanks for joining us. Joakim, thanks again. Have a great day, my friend.

Joakim: Thank you, Mike.

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