Welcome to our latest episode. Today, we’re thrilled to have Wendy Sweet and her brother Bill Fairman, co-founders of Carolina Capital, join us. Wendy and Bill bring a wealth of knowledge and experience in the real estate lending space, offering insights into the current market dynamics and their unique approach to hard money lending.
In this enlightening discussion, Wendy and Bill share their journey in the real estate industry, emphasizing the importance of private lending as a solution in today’s tight bank credit environment. They explain how private credit is stepping in to fill the gaps left by traditional lenders and the benefits of their conservative, first-lien loan strategy. The conversation also touches on the challenges and opportunities in the residential and commercial real estate sectors, particularly in light of recent interest rate hikes.
Wendy and Bill delve into the specifics of their lending model, discussing the types of properties they focus on, including single-family homes, multifamily units, self-storage facilities, and retail strip centers. They highlight the importance of staying conservative with loan-to-value ratios and the benefits of investing in real estate as a lender versus an owner.
Whether you’re a seasoned investor or just starting out, this episode is a must. Tune in now to gain valuable insights into the world of real estate lending and how to navigate the current market conditions with confidence and strategic acumen!
HIGHLIGHTS OF THE EPISODE
00:23 – Guest intro: Wendy Sweet and Bill Fairman
05:50 – Current trends in the residential real estate market
09:58 – Challenges and opportunities in commercial real estate
15:00 – The impact of interest rate hikes on real estate
20:00 – The benefits of conservative lending practices
25:00 – Preferred asset classes for real estate lending
29:57 – Future outlook and strategic advice for investors
If you found this episode substantial and want to dig deeper into real estate, or maybe you want to discover better investment opportunities, be sure to check out www.tempofunding.com.
CONNECTING WITH THE GUEST
Wendy Sweet
Website: https://carolinahardmoney.com/
Linkedin: https://www.linkedin.com/in/wendysweethardmoneylender/
Bill Fairman
Website: https://carolinahardmoney.com/
Linkedin: https://www.linkedin.com/in/bfairmancarolinahardmoney/
Full Transcript:
Intro: Welcome to The BigMikeFund Podcast, where you’ll learn about advanced wealth building strategies from real estate investing to creating massive ROI and secure retirement profits. So pour yourself a cup of coffee, grab a notepad, and lean in. Because Big Mike has got the mic, starting now.
Mike Zlotnik: Welcome to the BigMikeFund Podcast. I’m the Big Mike, Mike Zlotnik, and today it is my pleasure and a privilege to welcome back my really good friends, Wendy Sweet, she’s always so sweet and she’s smiling, and her brother Bill Fairman. Hi, Wendy. Hi, Bill.
Wendy Sweet: Hey, Mike.
Bill Fairman: Great to see you again, Mike.
Wendy Sweet: It’s funny, when people introduce other people on podcasts, they always say, oh, this is my really good friend, or my dear friend, and they really aren’t but we really are good friends.
Mike Zlotnik: Yes, we’ve been good friends for a long, long time. And, uh, it’s kind of, uh, every time I talk to you, I smile. Because you’re always so sweet. Well,
Bill Fairman: it’s a little bit different when you’re her brother, she’s not quite as sweet all the time.
Mike Zlotnik: Well, maybe to you sometime, you know what, you know how it is, if she’s sweet and nice to everyone else, she needs somebody to a little, you know,
Wendy Sweet: That’s exactly right.
Mike Zlotnik: Yeah. Take out the whip and kind of a, a little bit of an internal politics. Let me put it this way.
Bill Fairman: That’s exactly right. Yeah, we do make people in the office nervous.
Mike Zlotnik: Let’s jump straight into, just a couple of words about family, how’s family, how things are going, uh, how the boys, Wendy, uh, they’re working, working hard, uh, just, just a couple of quick, what’s new in the world of Wendy and Bill?
Wendy Sweet: Well, you know, for me, and we talked a little bit about this before we even got the camera on is, you know, what we want is for our children to be happy and moving forward and, and they are so, so I’m thrilled about that.
They’re, they’re both employed. And, uh, one of them actually, actually works for us. He’s, he’s our project manager on some stuff. So, uh, we’re really thrilled to see that.
Bill Fairman: Thing behind us as well. Looks like we’re in an old cabin.
Wendy Sweet: Yeah, but he, uh, it’s, uh, it’s really cool too. I was telling, I was telling Bill a couple of weeks ago that I was standing in the kitchen.
Uh, making breakfast and, and my two boys were, were also standing in the kitchen. They were talking about self directed IRAs and what you can and cannot do with it. And I’m standing there going, wow, this just warms the cockles of my heart that my children are talking about and interested in how they’re going to invest their money.
And, um, I thought, gosh, it did rub off. So I was really glad about that
Mike Zlotnik:. You’ve done something right. Right? You’ve educated them, obviously you brought them, brought them, uh, well and given them good education. At the end of the day, you know, the most important thing that parents can do for their kids and, you know, of course, give them love and, and all that stuff, but it’s not money.
Don’t give them money. That’s right. The best thing you can do is educate. And as long as they know how to learn and they can earn their own living, that’s the best thing you can do. Give them love, give them education, and then make them good people. That’s it. The rest, they’ll figure it out on their own.
Bill Fairman: Well, financial education for our young people is the most important. They don’t
Wendy Sweet: get it.
Bill Fairman: And I’m not getting political here, but. Uh, when you can’t get it from public education, that’s for sure. It has to come from the parents. Mm-Hmm. . And unfortunately, if you have, uh, a situation where both parents are working and they don’t have time to, uh, help, uh, with that portion of their education, that’s why we have so many people, uh, that are financially illiterate.
Uh, and get themselves into trouble and buy stuff that they want on, on credit versus buying stuff that will make them an income on credit.
Mike Zlotnik: Right. Yeah. Give them rich debt, poor debt book and give them some, some, some educational self directed IRA or whatever you want to call it. But I agree with you a hundred percent, the schools don’t provide financial education.
I don’t even know what schools do. Of course they, they, they educate science.
Wendy Sweet: Uh, they babysit
Mike Zlotnik: if you take some of the, uh, political, uh, politically, uh, challenged ideas of some of the craziness that’s been going on. I don’t want to put it any other way. When I came to this country, uh, I’m, I’m still shocked.
Uh, and I mean, this would all do respect when, you know, when they ask a question, is it he or she in that it’s, it’s, it’s, it’s at birth, right? You don’t, you don’t go through this discussion today. Try to make a decision like this stuff drives me insane and I can’t believe it. We’ve been spending time, energy and discussions on all this stuff.
So the school is worried about that. Yes, math, engineering, science. Financial education, etc. All that stuff should be what schools teach, but let’s leave it. I mean Let’s go into real estate because Unfortunately, there’s very little we can do about that and depending where you where you live Some states and cities are more, uh, conservative, some are more Not.
I live in New York City, that’s all I’m going to say. Education here is a little, you know Yeah, yeah. A little too much, but it is what it is. Maybe good science, but a little bit too much of some other stuff, so
Alright, uh, let’s go into real estate. So, uh, what’s going on in the Carolinas? Uh, you guys are running, obviously, Carolina hard money lending capital on hard money deals. Well, we do know a couple of things. Right before the call, we were chatting, um, about, you know, yesterday. We’re recording this in mid March, late second half of March.
I met up with Eric Goodman in Manhattan. He’s, like you, a hard money lender in New York City. And one of the basic observations is that the banks have tightened up their lending completely. In this environment, uh, bank credit is super tight, uh, inverted yield curve, the trouble balance sheets, many regional lenders, uh, smaller banks.
Um, uh, and regional banks who are the fundamental providers of the capital for real estate are pulling out. They’ve pulled out. They are just so squeezed. So private credit has come in as the resolution, as a solution. In fact, what’s really interesting, and I’ll shut up in a second, let you talk about this.
I have a really good friend, uh, and she was on a podcast. Her podcast just came out, Frances Newton Stacey, and she, she said that, uh, you know who substituted, uh, tight bank credit, and who is letting this economy chug along. We should be in a recession, but we are not, and there’s a reason for this, because bank credit is tight.
Fed hiked rates. They tighten the bank credit, but they can’t stop the private enterprise and a private saving the country. You guys are saving the country. You providing capital where the capital is, uh, is not available from the banks. So let’s talk about your experience. In private lending.
Bill Fairman: Well, let me add on to that. It’s not, uh, us that’s saving the economy. It’s investors that are willing to invest in companies like ours, because otherwise we wouldn’t have the capital to make these loans and they believe in, in real estate as well, as long as we’re, um, our assumptions are correct. Um, real estate is always going to be, uh, a good, Security
Wendy Sweet: and we use the right formula, the right numbers lending at the right loan to value.
Um, that’s so important to stay conservative in that respect. But for us, you know, it was a tough year last year. Very slow. You know, everybody’s just wondering what’s going on, you know, the rates started hiking up and, and even real estate sales slowed in the southeast. We haven’t seen prices drop. Um, in fact, we’ve actually seen them still increased 1 to 2%.
Um, but the selling timeframe has slowed down a lot. This is in the single family. Residential area. So, so we’ve seen that slow down. And when I say slow down, it’s, it went from like a week being on the market and that would be long to, uh, you know, 60 to 90 days is not uncommon. Um, but the prices have remained pretty strong.
So we’re really, really glad about that. But really, since January 1st, I think people are kind of fed up of waiting. So we’ve seen on the investor end. A lot of people, uh, coming back for loans, finding more deals. Um, we’re, we’re seeing that change a little bit now, as far as the commercial side, um, we fill a niche that the banks aren’t touching. Right.
Bill Fairman: Yeah. And before we get into commercial, I want to stay on residential a little bit. Um, our business is fixing flips, buy and hold that still need work. And then, uh, new construction. Yeah, custom homes. Um, and the construction part has really picked up because of the lack of inventory for existing properties.
Um, that’s, that’s a big issue nationwide. And that’s one of the reasons prices have stayed elevated is because there’s a lack of inventory. There’s still a demand for single family housing. And, you know, the builders can’t keep up with the demand. So 2023 was the first time in literally decades that the, um, new construction was above 10 percent as the average sales.
Uh, the last half of 2003, it was like 12 and a half percent of all, uh, home sales were a new construction. And that just goes to show you. Uh, you know, the issue with, uh, existing homes and then the builders can’t keep up because, and this is a debate, but it’s true. There’s municipalities that make you jump through so many hoops, uh, to develop new housing developments.
Uh, you have the, you know, NIMBYism, the not in my backyard thing. You have, uh, municipalities. Pushing more towards, um, a, um, we’ll call it condensed community. So they’re pushing towards more high rise, more
Wendy Sweet: multifamily
Bill Fairman: type developments.
Wendy Sweet: And
Bill Fairman: I, and I understand this, they get more tax money per acre when they’re pushing everybody together, although it’s like the electric car thing.
Uh, you’re forcing people to build stuff that, uh, There’s not a demand for it. Um, but that said, that’s one of the reasons you’re going to see single family homes stay at relatively high prices, no matter what these rates are, because there’s just not enough of them out there. And it’s a supply and demand thing on the commercial side.
You know, we’re in a. We’re in a specific niche. We try to stay under 3 million in value. So when we’re dealing with multifamily self storage and, uh, retail strip centers, they’re going to be smaller niche properties, which traditionally your local banks, uh, were, uh, handling these and they’re you’re right.
They’re not doing this because I think. Too many of them had, uh, commercial office space or other specialty type properties in their portfolios. And now that these, the economy is slowing a little bit and they’re getting some of these back, they’re starting to go into default because they have to refinance because their loans are due.
And now their rates are twice as high as they were before. They’re not qualifying. We’ve had three. Large office towers in Charlotte, uh, since last summer go into receivership. One of them has Wells Fargo on the side of it.
Wendy Sweet: Yeah.
Bill Fairman: Now, Wells Fargo doesn’t own the building. They’re just a tenant, but they decided to move to a new office building. Smaller. No, bigger. But newer,
Wendy Sweet: I thought it was the one across the street. That’s smaller.
Bill Fairman: Uh, they were moving out of the smaller one into the bigger one. Um, remember the tower of power we used to call it. We have an energy company that had their name on this new building and they moved out and we used to call it the tower of power, all the lights on it.
Anyway, um, they’ve moved out and now 80 percent of the tenant space in that building was vacant. So, uh, and, and it just so happened that, let for a
Mike Zlotnik: second, I, I, I just love a couple of things. So Tower of Power reminds me Tower of Terror. Now it’s Tower of Terror with 80% of tenants gone. Right.
Wendy Sweet: That is a tower of power, of, of terror for sure.
Mike Zlotnik: By the way, this is, this is the sad reality, many cities are going to have this issue. It’s, it’s, it’s the big cities like New York and the smaller cities like Charlotte. Problem is still the same, especially if an older building and a tenant wants to move to a newer built office space, Class A, like you said, like Wells Fargo moved. The old building, it’s a, it’s a ghost. It’s a tower of terror, unfortunately.
Bill Fairman: Yeah, and the thing is, you have fewer people working in offices now. So, um Which doesn’t make sense that
Wendy Sweet: they’d move into a bigger building. Well, it’s because
Bill Fairman: a lot of people aren’t occupying this space. Yeah. And they’re able to get deals now.
Yeah. And then, uh The older buildings are going to be the ones that are suffering because they’re not going to be able to make up the difference. What’s really hot in office space are the types of developments where it’s a mixed use, where you have, you know, live work kind of communities where you have a mix of single family, multifamily, um, office space, retail space, restaurants, all in a, Um, you know, two block radius, those things are still thriving.
Wendy Sweet: Yeah, they’re doing well. And there’s, they’re coming, they’re coming up all over the place, um, in the Southeast. They’re building that stuff like crazy, but the, the regional banks are, are not renewing people’s loans. They’re not renewing their commercial loans. They’re
Bill Fairman: under a lot of pressure.
Wendy Sweet: Can’t tell you how many people are coming to us that.
You know, what, you know, they, they’re in a 6, 7 percent interest rate, happy to get a 10 or 11 percent interest rate or higher because they just can’t renew, um, that 20 year note that renews every 5 years. They’re, they’re in a world of hurt. Um, hold this thought.
Mike Zlotnik: Let’s, let’s, let’s dissect a little bit, a couple of things that you said.
So I’ll, I’ll, I’ll add some comments and, and then we will move on. So we’ll talk about this in just a second. But first comment was when you, what you said originally, we have a potential shortage of, um, single family residential housing. I was listening to a podcast episode, uh, with D. R. Horton. It was, they were dissecting D.
R. Horton, one of the largest builders, and why their stock is still a good growth stock. And the story is still very consistent with what you said. limited supply, not enough, country needs about, uh, at least a million and a half new homes per year just to stay on a breakeven basis because 400, 000 gets destroyed per year or gets demolished, removed, and at 1.
1 million, uh, is kind of the population growth. And then, uh, we are behind, I don’t know, Three or four million at minimum behind, so we have multiple years of catch up. The challenge is even if you push construction to 1. 8 million units per year, just as an example, you’re only catching up 300, 000 a year, we need to catch up to 3 to 4 million.
So on a grand scale of things, single family residential, New construction is solid because demand is super solid, supply is very limited, hard to build, there are limitations, they talked about even in the construction space, a certain part of equipment they can’t get, like transformers, some other stuff, it’s limited supply, as a result you can only build so much, you can’t go faster than You That maximum capacity per se, and then, uh, that will continue to be solid foundation for many years of single family construction, right?
So I just, I have the comment because you said the price is staying solid despite high interest rates. Yeah, demand is hurt, affordability is hurt massively with high interest rates, but the supply is, of course, fixed in essence, where the growth supply is very, very, uh, limited. Now, let’s go into what you just described on the maturities cliff.
So when wages hurt from you, and I assume these are regional or small community banks that are not Extending these loans because they need money back because they have problems with their balance sheets and their boards are telling them don’t extend And then the borrowers wind up in a terrible situation where the rates are up a lot So, how are they financing?
Do they have to bring a lot more equity? They have to raise a lot of equity. Well, if they’re coming to you and a bank loan was I’m using an example 2, 000, 000, right? And the rate was 6. 5%. And they’re coming to you, are you giving them back 2, 000, 000? And you’re just checking up the rate to, I mean, checking up, I mean, you’re a hard money lender.
I mean, I mean this with all due respect. You are offering them market rate at what, 11%, 12%? And What are you giving a save to Milan? No, they’re having to bring up there.
Wendy Sweet: Yeah. No, they’re having to bring money to the table because Because it the ratios don’t work at that interest rate. So they’re they’re having to come up with cash To get it refinanced.
Um, and and that’s that’s happening to so many people i’m seeing it What if they can’t? With, if, what if they can’t, then they’re going to lose the property. I mean, there’s, and that’s what’s sad.
Mike Zlotnik: So you cannot give them a loan because you need them to bring, uh, more down payment, more equity, more whatever you call it.
You won’t do even private loan because the rate is higher, obviously, uh, and then the leverage may be a little too high for you. You’re trying to cut the leverage. Um, and if they can’t get your loan and the banks is not extending them, what happens? The bank is going to, I heard the bank’s going to do extended pretend because they don’t have a choice. Well, hopefully.
Wendy Sweet: Yeah. Hopefully. I know a lot of people are turning to private money as well. They’re going outside, even the hard money sectors, excuse me, looking for. Private money, you know, maybe it’ll be a fund that they start or some sort of a syndication to, to try to, to bridge that gap that’s in there.
Um, you know, maybe they’ll give up a piece of equity to do that.
Bill Fairman: I don’t know. There’s room in there for, um, individuals that are groups that can do mezzanine financing to make up the gap. Uh, and then, you know, in turn, they’re going to get obviously a little bit higher rate, but more and more likely they’re going to get a piece of the equity and listen, these retail strip centers, for example, we’re obviously not doing any loans on, uh, office space.
We’re just completely staying away from that. The only commercial that we do. Is multifamily, self storage, retail strip center, and then the occasional light industrial warehouse. Uh,
Wendy Sweet: those,
Bill Fairman: those properties are still fairly liquid. And for example, the strip center, those are businesses that are not affected by e-commerce like, uh, Amazon, you know, Amazon can’t deliver you hot coffee.
They can’t do your hair. They can’t do your nails. You know, they can’t do your taxes. Those are local businesses that are viable and they’re. For the most part, those businesses are going to be recession resistant. So those properties are producing an income. That’s not the problem. The problem is that now with a new higher rate, it’s harder for them to get to qualify.
Wendy Sweet: Yeah.
Bill Fairman: And. If you raise the rents on all these folks as soon as you can, then you’re going to have people moving out. So yeah, it’s a kind of a catch 22, but, uh, you can offer equity, uh, for the mezzanine financing to make up the gap and it will turn out good in the end because at some point those values will start coming back up because they, they still have to keep market rates for the tenants.
You just can’t, probably most of these leases are three to five years. So it’s hard to, uh, you know, jack them up.
Wendy Sweet: But it’s a, it’s a matter of how long can you hold on.
Bill Fairman: Right. And that’s what it is. It’s a, it’s a bridge.
Mike Zlotnik: Yeah. Funny that you’ve said this, these things guys. So not sure if you know, but we, we, we are launching our new fund, which is a mass fund.
It’s exactly what. To fill the gap exactly that smart, uh, to provide essentially called mass financing, mass debt or mass equity or preferred equity on deals that just need liquidity. Otherwise, they can’t bridge the gap and some of these deals need liquidity to finish value at work multifamily. Right?
Right. And that’s the, um, so I, I’m 100 percent agreement with you from market conditions. These higher for longer rates are creating these significant pressures either floating rate debt Is choking these deals because the rates are up or maturity cliffs They both wind up in the same position where they need more capital And you either go to your investors you try capital call and good luck with that.
That’s been super Right and then when you you go raise mass Which basically pushes both previous money back. It winds up at a second position on the capital stack. Uh, but at least you get these projects to the finish line. Then what the finish line is stabilization, hopefully. And then two, um, um, interest rates, maybe the hope and the prayer, I don’t hope it’s not a good strategy.
But a lot of people are, it’s almost like you got everybody addicted to very low interest rates. You push the rates up so much, so fast, and now they’ll praying for these rates to come down, but they really can’t, you know, it’s a crazy part. And I’ve talked about this so many times is that I’m, you know, I hate to put it, but I, I, for commercial real estate.
We need a general recession. And I mean this with all due respect. I don’t want unemployment at 10%. But unemployment at 3. 8, 3. 9 needs to be 4. 5. A little bit of a recession, just enough for the Fed to wake up and cut those damn rates. Yes, there will be some pain. Yes, some people will lose jobs. That is terrible.
I’m not Supporting that idea other than we need it because the recession is long overdue and if you don’t have a recession The Fed can’t really cut rates because they got this inflation. That’s kind of chugging along. So that’s right. Let’s go back to you What do you see opportunities? Obviously mass financing like you said You guys continue to provide mostly firstly loan.
Do you go into MAS at all? Do you ever do anything in the mass or you you really are one trick 20 first? By the way, all the asset classes you mentioned I completely agree with you and support really easy to understand simple Obviously residential easy to understand steady eddy. Then you got multifamily, which is easy to understand storage light industrial Open air shopping all these things.
We love those asset classes. They’re fundamentally strong now financial Capital stack may be a little messed up with the rates being so high, but that’s not a property problem It’s a financing problem. So i’m just curious. What what are you seeing in the um opportunity? What are you doing? Are you doing only firstly in loan or you’re venturing a little bit beyond that into preferred?
Any other interesting ideas?
Bill Fairman: Well, we are not doing anything other than first lien loans. We will do second mortgages if the loan, the value is. Really, um, within what we would do for the first lien loan in the first place.
Wendy Sweet: And we have to know who’s in the first and, or it needs to be us.
Bill Fairman: And 99 percent of the cases we’re doing second liens behind our own first.
Wendy Sweet: Yeah. Yeah.
Bill Fairman: Because it took a little bit longer or took a little bit more money to finish the project out. And we’re, it’s easier than. Modifying alone.
Wendy Sweet: Yeah, but we like to keep things simple. We are, we’re very risk averse and we are, we don’t mind being vanilla. Um, we don’t mind, uh, not being that sexy thing out.
That’s, uh, the, the newest thing out. We, we, we’d like to sleep easy and, and, and kind of really stay in our lane. We’re, we’re very much into the. Single family flip, fix and flip and the new construction. And, um, we’re, we’re in an area where that’s doing really well and we see that continuing. And so we’re gonna ride that pony as long as we can, um, and, and stay in a, in a safer place for, for us and, and our investors.
Bill Fairman: For, for me, the opportunities are those property types, but, um, investing in them. As a lender, not as an owner, because you’re, as a, as your typical investor, if an owner, you get great tax benefits. Don’t get me wrong. You get the upside when they appreciate, but as a lender, you don’t have the responsibility of ownership.
You don’t have the tenants, the toilets, the trash, the taxes, maintenance, all that stuff. Um, liability. Nobody’s no bank has ever been. Sued for a slip and fall incident. Um, and you’re always into the deal for 50 to 70 percent of the value. So you’re always in it for less risk than the people that actually own the property itself.
Wendy Sweet: Now, now we invest in other stuff. That’s outside of that. We invest in oil and gas and you know, we’ve, we’ve got, well, I am. And, um, you know, we, we do other things ourself cause we want to be diverse. Um, and we like being in things that are a little bit higher risk. What we think is higher risk, but, um, but for us and what we do, we want to, we want to keep our, the people that we’re responsible for.
Bill Fairman: Singles and doubles.
Wendy Sweet: Yeah, yeah. We’re, we’re not hitting for the home run and, uh, swinging for the home run. Although we’ve hit them every now and again. Yeah. We, we, we don’t mind singles and doubles.
Bill Fairman: And we’ve hit foul balls before. All day long.
Wendy Sweet: So, so let’s talk about what you’re doing. I’d love to hear more about your fun that you’re talking about for the mezzanine.
Mike Zlotnik: Sure. So thanks guys for sharing your wisdom. And these are the words of the wise kiss theory. Keep it simple, sir. Uh, and, uh, simple first lien loan business with, as you said, a little bit of seconds behind the own first is a very easy business on the asset classes that you understand. Well, all these principles are most fundamental principles.
You invest in what you understand. Yeah, people who, you know, uh, into the capital stack that doesn’t let you sleep at night. The complexities do arise, market conditions change. We’ve seen swapping changes in the insurance industry with rates hiking, and it’s not, if you’re not, if you’re a lender, It affects you way less than an owner, insurance is up for the owner, but you as a lender, listen, you know, just, just pay my mortgage.
So I’m a hundred percent with you on that. Um, yeah, I’ll just say a couple of things that we’re doing on the mass site, and I’m not going to go too, too, too much, uh, because this episode is getting long and people can learn more about, uh, this through, uh, other means. Uh, yeah, we see exactly the opportunity as you described, um, primarily with some of the folks we worked in the past and the deals that we already know, They need, uh, additional capital because, um, high flow rates, it’s one of the major drivers.
Of course there are other factors. Just to be very clear, uh, we, we see the same things. You get into these value added projects, renovations, uh, or multifamily and whatnot, they wind up taking quite often more dollars and take longer, and sometimes complexities hit. You run into property that needs heavy reposition.
You got to evict some difficult tenants, and then you’ve got to reposition it, or construction costs longer, more, or it’s taking longer time to get the right contractors, or inflation and the cost of materials. Etc. Etc. Etc. And then when the Fed push rates so much so fast some of the projects for 21 from 21 and 22 With some even earlier, right?
I end up in this position where? They raised capital, um, with certain set of expectations and very few people in 21 and 22, especially the early part, even late part of 22. You, you know, you, you know, you knew Fed was going to do their thing, but how much they didn’t, how fast and all these side effects, uh, was just very difficult to predict.
Wendy Sweet: Right.
Mike Zlotnik: Um, honestly, I still go back and I think, uh, that Fed, that historically what they’ve trained us all to, to do is they, Uh, hike slow and cut fast. That’s been the norm, right? Recession cut fast, get it over with. Here, they’ve seen the inflation was so, so much of a black swan event. And you go back, it’s the COVID, how COVID response, uh, from the, the, the government, the, the, the, the, the policy of shutdowns.
The, the policies of, uh, helicopter money that so much money is injected into the system, all caused inflation and the Fed had no choice but to react. They could have done it way slower, but they still went aggressive. All that caused, you know, where we are today. Now where we find ourselves is the fact that these projects just need capital.
And they called liquidity pressure, you can call it whatever you want to call it. Yeah, you also have maturity school, like you said. So maturity school is another exercise where, um, the banks might, might still want to. Get repaid, but what if they can’t the borrower just tells them I can’t listen Uh, you you do you want the asset or not?
Or can we work it through and many of them? Uh what they’ve learned from 2008 great financial crisis. They’re not taking the assets They’ll extend pretend but they want a higher interest rates if your loan was At at four four and a half percent and now it’s 675 whatever the number is. It’s a big increase in pay So maturity’s cliff is creating all kinds of pressure.
Now the project, uh, can still do well, like you said, perfectly good assets with good existing leases, good tenants, maturity cliff, they need more capital in the form of preferred equity or whatever you want to call it. So you can re it can extend with the bank. And that’s the exercise today. Can you have a conversation with the bank and say, Hey, we’ll bring some more money into the project, but extend me the, the, the, the loan.
And sound right there. Absolutely insane or they, they have a crazy agenda, uh, that they want to take the asset. They may start the foreclosure process. Who knows, right? It depends. But most banks, at least in, in, from what I’ve heard from people have significant, uh, incentives not to force into foreclosures because foreclosures cause problems with banks, uh, for regulators, et cetera, et cetera.
Right.
Wendy Sweet: Right.
Mike Zlotnik: Capital is needed. So we’re just working to inject capital in the form of MS financing some deals. It’s uh, If if the first will allow second recording then we’ll record a loan alternative to that You do some kind of a private loan without it’s being recorded as a lien third. You can do preferred equity So you can do a mix of all these.
Um, uh Capital injections depending on the structure of a deal But the objective is still the same is to provide the projects with liquidity to execute the business plan You So you got to make sure that the business plan is solid with solid operator. And then the financial plan has to be such that the, um, the projects can actually get to a point where you believe they can refinance with agency debt.
Right. If you’re talking about commercial deals, if you can refinance with agency debt, at least you’re not dealing with a bridge loan interest rates versus the longer money, and if the interest rates retreat somewhat from where they are today, Okay. Um, the conditions may prove that’s the objective and I hope it makes sense.
Wendy Sweet: Yeah, absolutely.
Bill Fairman: I do. I do see rates coming down, but not anytime soon. I would, it would not surprise me that it would be till 2025 before we see a rate cut.
Wendy Sweet: Well, we’re reporting this
Mike Zlotnik: right after the Fed meeting, FOMC meeting, Fed’s Open Market Committee. And what they said is consistent with the past. Of course, they could change their song, but they’re keeping the rates right now, based on what they said, flat, and they’re still projecting three cuts this year.
Yeah, we’ll see. It’s just basically a matter of, uh, matter of time and they are not in a hurry at all. Uh, yeah. Speculation of a rate cut as early as March originally, which didn’t happen, right? Then you go into May and you go into June. Now people are saying the first rate card will be in July. We don’t know, but we’re stuck with these rates.
And even And even if it’s the first rate cut a quarter, what difference is it going to make? It’s going to be very little, almost no impact. It’s a symbolic move where they do it, at least it’ll feel like they started to cut. But for now, that has been pushed back. At least that’s, this is the way I understand what’s happening.
And it
Wendy Sweet: depends on how the media speaks. Spends it too, because if they, if they, you know, spend that like they do all this political garbage, they could, uh, they could spawn more sales, people buying houses because even a quarter percent cut would make people start looking again. But, you know, I think, too, that people just need to get used to the new normal, you know, rates were too low, actually, um, and and this is the new normal.
I mean, I remember getting a 7 percent interest rate for an investment property. I was thrilled to be able to get a 7 percent rate. Um, and, and, and, and because it was just so much higher, this was, you know, 10, 15 years ago. Now, you know, people said, oh, that’s too high. I’m like, please, that’s incredible
Mike Zlotnik: for a long term, the adjustment from zero interest rate policy to these, um.
Normal, let’s just call it the new normal rates. It’s a hard adjustment. It, it takes retraining of the mind, retraining of the, of the purse, right, of the, uh, computations on what the mortgages cost, right? And ultimately, uh, for, um, commercial goods, so residential, we talked about residential, um, because of limited supply.
The prices are holding up, right? Affordability has been hurt, but the pricing seems to be holding up because of this, oh, the supply chain disbalance. But on the commercial side, we’ve got, there’s some adjustments in valuations and prices. When you, when you push the cost of money off so much and you tighten the credit and, uh, all other things being equal, the prices, um, come down.
I mean, this is, this is a lot of assets. It has to.
Wendy Sweet: Yeah.
Mike Zlotnik: And ultimately, with inflation, over time, as rents climb, these valuations will come back up. But but but the shock is still here in the system and then how long it takes to clear the shock It’s still you know, your guess as good as mine Yep. All right.
Appreciate your wisdom great episode as always. Uh, love you guys And what’s the best way folks can reach out to you to learn more about carolina capital car on the hard money what you’re doing and You’re steady at a simple way of business.
Bill Fairman: So on the loan side, it’s Carolina hard money. com on the fun side.
It’s Carolina dot fund,
Mike Zlotnik: and you can get to either. I haven’t heard that. I guess that fund is a new domain. Interesting.
Bill Fairman: Yes, it is.
Mike Zlotnik: Caroline. fund. Well, that’s, that’s, that’s wonderful. I need to do the same thing. Maybe I should have something like that for what we do.
Bill Fairman: Yeah, bigmike.
Wendy Sweet: fund. Yeah, bigmike. fund is a perfect Perfect one to buy.
In fact, if you don’t get it, I’m going to go get it and I’ll sell it to you.
Mike Zlotnik: You know, I’m going to run right now and go daddy and I’m going to right now. Like literally right now after the episode. Thank you guys.
Wendy Sweet: Mike, thank you so much for having us on. We really appreciate it. It was so good to see you again. We missed you.
Mike Zlotnik: Likewise. Miss you guys. Enjoy the spring.
Wendy Sweet: Thanks You too
Bill Fairman: See you soon.
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