Many fear owning real estate because they don’t want to deal with tenants, toilets, and trash. Is there a way to invest without even owning a property? And is investing in real estate pretty risky right now?
Our guest, Heather Dreves, answers that question for us by teaching how you can become like the bank and lend money on real estate properties. Heather further opens up about the good, the bad, and the ugly in today’s current market. Check it out!
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How Can You Profit In Real Estate Without Owning It? With Heather Dreves
This show is for you. Those of you that work stinking hard for your money and you’re now ready for your money to start working harder for you today. You want that freedom of cashflow now, not 30 or 40 years from now but right now so you can live that life that you love with those that you love. However, we know it’s more than just money, isn’t it? It’s about living a rich life because as you are blessed financially, you have a greater capacity to bless the lives of others. That is exactly why we’re here today. That’s why I’m here helping to create that ripple effect through your lives.
Thank you so much for reading and sharing. You’ve been binging on these other episodes and our other videos. If you haven’t done so, go to our YouTube channel, the Money Ripples page. Check it out. We got lots of videos including shorter videos that you could check out with lots of great subjects. Be sure to check that out now and even like them. You might even subscribe to it. It’d be awesome. Be sure to do that today.
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I’ve brought on a special repeat guest. I’m bringing in Heather Dreves here. You’ve probably learned by now that our show sponsor is Secured Investment Corp. We’ve had them on before. We even had Lee Arnold on a few months ago talking about the different things in the market going on. We’re bringing Heather on as well, who is specifically representing Secured Investment Corporation.
If you guys don’t know, they’re a company that has a debt fund that invests in people, gives hard money loans to real estate investors and then you get paid a return. The returns have been awesome. If they’re not double digits, at least the highest single digit type of returns that they’ve been getting on this money and better yet, for many of you, because I know a lot of you guys say, “I don’t have a whole ton of money,” they have a low minimum. We’ll talk about that today and what you guys can do there. Heather, welcome back to our show.
Thanks for having me. I’m excited to be here.
It’s awesome. It’s a good new year. I’m back with a little bit of a tan from Hawaii and stuff. I have a sweater on my lap right now to try to keep myself warm because it’s been so cold. It feels like it’s in the 60s here but I know it’s 30 degrees outside of Utah. I am excited to be back.
It’s not much warmer in Idaho, let me tell you.
I’m sure it’s not any warmer in Idaho, especially where you guys are up there in Coeur d’Alene. Heather, for a quick little reintroduction and those that maybe haven’t heard your previous episode, tell us more about you.
I am married to the love of my life for the last 28 years. I asked my husband recently. I said, “Does it seem that long?” He goes, “No, it seems a lot longer.” Apparently, he’s happy. We’ve got two grown children, two boys. One is a fireman and that’s pretty exciting. He is 25 years old and a full-time fireman. The other son is finishing up his Master’s degree in Kinesiology. We all are active real estate investors.
My journey and path to where I am today started eighteen years ago. I had a friend that worked in private money. I knew nothing about it. I had no idea what private money was. I always assumed that when you were going to buy real estate, you went to your banker and you got a loan through the bank if you were needing funding. If you were going to invest money, you called up your financial advisor.
When I started my career in this industry, it was eye-opening. I had no idea that providing you had a good deal and you were a solid borrower, there were people out there that were looking to lend money on real estate. You didn’t have to jump through all the hoops that a bank requires you to do, give a blood sample and give your firstborn. I also had no idea that there were other investment options outside of stocks, bonds, CDs and boring things like that. There was an opportunity to create wealth and also passive cashflow through alternative investments.
I took my bumps and bruises through 2008. I thought I was going to get out of this industry and I never left. I have a passion for helping all types of investors. People that are hands-off and want passive cashflow through real estate investments and then also, our active clients that are out boots on the ground buying real estate, fixing and flipping and things of that nature. I know that was a long answer to your question but that’s a little bit about who I am and how my journey led me here.
It’s interesting that you bring that up because I know I take it for granted too but it is like the whole Matrix red pill, blue pill choice, isn’t it? When you leave the whole traditional stocks and bonds, you realize there’s this massive, not only buy a property in your backyard or your next-door neighbors have but you could invest in real estate in so many different forms, ways and types of real estate. It’s almost its mutual fund when you think about it. You are one of those pieces there that you even create your fund that goes and invests in your students.
I joke that it’s like a choose-your-own-adventure book. I don’t know if you ever read those when you were a kid. I like this journey that way. You all start the book at the same place, whether you’re active or passive. Depending upon what your strategy is or what you’re trying to accomplish, you pick and choose your path. We have the ability to accommodate anybody looking to invest. We have a very small fund. Not small in dollars but small in the minimum investment. We can even help clients that have a thousand dollars that want to start investing.
That’s one of the number one questions I get on YouTube and email, which is, “I don’t have a lot. What could I do?” I encourage people to focus on building up their cash. If you put in $1,000 and you make 10%, you’re not going to make much but you might have a kid and $1,000 is a lot to them. Making 6%, 7%, 8% or 10% on that money is way better than making 0.1% at your bank.
We have kids that are doing the same thing and it’s very similar. “What am I doing here? Why am I doing it this way?” Tell us your perspective because you’re lending to real estate investors right now. You got a finger on the pulse of what’s happening in the market in real time. You don’t want to be lending to anybody who won’t pay you back because that hurts the performance of your fund. You’re being very picky and choosy about whom you’re lending money to and it’s usually a short-term type of fund. What are you seeing happening right now?
The most common question I have right now is what are you guys seeing in the marketplace? The biggest shift that I’ve seen lately is in the past, it was pretty easy to fix and flip and make money. If you found a good enough deal, ran the numbers and did your proper due diligence, values were increasing at such a crazy rate that a lot of times you would make more than what your original numbers told you.
One of the things to probably clarify is not only do we lend money to people but we practice what we preach. We are lending money to active real estate investors but we are also active real estate investors in our local market. We are practicing exactly what we tell our borrowers to do. What we’ve seen as probably the biggest shift is people are still buying. There are still deals out there and everybody is like, “The interest rates are so high. Nobody’s selling or buying.”
It has slowed down a little bit in the market as far as people selling because you’ve got people with conventional loans that were probably financed 3 years ago and are at 3% and 4%. They can’t get over the fact that now, interest rates are 6 to 7, which is normal. 3%, 4% and 2% are not normal and I don’t know that it will ever go back to that but we’re starting to see more people willing to sell when they’re going, “These rates aren’t going anywhere. I still have a lot of equity.” These people do have equity. That’s the difference between now and 2008.
People have equity and options. We’re starting to see the market and more people are selling. There is more opportunity out there but what we’re seeing with our borrowers and even what we’re doing with our portfolio is we’re starting to buy properties to cashflow them rather than the fix and flip strategy to make a quick 15%, 20% on your money because the market has softened. We’re not seeing the increase in value but there’s still an opportunity to rent these because the rents and the cashflow are so great on them.
They joke that in a downturn market, a real estate investor turns into a landlord and that’s exactly the shift we’re seeing. Most of our active buyers are buying to buy rehab and rent out and exit our short-term loan. They’re exiting those with a rental product, a 30-year fully amortized loan. We’re buying real estate and putting tenants in them. We’re cashflowing them and the cashflows are great.
That is probably the biggest shift we’ve experienced. It’s our job to educate our borrowers. They’ll come to us for funding. “I’m going to fix and flip this,” and we’ll run the numbers with them. There’s not enough meat on the bone. Either go back and renegotiate a purchase price with the seller because you’re paying too much for that or think about holding it as a rental because your numbers are much different for that. What we’ve changed as far as internally helping our clients, the active ones, is educating them like, “This is not the market to be necessarily focusing only on a fix and flip.” You should start focusing on also cashflowing some properties.
A unique opportunity that people don’t realize right now is that we are moving into a place where the interest rates have come down on the mortgage rates, yet rents have not. That means that now we get some price and profit increases in that rental space again, whereas in 2022 it wasn’t as rich. There were so many times we saw some of our friends in the turnkey space that we were saying, “You might make 0.2% cash-on-cash return with this property. You should break even.” Now, it’s starting to spread a little bit better. As the prices have stabilized, interest rates have come down but rents are still climbing back up. That’s a cool thing to see.
90 days ago too, what we saw was people still thought their houses were worth what they were 12 months ago. They hadn’t come quite to terms with the fact that we weren’t willing to pay what we would’ve probably paid twelve months ago. We’re starting to see people come around and accept. Even though in our market, we haven’t seen that much of a decline. It’s probably softened. They’re not increasing or declining. We’ve seen a lot more houses go on the market. I can tell you the ones we have been trying to sell have picked up.
In the last 3 weeks, we have had 4 houses under contract. Compared to December, it was like crickets. It’s like, “We probably should just rent everything.” The goal for our fund is cashflow. We’re either creating cashflow and profit for the fund off of the debt we’re lending out by borrowers making their interest payments or we’re creating cashflow by the houses we’re fixing and flipping. We’ve added the rental component to it. We’ve got this rent cashflow because that’s how our investors make money. This is how we create earnings for them. We have to have these different streams of cashflow coming in to continue to provide them the yields that they’re used to.
That’s nice because you have that diversification strategy but you can maneuver it and change it depending on where the opportunity is in it.
We joke that our motto this year is pivot. You have to pivot. There’s still opportunity but the clients, other people and colleagues that we work with are like, “There’s no opportunity out there.” It’s like, “Have you pivoted? Is your buy box still the same?” You have to look at changing those types of things as the market shifts.
You have to pivot. Don’t stay in your box. You have to change things as the market shifts. Click To TweetOne question I want to bring up or point I want to bring up and stop me is if any securities laws will stop you from answering this question but we’re talking about this before we went on the air here. You made about 8.5%. It’s the lowest you’ve seen in a long time and you had people complain about 8.5%. That’s an interesting perspective. It’s all about expectations. If someone wants 10% or 12% plus, they might be disappointed with 8.5%.
I wonder what the alternative would’ve been. Correct me if I’m wrong but if you look at 2022, the S&P dropped 19%, almost 20%. If you had a $100,000 investment in the S&P 500 but did not even with the financial advisory took their fees on top of that, even if you did that, you had $100,000 and went down to $80,000. With you, if you had $100,000, you still had $108,000 and change. What’s your response to that? Tell them first why it was lower and then secondly, how would you respond to those people?
We ended up in 2022 at 8.5%. To put that into perspective, we opened this fund in 2015. It’s been around for a long time. We have never paid out less than 9.7%. For the people that have been in the fund for a long time, it was a little bit of a surprise. In quarters 1 through 3, we paid out on average 9.5%. In quarter four, what we did was our fund is fully audited. We have a third-party auditing firm come in and they make sure that everything is as it should be. They look at the book, our numbers and our bank accounts. They make sure that if our fund says we only fund these types of things, we are following the rules of our fund.
One of the things that a lot of funds take into consideration is something called loss reserve. Whether you’re buying real estate and cashflowing it for rent or you’re lending money out in debt, you should have a loss reserve account. This is for the tenant that doesn’t pay. We don’t have cashflow coming in from that because our fund is based on cashflow or the debt that we lend out is like, “That guy we went money to in San Francisco is not paying us right now. We might have to foreclose.”
We need to take into consideration what it would cost to foreclose and do an evaluation of what that property’s worth right now. It’s because some of these loans are from 10 or 12 months ago that may not be paying. Our auditors given the market and all the potential headwinds that could be coming at us said, “We would advise you guys to beef up your loss reserve.” We’ve always had a loss reserve. What we did at the advice of our auditors was looked at our assets and said, “What’s not performing?”
Also, to understand that we probably have 350 debt instruments in that fund. Of those, there were 12 of them what we would call 60 days later greater. It means they hadn’t made a payment for 60 days or longer. We looked at all twelve of those. We got what’s called a broker price opinion on all those assets. We sold the properties. We sent out a broker and they gave us an opinion of value.
Of the 12, we identified 3 values that came in a little less than what we originally thought they were. It doesn’t mean we’ve foreclosed on them. It doesn’t mean we’re going to lose on them but we said, “We’ve got these three assets that could potentially be a loss if we foreclosed on them right now.” We sold them for what this BPO is telling us. We may potentially have a loss on our hands, which that’s the risk of debt. They’re not all winners. You look at it as an overall portfolio.
That’s three out of how many again?
Out of 350.
It’s less than 1%.
What tends to happen with those kinds of borrowers, you’ll let them know, “We’re starting foreclosure.” Typically, it wakes them up real quick and they’re calling in saying, “I’m going to pay,” or they’ll sell it or pay it off, whatever the case may be. What we did was considered those three assets and beefed up our loss reserve. We held back for a potential loss, taxes, insurance and attorney’s fees. We took that out of profit.
The fund didn’t lose any money. We have this profit bucket for the quarter and based on these calculations, we said, “Let’s hold back some more money out of profit.” The easiest way to explain it is it’s a rainy-day slush fund. If all those things happen and we get them back, we have accounted for that and we’re not going to have a big hit moving forward.
What people should realize as a consumer is this is the right thing to do. This is our fiduciary duty to the members of our fund that we are being mindful of the market and we are preparing. Worst case scenario, we’ve planned for that rainy day. In the best-case scenario, they pay off. That money goes back into profit. The fund didn’t lose any money but it had a low return in quarter four.
Overall, it still paid out 8.5% for the year. I looked at my 401(k) and it’s at negative 16% right now. The fund had a yield. It just wasn’t as high as what most people were used to. We hope that now we’re better positioned. Moving forward, every 30 days, we’re going to look at those assets again and any new ones and we’re going to say, “Are these current?” “Great. That goes back into profit.”
We might have new ones that aren’t paying. Now, we need to do the same process. What’s the value? How late are these? Could we potentially have a loss? We’re going to do that every 30 days. I sleep better at night knowing that we’ve planned. Best case, we don’t need it. It all goes back into profit but nobody’s lost principal. We’ve all gotten spoiled. Our target is always going to be 10% for our fund. That’s how we make money.
If we’re not hitting over 9%, we’re not getting paid either. I don’t know that 10% is unrealistic but I do know that from January up to June and July, there are going to be a lot of headwinds and it’s going to be telling. We feel pretty confident and bullish about our ability to get yields back up but it might take some time. I do feel very confident that we’re well positioned if we do have those headwinds hit. We have processes in place. We’ve taken all that stuff into consideration and we can weather a storm.
When investing, you have to be well-positioned to feel confident in your ability to get the yields back up. Click To TweetAll you guys did is the same thing we recommend to our clients when they buy a rental property or a turnkey rental. They’re taking all the profits but sometimes, clients will realize, “I could take cashflow right away but I should probably start building up an emergency fund for this property,” even if it’s $5,000 or $3,000 for that 1 property and that’s it.
It’s taking some of that cashflow and making a reserve. If times are a little bit more uncertain, we might say, “Maybe beef it up a little bit more.” Instead of $3,000 for that 1 property, maybe get up to $5,000 in case there’s a vacancy for more than a couple of months or some other maintenance issues might happen. We’ve had flooding in our basement or if something like that happens, just in case something like that goes above and beyond.
You guys did the same thing but instead of me factoring in like, “I hope usually in my rentals that 1 month out of every 24 might be a loss for me,” and at 23 months, usually I make a net profit on my rental, you’re saying, “Less than 1%.” That’d be saying, “If I have $100 a month reserve, there might be that one losing month.” You’re even being less defensive than even what we would do on the rental side of things. You’re doing that. You’re mitigating your risk to build offset just in case. If that doesn’t ever get used and things come back and start swinging more bullish again, then that money’s profit again.
It’s not lost and that’s where we become so numb to it here because this is our every day. That’s the reason people invest with us. If this was easy, everybody would go do it themselves but people put money in our fund because we are the professionals and the experts at it. We get a little numb to it. We see this. We understand it. We’re in the weeds every day, all day.
For the investors that are on the outside, they don’t understand. We’ve been transparent about this. What I would tell people is if you have other investments, make sure your operators are being transparent and communicating with you. I hope that our members understand that first and foremost, our goal is we are always going to be open and transparent. We’re always going to communicate with you.
We’ve had a couple of town halls. We’re going to continue to have those. It’s an opportunity for the fund members to get on and hear from us and the team. “This is what we’ve got going on.” Sometimes they’re not going to see a lot of movement and change but they’re going to always know we’re on the other end of it. We’re here to be transparent with people. That’s the best that you can do.
Our fund is not in trouble but we did this so it isn’t in trouble in the future. The funds and the operators that over the eighteen years that I’ve been in this that I see go away are the ones that have rose-colored glasses on. They think everything’s great. They are not preparing your cashflowing property for a tenant leaving and a toilet overflowing. That’s the reality. That’s what you’re investing in.
They do not have the battle wounds yet.
We’ve been very transparent with people and it’s been very well received. People are like, “Thank you. I have other investments that aren’t paying and I can’t even get ahold of anybody. I call. They don’t return emails.” You and I were talking right before we started. What is happening now is you better know whom you’re investing with and you better have full confidence that the operator can pull this off. We’re all going to see this and in another twelve months, there’s probably going to be a lot of operators that aren’t around. The good ones are still going to be around and we plan to be around.
That’s why we have you on this show. Nothing’s ever guaranteed. As a disclaimer guys, we’re not saying you should go and invest with Secured Investment Corporation. We’re not giving investment advice here but what we are saying is what’s great is that even just taking from what Heather’s talking about here, this could be applied to any investment you’re looking at because any real estate investors are dealing with their own kind of set of issues.
Even though we’re starting to see this little upswing and buyers coming back into the market again, especially in the markets you’re in, you are around Idaho, Boise, Washington and things like that, people are moving and are even doing short-term rentals right now to see if they want to move into these specific areas you’ve been lending into or renting in currently. There’s a lot of opportunity already happening in some of these other secondary-type markets that we’re seeing.
We’re starting to see an uptick. We have a weather much like you do. Winter sales typically decline anyways, not even taking into consideration the market but we’re starting to see a big uptick in the assets that we’re purchasing locally.
That is earlier than I expected too. I didn’t think it would happen this early in the year. That’s unusual.
It’s been over the last couple of weeks. We meet on a weekly basis with all of our assets. We talk about, “Was this one listed? How many people have viewed it? Are we renting this?” We’re very ingrained in this. Yesterday, we had our meeting with our Keller Williams agent because we are a licensed Keller Williams agent and they’re seeing an uptick. I don’t think this weekend’s going to be busy with the Super Bowl but we’ve got a couple of new properties hitting the market and going live next week. We’re excited about those.
What you’re saying is you started seeing this uptick even from late January versus usually late February.
In February and early March. It was quiet through December though.
It’s catching up. The thing is you always got to have that equilibrium coming back into balance again. This has been great, Heather. I appreciate it. I know you guys do a stellar job with what you do, which is why we have you sponsor our show. You guys do great with Secured Investment Corporation there. If people want to learn more about it, what’s the best way they can do that?
The best way they can do that is to visit our website, SecuredInvestmentCorp.com. We’ve got information on there about both of our funds. We’ve got two funds. One for unaccredited investors with a minimum of $1,000 with average yields of 6% to 8%. We’ve got another fund that is for our accredited investors with a $50,000 buy-in minimum. Historically, we have been seeing yields from 9% to 10%. Full disclosure, last year was 8.5% but that was based on the conversation we had.
However, our target on that is always 10%. We’ve had a lot of years where we’re over 10%. We’re excited about 2023. We think there are a lot of opportunities for our funds. We also sell mortgage notes. When they go to our website, all of our notes, the debt we talked about that we run through the fund, we sell that paper too.
If you guys on the show are more inclined to be more active, hands-on and like notes and you like digging into the deals, let me know also because we probably originate 35 to 40 notes a month and we sell all of that paper. They can connect with me on the website or with someone from my team. We’d love to tell them what we do and a little bit more about us.
I’m glad you brought the notes up because I didn’t even realize you offered notes until one of my clients said, “We got this note. I love it.” It was returning better than even the fund was in that particular case. They were very excited about that. Thanks for bringing that up.
We sell a lot of notes and service all the notes internally. We’re a one-stop shop.
Heather, I appreciate your time and your expertise and also the value you are providing on the show. It’s so good to lift the hood a little bit and take a look to see what’s happening. I know a lot of people hear about these investments but to hear about investment and how it works is very helpful. Thank you so much for being on our show today.
Thanks for having me.
For everybody else, check out SecuredInvestmentCorp.com. Always feel free to reach out and ask them questions if you’re interested to learn more about what they do. This is not only about reading this and saying, “That was nice,” and then moving on with your life. If you want your life to change, it requires you to take action. What are you going to do with the information you receive? That’s the question and the challenge I leave for you. Take action on what you’ve learned. Make it a great day. Make it a prosperous week and we’ll talk to you later.
Important Links
- Money Ripples – YouTube Channel
- Secured Investment Corp
- Lee Arnold – Past Episode
About Heather Dreves
Heather Dreves is the Director of Funding and manages a team that is responsible for raising capital through Secured Investments High Yield funds and the sale of Trust Deeds. She also holds a position as a Fund Manager at Secured Investment Corp. and oversees the activities of the Secured Investment High Yield Funds. She is a tenured employee that has been in the Private Money Industry for over 15 years.
Heather has held her Series 63 license in the past. She has been directly involved in the sale of over 100 million dollars in Trust Deed Mortgages and raised over 30 million in capital through three Secured Investment Corps High Yield Equity Funds. She has experience in assisting Underwriting, managing origination, Servicing teams and Investor Relations. She is an active real estate investor focusing on rental properties but with experience in flipping properties.