Is Real Estate Doomed In The Near Future With Guest Tim Herriage | 728

 

With all of the news about real estate, is this the wrong time to invest? Should we wait until the smoke clears?

Real estate investor and entrepreneur, Tim Herriage, joins us on our show to discuss what he’s seeing real time. Tune in to find out what’s REALLY going on in the market!

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Is Real Estate Doomed In The Near Future With Guest Tim Herriage

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I brought on a really special guest here today. It is somebody that I’ve gotten to know in our mastermind circles, Tim Herriage. One thing you got to understand about him is he is the executive director of RCN Capital. He’s also the host of the Uncontested Investing show, which you should check out. It’s something I’ve actually been on as well.

He’s in a lot of different real estate businesses. This is why I’m bringing him on because I want to get his perspective on what’s going on. He’s been in the real estate investor space for a couple of decades, but most importantly, he’s also in REI circles with real estate investors that way. He’s also the Founder of the 2020 REI Group. He’s a Cofounder and Managing Director of what now is Finance of America.

He is also the Founder of the REI Expo. Have you ever been to that? Not to mention, he has been a franchisee and development agent for the Home Investors of America. This guy has his finger on the pulse, and that’s exactly what we want. I want to challenge whatever the media’s been telling you because that’s probably why most people get stuck and never being wealthy. That’s why I brought Tim on here today.

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Tim, thanks for joining our show today.

Chris, how are you?

I am fantastic. I am glad to have you on. Give us a little bit more on your background. You’ve had a few decades of experience in the real estate space like I have as well, but go deeper. Tell us more of your story.

I went to the Marine Corps right out of high school. I got a job selling life insurance. After that, I realized that wasn’t any fun.

That’s awesome. Maybe we should talk about infinite banking on the show. I love it.

From there, I got a job as a project manager for a house flipper here in Dallas. That was the beginning of the time in the industry. My parents built houses when I was a kid. I started doing his project management and his owner-finance sales. He taught me the acquisition part about a year into doing that. I went and, like everybody, got enough information and wanted to go out on my own. I partnered up with a local hard money lender and started building a big owner-finance note portfolio.

A couple of years after that, my wife sold me a house, so I partnered with her and left the other partnership. The year before The Great Recession, we did 143 flips and almost lost everything we ever had in ‘08 and ‘09. We made it through without any foreclosures and are still married. Those are two things that a lot of people didn’t do.

I started the REI Expo and sold it to Think Realty. I met the guys at Blackstone and started B2R Finance. I merged that with Finance of America and took it public in ‘21. Now, I’m the Executive Director at RCN Capital. I’ve been borrowing from RCN for about 5 or 6 years now, maybe longer than that. Jeff Tesch, the Founder and CEO, is a great friend of mine. After we took FOA public, he called me and said, “Do you want to do it again?” I said, “Yeah. Why not?”

You’ve gone around. I’m saying this in the least sleazy Mac Daddy way possible. You’ve had a lot of experience in this space and what’s been going on here. I want to go back to getting your teeth kicked in a little bit with the flips. It’s awesome that you were able to come out of that unscathed. I didn’t. I came out with over $1 million in debt and had to pay that back. I kept my marriage intact at least to a certain point, but it was rough on the marriage, too. Tell us more about that. How were you able to pull through?

I’ve got a great wife. She won’t ever tune in to this. I’m not saying that to kiss up to her. We shifted. We went to the HomeVestors convention that December and they gave us the book Who Moved My Cheese?. I read it and listened. I’ve always been the kind of person that go around and ask for advice and opinions from people. I started diving in. The biggest thing is I took massive action quickly. A lot of people were ignoring the real impact that the issues were going to have on them, whereas I listened to the whys.

I took massive action quickly. A lot of people were ignoring the real impact that the issues were going to have on them, whereas I listened to the whys. Click To Tweet

We had 38 vacant houses in August of ‘07 when the crash happened. That’s the crash. Everybody remembers ‘08, but August ‘07 is when the subprime market imploded. I called a good friend of mine, and we were in another mastermind together. Masterminds have always been a big part of my life. I said, “Jeff, what does this mean?” He goes, “We’re effed.” I was like, “Can you expand on that?” He was like, “We’re effed. Sell everything you have.” I was like, “Great,” and I did it. I started dropping the prices, taking losses, and offloading inventory. When money is easy and everything is going up, you keep the houses that nobody else wants. When the market slows down, you realize you have a toxic rental portfolio.

My wife went and became an REO agent. She started selling Fannie Mae and Freddie Mac foreclosures in our hometown. That was pretty good money. Those were $300,000 to $400,000 sales. That was her full-time job. I was a stay-at-home dad for a certain part of that with our now thirteen-year-old. I would go and evict and do some of the work myself. We sold a lot of houses on owner-finance. By doing that, we were able to create that income but then also capture the down payment to offset the lack of capital that we were experiencing. How do we do it? We got up every morning and went to work. It was not fun or easy, but I’m glad we did it.

I love that story because it shows that you did a few things, which I picked up here from what you said. One is you didn’t trust in thinking, “It’s always worked. I’m going to keep doing that.” You sought counsel. You had that mastermind or those people around you that you could talk to and be able to say, “What’s going on in real-time?”

On top of that, you were able to still maneuver and figure out what was going on. I remember REOs back then. They were hot. You sell them for less than $0.10 on the dollar. That’s as long as you didn’t have huge tax liens on it where you’re like, “I bought a turd.” For the most part, it sounds like you guys maneuvered that nicely.

One of my mentors said, “Never sacrifice good enough for perfect.” Many people are always trying to achieve the perfect strategy, the perfect plan, or the perfect outcome when good enough gets them by. It helps to have a family you have to support because I didn’t have any choice. You got to do what you got to do. That’s probably the Marine in me and a little bit of a Type A personality, too.

That’s ultimately the message that I was spreading. Starting in February of ‘22, I told every new investor that would listen to me, “This is going to be bad. You don’t know.” Some of them didn’t listen, and some of them did. I approach my business and my life with everything. Do good and help people, and good and help will come your way.

The last seventeen months have been very interesting to watch with the way the investors are receiving the information that is out there and then, ultimately, what they’re doing with that information. I went to Mike Hambright’s Investor Fuel in the first week of February 2022. I got up there during my sponsor spotlight and said, “You got to listen to me. You don’t understand the effects that these interest rate increases are going to have. We don’t know how far they’re going to go. Inflation is baked in. If you’ve got inventory, now is the time to reposition it.”

 

Back then, we were still closing loans at 3.75% on 30-year fixed for DSCR investors or rental loans. The investor mentality in February of last year was, “This isn’t going to hurt me. I’m fine.” We got around the May Investor Fuel meeting and it was interesting. It was almost a sense of arrogance developing because rates had gone up. If you remember, there was a massive rush to buy houses. They were all making money hand over fist.

At that point, they’re like, “That isn’t going to work. This isn’t that bad. What do you mean?” I’m like, “You don’t understand. This is this false insecurity.” By the time we showed up at the August meeting, it was like, “I have to let my staff go. I’m going to need to stop advertising. I’m not sure I can pay for the mastermind.” In December, it was like, “I may shut down the business.” In their November meeting, everybody had cut half their staff.

You roll around to this February’s meeting. In the Marine Corps, we would’ve called it embraced the suck. They’ve adjusted. The ones that are still there have been adjusted. The ones that are still there reduced their staff, overhead, and expenses. Now they’re optimistic about buying back in at today’s prices because many of the markets have gone down 20%.

We’ve reverted back to normal. That sentiment is going to be a lot keener on discipline on maybe a slower scale and not trying to hurry up. I feel like the investor mentality and discipline have gotten to, and I said it on the stage at Family Mastermind, be short and simple wins of the day. At this point in the market cycle in real estate, you don’t want a lot of short-term exposure. The next two years are the weird part. Pretty sure we all know where we’ll be in ten years.

That’s what I was going to ask you next. Where do you see it going now? Do you see it on a slower scale? How would somebody pivot or do it differently today than they were trying to do in 2021 or 2022?

The lagging effect of these policy changes is so difficult to measure in less than 6 to 12 months. It doesn’t have enough time to get all the way through the economy. I can tell you this. As we sit here today, I filed my first eviction in three years. I didn’t, but my manager did. As we sit here today, I have more delinquency in my rental portfolio than I have in three years.

Real estate investors are taking the market and are using the average of three comps instead of the high comp. It’s back to discipline. For a while there, it had gotten to where you didn’t need three comps. You pick the highest one and tack 10% on it, and that’s what it would sell for. Whereas now, it’s getting more in the average of the three comps, you may want to skew towards the low one unless you’re under $300,000 if you’re under $300,000. Affordable housing is where it’s at.

If we’re seven million houses short, interest rates are not going down from here. They may go down a little. Homeowner paper may get down in the fives. In our investor paper, we can already do a 5%, but we have a pre-payment penalty. That’s why. One economist said this is a reversion, not a correction. We were in an opposite world for three years. It was nonsensical. People were coming to Dallas, paying $100,000 above the asking price, and there were three other offers with that same dollar amount with cash.

This is a reversion, not a correction. We were just in the opposite world for three years. Click To Tweet

I feel like the worst is over for the housing market. Intellectually, there should be some recession coming, but as we sit here today, we still have 1.6 job openings for every unemployed person. In The Great Recession, it was less than one. If we got rid of half the job openings right now, the only way that works is if places are closing and shutting their doors. You can’t get enough people to support what we have right now. I don’t know. I feel like we may have achieved the soft landing that the Fed wanted, but I don’t think rates will go back down in ‘23. If they need to hold around where they’re at for 6 to 12 months, they need to shake out some of the entrenched inflation.

I don’t know about you, but I’ve got a teenage son. I took him and two of his buddies on a ski trip. We swing into a McDonald’s and it was $51 for four value meals. The lady said it over the speaker and I was like, “What?” It was strange. I feel like there’s more to run. Rates are not going to go down, and I don’t think they should. This is going to be a slow, steady bleed of the ones that are good businesses and the ones that aren’t.

I agree. I could see that happening. It’s interesting you mentioned job openings. Something that popped into my head is whenever you have something that’s overinflated or over the top, typically, there always has to be that reversion or that correction. It makes me wonder, “For it to come back in balance, what does have to happen?” Either 1) Do we have to lose a lot of companies or lose a lot of jobs, or 2) Maybe that’s the whole Feds point?

That’s what I was trying to get to. We know it is already falsified anyways. 3.4% in April is ridiculous. That’s after layoffs and everything, too. It does make you wonder what has to come into balance. I know we’re in similar mastermind groups. I remember in 2019, we were beating the same drum. As we were saying in 2022, “There’s already correction happening.” Even the Feds were starting to lower their rates quietly. They were saying, “There’s something coming.” We were preparing for a recession then.

With COVID, there’s this huge influx of money. It creates a much bigger bubble than we already saw in the 2010s. Now, we’re like, “This crash is going to be even worse.” For people to not be prepared, it’s like, “How did you not see this coming at this point?” They’re like, “I thought I could ride that wave a little bit longer.” That’s why you got to be prepared. That’s where you have to be almost a little bit trigger-happy at that point.

I completely agree. When it comes to determining your behavior, I think of it like the Military. You never make a decision on one source of information. We’re entering a point in time where listeners need to consume the news but not the drama. I listened to Bloomberg Radio every morning. Even though Michael Bloomberg ran for office, it’s not a political radio station. They talk about financial news. That’s all I need to hear.

I don’t care what Trump or Biden have done or are doing. I know that we’re going to do the opposite of that in a year or two anyway. That’s the cycle we’re in. What I care about is when they’re saying that interest rates are going up, I need to learn how that impacts me. I need to look at how it’s impacting foreign economies. I need to look at what opportunities I have coming up and where to put my money. I need to hear the two-year treasuries are still 40 basis points higher than the tenure. I need to hear about swaps and spreads because, ultimately, I live and breathe in an interest-rate-driven industry and business.

Affordability is important. That’s why I do it, but I don’t act off of Bloomberg. I go ask our chief financial officer, “What does that mean? What do you think?” I attend the National Private Lenders Association meeting. I ask what they’re doing and how their business is. All those sources are where you make your decisions. You make your decisions from a point of being informed, not a point of being influenced.

Often, I’ve found that almost what’s between the lines of what’s being said is where the real power is. You mentioned what kind of data really matters. Do we see things such as credit card delinquencies or even auto loan delinquencies? How’s that affecting it? What’s the capital of the average consumer? Even today, I was reading where one of the Fed presidents came out and said, “I’m expecting it to be a tightening of credit.”

That’s a big deal when it comes to the economy because the loosening of credit is why the economy still seems like it’s very healthy. If, all of a sudden, banks, because of what’s been going on in the springtime, their potential for failures, and maybe even government regulations become more strict or require bigger reserves, that means less to lend out. That tightens credit markets and money flow and supply. We got a massive recession potentially.

I’ve been worried about the auto loan market for years now, but it’s interesting. There was an article recently. The average vehicle payment is now over $1,000 or something to that effect. Don’t quote me on that. That’s the kind of information you do not take action.

It’s up there. I think you’re pretty right.

Ultimately, that’s where the real estate market is as well. Something has to give. It’s either interest rates, price, cohabitation, or people staying put. Another interesting stat that may make this cycle be different than all other cycles is the 50-year average of the interest rates on mortgages is about 7.5%. It’s 7.75% if I remember correctly. Right now, 93% of active mortgages in America are 4% or lower. 70-something percent is 3% or lower.

The math right now is if I want to move and don’t want to spend more money, I have to buy a smaller house and pay the same payment that I’m paying for my bigger house. It’s creating this issue of nobody is selling. They don’t want to sell. Only if they have to sell will they sell. When you look at that, it has stripped supply out of the market because there’s now a significant intrinsic value behind that interest rate.

It’s going to be interesting. I don’t have the answer. I know we don’t have enough houses for the human beings we have. I know things are awfully expensive. Even if you double the amount of foreclosures that we had this month, we would not be back to the historical norm. If you double the amount of homes on the market right now, we would not be back to historical norms. There’s only 2.6 months’ worth of supply of houses available. Healthy is six. It’s what I say. I tell people. “You got to keep your timelines short. Invest in income-producing assets that you don’t need to if you don’t plan to sell in the next two years.” Fixed-rate debt has never been more popular, has it?

 

That’s for sure. Tim, I appreciate this. This is great stuff here. I mentioned the podcast and that they could follow you on the Uncontested investing show. Where else can they follow you?

I’m all over social. Tim Herriage is not a common name. I am @TimHerriage on all social platforms. RCN Capital is @RCN_Capital on all the platforms. I try to do my best to put out content that is helpful and entertaining. I brag about my kids when they smoke a home run.

You were valuable here today. I really appreciate your insights and everything. That’s what I love. I love the fact that it’s not like you’re buying into the drama. That’s what I wanted to spill on the show. Let’s get away from the drama. Let’s get to what’s actually happening and the reality so that we’re ready. No matter where this person is that’s reading right now, whether they’ve got cash or they’re ready to deploy but there’s no right moment, they’re trying to build up the cash, or maybe they need to build more cash because they’re in a world of hurt if they don’t, this gives lots of great insight. I appreciate your time and your expertise here.

Thank you for having me. I’ll see you pretty soon.

I look forward to it. Everybody else, it is the same for you as well. You could be a hero of the world but it’s so much more powerful if you’re a doer as well. Tim had mentioned earlier that it’s not about taking perfect action. It could be imperfect action, but moving in the right direction allows you to be able to be at a place where you’re able to prosper. You go from ordinary to extraordinary. Make it a wonderful and prosperous week. We’ll see you later.

 

Important Links

• Passive Income Calculator
• RCN Capital
• Uncontested Investing
• Finance of America
• Who Moved My Cheese?
• @TimHerriage – Instagram
• @RCN_Capital – Instagram
• https://www.YouTube.com/playlist?list=PLdpbc3-wRRVX-4IFh4HMPoQ7kv_bpmu9D

 

About Tim Herriage

Tim Herriage is the Executive Director at RCN Capital and host of The Uncontested Investing Show. Tim is a professional real estate investor and entrepreneur. For two decades Tim has been on the leading edge of the Real Estate Investor (REI) space. This includes being the Founder of 2020 REI Group, Co-Founder and Managing Director of Blackstone’s B2R Finance (now Finance of America), Founder of the REI Expo, as well as a Franchisee and Development Agent for HomeVestors® of America.