As we head into the new year, we are hearing so much noise in the media about what’s going to happen with the housing market. It is overwhelming!
That’s why I invited real estate master, Lee Arnold, on to my show. Lee is a genius in the real estate and lending space.
He’s not only just a CEO of multiple multimillion-dollar companies. The guy is a bestselling author and international speaker.
With 30+ years of real estate experience, I wanted him to share his predictions and insights.
Listen now!
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TRANSCRIPTS:
Speaker 1 (00:00):
Hello, my fellow Ripples. This is Chris Miles, your cashflow expert and anti financianal advisor.
Speaker 2 (00:07):
Chris Miles was able to retire twice by the time he was 39 years old, but he’s not content to just enjoy his own financial freedom and peace of mind. Chris wants you to have your own ripple effect so you can live free today. He’s not the financial advisor you expected. He’s the non-financial advisor you deserve. He’s jumping behind the mic right now, ready to make waves. Here’s Chris Miles
Speaker 1 (00:38):
Show. It’s for you those that work so hard for your money, but you’re now ready for your money to start working harder for you today. Why? Because you’re sick and tired of being sick and tired. You are sick and tired of not having that time freedom today to be able to do what you love with those you love. But more importantly, it’s not just about getting rich, it’s about living a rich life because as you’re blessed financially, you now have a greater capacity to be a blessing in the lives of those around you. Thank you for tuning in today because man, you guys really are some of the best listeners ever. Keep binging, keep sharing, keep doing what you guys are doing and more importantly, keep applying this that your lives change and that makes our ripple effect continue beyond just what we do here.
(01:14)
If you haven’t done so already, speaking of ripple effect, if you guys want to keep your education going, go check our website, money ripples.com. We got lots of free information resources, and if you haven’t already subscribed to our YouTube channel, the Money Ripples channel do so because we got videos coming out even beyond just these podcasts. So check that out. Alright guys, so I’m bringing back a repeat guest once again, remember bringing back Lee Arnold. Now, if you didn’t see Lee’s previous interview that we had done earlier this year, Lee is a genius in the real estate and lending space, right? He’s not only just a CEO of multiple multimillion dollar companies. The guy is an author, bestselling author, he’s a international speaker. He’s does great things. Not to mention, I mean this guy bounced back from the last recession like me, but I’m like a mini version of Lee in this sense where he’s done way bigger things since the last recession and having a big shakeup there to then bounce back and really be that comeback story. But the other thing I also love about Lee too is that the guy has a heart and he has a mission, and the guy is God-fearing. Him and his wife have a charity foundation they’ve done together, but he’s got a great foundation as well, and even puts on a huge conference each and every year out there in Washington state. So really excited to have Lee back on. Lee, thanks for joining us today. Chris,
Speaker 3 (02:28):
Thank you for having me. Always loved hanging out with you and chatting.
Speaker 1 (02:32):
Absolutely, man. It’s always fun, man. And the thing is, well give people a little bit more of your backstory just for those that maybe haven’t gone that far back in our episodes.
Speaker 3 (02:40):
So I started investing in real estate in 1995 and things were going well record low interest rates, a lot of things happening. We had September 11th in 2001 after that, rates were really low, the market gets super heated and this of course leads to this crazy recession of eight and nine. And at that time we were pretty heavily leveraged. I mean, I was doing large developments, had a lot of debts. In fact, the whole company was being run on debt because debt was so cheap. But then when 2008 hit, it just pretty much wiped us out. And I learned through that, that in a recessionary downturn, the area that the government is going to provide subsidies and helped to bail the market out is going to be in the first time and second time home buyer markets the affordable housing arena, because it was shortly after the session that rates dropped dramatically.
(03:27)
And then there was all these government coupons and things for first time home buyers, second time home buyers, but there was a specific class of real estate that they were lending on, and I’ll give you those five criteria. It was houses that were residential in nature, single family, one to four units, houses that were under 2,800 square feet, houses with less than five bedroom, three baths houses on less than a half of an acre and houses below the FHA cap, which represents affordability for 80% of the us. And so as we were rebuilding regrowing the organization, 2009, 2010, we took a very different position on not only the type of real estate that we would acquire and participate in, but also the type of real estate that we would lend on. And so we have been very, very conservative in our underwriting, the types of properties on. So now we put ourselves in this very interesting market in 2023 going into 2024. There’s disruption, there’s concern, but it always goes back to the old adage, Chris, and I’ll ask you, do you know what you call a hard money lender and a recessionary downturn?
Speaker 1 (04:30):
What
Speaker 3 (04:31):
Landlord, right? So if you write a loan on a piece of property and that borrower defaults, you’re going to have to end up taking that property back. The question is, can we take the property back and make it cashflow? Can we rent it out to cover the debt service on the original loan to produce the yield to the investor? And so that’s been our modus operandi since 2010 and 11. And as we go into this now, new norm, I see a lot more opportunity than I see downside.
Speaker 1 (05:00):
Yeah, and it’s interesting you brought that up. You brought something to my memory as well because you kind of deal with this Goldilocks type of property, right? You’re dealing with because one thing that made people don’t realize is the last recession, although we saw real estate values tank, the one place that didn’t really tank the values stayed pretty stable, was below that FHA guideline, wasn’t it?
Speaker 3 (05:20):
Well, even below the FHA guideline, I mean housing took a pretty dramatic hit, but that was tied more to inventory levels and demand levels because there was such a glutton of this inventory because so many people had bought that particular asset class as an investment, as a rental. They weren’t using it as an owner occupant. So that’s where that deluge of inventory hit the market and really just brought value down. And because we had 8 million Americans who lost their home and foreclosure during this period, so there was this weird 18 to 24 month period where people were just afraid to buy, they were afraid to enter the market because of what they had just gone through, what they’d experienced. Furthermore, their credit was in a situation that they couldn’t qualify. Underwriting criteria is requiring seven 20 minimum FICOs to get loans. So it was certainly an interesting market, but to your point, Chris, that’s where the government was wanting to get resolution quickly, and that’s why they were providing all of these discounted mortgage rates and down payment assistance programs to get that inventory filled up with people who are actually living in these homes.
(06:30)
The government and the nation just runs better when people are homeowners, and that’s the asset class that the government wants people to have is a home. It creates stability in the household. You have better socioeconomic factors when people own housing. So the government’s always going to throw a lot of attention and energy towards that.
Speaker 1 (06:53):
And I know we advertise your funds that you have here with one of your companies secured Investment Corporation. I know we advertise that here on the podcast several times a month. And the thing that’s great about that is that, I mean, there’s minimum investment level of even a thousand dollars like anybody can get in. I even a team meeting recently said, Hey guys, if you’re looking to create passive income, you haven’t done it yet, they’re secured investment corp. You could start there. You could start small even if you don’t have an excuse basically. But that’s the thing is I know when you invest your money, you’re investing by lending it to other real estate investors. So you’re doing more short-term loans to these investors. I know you’re seeing it like real time right now, and we’re hearing all this different stuff between even real estate guests on the show and even on the media, we hear things ranging anything from, oh, real estate’s fine, there’s nothing going wrong with real estate, nothing will happen. And then we get the other extreme of people saying, oh, it’s going to take a hit. It’s going to get hit hard again. What are you seeing in reality right now?
Speaker 3 (07:49):
Well, I think every guest that you’ve had on the show has probably been a hundred percent accurate in the particular area of real estate that they practition. So if they are in the office space, they’re having a really difficult time. I mean, office vacancies in downtown corridors are pushing north of 30%. So if you’re in that space, you’re hemorrhaging cash. We’re seeing a lot of defaults taking place on that. We also saw in the runup of 20, 20, 20, 21, 20, early 22, we had all of these people that were coming out with commercial syndications and new construction, and they ran all of their numbers at two point a half and 3% takeout loans at the end of the project. Well, if your takeout occurred in 2022 or 2023, your takeout now was hitting six point a half, seven, seven point a half percent where your initial underwriting had a four cap or a five cap.
(08:38)
So now it’s a negative cashflow just coming out of the deal. So a lot of people are getting hung up in those types of loans. So any type of a scenario where you have an oncoming call, meaning you got to pay the existing loan off the construction loan, the rehab loan, those people are really having a difficult time because banks just don’t have liquidity to provide takeout lending for those types of projects, especially when you have such negative cashflow. So now there’s this rush to build and you got to do a second or a third round of financing just to get the deal stabilized in those arenas. Yeah, there’s some pain and heartache taking place in the single family, the affordable housing market that we are in, we’re seeing some disruption. We’ve seen our median price point drop by about two and a half to two and a half to 4%.
(09:30)
So not huge disparity from value a year ago to present. The one thing that’s killing everything though is rates, even single family housing is moving slower days on market has elongated from roughly 25 days. We’re now seeing 85 days days on market to get inventory to move. And we’re seeing supply chains. It used to be we had a 15 day supply of inventory. Now we’re pushing almost a 90 day supply of inventory, which sounds like a lot until you realize that a normal market has a six month supply of inventory and the average days on market ranges from 90 to 180 days. So we’re still in a pretty good spot. But the reason that we’re seeing all of the negative things in the media is mortgage lenders. So if you are a conventional mortgage lender and you work with owner occupants, you have very few people coming out to buy new housing with rates hovering north of eight, at least last week they were.
(10:25)
This is creating carnage as well as bad news in the press. And so this is making its way into the general markets and real estate is dying. I can tell you from the front lines it isn’t, but there’s another thing happening, and that is real estate agents are really struggling to make ends meet because they get paid when properties are sold. So if I’m not selling houses because rates are too high, I’m not earning commissions, then I’m reporting that the market is tanking and everything’s falling. But if you look at the numbers, the numbers are such that inventory levels are still relatively low given what’s going on with rates. Why? Because anybody that’s got a loan is sitting at three point a half or 4%. They’re not putting their house on the market to sell it. So when does all of this deadlock begin to unlock my prediction?
(11:15)
And I don’t have a crystal ball. I’m not an economist, but I’ve been doing this for almost 30 years, so I’ve seen some trends. My prediction, we will begin to see the markets open up and really see more inventory, better deals, better pricing coming online. My expectation is somewhere between May or June of 2024, I believe rates will drop to six. I think the government’s done a very effective job, as has the Fed in curbing inflation. Inflation has come down from eight down to now sitting at three and a half. They want to get it below two, I think that they will. But the minute inflation goes below, two unemployment’s going to spike, and so they’re going to have to do something to jolt the economy or the market back into moving. And the way they’re going to do it’s by dropping rates. So I see rates between five and a half to six by the end of second quarter Q4, or I’m sorry, the end of second quarter 2024.
(12:04)
That’s where we’ll see rates start to come down. Now, just this week, Chris, we saw the rate reduction in rates that we’ve seen in over a year. They’ve gone from eight to now. We’re sitting about seven and a quarter. And just that, I mean phones are starting to ring again, and I didn’t mention this at the top, but we not only lend money nationwide to real estate investors, but we are also an active fixing and flipping and wholesaling and turnkey provider up in the Pacific Northwest. So I operate in Spokane County, Washington, which is eastern Washington, and we also operate in Kune County, Idaho, which is the Coeur d’Alene area, which is the northern panhandle of the state of Idaho, about a hundred miles south of Canada. So this is our territory. We cover about 80 miles in radius, and we’re actively buying, fixing and flipping and just when rates drop just a few days ago, we’ve seen more showings happening in our properties that are available for sale.
(12:58)
We’re seeing more offers coming in already. So just that little increase in rates makes all the difference in the world. The thing that people have to know is for every 1% increase in interest rates, 5 million people can no longer afford to buy housing. So conversely, when you see a 1% reduction in rates, that’s now 5 million people that now suddenly can afford housing. So as that thing slides up and down, millions and millions of people are affected positive and negatively. And with these now coming down, we’re seeing a lot more people being affected positively. So the safe place to be, in my opinion, is in that first and second time home buyer below the FHA cap because that represents 80% of affordability for Americans. As long as you’re playing in that space, I don’t know that you’re really going to have a disruptive time over the course of the next three or four quarters. I’m pretty bullish on where we’re headed.
Speaker 1 (13:55):
So unlike what the feds are saying where they say We’re going to keep ’em elevated up to 2025, you’re saying, I think they’re going to be a little bit more, well, and the feds have lied before, but you’re saying pretty much you expect them to start pulling back a little bit on those reins. And like you said, even the rates, which even the feds haven’t dropped the rates, but still the mortgage rates have already dropped just recently in the last few weeks where actually have seen better affordability and people are trying to jump in really quick before they raise ’em back up. Yet almost out of fear, people are jumping back in the market, right?
Speaker 3 (14:24):
Yeah. Well, and the other thing that we’re dealing with, we’re still seeing a very high ratio of investor purchase, single family one to four unit properties because investors really are struggling to get yield. I mean, the stock market has not been producing a whole lot. You and I were talking earlier about the oil and gas industry not producing as much as it was just six or eight months ago. And so investors are really now chasing yield and they’re having a hard time finding it, but the single family, affordable home market still produces it because rental rates have gone up almost 30, 40, 50% in some market. As I look at our own rental portfolio, both for me and my family personally as well as for our private equity funds, in the last 36 months, we’ve seen rents go up almost 50%. So housing that we used to rent for 1250 is now running at 1900 to $2,100 in just 36 months.
(15:18)
But that’s also the inflationary pressures that the feds are trying to curb. We are now seeing a reduction in rental rates, but we’re also in the fourth quarter of 2023, and we’re also in a cold weather climate. So it’s typical to see a slowdown both in house sales and tenant lease ups in November, December, January and February in northern states. Cold weather climates, people don’t want to be loading U-Haul trucks in zero degree weather. But that is the other reason I believe we’ll see some thawing pun intended in the markets in the spring of the year, both because there’s that pent up demand, but also rates will be lower.
Speaker 1 (15:57):
Gotcha. And what are you seeing with the borrowers, the investors that are borrowing money from you guys right now? Are they focusing still on doing fix and flip or because of the time on the market, are they more converting these to rentals? What are you seeing more of happening currently?
Speaker 3 (16:11):
Well, what we do, as I mentioned Chris, we are a fix and flip rehabber investor, turnkey provider, landlord, and we train our client base based on what we are seeing in the markets and where we are seeing the greatest opportunity. And right now, the greatest opportunity we’re finding is in the subject to space. So this is where you find somebody that needs to sell their house. Maybe they can’t sell the house for any particular reason, maybe they’re in arrears or the house is in such rough condition that it’s not going to qualify for conventional lender or an owner. Occupant’s not going to want to live there because it’s in such rundown condition. So what we will do is we’ll come in and we will take over underlying first lien. Here’s a prime example. We just got a deal under contract this week where the people need to move for a job in Texas, they need to get rid of the house they’re in now, and they have an existing first mortgage.
(17:04)
It’s an existing FHA loan sitting at 2.75% interest. Well, that loan needs to stay in tax. So what we will do is we’ll bring in just cash and we’ll say, okay, here’s the cash that you would get from a normal sale. We’re going to take over the underlying loan, okay, right now that’s a subject to loan because now we’ve got this great house that we can rent for 1750 a month with a monthly payment of $900. So subject to acquisitions is really going to be the big push over the course of the next 12 to 18 months. I believe it will run its course once we cycle through some of these low interest rate loans. But right now, that is in my opinion, the greatest opportunity for investors is in the subject to space. Now, here’s the challenge most investors have. You have this first lien position, which is a low, low rate, low payment, but you need to bring in 20 or $30,000 into the deal to get the seller money they need to get moved out to pay for moving expenses, maybe to bring the loan current, to do any renovations, to make it habitable.
(18:05)
And so as a company, what we have now created is what we’re calling a subject to loan. Now, you might call it a bridge loan. You might call it a short-term lending, but we’re providing the second position lien behind the government first so that more investors can get involved in these subject to finance deals. Now, some would say, well, Lee, that’s a second position. That seems like a risky position. No, we’re still below 55% combined loan to value or CLTV. And because of the nature of the first lien, the payment is so low that even when you attach the second, the investor is still getting significant cash flow out of the transaction. So because this is what we are seeing working in our market, we’re now teaching this to our clients, and we have a customer base of about 1.3 million people nationwide. And so we now roll this out as an educational offering, and I’m going to be teaching a class on subject to funding in January to teach people not only how to find these deals, how to negotiate ’em, which forms to use, but also how to get funding to cover the gap that you need to get into the transaction.
(19:11)
So it’s a pretty exciting time. And 30 years in real estate, the thing I love most is when the market goes left, we hang a right. When the market goes right, we hang a left. There’s so many variations of opportunity. I don’t know who gets credit for the quote, but the quote is, when there’s blood in the streets, buy, well, there’s a lot of opportunity in the markets right now. You just got to be very selective about which markets you’re playing in and whether or not you can sustain them through the cashflow cycle. So I’m telling my clients, avoid ground up construction. If it doesn’t produce income day one, I would avoid it. So ground up construction, I’m not a big fan of right now. I would avoid anything to do with the commercial sector, especially in downtown corridors, even though we’re seeing a lot of big companies push for employees to come back to the office, there’s still a lot of resistance from a lot of people. They don’t want to go back to the office, so they’re opting instead to quit. Well, this leaves more vacancies in the downtown corridor that have to be filled, which means we’re not going to see change or improvement in those sectors, in my opinion, for another 12 to 24 months. So focus on cash flowing, existing cash flowing investments, and you’re going to have a great 2024.
Speaker 1 (20:23):
Totally agree. It’s interesting you brought up the subject two strategy because I just had somebody recently email me saying, Hey, do you know anybody who teaches subject two? They were hoping I would, but I said, no, that’s not our thing. We teach passive investing. We’re more like the people that put the money with you, Lee instead of the other way around. So if somebody wanted to make sure they were able to learn about this, I know you said you were doing masterclass in January. What’s the better company they should follow to do that?
Speaker 3 (20:48):
They should go to sub two funding. So it’s SUB, the number two, sub two funding.com. We’ve set up a website there. People can go in there and opt in, give us their name, email, phone number, and then we will email them with the dates and the information about the class so that they can participate in that. And the other cool thing, Chris, for those that are going to get involved in the sub two space to bring that underlying loan current and get the property fixed up, we just purchased last week a house built in 2019, so it’s only four years old. We took over an underlying first at 3.675, we gave her $10,000 to get moved and we’re going to put in 7,500 bucks to fix it up. So total cash out of pocket about $20,000. Now, for your audience specifically, Chris, this would’ve been a great property to acquire in the whole life policy because most people have $20,000 in liquidity or cash availability, could have easily done that loan. And now you’ve got, I think that’ll produce almost $1,200 a month in positive cashflow coming out of that deal on a 20 investment,
Speaker 1 (21:56):
It’s like a 75% return rate there
Speaker 3 (21:59):
On a half million dollars brand new constructed home. So that house is not going to need a roof for 20 years. It’s not going to need HVAC for 20 years. It’s just going to spin out cash for a very, very long time. And to do that into a whole life policy would’ve just been an awesome way to structure that thing.
Speaker 1 (22:17):
See, I would think is, man, that sounds awesome. How do I get somebody else’s to do that work for me? So then I just say, Hey, I’ll finance the deal and then you just pay me or maybe cut me in on the deal, right?
Speaker 3 (22:29):
Absolutely. And that’s the reason that we have put together this subject to funding product is people can find great deals, but a lot of ’em don’t have that 20, 30 or 40 grand that they need to get themselves into it. Well, we’ll provide that funding. The starting rate on that type of a loan is five points and 15% interest. So I mean, you’re looking at a 20% yield year one just on the debt that you are using to get them into that deal. Now, the question I would ask is, well, Lee, how come you didn’t put that deal in your whole life policy? Because as you know, Chris, you and I have had conversations. I love whole life and I’ve got quite a few policies of it, but this was a deal that was going into our private equity funds. So the rule that I have with our equity fund investors is every good deal will go to our equity funds first if there’s liquidity or if it’s a good investment for the funds, if the funds don’t for whatever reason, have liquidity in that moment. We funded a lot of loans, we bought a lot of properties, then it will roll into something that I might do personally. Or if the risk is too great where we feel like, man, that’s just too risky for the funds. I don’t want to put the funds in harm’s way on that, then I might do that personally. But 90% of the stuff that I’m acquiring is going through and into our private equity funds.
Speaker 1 (23:44):
Gotcha. And where do they find that access to the private equity funds?
Speaker 3 (23:48):
You can read more about our equity funds. It’s secured investment corp.com. Secured investment corp.com. There’s now four five ways to invest with us. We have a credited investor only fund, 50,000 minimum. We have a plus fund with a thousand dollars minimum. We sell notes. All of the loans that we originate, we sell them wholly to investors. Return on those whole notes ranges from eight to 13%. So you can go look at the whole notes that we have for sale there. We also offer turnkey properties. So if you wanted to purchase turnkey and have rental properties for the tax benefits of property ownership, we provide turnkeys here in our local market where property management is already intact, cash flow is already occurring. And then Chris, I don’t know if you know this, we just opened a fifth fund and this is called our fixed income fund five. It pays a flat rate of 5% guaranteed. So there’s no pref, it’s just a fixed 5% and it’s liquid in 90 days.
Speaker 1 (24:47):
This is good alternative
Speaker 3 (24:49):
To people. Good short-term thing, there’s not a big lockup period. So where people are chasing yield going into a four or five year CD to get four and a half, they got tie it up for three and four and five years to get it. They can come into our fund, five get 5% guaranteed, and it’s only a 90 day tie up period. And let me restate that. There’s not even a 90 day tie up period. So you don’t have to be in 90 days. You can literally be in for three days and say, I’d like my money back, but we now have 90 days to get you that money back. So it’s all tied to liquidity in markets and property selling and loans being originated, loans being sold. It’s a very interesting and fun business. I enjoy it.
Speaker 1 (25:31):
Yeah, pretty much what you’re saying, Lee, is that whether someone wants to be an active investor or a passive investor, you’ve got it.
Speaker 3 (25:38):
We want to do all we can to provide as many opportunities for them to generate income, whether that be passively or actively. And if they have time, I believe this is a great time to get into the market as an active investor utilizing the subject to strategy because the yields are just unbelievable. Yields are incredible.
Speaker 1 (26:00):
Well, that’s kind of the whole point of this episode, right? Was everybody’s fearful right now. That’s exactly the time you should be buying, right? Is when people are scared to even get in. They’re all saying, oh, this is going downhill. That’s when the opportunities show up. That’s when you actually make the greatest amount of wealth is when everybody’s running away. That’s when the real players that make big money, that’s when they come in and do it,
Speaker 3 (26:19):
Right? Yeah. And I believe the window of opportunity is the next 12 to 18 months.
Speaker 1 (26:24):
Totally agree. Will Lee, this is really valuable today. Thank you so much for joining us, everybody. Like I said, he’s got the sub two funding.com. He’s got secured investment corp.com. Whatever thing you’re looking for, they’ve got it. Definitely check it out, follow them. We’ll have a lot of that in the show notes as well for you. So everybody, you could be sitting on the sidelines waiting for the right time, or you could be taken advantage and taken the bull by its horns and taken advantage of this time when everybody else thinks it’s the wrong time. This is the time right now for you to be able to create more freedom for yourself rather than saying, I wish I had many people did after the 2009 crash. So guys, this is your time to be able to make your life, make something special with it. Go and make it a wonderful prosperous week, and we’ll see you later.