Multifamily Real Estate Financing Explained

Full Transcript Below

Intro
Hi. My name is Rod Khleif, and I’m the host of “The Lifetime Cash Flow Through Real Estate Investing” podcast. And every week, I interview Multifamily Rock Stars, and we talk about how they built incredible wealth for themselves and their families through multifamily properties. So hit the “Like” and “Subscribe” buttons to get notified every Monday when a new episode comes out. Let’s get to it.

Rod
Welcome to another edition of How to Build Lifetime Cash Flow Through Real Estate. I’m Rod Khleif, and I am thrilled that you’re here, and I know you’re going to get tremendous value from the lady we’re interviewing today. Her name is Alison Williams, and she’s a Senior Vice President and Chief Production Officer with Walker & Dunlop, which is really kind of one of the big elephants in the room when it comes to commercial real estate debt. And so we’re very excited to get into all sorts of topics around commercial real estate finance. So welcome to the show, Alison.

Alison
Thank you, Rod. Really great to be here, and I appreciate the invite.

Rod
You bet. Let me turn my Internet and my Outlook off, so it stops beeping at us. Okay. So why don’t you just take a minute and talk a little bit about your background? It was very impressive when I read your bio, and you’ll do a much better job than I will, so please take it away.

Alison
Absolutely. So I’ll kind of start with how I got into the business. So I actually went to Florida State University and dual majored in real estate and in finance. And coming out of school, I joined Lake Mason Real Estate Services, which eventually was acquired by Northmarq Capital. But I’ve been in this exact industry for 20 years now, and I started just at the very entry level. So I started as a financial analyst, and I was analyzing cash flow models and proformas for real estate investors to help my producer, my, you know, mentor, you know, go out and source real estate debt for those developers, so they could actually acquire them. And then, you know, I kind of transitioned over the years into a sales role myself, and I became my own originator. And I was focusing on multifamily, but also hospitality and retail. And I was in the sales side of the house for eight years. And then I moved into a management role in 2020 with an emphasis on basically growing my own team of sales experts across the country. And my team specifically focuses on small and middle-market multifamily assets. So really that one to $25 million space, and that’s what we’re focusing on.

Rod
Fantastic. Fantastic. Well, so, let’s get right into the meat of this. So why don’t you talk about initially– you know, a lot of people get started in this business, they do single-family, then they’ll do some duplexes. Then they’ll buy a 10-unit to 20-unit, and typically, they’ll go to a local bank for that debt, at least back in the day. Now, the prices have gone up enough, they could actually go right into conforming debt. Let’s talk about conforming agency debt and what it is and how someone can position themselves to qualify for it.

Alison
Absolutely.

Rod
And I’d like to hear it in your words. They’ve heard it a couple of times for me, but please.

Alison
Yeah. So it’s interesting because you know when I think about– when you look at investors and they start in a single-family rental space, right? They’re starting there that’s really difficult. They’re buying assets all over maybe one town. They’re driving from property to property. They have different property managers, or maybe they’re operating by themselves. And, you know, that can be challenging to operate that many properties that aren’t actually in close proximity. But I think that’s also the most important step that you have to do to become a qualified real estate investor. Like it’s your first entry into the space, typically.

Rod
Let me stop you for one second because it’s really funny. What you just described is the reason I lost $50 million in 2008 and ’09. Because I had 2,000– well, I actually had 800 houses at that point.

Alison
Yes, you can’t keep up.

Rod
No, and I couldn’t. They were two hours north of me, two hours south of me, and everywhere in between. And it was logistically impossible to make it work. And so it’s just really funny to hear it articulated the way you just did because that was the main reason. Please continue. I’m sorry to interrupt.

Alison
No problem. So, you know, I mean, I think that’s definitely the very first step for people to get their feet wet in investing in real estate, but I think it’s important at one point in their career to go like, okay, how many can I actually handle? Can I just handle ten, 15 single-family rentals? And then should I maybe actually look at buying a little bit more in bulk? So going and buying a five-unit, you know, a seven-unit, a ten-unit, a 20-unit, and just kind of continuing to level up from there, I think that’s really important because as they do that, they’ll realize, wow, it’s a lot easier. And there’s a lot more consistency when you’re managing one asset with ten units in it than ten single-family units scattered across, you know, an entire region. And your costs are completely different.

Rod
So you’re totally selling my boot camp right now. Just so you know, to get into multifamily, I really appreciate that.

Alison
Perfect.

Rod
Because everybody transitions from that space into multifamily because you know, at some point, you’re not killing yourself anymore. But please, I’m sorry.

Alison
Yeah. You know, and then when that transition happens, I think you then get more efficiencies with your operating, right? So you have efficiencies and operating expenses. Guess what? Now you have enough money, you can pay for a property manager, and they can manage your property for you. That gives you financial freedom. It also gives you the freedom to go out and find that next deal. And I think right at that pivot where you jump from a single-family rental into the ten-unit plus space is when you actually enter our world. And, you know, by our world, I mean the non-recourse lending world. So what my company does, what I focus on, is actually doing non-recourse debt for multifamily owners. And the difference in recourse and non-recourses is when you borrow money, the lender requires you to pay back the mortgage in both scenarios. But in a non-recourse scenario, if the market tanks, your tenants move out, rents fall, and you don’t have enough money to make your payment, you can literally hand back the keys to the lender and you can walk away and you can go work on your next deal. And the way we get comfortable there is that we are truly underwriting the real estate and not necessarily just the borrower.

Rod
Let me interject for one second there, if I may. You’re saying all sorts of incredible stuff here. Yeah, obviously, guys, you don’t want to get into this thinking, okay, I’ll buy this place and we’ll walk away from it because you will not– you know if you’re dealing with Fannie Mae or Freddie Mac, you won’t get a loan with them again, but they won’t come after you personally. Ask me how I know, okay? Because you know, I crashed and burned and had tons of foreclosures back in the day. But the non-recourse is absolutely the best way to go when you can and maybe you could talk for just a minute about the bad boy clauses so it’s not completely non-recourse if you screw up. So maybe chat about that for a moment.

Alison
Absolutely. So we call them bad boy clauses because it’s basically don’t lie, cheat or steal and act in good faith. And so I think that’s really important. If you don’t act in good faith, the loan will become recourse. You don’t need to fight a lender. Like if you’re in a dire situation, let’s go back to 2008. You’ve got all these properties and tenants are vacating, rents are declining, you overpaid for the property, and you just can’t make the mortgage payment.

Rod
Right.

Alison
You basically, you know, act in good faith. You hand back the keys to the lender, and as long as you do that appropriately and respectfully, then the lender can then go and actually sell your asset and use those funds to pay off their debt. And if there’s a shortfall, it basically gets wiped. Does it sit on your credit record? A 100%, it does. Right?

Rod
Right.

Alison
And we’re going to always ask questions about it. We need to understand why somebody you know, handed back a property. But if there’s a true understanding and true, you know, justified reason why we can get our arms around that because it’s a business, right? We don’t expect people to continue to operate a business that just makes them lose money day in and day out.

Rod
Right.

Alison
And that’s a really just an important feature you know that we’re really focusing on is providing non-recourse debt to provide that freedom to investors.

Rod
Right. And back to your other comment around you know, the difference between borrowing money for a smaller asset, like a duplex, triplex, fourplex, they’re looking at your personal ability to pay back that debt where– in our world, in the commercial real estate, commercial lending space, they’re looking at the property’s ability to service the debt. And they have something called a debt service coverage ratio. And guys, if you haven’t heard me mention this before– well, why don’t you explain it instead of hearing it from me, please.

Alison
So in our world, I mean, banks have it too, right? So like, if you went to a bank and you were trying to get a loan for, you know, 20 single-family rentals, it would be the same. They would want a debt service coverage ratio just like we would. But we’re really focusing on that. And with cap rates being low, that typically is your constraining factor to get proceeds. And what that means is, say you needed a 1.25 times debt coverage ratio. That means you need 125% of the monthly mortgage payment as income, net operating income received off of the property to pay back your loan. And so we want to know that there’s this excess cash flow there to handle hiccups, right? I mean, we’re not doing loans to take them back. That’s not what we want to do. We want to make sure that there’s enough cash flow there to handle deferred maintenance and unforeseen circumstances. But, you know, that cash flow to us is truly how we get comfortable with real estate assets.

Rod
Sure. And if you do have to take it back, you know that it will cover the debt.

Alison
Yeah.

Rod
So, could you explain the loan proceeds? Because that confuses my students from time to time. What does that mean?

Alison
Yeah, so I think another thing too, right, like down payment versus equity, we in the commercial real estate world, we call it equity. How much equity or cash are you bringing to the table? I think it’s more common in the single-family rental space to call it a down payment. They’re both the same thing. So if you had a 75% loan to purchase price or loan to the current value, appraised value, that means you’re bringing a 25% down payment or cash equity to the table. And your proceeds would be that 75% of that valuation. That’s the loan proceeds. That’s the unpaid principal balance that you would have on that mortgage.

Rod
And just so you understand, guys, if you– you know, let’s say you’re being underwritten for one of these loans. And let’s say your debt service coverage ratio requirement is 1.25, which is very common. Sometimes it’s more depending upon, you know, a tertiary market or something like that, but it’s very common to be 1.25. Let’s say it doesn’t quite come in there. And then what will happen is they will lower the loan proceeds, meaning your loan amount is going to go down. Okay? So proceeds confuse people. It just means your loan amount is going to be less. Okay? So to simplify it. So let’s talk about you know when someone makes that transition from you know, the single-family space, you know, small residential space to commercial real estate. You know, how do they qualify for conforming debt to be in your space?

Alison
Yeah, so a lot of it is experience, so it’s showing a successful track record. You know we want to understand– are you doing this full-time? How many other properties do you own? How are they operating? Or, you know, do they have enough debt service coverage to actually you know, support their debt? And so we look at a lot of things. It’s a combination of borrower wherewithal, so how much net worth do they have? Typically, you want to see one times the loan amount. So if you were going to try to get a $5 million loan, you would need 5 million of net assets on your personal financial statement.

Rod
Let me interject, let me interject. I’m sorry, but I just wanted– people to like, okay, forget it. I can’t do this. Well, here’s the thing. They’re not looking at you personally. They’re looking at your team.

Alison
Yes.

Rod
And it’s very common for you to bring in other people to help satisfy– I mean, I get brought in sometimes to help satisfy that net worth requirement for the loan amount. Keep going because there’s another piece.

Alison
100%. Yeah. It’s the combination of the key principal team that we’re looking at. And then on the liquidity side, when we say liquidity, that means cash and cash equivalent. So stocks, bonds, you know, how much you have, and callable life insurance, you know, things along those nature. And that’s usually 10% of the loan amount. So on that five [inaudible]

Rod
After closing.

Alison
It’s actually interesting we only do the test upfront.

Rod
Well, really?

Alison
Yeah, the test is done upfront, yup, and so the test–

Rod
I’ve always heard it called post-closing liquidity.

Alison
We do the test upfront and it’s 10% of the loan amount. So they want to see that. Now they’re going to ask you how are you going to, you know, make your down payment, how are you going to come up with that equity? And we’re going to ask those questions. And if we do the math and we were like, well, they’re not going to have anything left, yeah, that’s troublesome. But, you know, we are looking again at the combination of all those key principals, all those managing members that are coming together to actually do the deal. It’s very, very, very rare in our space to have a single owner actually own the property.

Rod
Right. It’s a team sport. Yeah, you guys heard me say it.

Alison
It’s a team sport. You’ve got an LLC that you create and that LLC is made up of multiple members and depending on, you know, what percent they’re coming in for, as well as their control rights, it’s like, you know, can they actually have a voice in refinancing or selling the asset? You know, we look at all of those things to determine like who are we actually underwriting to qualify.

Rod
Yeah, I mean– listen, guys, this is why everybody typically gets– you know, does their first deal or two with someone that’s done it before.

Alison
Yeah.

Rod
Now, talk about the Fannie card kind of requirement. Yeah.

Alison
Yeah. So, agency requirements, so this is Freddie Mac and Fannie Mae, and obviously, they’re a massive player in single-family. But they’re also a massive player in multifamily. And so, you know, each of them has about an $80 billion market cap a year, which means they’re putting out about 80 billion each and financing for multifamily assets. They also have a mandate to always be in the market, no matter in a downturn or whatever. They have to provide liquidity. That is part of their mission statement, which is, you know, awesome for right now and going into 2023. Like you know—

Rod
And we’re going to talk about that a little more in just a minute.

Alison
Yeah. So, you know, what makes that, you know, unique is that along with that is non-recourse financing. But you have to meet certain requirements and those requirements are the net worth and liquidity requirements I just spoke about. They typically want to see you own three or more properties of similar– like, you know, so if you own a ten-unit, they want to see, you know, somewhere between five and ten units that you also have been operating recently. Or you can just own one asset for several years. But they want to see that track record. They want to see that you’ve done it. We’ve easily qualified sponsors that had only a single-family rental portfolio and they came to us and they showed us this massive track record and that they were able to operate that successfully, we can go in, we can actually make that case for our borrowers and we can get them approved. It’s not just a given, but it’s definitely something that we go in for all the time.

Rod
Or you bring somebody in that’s done it, you know, and they get a piece of the deal. You know, sometimes that one person can satisfy all three of these requirements. The net worth of liquidity and the experience requirement. That’s very common, very commonly called a sponsor. You know, you have to have a relationship with them. They have to trust you. They’re going to be actively involved because they’re on the hook. Even if it is non-recourse, you know, if a deal goes south, that’s going to hurt their chances of getting financing in the future or certainly impair it. And so, yeah, that’s why we–

Alison
Yeah. And I think the important thing that people need to understand is, you know, I think when they get that first deal and they’re looking at it and they’re like, okay, I don’t want anybody else involved, right? I don’t want to give away anything because that’s everything that I worked so hard on. But you also need to think long-term, right? And so with getting that loan, you get always 30-year amortization schedules. You get more interest-only payments. So your monthly cash-on-cash returns are higher. You know you get non-recourse debt. There are all these benefits that you get. The loans are assumable. You can add a second mortgage to them. There are all these benefits that you get and if you, you know, are just narrow-minded and saying like, no, I’m not bringing in another sponsor because I have to give them a piece of the deal, you’re going to miss out on those that–

Rod
Let me give you a great analogy. I don’t know about you, but I’ll take 20, 30, 40, 50% of something over 100% of nothing any day. Okay? There you go.

Alison
Yeah.

Rod
Oh, you just said something else I wanted to ask you about. Darn it. Oh, you mentioned second loans. Talk about supplementals.

Alison
Yeah. So in the small balance space, which is, you know, Freddie and Fannie, they do all loan sizes, but they really started a million. So for a million to seven and a half million, Freddie Mac does not do supplemental mortgages there, but Fannie Mae does. And so that means that when you actually– you buy an asset, let’s just say you get a $2 million loan, you know, you increase the income or the rent from the tenants. That increases your NOI. And two years from now, you come back to me and you say, hey, Alison, I created a lot of value here. My property is worth more today than it was when I bought it. Look at this income. It’s higher today than it was when I bought it. I can now support a higher mortgage than what I could when I acquired that loan. And instead of having to pay off your loan with Fannie Mae, you can actually just go and get another, you know, million dollars from them and increase your loan balance with that second mortgage to a higher amount because you now have enough debt service coverage we talked about earlier to pay that mortgage payment.

Rod
Talk about how that supplemental loan will correlate to the underlying first mortgage.

Alison
Yes. So they actually have the same loan term, so we’ll match them up. So the loan will balloon or mature on the same date. So if you did it initially, you know, a ten-year term with a 30-year amortization schedule, and then three years later, you came into us, that second mortgage would have a seven-year term. So at year ten, they both would actually balloon. And then we underwrite you know, your first loan, your first mortgage, at whatever that payment was, and that income stream based off of that. And then the second mortgage is underwritten at that amount, and you combine the two, and again, you do the debt service coverage. So the combination of your first mortgage loan and the combination of your supplemental, also called a second mortgage loan, has to meet that, you know, 1.25% or that 125% coverage ratio.

Rod
Yeah, talk about– we’ll keep it simple. Talk about prepayment penalties. We call it something else in our world, there are different terms, defeasance and yield maintenance. But talk about– well, actually, we don’t want to go that micro, but here’s the thing, guys. You know, you’re going to have these quasi prepayment penalties when you do conforming debt, and you can pay to buy those down a little bit, but very often you’ll see a step down where, you know, it goes to 3-2-1 or 5-4-3-2-1, whatever, and they’re significant when you’re talking about multimillion-dollar loans. But see, the beautiful thing about these supplementals is you’re not paying off the underlying debt, you’re not refinancing, so you’re not going to have that. And that’s why that makes it so attractive to an operator that goes out there, raises money for a deal, they improve the net income, the net operating income, the NOI like she said, and they get a higher valuation because as you guys know, any increase to that net income is an exponential increase to the value. And once they get that value up and it’s stabilized, then– in fact, I’ll have you talk about stabilized here in a second. But once you get that value up, then you can go, you know, get that supplemental, second mortgage and, you know, pay your investors some or all their money back. And, you know, it can become a legacy asset if you want it to, you know, if you want to hold onto it, you know, until the term. But talk about– what did I just say? You’re going to have, you talk about.

Alison
Oh, stabilization.

Rod
Stabilization. Yeah.

Alison
Yeah.

Rod
What does that mean in the conforming world?

Alison
So it depends on what loan you’re going for. But there are a couple of things. So like we do lease-up deals. So say a developer you know, built a multifamily asset and wants to come off of their construction term loan. Or the builder builds the property and then sells it, and the investor comes in and buys that property. But guess what, it’s not 95% occupied yet because it’s still in lease-up. It’s only 75% occupied. So we actually do a loan to stabilization, so we can actually you know, fund that loan day one and have an earn-out or a future funding of more proceeds as, you know, the operations increase, the NOI increases, your occupancy increases. So that’s one scenario where you have stabilization. You also have what a lot of people have been doing recently, which is the value add space, and that’s buying a property, recognizing that maybe it’s a little old and tired and you want to, you know, spend $10,000 on each interior unit to actually you know, bring it up to a new level so you can charge higher rents. So that would also be a stabilization play. So you’re going in, you’re buying it, you know, it’s a B-asset, and by the time you’re done with it, it’s an A-asset. And so that difference in income in place at closing to income in place post-completion of renovation would be your stabilization period.

Rod
Okay.

Alison
And so there are different loans out there. And that’s also, I think, probably leading to another good topic that a lot of people chose bridge lending, the last, you know, five, honestly, ten plus years to really finance value add assets because they were really just looking for short term debt that had the most prepayment flexibility. So just the 1% prepay–

Rod
And the highest loan to value.

Alison
Not defeasance, not yield maintenance. Yeah. And a really high octane loan to value, loan to cost. You know, the good is that you know, all the deals that were probably done you know, by early 2020 or probably in and out, but then the loans that were put on the books in 2020, the second half of the year to today, I mean they’ve been dealing with a lot of headwinds. I mean you’ve got construction costs that went through the roof, construction delays, material delays. You know, a lot of these properties haven’t been able to actually stabilize.

Rod
Right. And they’ve got to take a look at their take-out interest rate and take-out cap rate you know, to refinance. Because guys, you know, you do one of these, you know, say three-year bridge loans and maybe you do 3-1-1 where you’ve got a couple of one-year extensions but they’re adjustable rate.

Alison
Yes.

Rod
Very often you had to do a rate cap, especially the last year or so, but, you know, in some cases, people didn’t, but most of them did. But even with a rate cap, a 2% bump for example, in your interest rate is a big deal.

Alison
Yeah. Or that cost to buy a new rate cap is 10x the cost that you did it initially because SOFR, you know, is on just like this massive you know, incline right now.

Rod
Right.

Alison
Yeah. I mean, you know, I think this is where there’s going to be some opportunity for a lot of people that are out in the market right now. Next year you’re going to have a lot of deals that cannot pay off their bridge loan.

Rod
Right.

Alison
And they’re going to force to sell.

Rod
Yeah.

Alison
There’s no way else out. Right?

Rod
Right.

Alison
There’s no other lender that’s going to be able to come in and do a deal that has not enough cash flow to even meet the minimum debt service payment. They’re not out there right now. And so I think there’s going to be a lot of those deals that will be actually forced to sell. You know, I mean, that would be a great purchase.

Rod
So do I. We just looked at one in San Antonio actually where the borrower, they’re getting close to the end of their term on their bridge debt and the reserve requirement from the bridge lender went from 8000 a month to 80,000 a month.

Alison
It’s probably because of the cap.

Rod
Yeah. Right.

Alison
Yeah, the cap cost. It’s literally– that’s how much has gone up because they bought a cap in the initial. So let’s think about time period here. So if you bought an interest rate cap, you know, for a floating rate deal in 2020 and you bought a three-year term, that cap, you probably bought a 1% strike rate, which means that if SOFR or LIBOR at the time, it’s got to 1%, the cap kicks in and helps pay your mortgage payment. It’s like an insurance policy. Well, today, if you wanted to go buy that– and say that cap cost you, you know, a hundred grand. If you wanted to go buy that cap today, it’s going to cost you probably about $3 million to try to go buy it. [inaudible]

Rod
That’s just for the rate cap.

Alison
You can’t do it.

Rod
It’s just for the insurance guys.

Alison
Just for the insurance. It’s basically an insurance policy. So there’s that situation where that escrow just, you know, and the lender has to have it because it has to protect them to make sure that, you know, the borrower can actually support the debt service payments.

Rod
Yeah.

Alison
Because a lot of these deals cannot and will not work if you have to use a 6% or 6.5% interest rate.

Rod
Right.

Alison
They just don’t work.

Rod
Right. So why don’t you talk about for a minute how commercial real estate debt is priced? You know, like in the single-family space, you see these interest rates go up. I remember when I started the business, when I was 18, the interest rate was 18%. I’m 62 years old and I remember doing backflips when it hit seven, okay, I’m getting excited when it hit 7%. People are now freaking out that it’s approaching seven or it might have even gotten there. But, so, you know, talk about the difference between you know, the short-term interest rates versus commercial.

Alison
Yeah. So there are two options that you can do, you know, fixed rate, which is priced over treasury bills. So you have, you know, a five-year treasury bill, a seven or ten-year treasury bill. It’s always posted in the Wall Street Journal. And basically, there is you know, what we call a Spread and that is the lender determines the Spread, which is part of it is risk. So there’s a risk piece to the Spread and then there’s a profit piece to the Spread. So, right, like they want to make sure they get a return on their investment and that Spread is priced over a treasury. So say today, the ten-year is let’s just call it 4%. It’s actually less, but let’s call it 4% and say the lender wanted a Spread of 2.5% or what we would call 250 basis points, the same as 2.5%. Then your rate today would be the 4%, ten-year treasury plus the 2.5% Spread to a 6.5% rate for that ten-year term and that’s fixed rate money.

Rod
Right.

Alison
And then you have floating rate money, which is, you know, borrowers usually go into a floating rate for a couple of reasons. One, they’re doing a bridge loan so they have a short-term nature in terms of their hold period. Or two, they want utmost flexibility. We actually have people today who could go get a fixed rate loan but, you know, they are very adamant that in 16, 18 months from now, rates are going to come down and they want to have the ability to pay off their loan at 1%. And so they look at it like, hey, this is just short-term in the cycle of real estate.

Rod
But let’s hope they’re right.

Alison
Yeah.

Rod
That’s all I can say to them. Hope they are right.

Alison
I know, me too. Yeah.

Rod
I just put ten-year fixed debt, Freddie Mac debt on the $33 million asset we bought closed on Nashville a few weeks ago, and 60% loan to value, but it was ten-year fixed. I want to be able to sleep at night.

Alison
Exactly. And a lot of it is a preference, right?

Rod
Yeah.

Alison
The last thing we ever want a borrower to do is to get forced into a loan program because you know, a broker or banker tries to convince them to do a floating rate when at the end of the day, they’re a conservative investor and it will make their life just much more easy, much more you know, relaxing if they know that that rate is held and they don’t have to wake up every night going like, where are the treasury’s today? What is happening in the market, in the world today? But the treasury moves based on what’s happening in the market. So when CPI dropped– so, you know, CPI dropped last week, we saw a reduction in fixed rate loans for us where, you know, the ten-year treasury was 4.3% and all of a sudden dropped down to 3.8%. That’s a massive drop.

Rod
Yes, that’s huge.

Alison
Yeah. But the Spreads didn’t change because the risk is still the same. That return is still the same. But you all of a sudden we’re able to get a borrower a loan with an interest rate of less than 6% today. But last week it would have been, you know, 6.3%. It moves very much. Yeah.

Rod
Yeah, this deal we did with 5.4, you know, we got 5.4 fixed for ten years. But I will tell you a year ago on an asset I just came back from in San Antonio, yesterday, this morning, actually, was 3.2%. So to see the massive increase but it still is not as volatile and doesn’t go up as fast as like residential mortgage rates and things like that because it’s based on this ten-year treasury or treasury period.

Alison
And historically, if you look at it, I mean, the movement we’ve had in treasurys, like this is like a one-time, like, black Swan kind of scenario. I mean, we have not seen these massive 30 basis points you know, jumps in a single day in my 20-year history.

Rod
Yeah.

Alison
You know, like this is not normal. This is all being driven by, you know, the macro and the micro and then the inflation, economically.

Rod
So let’s talk about that.

Alison
Yeah.

Rod
So let’s talk about that. With your 20-year experience, I’d love to hear– let’s crystal ball for a minute. I’m very bearish, but I’m sure, you know, it’s in your nature not to be with the business that you’re in, but I want your opinion about when you think these rates are going to come back down and if you have some basis for your opinion, I’d love to hear it.

Alison
Yeah, so, I mean I do– I mean, yes, you know, I kind of laughed because you know, the CPI drops and everybody’s like, okay, great. That’s only–

Rod
By the way, that’s the Consumer Price Index, guys, the CPI, if you don’t know what means. Okay.

Alison
Yeah. Sorry. Yeah. We’re like quantifying where inflation is today. And so that dropped, I think to 7.9% from 8.2 or 8.3%.

Rod
Yeah, I would call BS, but okay, let’s dig on.

Alison
And the Fed wants inflation back to two or 3%.

Rod
Right.

Alison
We still have a long way to go. We’re not there. And I think it’s a little foolish to think that the Fed is going to immediately pause on continuing rate hikes because we just dropped to 7.9%. That’s not enough. They’re going to have to continue to put the gas on the pedal if there are a lot of risks there. I mean, it could throw us into somewhat of a recessionary environment. And so that’s concerning, right? It’s a balancing act. I mean, I do not wish to be that person right now, but I think long term, long term we will come back down. I think, interest rates should be in that 4.5 to 5.5% interest rate range. I think looking in the rearview mirror, they never should have been a 2.5 to 3.5% rate.

Rod
Agreed. Agreed.

Alison
That was unbelievable. We’ve never seen that happen before. You know, that was an anomaly. We cannot think that that is reality and we need to think like, okay, let’s get back to 5% interest rates because that is how business has always operated in that realm of, you know, 4.5 to 5.5%. So my crystal ball is we’re in this probably at least until the end of next year.

Rod
I Agree.

Alison
And then, you know, we should start to see some decreases in rates, but, you know, I don’t think we’re going to get back to that 3% rate.

Rod
I don’t either.

Alison
Nor should we.

Rod
Yeah, I don’t either.

Alison
It’s what created, you know, the current situation. I mean, it gave everybody access to so much capital, it drove prices up and, you know, became very unaffordable for people to invest. And, you know, I think we need to get back to very normal like 2018, 2019 levels. Like that is where we should be headed.

Rod
I agree completely. Yeah. I mean, I will tell you, I think we’re already in a recessionary environment personally, but I–

Alison
I mean, we’re seeing decreases. Yeah, for sure.

Rod
And I saw Jamie Dimon, you know, head of the Bank of America, say that he thinks it’s going to be worse than a recession, you know, and some big players in the world, Elon Musk on YouTube was quoted saying, “They’re lying to you. It’s going to be a bigger crash than they say”. You know, we won’t talk about Kiyosaki because he’s always doom and gloom, but he said “it’s going to really be ugly”, but, you know, let’s hope not. But again, guys, with crisis comes opportunity. And on that note, if you’re thinking about getting into this business, for God’s sake, get your butt to my next boot camp. It’s coming up in January. But, you know, get up to speed as quickly as you can because there’s going to be an opportunity. I know there’s going to be an opportunity. Regardless of how bad it is. If it gets really bad, there’s going to be more opportunity.

Alison
Yeah.

Rod
But regardless, there’s going to be an opportunity with the bridge debt, with, you know, some of these operators have got into this business when everything’s going fantastic that have never asset managed through a downturn, you know, don’t know how to maintain their occupancy and really keep their assets full. And, you know, they’re probably going to get some of them going to get their butts handed to them, you know.

Alison
Yeah. We’re like the true syndication market where you know, the main investor might have 1% on the deal and they have a lot of investors that are in it. But it’s not really that friends and family network where you know, you can pick up the phone and call them when there’s a capital call. Like they’re not there when there’s a capital call.

Rod
Right.

Alison
And those deals will get distressed pretty quickly, but, I mean, I think it’s just important for people to like– you know like last week, perfect example, treasury’s dropped. It was a moment in time where all of a sudden you could get a savings you know, of 30 basis points, so .3%.

Rod
Which is a big deal. Yeah.

Alison
But if you weren’t ready, if you didn’t have a deal in hand and you weren’t ready, you don’t get to take advantage of that. You literally could miss out on that opportunity. And so I think it’s just– you know, make sure you’re talking to people, making sure that you understand where the market is today. You’re underwriting to where the market is. You’re accounting for the fluctuations that we’re seeing, and, you know, just hope that you’re one of the lucky ones that gets to time it perfectly and pick up those extra savings here and there.

Rod
And you underwrite conservatively, not aggressively. You know, you have operating reserves. You have money in the bank just in case the you know what hits the you know what.

Alison
Yeah.

Rod
You’re just not stretching the envelope like a lot of people have done this last year and a half, two years. You know, like Warren Buffett’s famous quote, “be fearful when others are greedy”. It’s been some greed the last couple of years.

Alison
For sure.

Rod
You know, and then, of course, the flip side of that is to be greedy when others are fearful. And fear is coming, so, you know, there is some real opportunity coming. Well, listen, Alison, I really appreciate you coming on the show. It’s been a real treat for me because you obviously really know what you’re doing. So thank you, and I apologize for interrupting you a couple of times. Sometimes I interject–

Alison
No, I love the collaboration here. So, that was great.

Rod
Well, thanks again, and I’m sure we’ll talk again very soon.

Alison
All right, thank you so much, Rod.

Rod
Thank you. Bye.

Outro
Rod, I know a lot of our listeners are wanting to take their multifamily investing business to the next level. Now, I know you’ve been hard at work helping our Warrior students do just that using our “ACT” methodology which is Awareness, Close, and Transform. Can you explain to the listeners how they can get our help?

Rod
You bet. Guys, we’ve been going non-stop for three years building an amazing community of like-minded people, and our coaching students which we call our Warriors have had extraordinary results. They’ve purchased thousands and thousands of units and last year we did over 1000 units with our students. And we’re looking to grow this group and take it to the next level. We’re looking for people who want to follow a proven framework that’s really step by step and then leverage our systems and network to raise equity, to find and close deals, and to build partnerships nationwide. Now, our Warrior community is finding success in any market cycle. So if you’re interested in finding out more about how you can become more of our incredible network and take advantage of the incredible opportunities that are coming very soon apply to work with us at “MentorWithRod.com” or text “CRUSH” to “72345” and we’ll set up a call so you can check us out and we can check you out. That’s “MentorWithRod.com” or text “CRUSH” to “72345”.