Posted Monday, July 31st, 2023 by Enterprise Property Management
Aaron Ivey welcomes back Mac from California. They discuss real estate investment opportunities in Memphis. They focus on areas with potential for value addition and share their experiences touring properties. Mack reveals his personal journey into real estate investment after inheriting properties from his grandparents and managing the family’s portfolio. He mentions a nontraditional loan product called DSCR (Debt Service Coverage Ratio) that allows lending against the property’s cash flow rather than the investor’s income. They plan to explore opportunities in the Whitehaven neighborhood and near the airport. The episode includes a story about banks’ reluctance to offer nontraditional loans before the real estate market correction.
Aaron
0:00:00 – Thank you for joining us on the Behind the Curtain podcast. I’m your host, Aaron Ivey, and I have returning with us today, Mack from California. Mack, we really enjoyed our most recent episode where we kind of talked about your initial perspective about Memphis, your perceptions of Memphis, and had some funny stories of some neighborhoods where we probably will not be investing in the, let’s just say this year, maybe even next, but where you saw some opportunity. So what I wanted to do today is to talk about areas where we did see some opportunity and where you were impressed about the city of Memphis and the opportunities that are here.
Mack
0:00:48 – So I’m not familiar with the neighborhood as well as you are and what they’re called, but the price ranges were a little higher and they were price ranges that I hadn’t considered. There’s a couple of reasons why it’s going to be more appropriate for those price ranges. Number one, because of the opportunities. Yeah. And also because of financing, which I think we’ll get into, it makes it a little easier to do the deal and to leverage the money to do that. So I really like some of the homes. I like the locations. I like the way the neighborhoods felt. They felt different. They drove different. We walked them and some of them needed work and I like that. You know, to me, if it needs work, that means there’s a better deal to be had. There’s more value add to be had. And I need more experience in those types of things.
Aaron
0:01:32 – Well, one of the houses that I really liked yesterday where you immediately noticed a dip in the foundation. It was probably the best house that we had seen as of that time in our day. And there was a very, very small dip. And I didn’t say this at the time, but I want to say it now. You were like, oh, we got a foundation thing. And we walked around the back of the house and we looked at the facade on the conventional foundation. We saw some cracks.
Mack
0:01:56 – That’s the one where I said, this is an add-on right here. You can tell it’s an add-on. And we went around the back and we opened up the little crawl space and there was a concrete staircase underneath it. So you could see where the staircase went into the original door. And you’re like, oh yeah, that’s right, it’s an add-on.
Aaron
0:02:11 – It’s so totally cool. So one of the thoughts that I had is, and the add-on looked good.
Mack
0:02:16 – Yeah, it did.
Aaron
0:02:16 – I mean, the siding looked good, the roof line looked great, the roof was new.
Mack
0:02:20 – It was a necessary add-on for that kitchen size, and it made the kitchen the right size.
Aaron
0:02:23 – Usable, yeah. And we even noticed where they, in the add-on, there was at least one appliance Mm-hmm. So one of the things that I didn’t say though at the time is you when was this house built? You know, I kept considering when was this house built? It was probably built around 1950 Mm-hmm. So let’s just say the add-on was put on in the late 60s early 70s That add-on has it has not progressed, you know As far as like the any sort of sinking of the foundation or settling of the foundation These are normal things and so the cool thing for our listener that I just want to throw out there is we’re going to consider This property and we’re going to talk about Our perception of the property to the seller and we’re going to say yeah It looks like there might be a foundation issue back here that we need to discuss We need to investigate we may you know see if that’s caught on the inspection The point that I’m making is it’s an issue with the home or a factor with the home that is not a deal killer at all. It may never move again.
Mack
0:03:17 – It makes the deal better.
Aaron
0:03:18 – It does. Yeah, it gives you an opportunity to say, oh, I need to look into this. And so from a buyer’s representation standpoint, we are going to make the seller aware that we love the house. We can see that there are gonna be some maintenance issues coming up. And so then that’s when we make our play for a lower buy price. So that’s a fun thing that we get to do when you come to town and when we get to walk around these houses. And as realtors, for our buyers, we wanna do that as often as possible.
Mack
0:03:44 – And it’s hard to see that from pictures.
Aaron
0:03:46 – Maybe even impossible.
Mack
0:03:47 – It’s impossible, and you need two sets of eyes or three sets of eyes with different experience to catch certain things, because I’m gonna find things that I’ve experienced before, you know? And I’m gonna notice certain things. And we did notice something else about that house too. And you’re like, I don’t know. The tree. The tree. I said, immediately, I went back and I’m like, the tree’s got to come out. And you’re like, yeah, I didn’t want to tell you, but yeah, it’s got to come out. Because it was, you know, it was inches away. Right. And I’m thinking, oh, Lord, that looks treacherous. That looks like a YouTube fail compilation waiting to happen. But that’s cool to me. I want to do this, you know. Yeah. There’s going to be problems in everything and in every aspect and facet of life. But this is the problems I want to have. These are the problems I want to get into, because this is, like I said, this is where my passion is.
Aaron
0:04:31 – Well, I want to give my rationale for not saying anything. What I said is I didn’t want to say anything, because I knew that you would find it, right?
Mack
0:04:37 – Yeah, you said that.
Aaron
0:04:38 – Yeah, yeah, I was like, I was waiting, because you’re perceptive, you know, and you were going to catch it, and then, you know, the same house that we’re very interested in, we noticed that this tree, the root system is actually encroaching on the foundation, which may have led to some of the cracking of the concrete facade. So, very, very interesting. And as we were leading into today’s episode, we were talking about your portfolio and your investing history. So I was wondering if you could just tell us a little bit about what you own, how you came into the properties that you own right now, and what drove you in this direction and into investment in real estate. What was that?
Mack
0:05:13 – I was kind of forced into this way of life if you want to call it. My family had a sizable portfolio, most specifically my grandparents, and my grandfather died years ago, my grandmother died years ago as well. At the end of their lives they became ill and died relatively slow and so they stopped taking care of their portfolio, they stopped managing it. It just everything fell into disrepair. So after they had passed, the transition between them and my mother and her two siblings wasn’t smooth. And there was some gamesmanship, I think, that was played there. I know it was. I don’t have to get into anything in particular detail, but things weren’t handled properly. And so as the years went on, I kept asking, you know, what are we doing here? Like, why are, why do we have these, all these properties sitting vacant? We had apartment building sitting vacant. Things are still updating, but we’re paying property tax, we’re paying insurance, this, that, and the other. So finally I just said, I’m going to deal with this. It’s not mine, not yet, but this isn’t right. And so that opened up a whole can of worms from the perspective of dealing with family members who became hostile, who were already hostile, but that revealed it, you know. It’s like the bugs under the rug. You pull the rug out and you see them. Now you know they’re there, but they’ve always been there. And then dealing with all the intricacies that it took to get things divided, whether it be legally, because, you know, I had to learn about trusts, and I had to learn about probate because some things weren’t in the trust, thankfully had some real estate knowledge on titling and tenants in common and joint tenancy and how things worked. That’s how I discovered certain things. I had to deal with bank accounts and stock portfolios and all this stuff. And so it’s been an ongoing battle and we’ve got it taken care of piece by piece. But with that comes the real estate part. And that was the first thing we really dealt with. And there was a number of properties, some that we have, obviously, some that they have, and we were able to get them transitioned back and forth. So that way, each inheritor got their share, equal share. Well, they got a little more, but they were hostile, so we wanted to get rid of them. But everyone got their own share, sole and separate. But things were dilapidated. So now I have to go into, well, we need to fix certain things, but we don’t have the cash or the money to do it. So I had to get creative on how to get that handled. So that was my first look into creative financing and that sort of thing. And so did that a few times on a few properties. Because of some of the, I guess I can say, hostilities between family members, I learned how to protect ourselves and insulate ourselves from possible future problems, right? Not that there will be any, I don’t think, at least with our situation, but.
Aaron
0:08:06 – There could be some, but I mean, it’s always tricky when properties go to, I don’t know if your properties are gonna go to probate or not, or.
Mack
0:08:15 – One did.
Aaron
0:08:16 – One did, okay.
Mack
0:08:17 – One did, it went through and it’s done. Okay. So the others, to make a long story short, were moved out of a trust into their names, then they had to go back into the trust to redistribute as individuals and California changed its property tax reassessment at the time So we had to do it really funky so that the properties wouldn’t get reassessed for higher property tax Because these problems were bought decades ago and the values in…
Aaron
0:08:42 – That is a whole podcast just right there. For most people they have no idea what you’re talking about, but I do The the trigger it’s the trigger for reassessment. Correct. And I would, I mean, we’re not gonna do this now because gosh, that’s a great discussion, but we’ve gotta come back and we gotta talk about, you know, there’s a reason we’re not saying Mack’s last name. You know, like, he’s sharing some secrets here. Everything’s above board, but you know, he has learned a lot, so much, in order to be able to manage his family’s estate. And he’s had to, again, he’s had to be a great guy in the whole process I think that’s one of the things if I may say so that is a chemistry between you and me If you’re considering your family in these situations, and you’re actually considering them Even though they might not be the greatest of people even though they may not They may be putting their worst foot forward, but treating those people with respect and saying you know what it’s this
Mack
0:09:34 – We’re gonna manage this for you and hopefully make it to where everybody’s satisfied. I love that you did that. And as much as we don’t get along with certain people anymore, I actually did them a favor. Oh yeah. You know, they don’t have to fight with us. They got their share of other, it wasn’t just real estate, mind you. Oh sure, yeah. But they’ve been paid out huge sums of money. Yeah, they’ve been paid out huge sums of money that they would not have otherwise had access to. And we settling things, you know, so as much as they don’t like that we did it, they got their end of it. And so I guess that kind of leads into how do I get into my portfolio. So after that’s settled and there’s some money there, you know, my experience with banking and some macroeconomic knowledge, you can’t just let cash sit in a bank account, you know, it’s going to get spent. And in all likelihood, we’re going to outlive the cash or it’s going to be inflated to oblivion, right? So we got to turn it into something that creates something and it has to turn into something that gives us a tax benefit and really real estate is the only way to go. I tried stocks in the past and I’m always very successful but I just don’t have the stomach for it. It’s not that I don’t have the knowledge or the wherewithal, I just don’t have the stomach. With real estate, I have the stomach and I have the ability to weather the trends. With stocks, I get too anxious. And so I figured this would be a much better option, especially with all the tax benefits and the leverage. And you can go all over the place. And again, I like it more, actually.
Aaron
0:11:09 – I loved what you said just there. A quick little story for you, because you had mentioned that you’re five years into you know working in real estate so like one of the funny things that I’ve noticed about investors that just go full in you know and over the course of five years they own between 10 and 15 properties and trust me this is not the average investor this these are investors are they they have some means they’ve got that lazy cash that they’re trying to put to good use and they’re not risk averse you know they’re willing to jump out there. What I find is that for investors that do that 10 to 15 in 5 years, the last house that they buy at the end of that 5 years, they finally calm down. They’re very, very vigilant for the first 2, 3, 4 years. They want to go over their statements with me every month, which is great. We can do that. They want to consider every maintenance item that’s raised, you know, for consideration. And we’ll talk about that later. I’ve got three categories for maintenance, which are necessary, not necessary, and nice to have, right? So, you know, we categorize that, you know. And so they calm down. They calm down after that five years. And here’s why they do that. Because they’re so wise at the beginning, they’ve gotten all of their affairs in order, and moving forward, they’re confident in the process. They’re confident with enterprise property management. They’re confident with their their sales agent And they know that they can just kind of relax a little bit like this engine is up and running. It’s tuned it’s going and Because they’ve gone in for 10 or 15 I’m not encouraging people just to buy it outright But if it works that cash flow begins to offset losses and so you begin to share That strain or the cost of operating these properties, and so I love it when people calm down. You know, I’m like, yes, you know, we, you feel comfortable. So, you know, it makes it easier for us to do our jobs. And then that leads into some investors that I’ve worked with for 15 years or longer that sometimes I won’t speak to for two, three years. And then they’ll call me up. I got a call from one of them yesterday while we were at this one house, talk to her about an appraisal and we got it done. So we know that you’ve got a portfolio now, you’ve generally described it, it’s in several different cities. So one of the very interesting conversations that you and I have gotten into with Jo Garner, who’s our lending expert, and we’ve talked about her before, you can find her on Talkshop.com. So Jo Garner has some non-traditional financing options for you that she highlighted and right off the bat it seemed to make sense. She told you something that I had heard for the first time, which is a loan product where you can take equity from properties that you own, if I’m not mistaken. I want you to correct me on this because you’ve done the research, and are able to lend against that equity. Is that right?
Mack
0:13:54 – Well, the product is called the DSCR, the debt service coverage ratio, and it’s a nontraditional type mortgage. So it’s something that’s not going to be conforming to Fannie or Freddie or VA or type stuff.
Aaron
0:14:08 – Got it, so non-conforming.
Mack
0:14:09 – Non-conforming. Yeah. And basically what it is, and it’s something that I had been looking for for a long time, I need someone to lend against the deal, not against me. Because that’s what conforming they’re going to do. They’re going to lend against you, not the deal. They don’t care about your deal. And that was one of the problems I ran into when we had first settled our real estate issue is we had a lot of assets, right? No one would lend us money against it to fix it or to buy more stuff or to do whatever the case is. And I’m thinking, well, I have 100% equity in a million dollar house. Like, why won’t you give me, and I’m only asking for 10% of it. Like, you won’t even give it, no. DSCR, they will lend on the deal, and so they don’t consider your debt to income, and that’s the big issue is your debt to income for a qualified product. So they will consider the ratio of what the property generates, and there’s certain ratios to it, and you know, the finance person can tell you all the details on that, but yes, that’s basically how it works.
Aaron
0:15:09 – Now, as we’ve talked through it, and we had lunch with Joe yesterday, and we’ve all been on the phone together and we’ve done some emails together. Joe laid out that there are minimums for the buy price for these properties. So what is the minimum again for a DSCR?
Mack
0:15:24 – The minimum for the vast majority is about 100,000.
Aaron
0:15:29 – Okay.
Mack
0:15:29 – Right, and so that cuts out a lot of the smaller stuff that we were looking at, the less expensive. That’s why we have to look at something a little more. And at 100,000, that’s after your down payment, so 20, 25% down payment, it has to exceed that 100,000.
Aaron
0:15:43 – Okay, so that’s really interesting because the concept of the loan that you were talking about talks about cash flow, right? And so one of the things that we’re seeing in Memphis a lot, and by the way, listener, I find it shocking that Mac and I have not talked about cash flow very much. He’s just wanted to come and see the product. We’re talking about the value of the product He’s looking at the finish of the product and considering the purchase opportunities that are there But we’re going to talk about cash flow, you know, like upon max exit We’re gonna you know, we have that shared spreadsheet and we’re gonna jump in there We’re gonna see the houses that are available that we we both say Yeah, these are good opportunities and then I’m going to be giving you cash flow numbers. One of the interesting things that’s happening right now in our economy is that rents are not really coming down. You know, rents have sort of plateaued. They’re not deflating. Rents are not being devalued. Now they’re softer because in Memphis and like in most other cities right now where there has been an investment real estate boom, a lot of people have jumped in and purchased property. So we’ve got a lot of inexperienced people that are trying to get 300 percent You know of the reasonable monthly rent and those by the way those properties. They just hang out there, right? They don’t ever go anywhere You know so eventually that person has to swallow their pride and has to bring the rent down So several of the properties that we’ve looked at that would qualify for the DSCR Will definitely cash flow per the 1% rule just like beautifully one of the last one that we saw with the glass tin Sunroom you know that one was that a three-bedroom. I think that was a three-bedroom I think it was a yeah, I think it was a three one. I had the stairs to the right corner Yeah, that was interesting and so just like off the cuff I would say that that one’s probably going to lease for somewhere between thirteen and fourteen hundred dollars and beautiful, you know, very welcoming neighborhood. And so, very, very attractive, would work for the DSCR. I’m excited about this loan product for you and for other people that just don’t know about it. So that’s interesting. And the houses that we’re going to go see today would more or less qualify for the DSCR. Right. And that’s exactly what we’re looking for.
Mack
0:17:53 – We’re looking for something that we can value add, get a deal on, value add, and then qualify for the DSCR product. Yeah. So. Yeah.
Aaron
0:18:04 – And so there are a lot of people that are listening right now that probably are in a similar situation to where they have property that shows that they’re, you know, they look great on paper, right? But banks, as we know, are a little hesitant to lend as much as they were lending before. A lot of these regional banks, they’re owners of the bank itself or shareholders or board. They’ve recommended that we pull back, you know, on more non-traditional loans or loans that aren’t as profitable on the outset as a traditional loan, right? And obviously the other thing about the DSCR is can it be sold or…
Mack
0:18:32 – You can refinance out of it They have prepayment terms and you have to negotiate up front But one of the things that’s really cool about a DSCR is you can have as many as you want A traditional mortgage, I think you can go up to four and then they get really strict and then anything beyond ten, good luck. You’re not going to get any more than that, so you’re sort of capped. DSCR, you can have a thousand of them as far as I know. I mean, there’s no real limit because they’re lending against the deal, not against you. The deal is the collateral, not your income, not your W-2, not your earned cash. The interest rate is different on a DSCR. They’re a little more expensive. I mean, definitely more expensive on the in and on the out, but again, you’re paying for that convenience, right? And as long as you can get your return that you’re looking for and structure your deal properly, what do you care in that regard? I hate to say it like that, but really, I mean, what difference does it make?
Aaron
0:19:29 – Yeah, so I guess in a future episode, we’re gonna continue to unpack this with Joe. So I think one of the fun things that we can do is to have you back on with Joe here in the studio and talk about just how the DSCR is working. Because I think that this is a product that since Joe has it available, a lot of people are going to be able to take advantage of this and I think they’re going to be able to learn from our process. So I’m super excited about that. And then once we do a couple of deals, we can talk about some of the strategies that we talked about yesterday at lunch. Yeah. You know, some of the ways that you can offset some of the costs in that absolutely We’re gonna. We’re gonna try some of those out and see how it works. I’m looking forward to it You know again a fun thing about working with you Is that we’re able just to sort of stream of consciousness spit out some concepts and when we have? Professionals like Joe sitting with us it is so cool to hear her to like watch her face Mm-hmm. You know and hear her basically say yeah that this can work. I don’t think once yesterday, she didn’t once say that something couldn’t work. And so having her as a partner is just phenomenal. In fact, for the listeners, and we’ll talk more about Jo later, and you’ll hear her again on our podcast, you know, a week’s time for us in real time. She is highly recommended in our city by traditional bankers and I’m talking traditional bankers and very large regional banks. They basically say they’ve known Jo for forever and they say, you know what, I can’t do that You know I’d love to these are great people that I’m talking about Great people, but they don’t have access to the product and so they all have been recommending Joe for this so it’s super exciting So I guess as we’re kind of rounding out this episode. We’re about to head out We’re heading into a neighborhood that we’ve talked about on this podcast several times Where there really has been a lot of opportunity that’s been realized over the last Honestly 30 years 30 40 years even and the name of that neighborhood is Whitehaven Sounds funny, but it is it’s a an established neighborhood name and we’re going to be seeing some properties that are basically Riding the coattails of the improvement of the Whitehaven area that’s happened over the last 30, 40 years. So I’m really excited about showing you, we’re gonna drive past Graceland. So yeah, we’re gonna go. That’ll be fun. Well, yeah, we’ll see it. Who knows, there could be a bunch of tourists there. It might be hard to be able to see the house, but Memphis has had huge improvements, Elvis Presley Enterprises and the Presley family, huge improvements around the Graceland Mansion. So we’re gonna see that, be on Elvis Presley Boulevard, that’s kinda cool, and that’s where Whitehaven is. So I don’t know if I told you that yesterday, but all the Whitehaven houses that we’re going to see are around this area. And then one of the other houses that I’m very interested in looking at with you, we might not be able to get in, but we’ll definitely drive by, is a house near the airport. Mac and I saw the properties that we did yesterday, and we weren’t frightened, if you will, by some parts of the city that have a higher risk, then you’re not going to be frightened for the neighborhood near the airport. Don’t let that scare you. There are opportunities all over the city. I’m not talking to you, Mac, but the listener. We get close to the airport. If it’s in a good neighborhood and it’s a quality home, 50s or 60s built, that’s a great opportunity. And there are people that live or that work at the airport that they don’t want to have to drive 20, 30 minutes to get to their home. They don’t have to worry about the schools that are around and so these houses are great opportunities. And then we’ve managed a lot of houses there. So I’m super stoked about what we’re about to see. Is there anything you want to close with before we go?
Mack
0:23:00 – I did want to tell a quick story. It goes back to the financing and banking. Sure. One of our banks, we have a credit union, we have a large bank. It’s a top five. And we went to them to ask for some loan products. This was before SVB or certain banks. Oh yeah. You have some issues, right? Yeah. And our banker had said, yeah, talk to the wealth manager, he could do stuff. So we talked to the wealth manager and the bank flat out was like, we don’t do this stuff anymore. You have to put 250,000 on deposit with us or more and then we can start talking about this kind of thing. And it surprised me, but it didn’t surprise me, but that was before a lot of the collapse happened more recently, and they knew. And so I just wanted to mention that. I don’t know how appropriate that is, but I just thought it was a fun story.
Aaron
0:23:47 – I think it’s so appropriate, because you had told me about the institution that you used to work for, and the awareness that the corporate heads had of what was going on from an accounting perspective, from a bookkeeping, and from losses that were deferred if you will and so like you just can’t defer those losses forever Eventually you have to acknowledge them and that’s really what brought the correction in the market.
Mack
0:24:14 – The banks know way ahead, so if you know who to talk to what questions ask they’ll tell you if you ask they won’t tell you right
Aaron
0:24:20 – But if you ask about certain things certain products you get the hints. Yeah, and you can almost always find the trusted, seasoned, sort of grandfather or grandmother in lending if you look hard enough. Somebody will say, oh yeah, you need to go talk to this person about it, and that person will be very transparent about what’s going on. So, well, thank you so much for coming out. Thank you for being on the podcast face-to-face.
Mack
0:24:45 – Yeah, it’s a lot of fun.
Aaron
0:24:46 – Yeah, and this will not be the last time that we hear from you. I’m looking forward to discussing our experiences as we move forward.
Mack
0:24:52 – Sounds good. All right. Thank you.
Aaron
0:24:55 – Thank you.
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