December 3, 2019

Real Estate Law 101 - Basics

What is real estate law?

What is property ownership?

What is a purchase contract?

And why does it matter?!

This is the first in a series of real estate law focused episodes. Our aim is to answer questions you face as a real estate investor and to provide some of the legal context behind these topics.

Real estate law is confusing, and understanding the lengthy history of property law sheds some light on why.

What topics have you encountered pertaining to property law or contract law that impacted your real estate investing?

*Our content should not be construed as legal advice. We always advise you to retain your own legal counsel. We hope that our discussion helps to better inform you for those conversations.*

In the spirit of Thanksgiving, we are thankful for the ups and downs of entrepreneurship (and of life). This week, John and Ryan channel their inner BuzzFeed with the "Top 3" successes and failures as entrepreneurs and real estate investors.

Care to share yours? Let us know on Facebook, Instagram, or via email ( and

November 18, 2019


Mistakes: We all make 'em. For some of us, they're the reason we even exist.

For us, they present an opportunity to learn. Our team uses Slack for communication, and we've established a habit of logging our mistakes in our #mistakes channel.

While it's great to log them, the goal is to learn from them. In this episode, we'll go through our first month (August 2019) worth of mistakes, and we'll explore how we can do better next time!

"Do-it-yourself," they say. "You will save money!"

"Leave it to the professionals," they say. "You'll avoid mistakes, and ultimately save time and money!"

John and Ryan are back to debate the age old question: Which came first, the chicken or the egg?

Oops, we mean: Should I do-it-myself, or hire it out to the pros?

Spoiler alert: There's a use case for both, but choose wisely!

Do you have a job, or are you a business owner?

John and Ryan are back to discuss the ongoing challenge of building a business amidst the chaos of running one.

How do we balance growth while ensuring that the business continues to fire on all cylinders?

This topic we'll be discussed at length in the future. Consider this Part One.

(Fun Fact: This is the first BxB episode recorded on location! Can you tell?)

Ben and John are back with tales from Building Departments!

The duo shares war stories from an assortment of jurisdictions, including a few obscure encounters.

Learn from their experiences and share your own with us on Instagram @brickxbrick_podcast!

July 23, 2019

Education as a Launchpad

After a long hiatus: We're back!

Well, at least John and Ben are back... Today's topic: Education!

Is college a viable path to breaking into real estate? Ben talks through his experience in NYU Shack's Undergraduate Real Estate Program.

(Not to be confused with Shaq's real estate program, which is coming soon to a university near you. Fun fact: Shaquille O'Neal is an active real estate investor!)

For those with a keen eye, you'll notice some changes to our logos and branding. Lots of new things coming at you soon... Stay tuned! As always, we'd love any feedback.  

In this follow-up episode to Real Estate Debt Financing 101, the team discusses various ways to sort through your options when it comes to sourcing debt.

(Transcript below.)

Ben Shelley: [00:00:00] Welcome back to the Brick x Brick Podcast. Today's episode is part two on the topic of debt financing. If you haven't heard Part 1 I encourage you to listen back. Part two is focused on discussing different strategies for the types of financing we reviewed in the first episode. Enjoy.


John Errico: [00:00:28] So we have all the terms down and depending on how we edit this that could have taken five or thirty five minutes 45 minutes and we've only listed terms. It's important the definition section of contracts very long. So what I think we would be great to talk about is if you're an investor or homeowner and you want to actually buy an investment property or your own house to live in. How or what should I. Why would it make sense to get a different type of loan product or a different type of loan. And there are pros and cons and whatever we can just walk through some sort of common use cases that we do as property investors so I would say one major caveat is how these loan products are underwritten so how they're analyzed varies depending on the product and depending on the type of home that you want to get in general very high level. If you're going to get what we've been talking well maybe even before delve into that let's just dealing it out even further the different types of loans are going to be talking about. So we're talking about step one would be a conventional loan. So a conventional loan in the parlance of real estate would be let's say a residential conventional loan. So we're talking about a 30 year fixed mortgage that you put down a certain downpayment depending on the type of property you're buying. We can contrast that with say a government backed insured loan like an FHA loan which is different from a conventional loan in that it might determine there might be limitations on the type of property you can buy with it. There might be advantages to using it based on down payment. There might be different interest rates et cetera et cetera.


Ryan Goldfarb: [00:02:03] Just just real quick. John distinguish between these two well but conventional in the common marketplace refers to Fannie Freddie back loans which our government is somewhat government affiliates. Right. But FHA is kind of its own beast. So those are kind of separated out.


John Errico: [00:02:24] Great point. There are loans that you might get that appear to be conventional loans but are not necessarily backed by Fannie or Freddie. So those could be portfolio lenders that are banks that are lending money but are not necessarily complying or reselling their mortgages on a secondary market so don't necessarily have to comply with some of those some of the laws that a conventional mortgage would have to comply with. There's the hard money side which is essentially a type of private loan. It could be given by a bank or an individual or a quasi bank or something which generally also has different terms and a different purpose and a different rationale for obtaining it. So very high level we're talking about conventional loans. We're talking about FHA loans we're talking about portfolio lenders I don't want to classify commercial and virtual lenders before lenders hard money and then we could talk very end about private lenders a hard money lenders are kind of like private lenders but whatever.


Ryan Goldfarb: [00:03:22] And then on a real institutional side you also may have life companies insurance insurance companies. They do a fair amount of lending as well. And also CMBS lenders which are very much active or inactive depending on the state of the market.


John Errico: [00:03:39] So if you were to buy a property say you want to buy an investment property you could buy cash or you could attempt to get financing on it. So why don't we just say I'm a new investor. I want to buy a flip. What would I do.


Ryan Goldfarb: [00:03:53] You can start either from the beginning or from the end. So if you're starting to the beginning you're just thinking about what kinds of loans are available to me maybe Who do I know what have I used in the past. You know it's you're limited by what's in front of you I guess if you think about it from the end and you think about what your end goal is with that property. Then I think that's probably a more efficient way and arriving at the best option for you. So if you're looking at it from the end and working backwards you might say OK this is a flip and then you may ask yourself what kind of liberty is it is this. Am I buying a piece of raw land that I'm going to develop. Am I buying the house next door to me that just needs a fresh coat of paint. But I've known the owner for years and they just want to sell it. Am I buying a property that is bank owned has been vacant for five years and needs a renovation. That question is important because each one of those strategies is going to have a different timeline. So if you're buying the house next door that just needs a fresh coat of paint you could conceivably be ready to sell that in a month or three months or four months if you're buying. A vacant foreclosure. It might be more like six months or nine months. And by the time the new buyer gets into the home it it might be nine or 12 months. And then for a new construction project depending on where you live it could be 18 months. It could be two years it could be even longer than that. So if you're looking at one of these longer time horizons it would certainly not behoove you to explore hard money options for example that generally have a duration of twelve months.


John Errico: [00:05:33] Well it's actually interesting sort of analytical question because part of the type of loan that you might get is driven by the asset that like to Ryan's point like what you're doing with the actual thing that you're buying. And part of it is just driven by can you actually obtain it for that property. So there might be a loan like I would say it would be amazing to get say conventional financing for every flip that we would do. But assuming that we could also get you know renovation costs baked in. But that's just not obtainable for these types of projects.


Ryan Goldfarb: [00:06:03] The other the other question is what what will you or the quote unquote borrowing entity qualify for. So when one issue that I've run into in the past over the past few years is that I'm. Somewhat newly self-employed and generally most conventional lenders require two years of tax returns with quote unquote self-employed status in order to qualify for a loan for any one of their loans. No matter how good the deal is. So as much as I would have loved to take advantage of that in the past that just hasn't been an option for me. Though it may have been for Ben or for anyone else who could have qualified it.


John Errico: [00:06:42] Yeah maybe. So let's look at it this way. Let's look at two different common investment hypotheticals that an investor might face and talk about how the different options that we might take advantage of to finance them. So we could look at say a very run of the mill a fix and flip on buying a distressed property that has a lot of damage but it has a lot of value. When I sell it and I want to sell between six and nine months from now if I were to look at that we could automatically eliminate a couple of different types of financing for their property just because it's probably the case that a bank will not lend money for that property under a conventional loan or possibly an FHA type of loan. Maybe there's a caveat. If you're living there but.


Ryan Goldfarb: [00:07:31] And that that limitation may also be driven by the fact that if it's that good of a deal you're probably going to have to close it quickly which would be maybe in 30 days. And I would say it's generally not a good assumption to assume that your lender can close your conventional loan or FHA loan or even commercial loan that would otherwise that this property would otherwise qualify for within that time frame.


John Errico: [00:07:55] Right. So that teases out another important thing which is that just in order to buy the property. So if I'm if I'm buying a a flip. There are several reasons why I might not either want to be able to use conventional financing to do that. One reason Ryan mentioned is that banks generally when you are getting a conventional or an FHA type of mortgage require time to closing it and will often look at your personal assets as a means to underwrite or analyze whether or not they should give you this loan. That is contrasted significantly with the hard money loan or a private loan in which case banks will though be aware of your private finances will not use that as the basis necessarily to give you a loan and also are created. When I say banks it just mean lenders not necessarily a bank. These loan products is what is their standardized products are usually created to accommodate this type of activity. So they'll close within 10 days 15 days maybe three or four days if you have a relationship with a hard money lender in return for a different loan terms.


John Errico: [00:08:58] So a conventional loan would be say as we talked about before a 30 year fully amortizing loan where you put down maybe anywhere from three and a half to 25 percent down a hard money loan will be oftentimes an interest only loan that might be between six and 18 months will require probably some amount of downpayment maybe between 10 and 20 percent down possibly inclusive of renovation costs and we'll have an interest rate that's more like 9 10 11 or even higher percentage however will be able to get loans upfront with points of front points upfront meaning that you essentially are paying a percentage of the entire loan amount as a fee to the lender to initiate the loan.


John Errico: [00:09:40] However you can usually they usually will not care about so much your personal finances. So some of the things we talked about about debt to income are not so much considered with many hard money lenders again this isn't a standardized industry but may many hard money lenders don't care about that per say they do or may care about how much you anticipate selling the house for how much they believe you could sell the house for as it means to underwrite their product and they will close within a very short amount of time relative to conventional or FHA lenders.


Ben Shelley: [00:10:09] And it's probably worth noting that these specific areas of investment there are institutions and individuals who are specifically targeting these different types of investors and investments. So right there's a whole marketplace of hard money lending that you can go to if you're not qualified and that's a great point. If either the situation. Thank you. If either the situation doesn't allow for it because of either your finances et cetera or because for example you have a short closing timeline that you need.


Ryan Goldfarb: [00:10:37] And if I wasn't gonna knock my microphone over I would have gotten up and given you a physical pat on the back.


Ryan Goldfarb: [00:10:41] So yeah. That's a great point.


Ryan Goldfarb: [00:10:43] And it also highlights the importance of having the right contacts within your network because our hard money lenders for example make it far easier for us to say yeah we will really buy this in 10 days at this number. If you're willing to accept that and oftentimes you're dealing with a distressed seller for any number of reasons. That's the ultimate selling point for them because it's more important for them to get their money in 10 days than to wait 45 days and get an extra 15 percent.


John Errico: [00:11:12] So the reason why when you see fixed and flips usually the to the extent that they're purchased with debt and sometimes the purchase with cash. But the reason why they're often purchased with debt would be a because a conventional finance conventional bank can't fund the loan can't essentially underwrite and go through the process and the amount of time that is required for you to buy it be because the person buying it you may not have the the credit or the debt to income ratio or other assets that a conventional lender might require and C would be the bank itself might just not want to make this type of loan. They might not be interested in making a loan or a property that maybe has substantial damage or whatever you might have issues with the appraisal essentially.


Ryan Goldfarb: [00:11:58] One thing to keep in mind with these hard money loans is that they will generally lend a percentage based on what the appraised value is minus renovations or After renovations rather. So in order to qualify for one of these loans they're essentially screening the deal for you and saying OK your numbers are like there's enough of a delta in there there's enough margin for us to expect that this makes sense for you as a flip to the point where at the end of this project you will be able to pay us back. Based on the value that you've created through this renovation. So to understand the numbers a little bit. A lender's requirements might be that they will lend no more than 75 percent of the appraised value which might be in this case let's say it's two hundred thousand dollar appraised value after repairs. That means the market value of this property. When you're done with your renovation is two hundred thousand dollars. If you're buying this property and let's say it's reasonable to assume that you can do this with fifty thousand dollars in renovations. So if you back into kind of your maximum offer price on this property you're going to arrive at one hundred thousand dollars. The way to arrive at that is saying 75 percent of the two hundred thousand dollar market value is one hundred fifty thousand dollars. I know that I have to put 50 thousand dollars into the project to get it to that point so I can offer no more than 150 minus the 50 which is a hundred thousand dollars. So based on those numbers you'll see that there's a margin and there are fifty thousand dollars and at first glance you'll say wow I'm gonna make fifty thousand dollars on this project. But as we've discussed in the past that is certainly not the case embedded in that fifty thousand dollars is both your profit margin and all of your additional expenses. So that's your holding costs for the six months that you have to hold onto the property before it's done or nine months or whatever it may may end up being your mortgage payments your taxes your insurance it's your closing costs on the back end your closing costs on the front end the lender is generally not going to take those into account but there are those in class when you require it and then when you sell a grant programs commissions transfer taxetc.


Ben Shelley: [00:14:17] Partners for disposition or foreclose you got legal fees legal costs relation fees rise also processing fees title and insurance again substantial.


Ryan Goldfarb: [00:14:28] So you know based on those numbers you might at first glance I think your margins 50 grand. But the reality is it's probably closer to like 20 which depending on your circumstances and your arrangement might be might be a good deal you might be a realtor too and that's your that's your way to continue building a pipeline and to feed the beast so to speak.


John Errico: [00:14:50] But I think that's so yeah to Harken it back to the terms that we discussed before. If you're talking about a hard money load in this context your I don't know in what order we did the terms but your loan length is generally going to be I would say very commonly twelve months but could be between six months and 24 months.


Ryan Goldfarb: [00:15:07] And it could be and it could be 12 months with a three month extension not shorter term multiple of those for a price.


John Errico: [00:15:13] Your your interest rate or your EPR is going to be probably in the high single or low double digits.


John Errico: [00:15:21] So you're looking at I don't know 8 percent 9 percent at the very low end up to 15 20 percent at the very very high end. Is this a before you might have to pay points upfront which are a percentage of the total loan amount as a fee to begin the process which some people I think don't consider as a cost but can be very significant. So even one or two points can be thousands and thousands of dollars that you have to pay either as wrapped into the loan or upfront.


Ryan Goldfarb: [00:15:49] In addition to maybe a legal lender legal review fee title insurance like your personal closing costs and then on top of that lender Title Insurance lender legal and maybe an appraisal or inspection amount.


Ben Shelley: [00:16:04] And worth noting that you're paying interest on the totality of what is being loaned. So that's that's both the principal and sometimes.


John Errico: [00:16:10] Yeah. So you're paying interest on debt depending on your arranged with the hard money lender you could be paying interest on the amount that you're actually obtained. Or you could be paying interest on the amount that you actually anticipated needing. So the difference is that you might say buy a house that costs one hundred thousand dollars and you loan one hundred thousand dollars but you know that it is cost fifty thousand dollars renovated so you actually want to get a hundred and fifty thousand dollars if you put say 10 percent down of that total amount you might be lending either one hundred thirty five. So yeah you're lending a hundred thirty five. But to actually buy the property you only need a hundred thousand dollars so you might be paying interest either on the amount that you lent the amount that you needed to purchase the property which could be a hundred thousand dollars or the amount that you need to purchase and renovate the property which could be hundred thirty five thousand dollars.


John Errico: [00:16:59] You might have actually received thirty five thousand dollars until one two three six months into the project.


Ben Shelley: [00:17:04] Would you say it's more common for hard money lenders to incorporate renovation costs as part of what you're paying your interest as in not what you need in the moment but what you ask for what you're approved for use in totality.


Ryan Goldfarb: [00:17:16] Usually it's done based on the loan amount less commonly it's done based on the amount that you draw. But that's obviously advantageous especially if you have a significant renovation budget. Right.


Ryan Goldfarb: [00:17:26] As we're learning on a few projects so yeah. So why don't we. Why do we move to the buy and hold.


John Errico: [00:17:31] Read universe which is has different considerations other perhaps might have similar strategies depending on the project. So if I buy a 2-family home and I want to buy it for cash flow I would say your options for buying a 2-family home are probably a bit broader than your options for buying a fix and flip. So you could consider hard money.


Ryan Goldfarb: [00:17:52] You could consider conventional lending you could consider FHA lending the one the one caveat I would add is that it's also going to depend on the condition.


John Errico: [00:18:01] Yeah so the way that I I guess I could maybe conceive of buying a home a multifamily home as like a hierarchy. There's kind of an order of preference and maybe my order of preference might be different from your order of preference but I would say if I had the option to do it I would probably say buy home with FHA financing as the number one option. If it's possible because I'd be able to put very little down and own a home essentially. So with an FHA loan on a multifamily home said 2-family I could put down three and a half percent of the purchase price. Pay some additional fees for FHA appraisals or whatever might be and then move into the home with only putting down very little the disadvantages to that would be it could take a very long time for that loan to close and if the property requires repairs I might not be able to I might not be able to obtain an FHA loan. There is an FHA 203k loan but I might not be able to obtain a straight FHA loan. I also would have to live in the property which is maybe the biggest catch you had. FHA loans are generally available only to primary resident owners owner occupants and for many reasons a sell ever home might not find that as an attractive offer because they know that it will take a very long time to close the property and one additional caveat is that I need to make sure that I have sufficient credit and income and debts to qualify for the loan. So we're talking here in the world of it's essentially a loan product created for you as a primary homeowner to live at home. But you could use it for investment purposes and I've bought homes with an FHA loan. The living in it. But in my mind thinking I'm going to use this as a as a real estate investment long term. I guess the second thing in my my hierarchy would be to buy a home with conventional financing so conventional. Well I don't know if that's thing.


Ryan Goldfarb: [00:19:54] Well I actually would look at it a little bit differently. Yes and different hierarchies. Yeah I mean in a perfect world for sure I would love to be able to buy an investment property that hits my investment criteria while putting three and a half percent down even if I to live there for six months or a year whatever the requirement is.


Ben Shelley: [00:20:14] But I think most people do you think most people don't qualify them for that FHA more so than let's say your average conventional life.


John Errico: [00:20:21] It's the property that the underwriting for a person is probably more lenient but the underwriting for property is more difficult to read.


Ryan Goldfarb: [00:20:31] But what I would say is I would rather a better investment even if I had to use a more onerous financing strategy than to buy a lesser quality investment and only do it because I have the ability to obtain an FHA mortgage through it or for that property. That's that's not to say that you can't make a good investment. Either way I think there are certain properties that lend themselves extremely well to doing to obtaining or acquiring through FHA financing. But I'd rather if I can buy a 2-family if I'm looking at two 2-family right next door to each other one of them needs to sell superfast and maybe needs a little bit of work but they're offering it at two hundred grand if you can close it close on it in 14 days or you can buy the one next door for two ninety that's ready to go and the sellers in less of a rush but they know they're asking a little bit of a premium and so they're more receptive to an owner occupant buying it with FHA financing. Depending on how much work it needs and whatever my personal financial situation is at the time I may prefer to buy the one next door and forego the opportunity to use FHA financing because the deal itself maybe you make more it makes more sense for my investing thesis.


John Errico: [00:21:44] Yeah. So I think I mean it's kind of a difficult even general topics to discuss because it's so dependent on the particular asset.


Ben Shelley: [00:21:54] I would like to look at it through your guide size.


Ryan Goldfarb: [00:21:57] I think that's the most well I look at I look at all of these finance financing options as just another tool in the tool belt and there are different projects that are going to that are going to make a lot more sense for different financing strategies.


Ben Shelley: [00:22:09] Well say something you just said Ryan too is is interesting to note which is that from a buy side perspective to keep in mind that also the way you finance your property can have an effect on how the deal proceeds because certain sellers will be more in climbing. Naturally you're more inclined to take a cash offeretc. And as you go down and put less down it becomes more tenuous for that seller to proceed with with your offer. Yeah.


Ben Shelley: [00:22:32] Yeah. So I would say I've just SEO my own life as an example. I have I've purchased several properties or purchased a property with an FHA loan. That was the very first property that I bought. I lived in it as a multifamily proper 2-family property and it was a great success because I was able to live in one unit and rent the other unit ultimately move to the basement rent out both units essentially all the other investment properties that I purchased for buying whole purposes I've bought with I don't use that word commercial loan because I may be a little confusing but I've bought from banks that are portfolio lenders so like nonconforming non not conventional loans but that have terms that are comparable to conventional loan to conforming loans. To explain the reason why I've done that it might be important to tease out the difference between a conventional lender and a portfolio lender. A portfolio lender is generally going to be in this world of real estate finance like a local bank or your credit union or a savings bank or something like that that is interested in getting your business for whatever reason but is not either eligible or interested in reselling that loan. They want to continue servicing the loan for the life of the loan and they have enough liquidity and other advantages to continue servicing the loan for however long you have it. So the advantage with going a bank like that is that they could offer interest rates in terms that are very similar to conventional loans. They can offer a 30 year fixed loan at say whatever the prevailing rate is like 5 percent for 4.5 percent. However their standards as to your credit or your debt to income or whatever aren't governed by essentially federal regulations but by their own perception of your credit worthiness. So in my case in New Jersey I've been lending I've been buying homes in an LLC quite frequently and I don't usually want to transfer the home after I buy it. So for various reasons you may not want to buy a home in your own name and transfer it into an LLC with with a mortgage one being because the due on sale clause if your mortgage could be triggered and another being that your name is on the property records anyways you're sort of defeating the purpose. But having said all that if you want to get a in New Jersey if you want to purchase a property in the name of an LLC you are generally not going to be able to get a conventional lender to do that you're going to have to find a portfolio lender. So I've used portfolio lenders to do that but have offered me terms that are identical to a conventional conforming lender. So those are like I said before a 30 year fixed prevailing rate usually there's an underwriting process about my personal credit so they do look at my credit score and my whatever but if my credit score is above or below a certain number they may or may not disqualify me as it would in the world of conventional financing if my debt to income is a certain thing. It may or may not disqualify me depending on the banks discretion.


Ryan Goldfarb: [00:25:24] In that world, it's generally more asset based than then borrower based so that's they may have certain thresholds that you need to eclipse with respect to credit score or net worth or debt to income. But so long as you are above that threshold it's it's generally driven by whether or not the property itself is a good investment amidst that criteria.


John Errico: [00:25:42] And then there is leeway so that these banks will have they might have they certainly have their own standards but if you don't meet those standards you might be able to negotiate some some means to make the loan happen even if you don't meet the standards as opposed to a conventional lender where if you don't meet the standards you just tell me the standards because they the standards are set by federal regulations. So if you don't meet the standards that can't resell the loan and they're just not going to they're just not gonna accept it. So it would sometimes it could sometimes make sense to produce a property a multifamily property with hard money. In fact we're doing that right now. And the reasons why it would make sense to do that or what Ryan mentioned a few minutes ago which is that a you need to buy the property in a very short amount of time because it's such a great deal and or b the property is in such a bad condition that you can't possibly get lending from any other institution or whatever and or see you yourself don't have the personal financial you know credit debt to income whatever might be to qualify for a conventional loan or whatever other type of loan product you're looking for.


John Errico: [00:26:46] So in that case you're almost treating it like a a fix and flip it cept the flip part the cell part is going to be you refinancing that property into a conventional or otherwise more typical loan product.


Ryan Goldfarb: [00:26:58] Yeah another. This is actually just reminding me of a strategy that I haven't really employed in the past but that is an interesting thought experiment for the purposes of buying property. There are obviously advantages to you as a buyer for utilizing different financing strategies. And there are advantages for the seller as to why they might have a preference for one or the other. I think we've done this in the past but I don't know if it's ever been successful. I know of people who just like to make offers with multiple options embedded in the offer. So they'll say if you if you want a 21 day closing here's our number. If you're willing to go to extend this out 60 days will we're willing to pay an extra six thousand dollars or something like that. And that's generally just a way of quantifying the difference between the two different financing strategies how much it's going to cost you either upfront or over the duration of that. Something else we hadn't really touched on that is maybe a little bit more common in lower cost markets but there's something called delayed financing which is generally generally entails acquiring the property with cash and then obtaining financing after closing. So you buy the property for one hundred thousand dollars because you have the cash sitting around and then you approach a lender to refinance out as soon as you close. There are certain a lot of banks have limitations against it because they don't. They might have quote unquote seasoning requirements but there are some lenders who will do something like that they may just they just may have a little bit more restrictive terms they might not go as high leverage or they'll no limit you to a percentage of cost. You'll see you'll be limited your leverage will be determined on a loan to cost basis rather than on a loan to value basis. So if you paid one hundred thousand dollars for the property even if the bank praises it at two hundred thousand dollars they might still only lend you 70 percent loan to cost which is seventy thousand dollars instead of 70 percent loan to value which is a hundred forty thousand dollars.


Ben Shelley: [00:28:57] Yeah I mean I think as John always alludes to both in person and on on the show there are so many creative ways to finance your deals. And so I think you know one of the things obviously the theme of this episode is to look at all your bevy of options and identify what's the best strategy for you. But I mean for example I guess you could probably approach your seller to do like a seller financing and say you want one half million dollars let me pay five hundred thousand dollars in cash and you take a million dollar note and we'll set up some sort of amortization structure for sure you know for a year. You know the rest of your retirement. I think that's particularly good for sellers who are a little bit older.


Ryan Goldfarb: [00:29:31] And it's also often used as a bridge that you might say hey I I know this property is going to need a little bit of work and might take nine months to do it instead of going and getting bridge financing and then ultimately refinancing into a more permanent loan. You may just say hey seller will you take will you offer this seller financing. Give me two years or whatever knowing that you're going to probably refinance around the year one mark.


John Errico: [00:29:53] Yeah. And it brings up a good point which we can touch on very very briefly at the end which is the world of truly private financing which I would say hard money is a subset of or a type of. But as Ben alluded to a seller financing if you're if you're talking about somebody maybe even a friend of yours who wants to invest in real estate you can structure a lot of times people ask me like well you know how do I do it or like how do I get money from my friends or whoever to buy property. And there's no really satisfactory answer because you can structure financing and debt in this way in every way. We've talked about this before a little bit with very high level like financing for deals. But in terms of the interest rates are all the definitions we talked about earlier. All of those things are totally up in the air and there's it's unsatisfying to hear this but there really is no market for these things. It's really what you and the person that you're investing with want to offer. So you can you can ask. So you're investor you can ask your investor friends what are the sort of deals that you give your friends. But I've done that before and I've been amazed slash appalled at the types of deals that other people have have struck with people in the investment world and it's very common for a smaller properties that to be the case. Nobody knows what the market is. There's no commonly understood market interest rate for private money deal at all. I mean there's a hard money interest rate but that may or may not have relevance towards what you know your best friend is going to lend you to buy your property. So that's a whole other topic. I think they were getting into.


Ryan Goldfarb: [00:31:24] But to to that point the reason why a lot of these requirements and restrictions are in place for these institutional lenders or for these bigger banks or for Fannie Freddie at large is because they don't have any way of understanding you or understanding the deal without looking into these metrics and all of this is a way of. It's all it's all a means of risk mitigation. So if they can say on average if we only lend to people with a 720 credit score with a DTI below 47 percent. And we don't lend more than 70 percent on the purchase price generally across the board. These will be pretty safe lending opportunities. But your friend may look and say Hey John I know exactly what you've been doing for the last five years I've seen every property that you've bought. I know you as a person maybe we've done business in another capacity before your bank might want six like your bank might be offering you 6 percent but your friend they have a ton of money. He may want some real estate exposure and he may say I'll do it for five and I'll go a little higher on the leverage or whatever and it's ultimately it's an opportunity to create a win win situation when you truly understand everyone's needs. Because these banks have very different needs than what your investor friend may have and you have a very different need than the vast majority of investors who these loans are otherwise targeted towards.


John Errico: [00:32:44] Yeah it's a great point and I think it gets to to sort of a problem with the industry that we've talked about quite frequently and why now. I think with in particular the past like five to 10 years there's been a lot more institutional ish private lenders out there. So I think that for a long time hard money lenders were almost like seen as a like a subclass of human like they're just like the like loan shark you know like kind of sell your soul to get a property.


John Errico: [00:33:13] And now we're seeing hard money lenders that are venture backed that have billions of dollars in valuation that are advertised to me every time I watch a video on YouTube.


Ryan Goldfarb: [00:33:22] You know that sort of thing because they're listening and because John watches a lot of the noise I wonder gosh it's scary actually.


John Errico: [00:33:31] But so because of what Ryan indicated about the status of the market of conventional lenders reselling their loans and the regulatory environment that frankly has has come up post the last financial crisis the housing market crash there really are sometimes gaps in the market for investors that can only be filled by private financing either by like your buddy or by some of these companies that are coming up that offer private financing although look like big companies now. So there's a market opportunity in my opinion or in many people's opinion to offer different loan products that may be not in the world of conventional financing that we've been talking about in this episode.


Ryan Goldfarb: [00:34:13] For sure. I have a few other things that came to mind while we were discussing that I just want to highlight real quick.


Ryan Goldfarb: [00:34:19] Maybe as an annex or as an appendix footnote well known as a footnote it came in right at the right I was just a buyer of close it's a place yes right.


Ryan Goldfarb: [00:34:29] Right. The first is seasoning. John discusses a little bit before and I think I mentioned it too but there are one thing you may run into when you're looking to execute on a BRRRR strategy is that certain lenders will have seasoning requirements so they won't loan on something until you've owned it for a certain period of time and it's quote unquote seasoned. So that might be six months or nine months and they really just don't want to get too ahead of themselves with constantly you know having someone who's constantly recycling loans and it's another just another means of protection for these lenders.


John Errico: [00:35:04] And also your seasoning in the context of money that you're using for a down payment which is another.


John Errico: [00:35:09] Sometimes people say there's a seasoning requirement for cash used to close in a loan so that prefigured a slight point but is an important one. Usually with a conventional or even FHA loan or any loan that's not a private loan they're usually limitations on where you get the downpayment money for and it usually can't be lent. So again usually there's a seasoning requirement for money in your bank account. So if you just got a check for fifty thousand dollars in your bank account it either has to be because you transfer it from another bank account or maybe got a gift but it can't be because you got a loan from your friend in general right.


Ryan Goldfarb: [00:35:42] And you can't just throw some salt and pepper on there to season it.


Ben Shelley: [00:35:45] Oh no. Nice was just about we get it.


John Errico: [00:35:49] That's so many laughs. It's crazy just crazy. I was an editor. Actually the whole room I mean I was worried about the structural integrity of the building standing ovations. Crazy. Well I stood. Moving on. There was a body. It's just a. I was in here. It was in silence.


Ryan Goldfarb: [00:36:04] The next thing is interest rate risk. This is I think only really applicable to commercial loans. I've never heard of this in a in a residential mortgage context. But if you're looking at commercial financing and you're obtaining an adjustable rate loan or a floating rate loan you may see that your lender requires some form of interest rate protection which can be in the form of an interest rate swap or an interest rate cap. The mechanics of each of these are a little bit different but they functionally serve the same purpose. It's to it's to offer you some type of protection against a crazy spike in interest rates and it keeps your interest rate payments. Those still variable a little bit more predictable so they generally they they wouldn't exceed a third a certain threshold up or down predictably variable rate. Next one was John also mentioned this with his some of his rental properties but it's not uncommon for investors to run into the issue where their lender will not loan to an LLC. It's just best to vet this upfront and to ask and I think this is actually a good lesson across the board but if you have any concerns about any one of the points that we've discussed today just ask your lender because it's a lot easier to figure out a way around it. At the very beginning they may just put you in a different product entirely but it's a very it's a lot easier to deal with it at the beginning than to try to deal with an issue when it comes up two months down the road or 45 days down the road when you're already in underwriting or when you've gotten your commitment and then you're looking to close.


John Errico: [00:37:45] And it reminds me of one other issue that I've run into which is that you might actually be disqualified from getting a loan at all because you have too many loans just in general.


John Errico: [00:37:54] So there is there is a Fannie Freddie guideline where you can only have X number of loans that's it doesn't matter what your debt to income ratio is.


Ryan Goldfarb: [00:38:01] About anywhere between like four in 10 per person.


John Errico: [00:38:04] Right. And again with a portfolio lender you might not have the limitation in with a private lender you probably won't have the limitation either.


Ryan Goldfarb: [00:38:12] There are also sometimes you may you may see some escrow requirements for things like taxes or insurance on larger properties you may also have escrow requirements for replacement reserves. It's usually something that can be negotiated but sometimes there's a hard stop on these things.


John Errico: [00:38:29] That's another thing. There are definitely in the world of again like Fannie and Freddie compliant loans. You will often find reserve requirements for certain types of loan requirements and you'll have to keep reserves for your other property SEO and eight other properties the bank might say. OK. We need to have 15 thousand dollars per property in a liquid account which can be a lot.


Ryan Goldfarb: [00:38:50] And that's actually that could be what's called a covenant a loan covenant which is actually the last point that I had written down but a loan covenant is an obligation that you agree to maintain throughout the life of the loan as a as a condition of that loan and a failure under your covenants may trigger it may trigger some type of action that could be default. It could be some kind of renegotiation you may have a covenant that says your group this is more relevant for commercial property but you may have covenant to maintain a certain level of occupancy through for the property and if not you may have to pay the loan down a little bit or they may hold back some kind of retainer or some money in escrow. It can be any number of things and when you're in the money on the commercial lending side that's when you'll see covenants that are a little bit more unique and tailored to that specific deal and the specific risk profile of that deal.


John Errico: [00:39:49] And in the residential world you could argue that you have a covenant for primary resident type properties that you have to intend to live in the property for a certain amount of time.


Ryan Goldfarb: [00:39:57] Yes. I just got lawyered up legally.


Ben Shelley: [00:40:00] Well more than in any episode I think we have ever created. I would very much recommend listeners. Go back to the beginning of this episode with pen and paper in hand take notes make sure you fully understand these concepts. If you don't look them up or feel free to reach out to us on our socials and I appreciate you listening. Guys thanks so much for your time and expertise as always. For the folks listening at home make sure you subscribe to us wherever you get your podcasts. You can find us on the brick by brick. That's brick X brick Facebook and Instagram. Thanks so much for listening.


Time to talk about leverage!

In part one of this two part series, the BxB team discusses the essentials of real estate lending, including industry terminology: LTV, DCR, DTI, NOI, and more!

We also talk pricing, terms, and additional variables to ensure that you match the right loan with the right project.


(Transcript below.)


Ben Shelley: [00:00:00] Welcome back to the Brick x Brick Podcast. Today's episode is part one of a two part topic on debt financing. Part one is focused on terminology surrounding the financing process. Enjoy.


Ben Shelley: [00:00:21] Welcome back to the Brick x Brick Podcast. I'm Ben and I'm here with John and Ryan. And for today's episode we're going to talk about debt financing. Now if you've been a avid listener of the show which I'm sure many of if not all of you are you know that we've already done a sort of overview episode about real estate financing more broadly today. We want to hone in a little bit more specifically on the debt side. And why we want to do that is so that you both the everyday intermediate and expert investor have a sense of the landscape and know where to go and what to look for when you're negotiating and talking with lenders. And so some of the types of financing in lenders you may be dealing with are conventional lenders portfolio lenders FHA lenders hard money privateetc. So our experts are going to take you through it. Nobody knows it better than John and Ryan and so I'm going to start by throwing it over toMr. Wells Fargo himself. Ryan Goldfarb where do we want to start this?


John Errico: [00:01:13] Ryan quote Wells Fargo quote Goldfarb.


Ryan Goldfarb: [00:01:17] Together Wells Goldfarb so far has really come. It's one of my friend's jokes. I want to try to get him right here. I think it's Neal. Okay.


John Errico: [00:01:26] And about 50 years when you acquire Wells Fargo you can.


Ben Shelley: [00:01:30] You don't want that kind of publicity.


John Errico: [00:01:32] So just over set big goals and then try to achieve. And that's you know that's just put it out to the world see what's gonna happen.


Ryan Goldfarb: [00:01:38] Interesting too. It's interesting to think about where these banks will be in 50 years from now.


Ryan Goldfarb: [00:01:42] Any who because.


John Errico: [00:01:44] They keep loaning money to us. I mean they might say.


Ryan Goldfarb: [00:01:48] Well we in Ben's eyes are the experts on this.


Ben Shelley: [00:01:51] Now of course my only goal is really to convey every episode that you guys are experts at fill in the blank topic of that episode should I cut that.


Ben Shelley: [00:02:00] I don't know.


John Errico: [00:02:00] Well we're always there's like the point 0 0 0 1 percent of the Earth's population that we listen is like these guys go to the bank for 40 years. Well they set it on the by podcast. It must be true.


Ryan Goldfarb: [00:02:12] Well sir I worked at one for three years.


John Errico: [00:02:14] I want to make sure that we accommodate that person. What incentive do that person who's like five people enter.


Ben Shelley: [00:02:20] We are way off the rails.


Ben Shelley: [00:02:21] We didn't even get started yet more sidetracked.


Ryan Goldfarb: [00:02:24] Anyway. Taking us back to square one.


Ryan Goldfarb: [00:02:26] The way that I've been thinking about this is in the context of buying let's say a car. There's so many different places where you can start and there are so many things to think about. You'll walk into a dealership and they'll start throwing all these terms out at you both pertaining to the car itself and to the different ways that you can obtain the car. You can buy it outright. You can lease it and you can finance it. And in a lot of ways I think there are parallels to buying property. You can buy it outright. You can buy it with financing.


Ryan Goldfarb: [00:03:00] You can lease iti.e. rent it as as many of us do for our own purposes.


John Errico: [00:03:05] Steal it buy adverse possessing defective squatters.


Ryan Goldfarb: [00:03:10] That be an interesting episode that is going to anyway.


Ryan Goldfarb: [00:03:14] So that's kind of how I think about this high level. There are I guess to start any number of ways that you can buy it. As I alluded to before it can be through all equity or in the case of you know just buying a property for 100 percent cash or the more common way to do it would be to put down some money in the form of a downpayment and then obtain a loan for the remainder.


Ryan Goldfarb: [00:03:44] That loan is what is classified as debt.


John Errico: [00:03:47] And usually just to clarify that the loan is secured by a lean on the property. So that's what classifies this type of financing from me. You could also get other types of debt I suppose that aren't secured by leans like you can get a personal line of credit or something like that that's secured by your personal credit. But these are all secured by the actual asset. So that distinguishes there's a category of thing. Right.


Ryan Goldfarb: [00:04:12] So under that umbrella of debt some of the options are conventional financing which is what most people think of when they're going to buy a home. It's you go to the bank and your banker says we can get you into this new house for 20 percent down while we're on your credit. It's oftentimes the loans are guaranteed by Fannie Mae or Freddie Mac and they fall into this bucket that allows them to be offered to you at pretty attractive rates. And so that's that's generally more applicable to the owner occupant class of purchasing which is what you would use to buy a primary residence on the investment side. There are also a litany of other options including commercial portfolio lenders hard money loans private lenders each of which have many similarities but also some key differences that are important to be aware of before you dive in and pursue any one of these paths. John, am I missing anything here.


John Errico: [00:05:12] Well I think we'll get into it. But part of the the skill of being a real estate investor is knowing when and how to use these different financing options. So oftentimes with the home you'll you might buy a home with a certain type of financing or no financing and then obtain financing for that home at a later time or you might start with one type of financing change or a different type of finance in Exeter et cetera it be known as a refined refinance right. And depending on your goals of the property and the type of the property that may be very advantageous or not so we can run through some examples. I mean just very high level of you if you're familiar with reading say BiggerPockets or that community of thing you've probably heard of the Byrd strategy which is buying renovating renting refinancing and then repeating and refinancing is sort of the key word or what we're talking about which is normally in a BR technique you might start with could be conventional finance and could be FHA financing whatever and then you got to refinance that into a conventional loan and take money out of it. So even like very beginner like house hacking type strategies you're going to have to know knowledge about financing and how it works.


Ryan Goldfarb: [00:06:23] Then I guess before we get too deep into the weeds here it's probably good to start with some definitions or with understanding some of the key components of what these different loans will offer. The first one is leverage. That's often referred to as the loan to value or in some cases loan to cost. So if you're buying something for two hundred thousand dollars and your lender is offering a loan product with an 80 percent loan to value that means that the lender so long as they support that two hundred thousand dollar value via an appraisal or some other type of internal valuation they're willing to loan up to one hundred sixty thousand dollars on that property for that purchase. Which means that you as the owner investor whatever you want to call yourself. Need to bring the remaining forty thousand dollars to the table plus allocations for all the closing costs that you that you will incur. Plus any holding costs that you will have for any period of time thereafter up until you are fully stabilized with your rental property and have tenants in place who are going to cover those holding costs. So.


Ryan Goldfarb: [00:07:38] Leverage. Most commonly I think the most common benchmark that you'll see is generally 75 to 80 percent loan to value for investment property. The more risky an investment can be generally the lower loan to value that a lender will offer out because it's true.


John Errico: [00:07:58] That's that's a victory for the world of residential loans properties for commercial loans.


John Errico: [00:08:03] You can get a lot lower or higher whatever you want to call it requirements so you might be a little like 70 percent loan to value 65 so a lot of other things that graduate.


Ryan Goldfarb: [00:08:11] As you get into as you get into say commercial property like a strip mall or a standalone office building or something akin to that you may find lenders that are a little bit more averse to lending and high leverage because the secondary market for that kind of mortgage is a little bit different. There aren't as many means to securitize and sell off that paper which means that the lender themselves often has to hold on to the loan for the lifetime of that loan whereas when you're buying a residential mortgage through Wells Fargo or through ABC lendingCorp. in your town that is a well known mortgage broker. They're originating alone but within a few months that loan will get bought by an investor generally as part of a pool and that investor will be the one who's essentially clipping the coupons and earning the interest on that.


John Errico: [00:09:06] Yeah. So the banks are like recycling cash. That's how these big originators are able to do so much volume because they're not at any given time loaning out like a hundred million dollars of cash they're loaning out X amount they're selling it to an investor or securitizing it or whatever and then they're recycling that money that they got back to re lend it out to more people. So right. So it may be worth noting sorry to cut you off right but that for primary resident if you're living in the home that's generally the most leverage that you can obtain. Actually no. I mean I could fathom exactly why.


Ryan Goldfarb: [00:09:41] Well I think I'll do that but I don't think it's necessarily a business play. I think the reason for it is because the so if you if you think about the existence of Fannie Mae Freddie Mac FHA FHA I think about it. FHA is is a government agency Fannie and Freddie are quasi government institutions so they are effectively the Federal Housing Administration right authority administration authority for monetary Administration FHA and Fannie and Freddie meanwhile are technically private entities but they are kind of under the oversight. Yeah they're under the oversight of the of the federal government. And the reason that those institutions are in place are for a few different purposes. One of which is to make homeownership more accessible to the everyday American. We've actually discussed this in the past. The idea of through and through government trying to catalyze good behavior or sound behavior in this case buying a home is probably better than spending that same money on a car or a or an asset that is under any circumstances going to depreciate. Home at least has a high chance of retaining its value and potential even increasing value.


John Errico: [00:10:59] So if you're living in the home as your primary residence you can get loan products that are as low as even zero percent down or maybe even pay you closing costs. But for most people it's more like three and a half percent down 5 percent down or conceivably possible depending on your credit in the home at Exeter cetera.


Ryan Goldfarb: [00:11:14] But then the other reason why these institutions exist is to promote liquidity in the marketplace. And that's mostly for the health and longevity of of the real estate markets. Anyway getting back to leverage. So as John alluded to they're actually somewhat products out there. I believe the conventional ninety seven still exists store something in that realm and then there's an FHA loan product as well that can provide access to or access to a mortgage with as little as three or three and a half percent down.


John Errico: [00:11:49] Is there evidence of a loan at zero percent interest rates on other things.


Ryan Goldfarb: [00:11:53] And then there are also some sometimes in addition to these attractive loan products there may be some down payment assistance programs and through different grant programs or other subsidies.


John Errico: [00:12:04] So you get anywhere between over 100 percent loan to value ratio to 60 percent 50 percent depending on the type of building asset that you're buying your personal creditetc. so that we'll get into that. Right.


Ryan Goldfarb: [00:12:15] And then another offshoot of the leverage question is that is the fact that some loans allow for the ability to borrow renovation proceeds. So there is still some calculus in there pertaining to to leverage limits. They generally won't let you borrow something in excess of what the property is going to be worth. At the conclusion of renovations I think two or three K may actually have an exception for that but generally any kind of investor focused loan will not. So if you're buying something for a hundred thousand dollars and plan to put twenty five thousand dollars into it you may be able to finance both a portion of the purchase and a portion of the renovation so long as your value upon renovation or upon completion is in excess of the value might be a minimum of one hundred fifty thousand and might be a minimum of 175 or 200 but depending on the loan program that will be that would generally be considered loan to appraised value or as stabilized LTV.


John Errico: [00:13:17] It can be enumerated so that you can wrap multiple loan products into one loan depending on the banks. You can get like a construction loan construction to purchase Russian to permanent something all sorts of things.


Ben Shelley: [00:13:28] To what extent do you have influence when you're talking with I know we'll get more into the process of of what is the give and take between you and a lender when you're offered terms. Can you play a part in the process of determining that after renovation value for example. Is that purely on the banks assessment or are you able to have some say in what you think that is and where you think the fairest terms are. Well.


Ryan Goldfarb: [00:13:52] If you're talking about just with respect to what the appraised value is on the back end that's generally gonna be driven by some kind of internal valuation by the bank or more than likely driven by an appraisal which is supposed to be done by an independent third party. So you may be able to make the case that based on something you know or some kind of substantive experience that you have that you know this property is gonna be worth six hundred thousand dollars when it's done because you just renovated and sold the one next door which is identical and you got six hundred thousand dollars for it. Generally on the residential side it's gonna be driven by mostly by comps sales comps that is on the commercial side. On the investment side it's generally gonna be driven by the what's called the income cap approach which is it's a valuation methodology driven by capitalizing the NOI on a property. So you go through an income and expense pro forma something out arrive at an NOI and then apply a cap rate to that NY to arrive at a value. That's something that we've gone into and a little bit more detail in in prior episodes but high level that's that's how it is.


John Errico: [00:15:02] Cap rate is usually from the market with market cap rate red is for that area.


Ryan Goldfarb: [00:15:08] Right. For that area for that asset class.


John Errico: [00:15:10] Appraisers I mean it's a whole nother different episode.


Ryan Goldfarb: [00:15:15] We can I guess move next to the loan term. So that's always going to be a big factor in weighing different investment options or loan options. The standard again in the in the residential space nowadays at least is the 30 year fixed rate loan. 30 years is advantageous to the borrower because it spreads out the principal payments over a longer period of time which means that your monthly payment is able to be kept within reason and it ultimately gives you more buying power.


John Errico: [00:15:51] So 30 years amortized and fully and so that the passive barely fully advertising loan correct advertising would mean in this case that you're not paying only the interest on the money that you lend you're paying back the principal interest for all time.


Ryan Goldfarb: [00:16:03] And that's and that's governed by an amateur nation's schedule which if you look into is is quite unfavorable to borrowers.


John Errico: [00:16:10] So you're paying mostly interest at the beginning of your loan. You're paying mostly principal at the very end of your loan.


Ryan Goldfarb: [00:16:15] Even though your payment might be the same. Twenty five hundred dollars a month for the duration of the loan. So the loan term again 30 years is common in the residential space but when you get into the commercial space it's more common to see maybe a five seven or 10 year loan. Oftentimes there's variable pricing within that. So you might have a certain period of a fixed rate loan and then it adjusts after the fifth year every year until the end of the term so you might have five years of the fixed rate loan and then after starting year 6 you will have a new rate that maybe cannot increase more than a certain amount but that will generally be pegged to the prime rate or live or perhaps the Treasury although that's a little bit more common on fixed rate loans. The loan term is is important to keep in mind as an investor for a variety of reasons but probably the most important of which is you don't want to be caught. If you're looking at. If you're looking at a five year loan and a 20 year loan and you decide to go with the five year loan because the interest rate is significantly lower it's important to bear in mind that there's risk associated with that if you're buying. If you bought in two thousand four and you put five year financing on your property and your price and your loan came due at the end of your five you were. Your loan is coming due at a time when property values were at maybe not an all time low but we're at a low for a significant period of time preceding that.


Ryan Goldfarb: [00:17:47] So you are going to be the reason we saw so many foreclosures during that time in part was because people who were in that situation and we're seeing their loans reset or we're seeing a pending maturity they couldn't purchase or they couldn't sell at a number that would allow them to pay off their loan and they couldn't refinance based on current values at a number that would make it. That would make it feasible for them to hold onto the property.


Ryan Goldfarb: [00:18:14] So that kind of fed this vicious cycle of increasing supply which further suppressed property values and just kept the spiral moving downward.


John Errico: [00:18:25] If in the short term if you're flipping for example and you have a non amortizing loan like an interest only loan you might have the term the length of time of that loan is gonna be very important because that sort of determines the amount of time that you have to sell or refinance out the property to give a six month hard money loan that gives you essentially six months is other property which is not a very long time versus a year versus 18 months. And those are usually interest only as we were talking about before they're not fully amortizing so you're only paying the interest you haven't paid the principal and at the end of the loan terms you need to pay back the entire loan in one go.


Ryan Goldfarb: [00:18:59] On the flip side of this there are also investors who use this on the more conservative side of things but they will really take a long term view view towards this and they'll say look my retirement goal is in 15 years and all I'm really looking for this property to do is to serve as a source of income for me during retirement. So they might buy a property knowing that they're going to be putting 15 year financing on the property and they might amortize that loan only over 15 years. So they're paying back a lot more principal during those 15 years than if they had spread that out over 30 years so their monthly payments are going to be higher and their cash flow is going to be lower because of that. But their goal is to have this source of income for retirement so they'll have in theory a fully paid off property at the end of year 15 no mortgage which will mean more more cash flow down the road at the expense of cashflow in those first 15 years.


Ben Shelley: [00:19:56] Good point.


Ryan Goldfarb: [00:19:57] John alluded this before but the flipside of this is when you're talking about. No pun intended flips. When you're looking at a much shorter time horizon and this is another area where investors can get a little ahead of themselves and they'll think that they can complete a flip in six months. No problem but they underestimate the scope of the work. They underestimate the obstacles with zoning or the building department. They get screwed over by a contractor and they get left with a project that's going to take them a much longer to finish than just 12 months. But I think in the hard money space it's very common to see twelve months as a typical loan term and what that loan term means is that at the end of it you were loan is due and if you can't pay off that loan then you are in default and that's that's not a road you want to go down.


Ben Shelley: [00:20:46] That's bad that's bad in the words of bench expert opinion.


Ben Shelley: [00:20:50] But I think it's probably fair to point out from a hard money perspective too that it's it can be a good option for people who may not either qualify for two reasons either.


Ben Shelley: [00:21:00] If you're looking to flip in a short term period or for investors who might not initially qualify for conventional loans for whatever reason as almost like a bridge to that conventional loan via refi we'll get into those strategies right.


John Errico: [00:21:12] Yeah well I guess I should go. Just leave particulars.


Ryan Goldfarb: [00:21:18] What other one other subset of the of the term is that you can have a different amortization period than what your loan term is going to sound very confusing. And it took me quite a while to grasp fully but you may have a 10 year loan that is due at the conclusion of 10 years and you may have an amortizing loan but it may not fully amortize over that 10 years. So you may pay off that loan as if it's a 30 year loan in which case you after 10 years you've maybe paid off 20 or 20 or so percent of the principal. But at the end of that 10 years your loan term and maybe up so your you may either have to sell or refinance or pay it off in cash if you are so inclined. The reason that this is done is because it gives lenders a little bit of cushion. And frankly borrowers as well but it gives lenders a little bit of cushion and lessens the risk on their side of things. Because if you're doing a 10 year loan as a lender if you offer it as interest only that's super risky because your borrower is not paying anything down and if they're buying it at the height of the market when they go to refinance there's a high likelihood that the valuation that they arrived at on day one will not be the same at the end of year 10 in which case they may be it's it's more likely that they will be unable to refinance the property. That's that's what we would call refinance risk. So to allay that concern to an extent they will build in some amortization into the loan schedule so that 10 year loan might amortize over 30 years which means that the principal payments are going to be embedded in every monthly payment. So it's a little bit more expensive for the borrower on a monthly basis but it's far less expensive than it would have been had that 10 year loan be fully been fully amortizing and if you if you just kind of play around with a mortgage calculator. I mean I do this all the time. If you go into Google this is what I do in my free time ladies and gentlemen if you go into Google and just type in mortgage calculator Google has a built in mortgage calculator right there and you can kind of play around with some of these things so you can see a million dollar loan at 5 percent on a 10 year term versus a 30 year term. That assumes that these loans are loans are fully amortizing so you can kind of get a sense of how that impacts the monthly payments.


Ben Shelley: [00:23:47] I mean I think it's a lot of fun when we do a lot of something that we talked about at the beginning which is interest only hard money cash purchases and refinance now we're going to talk about it later on and refinance to conventional mortgages but to to to Ryan's point I think one of the most the things that gets my blood going is playing around with the numbers in such a way to see just how much we're reducing our interest. You like playing around with those numbers. I love playing around with those numbers. Talk dirty to me. When we refinance right the whole purpose is to make your debt less expensive in essence. And sometimes that means along getting your amortization periodetc.


Ryan Goldfarb: [00:24:24] That's great.


Ben Shelley: [00:24:26] Like I didn't really I don't care at all. I'm sure you know I'm just trying to do my part. I'm sorry that I'm sorry. And we value you here. That's very clear. And the interest in the interest


Ryan Goldfarb: [00:24:43] of time. I just want to highlight some quick definitions so that we can get a little bit more into the strategy of things. But it will be useful for the details of the later conversation. So amortization we discussed on DSC RR is the debt service coverage ratio. You may also see it abbreviated as DCR and the formula for that is NOI divided by annual debt service payments. The sum of those effectively what it is showing you is the cushion between your net operating income and your debt service obligations.


Ryan Goldfarb: [00:25:18] So it's the lender's way of saying okay they're paying us ten thousand dollars a month on their mortgage. That's one hundred twenty thousand dollars a year they're projected NOI is one hundred fifty thousand dollars. So the form the math is one fifty over hundred twenty thousand which I believe is a one twenty five DCR one point to five which is oftentimes is an arbitrary threshold.


Ben Shelley: [00:25:42] I know at least federally backed financing I got rent high.


John Errico: [00:25:45] I don't know. Yeah.


Ryan Goldfarb: [00:25:48] So there's been a little duel that we'll discuss that a little later but one twenty five is a pretty common benchmark in this maze. All right. So beyond the DSCR we have the mortgage constant or debt yield. I think this is actually more of an internal metric that banks use. But the formula for this is pretty simple. It is the NOI divided by the loan amount. So for if a bank's a 10 million dollar loan on a property with eight hundred thousand dollars I know I.


Ryan Goldfarb: [00:26:15] That's a debt yield of an 8 which is another way of saying it's another way of gauging the bank's return. If they had to take over this property next we have interest rate. That's pretty straightforward though it can get a little bit more complex when you get into some some more unique deal structures.


John Errico: [00:26:36] You talk about interest rate versus EPR.


Ryan Goldfarb: [00:26:39] Yes. Would you like to do that?


Ryan Goldfarb: [00:26:42] Well no I would not like to talk about interest rate versus you. I don't I don't either. I don't know all the technical.


John Errico: [00:26:49] I mean APR is just like your interest rate. So an APR is inclusive of like additional fees or other things that might be wrapped into the loan. So you might have an interest rate of you might be quoted an interest rate of say 5 percent but then you're effectively paying five point to 5 percent because of various fees and other things that are that are wrapped into it so like it doesn't like a credit card. So you see like a credit card APR it's sort of like the effective rate that you're paying even though the your set interest rate might be below that.


Ryan Goldfarb: [00:27:20] Thank you John.


Ben Shelley: [00:27:22] Notice Ryan's different reaction when John speaks. Then when I speak out how should we feel sorry for Ben. Is trending on Twitter right now.


John Errico: [00:27:31] Anything we hear like the voice of God kind of man. You know a deep sonorous mass where he wears a voice whereas George I need Joe. Thirty two years of life pulsing over my veins.


Ryan Goldfarb: [00:27:42] All I want is for this episode to consist


Ryan Goldfarb: [00:27:45] of more than just a few definitions. All right so under the umbrella of interest rates we have a few different benchmarks that are used to determine when interest rates are some different ones that you'll hear our library which is the London Interbank Offering Rate. I believe the Treasury rate which is based off of the Federal Reserve or the Treasury Department's current yield on bonds and that's over different timeframes you have a you might have you'll have a five year treasury a seven year treasury and a 10 year Treasury and there's a yield curve that's a pricing curve that is generally accepted in that space and so you'll see a little bit of a difference between the 5 7 and 10 year pricing as a result of that. And then there's the prime rate which is I think it's actually pretty murky or unclear as to what the actual science is behind the prime rate. I don't know if John has any more.


John Errico: [00:28:36] I don't know if you're into that but it's a good question. I do know that the primates are only 1 2 3 5 7 13.


Ryan Goldfarb: [00:28:44] Yes prime no jokes ladies undergraduate Rob it's like a dad Joe our graduate. Thank you.


Ryan Goldfarb: [00:28:53] Well that's like a very specific type of bad joke that's a dad joke for a dad who's a math teacher I know.


John Errico: [00:28:58] I'm neither of those. It's unbelievable. Thank you so much. You're welcome.


Ryan Goldfarb: [00:29:02] But prime rates I believe are published publicly but I believe they're determined based on like a survey of banks and their current.


John Errico: [00:29:13] Yeah I think that's great thing it's maybe a survey of the Fed Reserve Bank. Something like something like it's a it's a it's like small sample size of banks and it's a it's it's a said obtainable number but I don't know how it's obtained.


Ryan Goldfarb: [00:29:27] But the primary it's actually important because a lot of a lot of loans are priced off of primes. You're your pricing might be prime plus 1 which would mean 1 percentage point over what the prime prime rate is of primes 5 your price that your interest rate is going to be 6. That's also adjustable rate mortgages are commonly priced as a in relation to prime.


Ryan Goldfarb: [00:29:49] Other things that you will see when shopping around are prepayment penalties which can take the form of defeasance or yield maintenance.


Ryan Goldfarb: [00:30:00] Sometimes they're in a step down pattern after a certain period of time but essentially it's just the the banks way of protecting their downside because they don't want to spend three months underwriting a loan for five million dollars and have you come back day two and just pay it back with any. Yes Ben we have a question.


Ben Shelley: [00:30:21] Yes I do. Thank you.


Ben Shelley: [00:30:22] Just curious actually so I know obviously for for hard money generally there is either no or very minimal prepayment penalties given the term but is it a direct one for one. Generally speaking that the quote unquote shorter your term the shorter the prepayment penalty will be or what is your experience.


Ryan Goldfarb: [00:30:40] I'm just curious. I don't necessarily think that's the case. I believe unconventional financing conventional loans for a home. I don't know if there's any prepayment penalty built in


Ryan Goldfarb: [00:30:50] whatsoever. I've never seen it before. I think I do. I think lending you might burn some goodwill with your lender. But I don't think there's any monetary. But again the lender is probably selling your letter. They really don't care. I think there is a minimum amount of time that they have to hold. I could be wrong but made so in order for them to articulate your views.


Ryan Goldfarb: [00:31:04] I mean maybe the 30 60 days like that but so the answer I would say is no on.


John Errico: [00:31:12] And your question is this is this episode to turn into the roast of Ben Shelley.


Ryan Goldfarb: [00:31:19] That's like the like you really really like the chocolate factory. Like you get nothing. You are awarded no points and then God have mercy on your Exactly.


John Errico: [00:31:28] Yeah.


Ryan Goldfarb: [00:31:29] So sometimes I'm like a hard money loan you may see that the lender wants like a guarantee of three months worth of interest payments. Other times you might see a loan prepayment penalty of like 1 percent of the loan amount. So it varies loan term amortization. We talked about that. Interest only has been alluded to before. It's pretty simple it's a loan on which there is no amortization and you're paying only interest. So it's a lot easier to calculate the rate on that if you have a hundred thousand other loan and your interest rate is 12 percent. That's twelve thousand dollars a year or 1000 dollars a month. That's your interest. That's your mortgage payment. That's all you pay on a monthly basis outside of your holding costs interest only loans are only really comment on investment property I've never really seen them offered on at least conventionally on owner occupied either.


John Errico: [00:32:21] It's either for hard money flips or for like commercial or he locks are like what he likes are often interest only but that can be advantageous because they may obviously allow you to have a lower monthly payment than men if you are paying decades as well shall we say.


John Errico: [00:32:38] Juice somebody returns you you have to buy and hold property if you really wanted to cash flow and you have an interest only loan.


Ryan Goldfarb: [00:32:45] If you're and if you're working with a more sophisticated lender or a lender who is willing to get a little bit creative oftentimes one way that you'll see these structured is that you'll have an interest only period so you might have six months 12 months two years of interest only payments and then it goes to an amortizing schedule and that's all.


Ben Shelley: [00:33:05] Now that's fun to underwrite.


Ryan Goldfarb: [00:33:06] Yeah that's generally done for the purposes of giving the owner time to get their operations up to par. So if you have a big repositioning or if you have a development occurring it's a way to say like OK we understand that your cash flow is gonna be tight for the first six months or twelve months or two years but we understand that there's upside in that and we'll work with you to to create something that's gonna work for you. The one last thing that we can touch on are that we should just highlight now as the DTI or debt to income that's a common metric for conventional financing because that's underwritten on an individual level versus against the property. So your debt to income is it's the ratio of your debt to income.


John Errico: [00:33:50] It's important to consider that the debt to income ratio and that's thrown around a lot particularly in the residential world too could be inclusive or exclusive of the debt that you're about to assume. So oftentimes the minimums are inclusive of the debt. So if you're buying a home your debt to income ratio has to be a certain number including the debt you're about to assume which is often quite substantial. So just as a very high level overview and we should talk also about what underwriting is. I know that that might be very obvious but we've just used the word underwriting many times. Underwriting is essentially like the call analyzing like you're just like running the numbers and seeing like do the numbers make sense. So a lot of people in the finance world say I'm going to underwrite a deal it sounds very fancy but just means that I'm going to take like three numbers together and see what they are.


Ryan Goldfarb: [00:34:35] So my first title was underwriting analyst and it took me a while to understand what that even like what that even meant analyzing I think is redundant.


Ben Shelley: [00:34:45] I think it is fair to say that in previous episodes we've alluded to a very basic form of underwriting this idea of underwriting or analyzing for the common investor or rental properties. I was an underwriting analyst for a mortgage debt lender.


Ben Shelley: [00:35:00] You were an underwriting analyst for a mortgage debt lender.


John Errico: [00:35:03] Do you ever underwrite the La Brea Tar Pits which is the tar tar pits.


Ben Shelley: [00:35:08] This is so over my head at this point I just don't even know that's not involved in it.


John Errico: [00:35:12] It doesn't matter because you can't. I just made a very common joke. I didn't I mean it's like no complexity.


Ryan Goldfarb: [00:35:18] No. I made a unique joke.


Ryan Goldfarb: [00:35:19] It just wasn't that funny.


John Errico: [00:35:21] Laughing very hard it was. Cut it out actually. We're moving further and further away.


Ryan Goldfarb: [00:35:26] Nobody laughed harder at Ryan's joke that Ryan himself.


Ben Shelley: [00:35:30] Point being that if you listen to some of our previous episodes you hear some of also the assumptions that we draw from our quote unquote analysis and underwriting cash on cash, IRR, etc. That's all part of this and I definitely recommend listening to previous episodes to make sure you have a firm sense of the concepts. For the folks listening at home make sure you subscribe to us wherever you get your podcasts. You can find us on the brick by brick. That's Brick X Brick. Facebook and Instagram. Thanks so much for listening.


The BxB team discuss various pieces of technology that they use in their real estate and construction businesses to help with everything from communication to document storage to project management and invoicing.


(Transcript below.)


Ep 14 - Leveraging Technology as a Real Estate Entrepreneur.mp3


Ben Shelley: [00:00:07] Welcome back to the Brick x Brick Podcast.


Ben Shelley: [00:00:09] I'm Ben and I'm here with John and Ryan for today's episode we're going to talk about technology something we're all familiar with but specifically related to how you can utilize modern technology to efficiently run your business or operation. I think there's a lot of tools and apps that people may or may not have heard of who think why would that be helpful for me. Or maybe they recognize that they could utilize these tools in certain ways but simply haven't tried them yet. So we thought it might be helpful to talk about some of this technology more broadly and then specifically some of the things that we utilize which we think really helped push our business forward. So where do we want to start guys I mean we can really talk about any of the I mean I'm a slacker. To be honest I am a big slacker which really sounds bad but is actually very good.


Ryan Goldfarb: [00:00:56] Well for starters I think it's relevant to say that our utilization of technology is ever changing since we've started working together over the about eight nine months ago. I think we've at this point probably employed like five six seven eight different platforms some of which have stuck. They've withstood the test of time and they are still a relevant part of our practice today. Others we experimented with and found that they either didn't work for their intended use or we found a better solution for that same problem. I think as a general theme one one thing that I like to consider here is that the best system that you never use is not as valuable as the OK system that you already are in the habit of working with. And this is particularly true for things that are repetitive in nature things that require constant updating. And so I guess for our purposes and for our context this is particularly relevant in the communication space in the document management space in the project or task management space. John you wanna maybe give a little high level overview of of what we use and why we use it.


John Errico: [00:02:17] Yeah I think this is another general framing point. Like all technology is some of the technology that we use I would describe as being very important or maybe even essential. But at the same time it's all for us it's more of a it's a productivity saver. It's also I think a way to save processes and make things repeatable which is important to the business. But like nuts and bolts I would say we we use the Google suite of products to do a lot of stuff. We have all of our central documents for. So what we do is we have a construction company. We have a management component. I do legal work in relation to real estate stuff and then we have the private equity fund which is a lot of legal work and documents and we also have our own private real estate holdings and acquisitions which we do sort of all the time. We have a lot of different components to that. We use a Google Drive calendar emailG.M. for everything like step one. And I think a lot of organizations do similar things with that. We use we've started to use it has become I think an essential component of our workflow Tello Tello is a task management system I guess you could call it. We use it. I think you can do a lot more powerful advanced things for it but we basically use it as a repository for things to do. So. We employ in conjunction with our use of technology very high level project product management type systems that I used to employ when I was in my technology startup days. So again very high level what we try to do is have a weekly meeting which actually is today for us where we talk about all the tasks that we're doing this coming week. All the tasks that we did in the prior we talked about how much time or complexity going to take et cetera et cetera but we use truckload to keep track of all that. So if there's something that comes up like a task that has to be done but as an emergency we can just put it in trailer and say like here's where it'll live. And when we have the meeting we can go back and refer to it real quick.


Ben Shelley: [00:04:25] I think it's worth highlighting that the a lot of these workflows are relevant for the team context. So if when I was operating as an individual proprietor mostly working solo a lot of these things probably would have been overkill and might have been nice to have them written down somewhere. But it's I think it pales in comparison to having three or four people working together in conjunction with one another on a recurring basis. I think it's arguably a necessity in that context. So I think a lot of these tools are kind of geared towards that context. So keep that in mind for all residents.


John Errico: [00:05:08] And like we reference this in a previous episode as well but a lot of what we're doing is we are ourselves trying to impose processes on all the tasks that we're doing and we're using technology to help those processes. So like for example we use Google Calendar for all of our calendars calendar ring needs but or on the counter we'll put things like Hey we're gonna be done with whatever rough inspection for this property by this date or we're closing on this probably by that date and that's part of our process system of like you know what. One issue which may not be obvious but is a big problem for us is that we have a lot of properties that we ourselves own. We're also doing the construction work on them and so we don't have a client that's sort of breathing down our back to say like hey are you gonna get this done. But at the same time we have to push them through because their dollars and cents consequences for it. So we're trying to impose the same processes that we would do for a third party project on our own projects just to do it.


Ben Shelley: [00:06:00] I think from a productivity standpoint when you talk about practical use right so for example John talks about I like the phrase calendar in so when we calendar in our daily weeks and schedules what have you. It stops us from having to waste any time saying I know I don't have to call John if he say Hey I'll meet you later at this property to meet with a potential construction client. I don't have to call him out of the blue to find where the address is right. I already know it's in the calendar and from trellis standpoint and maybe we could talk a little bit more about our points system but is the system we use I happen to really like because I love putting in travel and not just from a standpoint of knowing what everyone else is doing in the context of what my goals are but setting weekly goals is remarkably motivating. I know for myself just to have everything organ. Okay yes I need to do this I need to do that and you do this as priorities. And then if I have time I can do X Y and Z. So from a practical standpoint I think it's been great.


John Errico: [00:06:50] Yeah yeah. Both times I agree. Yeah. Another tool that we use that we've been using quite frequently that Ben mentioned at the beginning of the episode is slack so slack for us as a communication tool that has replaced a lot of ways email and text messaging. So they deal with slack is that there are no important pieces of communication that we need to share among each other but we don't necessarily need to want to interrupt someone in the middle of whatever they're doing with that information. So for like not absolute emergency pieces of information we put it in slack. We can look back at previous things like decisions that we've made which has become very very helpful because we have a lot of different projects in the frying pan if you will. So we've been using that. We have channels for individual projects individual homes individual business ventures whatever it might be. And that is something that we've adapted adopted I would say over the past month but it's been very immediately an essential tool for us to be more productive and to keep track of things.


Ben Shelley: [00:07:48] I think my favorite thing about slack beyond its practical helpfulness is for people. Why would people know this our office setup is the three of us all facing back to each other and I think my favorite moments are when we're actually having a conversation on slack while we're all sitting within two feet from each other because that's how productive that's how committed to the work we have at hand is.


Ryan Goldfarb: [00:08:08] But it's also worth bearing in mind that the reason for that is because if Jon is working on something that requires immense focus it doesn't distract him in the moment because Ben and I are having a conversation about something that could be could be discussed in the background over the course of the day and then isn't immediately urgent.


John Errico: [00:08:29] Right.


Ryan Goldfarb: [00:08:30] The other thing I want to highlight with slack is this speaks to the point earlier about the the perfect system that you never use is not as valuable as the system that that you use regularly. One concern we had in Slack was that we were implementing a new system and the adoption of that new system was really going to be the key to success. One thing that was nice about working within a team context was once one or two of us made a concerted effort to use that system by virtue of necessity. The other two had to do the same in order to stay on board. So adoption really wasn't as much of a concern for us as I thought it might be. And that made things a lot easier. I think if we already had another system in place where maybe we had a group me or WhatsApp group or a Facebook group or something like that where we had been previously communicating I think it would have been a little bit tougher of a transition but up until this point we were mostly just communicating between some combination of text messaging email and a little bit of back and forth on Trello itself.


Ben Shelley: [00:09:37] And I think a good thing about it too is it's helped to delineate the quote unquote most important or like high line items for us to discuss.


Ben Shelley: [00:09:45] You know I think Ryan was the one who described this when we started this but we've all adopted this which is that you know slack tends to be this is just our choice obviously but slack tends to be things that we you know maybe don't need to address right right away but are things that we can look back on and respond we have time versus making email like OK if we need a contract signed for closing or to talk about some major issue at a property and that's what email really is for and so also delineating those in terms of importance. So you know in your mind if there's a slack I'll get to it versus an email. I need to address it right away. I think that's how productivity as well and can help your team.


John Errico: [00:10:21] Yeah. I mean what a feature that I like about psych too is that it's a it's a nice repository of information that is easily searchable so oftentimes I have the problem where like I need to find something that's buried in an email or a text message so hard to find that even there's just this morning we had a subcontractor going to one of our properties and needed the lockbox code and we just had this exact problem but we communicated over slack about how to solve it. And so I was able to send him a picture of that that someone had said on slack about how to solve this problem. And if I'd try to find that I'd like a text message or an email would have taken a long time to revive Zach in a lockbox channel I hadn't even thought about that would be brilliant because I just clicked on story just getting the last I could do.


Ben Shelley: [00:11:03] Yes that's right at this.


John Errico: [00:11:06] Yeah. So yeah we use Slack for for accounting we use quick books and I think that's been OK. We switched over from an accounting service that we used in 2018 that we weren't really satisfied with but garbage would be the right term to use.


Ben Shelley: [00:11:25] Yeah.


John Errico: [00:11:25] I mean we had some problems but so quick books has been it's you know I I we have another way of doing some of our accounting that I'll touch on a little bit but quick books is a great way you know the sort of ultimate source of truth for accounting or are our transaction logs from our checking account and or other accounts credit card accounts.


John Errico: [00:11:48] So there's there's no like there's no lying or confusion when you look at the actual brass tacks the amount of money that you spend or you took in. So we use quick bucks to keep track of that. We used to call rail as a a phone system. So we have phone numbers that we're forward to each of our phones for various reasons like we have a construction phone number that photo sales phone number that fraudster phones with a construction work number that forwards to our phones I think for four acquisitions we have in the past set up you know numbers that flow to our phones.


Ryan Goldfarb: [00:12:23] Yeah a lot of that a lot of CallRail's intent is to help with tracking. So if you're running multiple campaigns let's say for acquisitions you're running an online campaign you're doing direct mail you're doing Facebook and you are bandit signs setup. If you have a different phone number allocated to each one it better allows you to track the efficacy of each different path as opposed to just saying I had 10 leads come through this month but I don't know where they came from. Going back to the Google suite. One of the most I think in a lot of instances one of the most effective solutions is often the simplest.


Ryan Goldfarb: [00:13:04] And I would say that just taking photos using the stock app in your phone taking photos is quite possibly the biggest time saver that you can have as either a construction individual a construction person or as an investor. And one thing that I think we should do a little bit more often but that we've been getting better at recently is chronicling each project through pictures and through video and then depositing those photos or those videos into a folder for that specific project. It helps for a variety of reasons it's obviously nice to have some kind of before and after photos but it's also helpful to have to have a point of reference if you're thinking about you know how many outlets you have in a room and you're going to buy you're going to buy the electrical boxes or you're looking at purchasing light fixtures and you want to know exactly how many you have rushed into rushed into a room or if you're getting into a dispute with a subcontractor who's saying you know this wasn't there before I started it and you can say Yeah I know it was there I can show you the pictures it's super helpful and there are a lot of instances where it can save you a trip to the property and when you have multiple properties and multiple projects going on or at any point in time that can be a huge time time saver.


Ben Shelley: [00:14:22] I also think coming back to the G suite at a high level look I think it's fair to also caution the convenience of it sometimes I think I know I create a lot of Google Docs and Google Sheets and we'll drop a ton of stuff in the drive and so I think oftentimes it's something that we found too is because everything the G suite incorporates so many things where you can drop the information that both Ryan and John have talked about it can become almost a black hole. So it's really one of the things I've really enjoyed about some of these other resources. It's helped to aggregate a lot of information. I used to just drop in G suite in a drive and so unless you're being really active and again another thing we've talked about about organizing your drive you just want to be really careful because you can just get in a habit of saying now it's in my it's somewhere in my g suite so. I'll always be able to find it but that becomes a very slippery slope when you actually need information on hand right away.


Ryan Goldfarb: [00:15:13] One other one other tool that we've used not to totally Segway off of that point now is Segway away. One other tool that we've used is joist. We use that for our invoicing and estimating for the construction business. It's a pretty simple tool but it allows us to kind of operate in a professional manner. It helps in some capacity it helps with tracking invoices and outstanding invoices. What the balances for any given project but I think one of the things that I've liked about it is when we're managing our own projects we can employ some of the same practices that we use on third party work which is I think just generally a good practice to have a good habit to get into. It's very easy to just kind of like lose sight of of the bigger picture when we're working on our own projects. We don't have another investor or we don't have a client to be accountable to you. But this is also something that I've taken from working with certain hard money lenders. Having them in the picture obligates you to keep a scope of work. Keep track of where you are in the projects to kind of tabulate your costs on a consistent basis for each division within the project overall. And it just kind of creates a sense of order in what can otherwise be a pretty chaotic process.


Ben Shelley: [00:16:34] Ryan I was also going to say do you want to talk about Carrot as a tool.


Ryan Goldfarb: [00:16:38] Sure. So one of the platform we use as real estate investors as investor carrot which is I think we've mentioned them in the past but they are a firm that has templates Web sites and a suite of online marketing services that are geared specifically towards real estate investors. So that's how that's one channel through which we do some of our online marketing for mostly for motivated sour weeds. So this is mostly an acquisition tool for us. There are a few others out there and a lot of these platforms are great but they there's a pretty critical element of consistent practice and oversight and management on behalf of the business like on behalf of us as investors. You can have the greatest site in the world but if you ever market it it's not going to drive any traffic.


John Errico: [00:17:30] When we use have used in the past and would again cozy for certain property manager related tasks. Cozy is a Web site where you can put a listing for a property and it will syndicate. You're listening to a couple of other Web sites but primarily I use it for the application and sort of credit score component of it. So once you set up a listing you can set up a an application for it accept applications through the Web site and then if you want to you can also collect rent through the Web site. I generally don't do that just because it's easier for me to collect rent and tenants will pay in various ways. But it's intended to be like an end to end full service property management tool and it's essentially free to you as a landlord. They charge tenants for various things like credit checks and background checks.


Ryan Goldfarb: [00:18:16] We actually used cozy for one of our tenants to collect rent and it's nice that it's nice that it all integrates together my one gripe about it is it's a little slow when it comes to processing a payment but it's not. It has improved and as we know pretty well catching a track through a bank standard process or is is not the quickest to begin with.


John Errico: [00:18:38] We've had the same problem with Joyce. Actually because Joyce can also do payment payment processing but it's something else that we've or that I've used and I think we all use probably pretty frequently is Zillow Trulia Redfin all those websites are pretty good reference point mostly because they provide a good user interface for looking at property and with the map views it's pretty intuitive as opposed to some of the.


Ryan Goldfarb: [00:19:06] A lot of like realtor websites that integrate with the MLS. Maybe you don't have the best interface or don't have the the best ability to filter in in a specific way. I also use Google Maps a ton both for obviously for navigating purposes but also the street view tool is indispensable. It's also it's also it's also a really cool tool tool to use. You can go back and scroll through the history of a given location so you can look at you can gather the street view history from 2011 or 2012 2013 whenever they first started gathering that data up through today and then a lot of areas they've gone back they've gone back and forth to and covered the same locations multiple times. So you can kind of get a sense of how things have changed that can be helpful if you're looking for a looking at a specific building and you're trying to cross-reference different different old listings or different stories that you're hearing together whether whether things were renovated.


Ben Shelley: [00:20:06] Just as a specific example of that in particular we were just looking at a property in New Haven that is packaging together a second plot of land as part of a sale.


Ben Shelley: [00:20:16] And we still don't know if legally you'd be able to build on that but by actually going back into Google Maps years in the past I was able to see that at some point or another there was a home built on


Ben Shelley: [00:20:26] that area. So it's just just a practical use of it and then of course just sort of going back and getting a sense of the wider.


John Errico: [00:20:31] And like the satellite or Google Earth satellite version too because you can see that you can try to see the bounds of the property like if there is a parking area or garage or whatever it might


Ryan Goldfarb: [00:20:41] be. I have also seen a tool I forget the name of it but there's one that can estimate the footprint of a


John Errico: [00:20:46] building. I've used that based on based on the aerial view kind of dimensions that you can draw on it and say like here's the approximate square footage if.


Ben Shelley: [00:20:54] There's a whole mess of apps to that that I should update in the next episode that I don't know offhand that that you can look up for going in property getting measurements and getting a sort of a specific layout when you're physically in a property not just sitting by another.


Ryan Goldfarb: [00:21:09] Another tool that I love and this is an online tool. It's a physical tool but the laser measure laser measuring tool (Ryan goes nowhere without it). I love those things. It's just it's really nice for approximating square footage even even if you just use it to get one one clear shot from end to end of the building just to get a general sense of the footprint.


John Errico: [00:21:30] And then multiplying that by the number of stories that are out there to return to your earlier point right about you know looking at property data through Zillow there there there are wrappers as well that we use a lot that will take city or county or state data and then repackage them in a digestible form. A lot of increasingly cities and counties and states will have online data but oftentimes it's really inconvenient to search through it or whatever. New Jersey is and is a good example of that. So something that I use I don't know if you guys will use it as NJ parcels dot com I really like that it's a wrapper around the tax records essentially.


Ryan Goldfarb: [00:22:04] For whatever reason I is the tax records which is also good.


Ben Shelley: [00:22:07] I also want to plug state info services which is Jersey specific it's like another form of NJ passes that I absolutely love is property shark which is a paid service but has similar information.


Ryan Goldfarb: [00:22:17] A lot of these systems or most of these systems are only as good as the data that they collect. So to the extent that they differ in terms of data services you'll see some variation and.


Ben Shelley: [00:22:26] I would always suggest to cross-reference.


Ben Shelley: [00:22:29] So never just rely on one source. So I know that when I'm looking at comms I take the MLS out of it first second I'll probably go through some combination of Zillow and Trulia and then also cross-reference facts on state info services and NJ parcels and aggregate that all in a summary I'm doing of a given property just because the more info you can gather on it the better. It's a great way to verify some of the things that you're seeing.


Ryan Goldfarb: [00:22:50] It's also we've mentioned a few times already but the MLS itself despite its its deficiencies it is super helpful in terms of being in terms of being a repository for a lot of data specifically historical data. So it's nice to be able to if you have a specific property that you're looking at and you have a realtor there that you work closely with at the nice to be able to pull all relevant MLS history for that property. It's also nice to be able to search if you're in an area where a lot of the housing stock is similar. It's nice to be able to search for example as granular as like a specific block and look inside and get a sense of what each and every house on that block is like. Because obviously one of the big challenges that we all face is finding relevant Thompson.


Ryan Goldfarb: [00:23:33] Oftentimes that's the closest you're going to get.


John Errico: [00:23:35] One piece of technology that or suite of technologies that we do use which is unique to us is that we've actually built some of our own technology to manage the construction process so as we as we mentioned probably a few episodes ago when one major issue that we have as a construction company is we have a lot of projects that are going on simultaneously. And you know we're paying out expenses for these projects and to the greatest extent possible we try to use built in things with things like credit cards to divide out what expenses are per projects. But at the end of the day it can be very very challenging to keep track of where our guys worked. On any given day what we bought for a project in any given day. Well we made in a project any given day like. I mean there are definitely construction companies out there that have no idea what they're making on a project like how much margin they made or whatever else which is a whole nother episode about how these construction companies price projects but. So we I built something for us essentially to input a summary of what we did every day which allows us to keep track of our workers allows us to get progress updates on the particular project we can keep pictures in there we can put expenses like receipts in there in the future we should be able to track income and what our subcontractors are doing at every project. So with even without doing the sort of quick books based accounting we can go in and very quickly see Hey how much do I spend for framing for this particular project. How many days to take me and do in every given day or the same is true for sheet rock or plumbing or whatever else might be. So that's I would say it's been very helpful for us to keep track of our our money and our labor when we're not necessarily there at every single project every single day.


Ben Shelley: [00:25:21] And I would just say first and foremost if you're interested in learning more about managing the construction process I'd refer you to managing the construction process part 1 and Part 2 earlier episodes in our repertoire.


Ben Shelley: [00:25:31] But to John's point that's exactly right I mean one of the things if you have the capabilities we're lucky to have John who is able to build these systems for us. You know obviously you're going to have we're talking about are the uses of some of these programs and technology in the context of what we do. If you can fit that into what you do that's phenomenal. But if you're also able to build certain things that are tailored to what your specific needs are and you'll find what those are as you go on through through your operations then that's phenomenal. And just as another example John built out something to help us track our accounting he's also helping all of us build out a an acquisitions platform so that we can better keep track for example of what we're looking at. Our thoughts and opinions on on projects both that we we put offers on and didn't and that again is something that's specifically tailored to us from a technology standpoint so if you have that capability obviously that that is quite ideal.


Ryan Goldfarb: [00:26:21] A few other things I'd like to plug while we're at it. I have an app on my phone called Jotnot, J-O-T-N-O-T. I think there are various competitors to it but all of them kind of serve as like a mobile scanner. So it allows you to take a Ben Shelley scan a PDA off of a document onto your phone which I've found super helpful when I don't have a true document scanner on hand. I also do have a document scanner. It's a little bit of an older piece of technology but in terms of scanning text based documents both in terms of accuracy and speed it's it's been super helpful for contracts and invoices and things like that.


Ben Shelley: [00:27:01] It's a good idea by the way to just look at the five and even think about that just going on my phone a lot of the apps I use going through air Dropbox can always be helpful in whatever business that you do I realize that's not really where we've been.


John Errico: [00:27:11] We've had a debate about Google Drive there's a repository for documents versus Dropbox.


Ben Shelley: [00:27:17] I prefer Dropbox team Dropbox only using Google Drive which is crazy. That's a majority. I think that's all my fault.


Ryan Goldfarb: [00:27:23] I also use healthy use a cloud files though it may not be the best at integrate I'm a Mac guy and everything is OS X iCloud. I use it for some document stuff.


Ben Shelley: [00:27:36] And it's worth download where we use Canva a little bit to work on our social media I mean obviously we didn't talk about this clearly because everyone is we're on Instagram and Facebook even Twitter which we use less if at all. So having anything any kind of app or technology that can help you individually or aggregate some of your other tools can be of service.


John Errico: [00:27:56] Yeah I use Hello sign for signing document just gonna say W H genius scanner for. For the scans. That's just another. Just another scanner test which integrates with Nest.


Ben Shelley: [00:28:10] It's good to have the apps of anything so if you go to Home Depot a lot. Download the Home Depot app library. Same thing. Got to go to Lowe's I don't got to go to Lowe's actually.


Ryan Goldfarb: [00:28:18] That's actually lose it but that's Mo's. I think it's low is low. Got to go to Mo's, Modell's!


Ryan Goldfarb: [00:28:31] There's also there's also actually an I think the newer iPhone OS there's a measure app which is like kind of an augmented reality measuring tool. I don't know exactly how precise it is but in theory it's cool.


Ben Shelley: [00:28:46] I also have you have you have to have the pioneer app obviously because you can't live in business without going up and.


John Errico: [00:28:51] I also like the phone feature of the phone you can make a phone call.


Ben Shelley: [00:28:55] This is crazy thing called text messaging. Wow. Coverage. Was really really diverted. Any other things that you think can help people in business moving forward.


John Errico: [00:29:05] Operationally we could touch a little bit on I don't know if we have a lot of time but the process that we use to do product management or project management which is in conjunction with cello but. Sure. So it's I mean I guess you could call it like a pond bond or lean or whatever mini terminology is to describe it but we operate on the premise that obviously all of us have discrete amounts of time and effort that we can put into work in a given week. And one big detraction from the amount of time we can spend is figuring out what to do and also having meetings about deciding what to do. So the takeaway or the observation is that what if we just had essentially one meeting once every time period we've decided a week. But you could do it every two weeks or month whatever you'd like to determine what it is that we're going to be doing in that given time period. And so that there are recurring tasks that we all do those would not be appropriate for this type of meeting because ostensibly the things that you do every day. So like if every day you do the accounting or you update the counting and that's not a task for this type of system it's just something you do every day. But the idea being that every person has a set number of points. What I'm going to call it meetup meetup units. They can do per time period SEO per week. So you might have ten points and you can call them story points you can call them complexity points. You can call them whatever. But the important thing is that these are not time. So you might say every week I have 40 hours a week to work. But the problem is that human beings are the premise that human beings are not very good at determining how long tasks will take. But it's a lot easier to determine how difficult or complex a task might be. So even a task that might take a very long time could be very simple just because it's very repetitive like and I don't know how to treat that system but a task that might be not take a lot of time like maybe filling out an application might require a lot of thought and effort because I need to pull documents from somewhere I need to think about how to answer certain questions you know whatever else it is that willpower is a renewable resource. But it's also an expendable resource. So if you expend all your willpower doing one very complex task and one day that might really ruin your productivity for the day even if it only took you an hour or two hours to do that. So the point being is that you ascribe points to yourself or to other team members and then ascribe tasks with a value of points. So if I have 15 points to do in a week and one task takes me five points to do it then that detracts from my fifteen point total I only have ten points left for the week. So that's the system that we use to delegate work to each other. And it's used in conjunction with with check ins. So every day although we haven't been good about this recently to be frank because we see each other so often but every day we'll do a meeting that's supposed to be no longer than five minutes where we all very quickly say well we did the previous day and if we need help on doing anything the next day. So that's a way for us to keep accountable to each other and also to check in and say you know hey this task I'm waiting on you know Ben to finish something. And unless you finish it I won't be able to do it so can you talk about how to finish it or how to get it going. It's not a perfect system and we're we're evolving and working on it. And I think it's most appropriate for four companies that have our very project and task oriented which can be us sometimes but other times it's not. But in any event it's been effective for us just as just as a management tool and as a way for us to scale in the future. Know Right now we only have essentially four people that work for us that some contraction guys. But at some point when we have 10 15 40 people that work for us some system like this is going to be very important both to minimize the Times of meetings and context switching and figuring out what I'm going to do. And also just as a high level management technique where say I'm overseeing people I can understand what everybody is doing without having to go into the details and minutia that every individual task.


Ryan Goldfarb: [00:32:59] This all comes back to the the theory that that which gets measured gets managed. I think for a while we weren't really managing these things or measuring these things in any.


Ryan Goldfarb: [00:33:08] In any real way. And and now that we are. While it may not be perfect I think we're constantly iterating on it and we're constantly trying to improve it and the fact that we have a processi.e. these weekly meetings is super helpful during those meetings we also generally review whether we felt we adequately allocated points to each of us and how we could have done that a little bit better.


Ryan Goldfarb: [00:33:31] And then generally the challenge that we seem to have with this is is by the nature of what we do and we're oftentimes putting out some type of fire and it becomes difficult for us to just focus exclusively on the six tasks that we were assigned for the week. So while none of those tasks may be insurmountable or unachievable when they're taken in the context of everything else that we have going on sometimes they fall by the wayside a little bit more than they should. But it's been I think a vast improvement over the essentially nonexistent system that we had in place before here.


John Errico: [00:34:09] Is it true. For me it's the difference between working for myself and working for a company that I own is in some way creating these processes because that in a large part is like the secret sauce of a lot of these companies is having repeatable processes that say I say I am working for myself well I might do everything and everything might run through me but say I'm working in a company that has a process I might be an integral part of that process but I also might be hopefully at some point in interchangeable part of that process. So if I can't do something in it I can hire someone else to do that thing and then scale in that capacity. So you know we are already in our sort of early history of the company. There are already too many tasks where it was just me and you Ryan for example we couldn't possibly do all of the things but now that we have other people working for us we can do more thing however in order to keep scaling and keep expanding we have to put in processes in place where we're able to do that effectively and without a lot of setup and thought costs to do it. So like if we can expand to a new market we're just talking about this in fact what is the process they're going to have to say go into a market that we've never been before. And once we develop that for a market a then we can apply the exact same process with market B and C and D just plugging in different people who might be local to that market and be able to do the same processes that we've already developed and consistent with that theme.


Ryan Goldfarb: [00:35:37] Another tool that we've implemented over the last three weeks maybe is we've put a little forum together and the idea was to kind of tease out some of the repetitive tasks that we each face and to first and foremost bring them into our consciousness so that we're aware of them. And then secondly to think about ways that we can either automate the process or streamline it or outsource it to somebody else. And I think you know for John just one example of this is so taking us that back the way that it works as every day in the evening it sends us each a text message with a link to a form click the link and the form asks you a few simple questions.


Ryan Goldfarb: [00:36:20] What did you do today. What of the tasks that you did today is repetitive in nature and then how can you streamline any of these repetitive tasks and I know one thing for John a consistent theme in his responses is Airbnb messaging Airbnb responses and so naturally you know it's not something that you can necessarily automate but it is something that could potentially be outsourced and I think the the idea is to get things like that into our consciousness so that you know it sparks a debate or it sparks a conversation at some point about when the time is right to bring someone onboard to handle that task.


Ben Shelley: [00:36:57] And I think just as a final note it's just worth remembering trial and error is your friend right. Trial these things I think it's worth you.


Ben Shelley: [00:37:04] I knew of a lot of these apps Slack was something I'd done before but I had never used Trello. I had never heard of Joist I've only just learned about cozy maybe for future rentals I do try as much as you can and don't be afraid or worried if you know you stop using it or if you're not enthusiastic about it do what works for you I think that's sort of the most important theme here I think we have come to this point both from a technology of our own creation and things that already exist a nice balance for how we operate but again for for the listener out there do what what's best for you and try as many possible resources as you can as you try to streamline and make your business as efficient as possible.


John Errico: [00:37:43] And I would also briefly say and realize that there are other too. If you have a problem a business problem you are not the first person to have this problem and it's more than likely that someone else is out developed a tool to fix your problem. So sometimes businesses will go and they'll like describe their problems in such unique ways that it sounds as though like the only way to solve it would be to just build your own you know roll your own product but nine times out of ten there's gonna be something else out there it's just a matter of you know I think if you're listening to this episode then that's a great start because you can learn from our experience but also just go out there and say like hey I have this problem. I guarantee someone has thought of it thought of a solution you know whatever else so much much easier to implement somebody else's solution than roller will rule your own.


Ben Shelley: [00:38:26] Gentlemen thank you for your time and expertise as always. For the folks listening at home make sure you subscribe to us wherever you get your podcast reach out to us on the Brick x Brick. That's Brick x Brick Facebook and make sure to listen to us and iTunes and Spotify. Thanks for listening.


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