Be The Bank S4 Ep21 - Sexy Sells
On episode 21 of season 4, Justin Bogard and Richard Thornton talk about what effects happen in rising interest rate environments!
Key Takeaways:
Resources and links discussed
About the Host
Justin Bogard – Note Investor specializing in performing Residential Real Estate Debt. He finds deals and acquires them for his own portfolio as well as educates investors while walking them through the process of owning a Real Estate Note!
Connect with the Host:
Be The Bank S4 Ep21 - Sexy Sells
On episode 21 of season 4, Justin Bogard and Richard Thornton talk about what effects happen in rising interest rate environments!
Key Takeaways:
Resources and links discussed
About the Host
Justin Bogard – Note Investor specializing in performing Residential Real Estate Debt. He finds deals and acquires them for his own portfolio as well as educates investors while walking them through the process of owning a Real Estate Note!
Connect with the Host:
Interested in real estate. How about wealth? Well, they go hand in hand. And here you'll learn all about it. About it. Welcome to Be the Bank, a podcast where we discuss and debate the topics centered around real estate investing. Your host, Justin Bogar, shares insights into investing in real estate to create real wealth and passive income for you and your family. He'll share stories of real estate investments done right, walk you through the process of owning a real estate note, and most importantly, educate you so you can be the bank, your bank. This is be the bank brought to you by Bright Path Notes. Now, here's your host, Justin Bogar.
Justin Bogard:Where did I go? There I am<laugh>. Those of you watching the video cast, you probably saw there was no camera up there. So I'm here episode number 21. Justin in Bogar, your host interest rates are up, equity is getting lower, and people are finding it more challenging to buy their home. All this and more, we've got Richard Thornton on the call today. We'll see you guys soon. Hey Richard,
Richard Thornton:Mr. Bogar, how are you sir?
Justin Bogard:I'm doing pretty good. I got a, a Costco Aaron running this morning, so I got all the snacks IV now and had a little bit of lunch there as well. So it's kind of nice. I I like going Costco.
Richard Thornton:So you're gonna, you're gonna, you're gonna be a gamer this weekend, right? Meaning not video, you're gonna be watching, uh, Broncos and everybody else,
Justin Bogard:The Broncos. How dare you say that? When I'm wearing a cold? Well,
Richard Thornton:What kinda hat does that have on you? Gotta horseshoe. It's a
Justin Bogard:Cult. It's an Indianapolis Colts. Oh, they're the other horse team.
Richard Thornton:Well, you can tell how much I follow it.
Justin Bogard:I mean, I live in Indianapolis, Richard, come on.
Richard Thornton:Oh, that's right. There
Justin Bogard:Are some Bravos bands here. Anyway, they just had a game not too long ago. Um, as we're recording this, this is October 14th. They had a game a week, uh, a little over a week ago, but eight days ago at Denver. Were they They won
Richard Thornton:Good deal.
Justin Bogard:Anywho, Richard. Um, You are a man with a thousand made up words.
Richard Thornton:<laugh>. Okay.
Justin Bogard:You say the word spiff. That word has me thinking, what does spiff mean? Is it in the Webster dictionary? Is it a Richard made up word? Is this a note term that I've never even heard of before? And, uh, we were talking offline is why both of us are laughing because I was teasing him and going, Is this, is this a real word? Cause I've heard you say it a few times and I didn't, I maybe I I didn't wanna sound too dumb if it is so<laugh>, I, what did you say the word spiff?
Richard Thornton:Well, so in real estate, a spiff can be a, a small commission that you get mm-hmm.<affirmative>. So on the trade stocks, something like that, you're looking for, uh, you, you, you might get a price of of 1 0 1. So there's a premium price, a hundred plus one, um, and a spiff on top of that.
Justin Bogard:That's beautiful. That's beautiful. Some people call it a kicker. Some people call it a bonus. Richard calls it a sp That's right. There you go. Now
Richard Thornton:I, I may be the only one, but
Justin Bogard:That's okay. It's legit. It's real. You've set the bar, you have proven conceptually that this is a real thing. So in other words, spiff,
Richard Thornton:Should't be the first time that I'm, wouldn't be, the first time that I've been accused of being off of my own world. Not a touch.
Justin Bogard:Yeah. We, we won't get too far into that.
Richard Thornton:Okay.
Justin Bogard:But what's the interest rate today?
Richard Thornton:Uh, you know, I think the, the, uh, 30 year, unfortunately, according to bank rate, is a little over 7%, 7.8 and, and, uh, and rising.
Justin Bogard:Okay, 50 year national average, 7.77%, Is that right?
Richard Thornton:Something like that. Seven point I I've heard 7.7 and 7.2. But yes, it's right in that, right in that bracket. And the Fed is saying, uh, or maybe it's rumored saying, but, um, that they're gonna raise rates probably three quarters and on the November 2nd meeting, um, and then again in December. So we could be over 8%, um, for a 30 year rate, uh, closing the closing the year end.
Justin Bogard:And you feel that it's going to go up that much of a jump because of how low we were in the past?
Richard Thornton:Well, because the low, how low we were in the past, I mean, they, I think it's pretty common knowledge that, um, the Fed kept the rates low to keep the economy going and also to keep the mm-hmm.<affirmative> their cost of borrowing down, but also to keep the economy going because of the pandemic, because that was, uh, utter chaos, uh, for a while. Um, but, uh, if you read, um, I don't know any of the news sources today, uh, the economy inflation is, is not under, um, management yet. Uh, OPEC is going to, uh, reduce, um, production once again. Mm-hmm.<affirmative>, they're saying that they're gonna cut it by another 2 million barrels, which means they're playing to Russia and playing against the us, which means that oil prices are gonna go up even higher. Okay. Uh, and honestly, I think we're probably, I don't think I'm too far out there, um, from saying that we will have, we'll have, if we're not on a recession already, we will have a recession next year. Uh Okay. And so until things quiet down Yeah. They've still gotta keep the pressure on.
Justin Bogard:Gotcha. That makes sense. Interest rates were low, extremely low, especially during covid. They'd been low for a while. I'd say probably sub 4% for at least feels like six, seven years. Right. Right. And so home equity, um, got larger during covid because the appreciation of home prices just skyrocketed through the roof.
Richard Thornton:Right.
Justin Bogard:So a lot of people took advantage of home line of credits or what we call helos at low rates. I've seen them riched as low as under 2%, like 1.9, 1.8%. You may have seen lower or different, but that's a really good rate for a helo. So definition that, that I see as a HeLOCK or that I've been been told, I haven't personally have a HeLOCK right now, but you pretty much borrow against your house, the equity in your house and the bank gives you, um, a line of credit and they say, Okay, if you have a hundred thousand dollars worth of equity left, we're gonna, we we're gonna give you so much, let's say$50,000 will just make the, the math kind of simple here. 50% of the equity that you have built into it. And that$50,000 is to like a, kinda like a revolving line of credit, except you do have to pay it back. Right. But it's on interest only payment. So actually the payment's a little bit lower and more affordable. So a lot of people take advantage of that cuz the appreciation of their house went through the roof, a fixed their house up, they did some landscaping, they had some things done to it, they did some remodeling, they paid off some debt, some student debt, some credit card debt, anything that was a high interest accruing debt that they had a liability and they paid it off. Uh, so that's great. Right. Except typically paycheck to paycheck is Richard, they're probably gonna end up racking up that credit card bill again. Right?
Richard Thornton:Right. Th that and that HeLOCK that they got it at maybe two or 3%, um, was probably over a six month floating rate or less. And it's right now probably up at six and a half or 7%. So it's costing them significantly more than when they took out the money originally.
Justin Bogard:Yeah. And hopefully they had a guaranteed rate for, you know, rate lock for five to 10 years.
Richard Thornton:<laugh>, uh, not with a HeLOCK.
Justin Bogard:Sometimes they, they can rate lock for a certain amount of time. Typically what I've seen, helos is a year, it's usually a year that's, um, they recycle it and then they, they figure out what prime is and maybe under prime or over prime or however, however they figure it out. But I've seen the local regional banks that we, we deal with here, I've seen that, I dunno what the big banks do, Richard, maybe you have more insight of that, but the local banks here, they, they were pretty much recycling it every year.
Richard Thornton:Right.
Justin Bogard:So you gotta pay back, You gotta pay back that, that debt that you borrowed. So, um, those that can manage their money, those, those debt, those debt, uh, items can be vehicles or be weapons for you, right? You can go out and you can take care of damage with other high interest, uh, earning debt, pay off some other car loans, camper loans, motorcycle loans, boat loans, anything that was a higher interest rate than what you were paying with your, uh, loan that you were getting. You, you just trim that down pretty quickly. A lot of people leapfrog that am schedule with the HeLOCK, right? They just borrow as much as they can. They put it down against the principle. They, they leapfrog down their AMT amateurization schedule. So then they still still keep paying their payments and they're make paying the, the loan back and works out great for them. Cause they can shave off Richard probably, you know, 10, 10 years or so on a 30 year am they do it from the beginning.
Richard Thornton:Right. And, um, I don't wanna get us, uh, too, uh, off track here, but I listened to a very, uh, interesting discussion from an economist yesterday. Okay. That, uh, actually my own experience bore this out. I didn't realize I was part of something that was, uh, more widely known. All right? But he did a report, uh, or did a study that went back 30 years and it compared floating rates like you would get on a HeLOCK to fixed, because obviously everybody likes a fixed rate mortgage.
Justin Bogard:Well, when it's a good rate, right? They want a floating rate when it's really high, like the eight percenters, right?
Richard Thornton:Right. Mm-hmm.<affirmative>. But, uh, an argument can be made against that. And that's what he was doing. And he said, Look, if you really index over LI b o r or something like that, that's less, and you look at your overall cost on a 30 year basis, um, if you fix fixate, so let's say your payments were at a lower, lower floating rate, were about two or$300, but you say, All right, I'm gonna pay$500 or whatever, whatever your fixed rate would have been at that time, and you continue to pay that in, not only will you have paid down your principle quicker, but you have paid far less interest overall even if rates go up. And I, you know, my own experience when I had a mortgage, I don't have a mortgage anymore in my house, but when I did bore that out, I paid, uh, two and a half percent for years when everybody else was paying six and 7% on a fixed rate and I was able to pay off my debt much quicker. So that's just a little note for your listeners to, to think about. Um, realize it's not quite on target here, but I thought it was a very interesting point.
Justin Bogard:Yeah. Just, just a little sidebar of that. So you're, you're sawing down the principle as our mentor would say. You're just, you're trying to saw it down as quick as you can with the lowest interest rate that you can. If you can pay more on it, that's all the better to you as the ideas for you not to pay that much interest, but to borrow somebody else's money to pay down whatever your asset is or whatever your, uh, personal asset is. Like, you know, a boat, motorcycle, car, what have you. A non non real estate type asset.
Richard Thornton:Right. Right.
Justin Bogard:Yeah. So what, what else did you learn, Richard? I know you had had studied, um, recently one of, one of the people that we respect in the business and they were talking a lot about what's going on in the state of industry today. We talked about the interest rate, the affordability factor and things like that.
Richard Thornton:Yeah, so I mean, in general with rates where they are right now, even if they don't go up, uh, depending on the market that you're in, uh, and you know, rates are, are different in different markets. Uh, people have lost in general anywhere from 25 to 40% of their buying power due to the increase of rates. So if you go back to say last, uh, May or something like that, compare rates where they, um, where they were the Fed really started hiking its rates on right about June 13th. Uh, and look at where they are now. I'm an expensive market here in California. If people were gonna buy a, uh, a a million dollar home, that now means that if you just do the rate change and the way they would qualify, they can only buy a house that's, uh, ranging in price from 600,000 to 750. That's right. That
Justin Bogard:Means that that means, yeah, their income has stayed the same, Nothing changed, but the interest rate and the interest rate caused them to lose buying power. That's basically like a bedroom, not California. Cuz it's so expensive out there, right. It's going, That's right. Going for a four bedroom, now you got a three bedroom, maybe a half bath,
Richard Thornton:Look at it and, and you're in a whole different part of town and it's a whole different, I mean, it's a whole different bag.
Justin Bogard:You have to accept the, accept the fact that this is reality now. So those that took advantage of the low rates a few years ago and, and bought some property before it went all crazy. Um, they're gonna be sitting there for a while, right? They're gonna be sitting there for a while. Right. So they, they, they're, they're sitting very well in their situation for that. But they also, if they decide to sell, they're kind of trapped. They're like, Okay, I'm used to paying a 2% rate or whatever rate is, and now they gotta pay a seven and half percent rate on another mortgage. Like, it's, it's pretty intimidating. So they, they don't have an excitement to want to move.
Richard Thornton:Right? Right. So, uh, I think that we're just looking at, at, uh, a lot of people are gonna be, um, pulling their houses off market mm-hmm.<affirmative> cause they don't wanna sell'em because for less, Right. So that's gonna slow everything down and, and make, uh, prices drop, uh, overall in general. So it's a little bit of a double whammy.
Justin Bogard:You think the inventory will get tighter then?
Richard Thornton:I do.
Justin Bogard:That might cause uh, a spike in real estate. Maybe. I I can see it go both directions, Richard.
Richard Thornton:Yeah, it might. But you know, with rates being where they are, um, I just don't see any spikes come along for a while here.
Justin Bogard:It'll be interesting. Maybe it's micromarket specific. Certain areas might see that. Overall, I think, I agree with you. I don't, I don't think it'll, it'll, it'll rise that much at all. I think it'll start this continue to cool back down to what normalcy is and the market will tell us what normalcy is. They'll tell us when it's, when it's balanced.
Richard Thornton:Right. So I mean, in general, um, I think investors are gonna be looking for more security mm-hmm.<affirmative>, uh, as we have said in a down market security cells and an market, sexy cells right up market, you feel like you can take that chance. But yeah, when things are going down, you, you wanna, you wanna hunker down. So that would mean that things like notes that we invest in, excuse me, and that kind of stuff, um, is actually, I'm not gonna say people are gonna be able to get premiums for them, but I think the demand is going to increase.
Justin Bogard:Definitely it's high security. It's one of the highest securities that you can get out there without actually having to own an asset.
Richard Thornton:Right. Even if you're buying a non-performing note. And we, we will see a lot of more non-performing notes. I, I think in general, uh, the, at one point, maybe a year, uh, ago, we thought we were gonna be hit by this tsunami of foreclosures and things like that.
Justin Bogard:I remember that.
Richard Thornton:Right. And I think more people are more now saying, uh, gosh, it's not gonna be a tsunami. It's going to be more like a raise in tide where you've got, uh, a, a slow constant increase. Uh, because PE banks aren't foreclosing all at once and people are finding some alternatives in general, some people have been saved by the higher equity that they have had in their house. So they haven't gotten foreclosed on, they've been able to refi or, or whatever. But, um, right now there's supposed to be over a million, a million houses that are in foreclosure according to back black night. And I think some of the information that you came up with said that there are 2.8 million or something like that, that are sort of in the pre foreclosure. I can't remember exactly what sta you had
Justin Bogard:The other day. I don't think it was up that high. I remember what Richard's referring to is the broadcast, the live broadcast we did on October 12th, I think it was Wednesday is 11th or 12th was today, today is a Friday when we're recording. So 13th. So yeah, 12 two about two days ago. And there was a half a million in active foreclosure of just the forbearance, covid related mortgages. Doesn't mean all more just the, the 8.3 million that were in forbearance. Right. Which isn't very many. No. So that means 90 plus percent of the loans that went into forbearance because of Covid have came out really unscathed. Like Richard said, we had a ton of appreciation so people were able to sell their house and make money. If they got in trouble with their mortgage, they couldn't pay it. They could sell their house and still make money. They could refinance their mortgage to a lower payment. Cause at the time the, the interest rates were starting to creep down even lower. They could refinance, which pays off that mortgage and they get a new mortgage on it. So every, all the, the data looked very good. The forbearances didn't look nearly as bad as it did. So we kind of came out unscathed in my opinion, for just that data set. And there's a whole nother set of numbers, Richard, and you know, this, of these legacy loans before Covid that were already in trouble. They got paused for two years during Covid and now they're unpaused and they're starting to flush through. And that's what Richard is referring to. Those are, are in abundance right now and those could be a couple million.
Richard Thornton:Right? Right. So I think we're gonna see a lot more of that. I mean, um, obviously you and I are setting up a fund, uh, getting queued up to, um, to invest, um, in that. And if anybody's interested just um, reach out and, and uh, contact either one of us. Cuz I think it's gonna be an exciting time. Uh, and uh, we're all gonna get good returns on it. But, um, yeah, I think, I think, um, as always there's gonna be a lot of opportunities, but there's gonna be some more opportunities coming than the ordinarily would.
Justin Bogard:This is what I like about real estate and specifically the note business, Richard, is because through any economic real estate cycle that I've seen in, and I haven't been in the business too long, but as far as investing for myself, it's been a little under 10 years, but I've seen some interesting things. I've, I've lived through the real estate debacle of, you know, the oh 8, 0 9 10 era. Personally I wasn't investing at the time, but I lived through it. So I understand through a certain lens what that looked like. And now when I hear the stories from some of the people that have lived through that investing wise, that are more mature and more seasoned than we are in the real estate, uh, note world, you know, they told us about things and we saw how mortgages were so far underwater, meaning the property value is lower than what they owe the bank as far as principal balance. Now we were seeing the opposite people getting forbearances and now people going through foreclosure to where their property value is worth more than what they owe the bank. Plus arage is plus, you know, all the legal, legal collectible balance that they put on there. So it's, it's very interesting time. It's almost like the complete opposite type of a non-performer. You've got an underwater non-performer and you've got a, uh, above water round perform. I'm not sure what you want, wanna call the latter of the two. So it's just a very interesting time. So what I'm trying to say, Richard, is that no matter what economic cycle that we're in for real estate, especially the note business, it seems to be an always a great place to land your money or be, have that be a part of your tool and your tool belt to be a part of.
Richard Thornton:I agree. And I think we're in a little bit of a lull now. Yeah. And that we're, you know, waiting for the, the, the market to change. Um, and that's a good thing. I think we've used the analogy of a, of a surf of surfing here a couple times. Yeah. And uh, it's like the surfer who's sitting out there and uh, if he's not too sure of him or herself, um, they may take a couple baby waves and just ride those in and get used to the whatever the, you know, the day is like there and then sit there and wait for, uh, those big ones to come in. So, um, I think it's a, a great time for anybody to, uh, get some dry powder, meaning save up some money, um, uh, pay down your other debts, do whatever you can, uh, and uh, maybe make one or two small investments in real estate or, or whatever and get those done. Um, because prices are going to drop, um, uh, for a lot of the notes that we have. Uh, and the profits are gonna be bigger. We just have to be ready to, to seize on the day when it's come sit A little bit of carpet dm. Yeah.
Justin Bogard:Let's, uh, let's get real for a minute, Richard. We'll get real. Let's get real,
Richard Thornton:Let's get real. Okay.
Justin Bogard:If you watch in any investing that anyone does for any type of investing, we're not just talking about real estate in anything. The people that are the most excited, the people that are most anxious, the people that are most new to that type of investing are investing in general. They typically get a little, um, active to early. And so if you notice, if you pay attention to the really smart stock market guys and you go in when they go in, that's the best time to go in. When you watch some of these, these older players in real estate in the note world and you watch when they go in on stuff, that's when you should go in the, the, you know, in the game of chess, you wanna send like your paws out there first right? To, to get taken out because that's, that's your paw, that's your, your your your lowest uh, soldier if you will, on, on the battlefield. So they, that gets taken up first. So that's, that's kind of what's gonna happen I think with this next cycle is that it's gonna be very easy for people to be wanting to get involved in the game thinking that there's not gonna be, that there's gonna be scarcity with these non-performing loans. And to a certain degree there might be. But I think, like you said at best, Richard, it's going to be like a slow drip or a slow, uh, trickle of water throughout a couple of years to where it'll be a nice even amount of non-performers flowing through every single month. And there's gonna be, you know, more than enough for people to chew on. So that's kind of my advice that I'm telling you, or, or anyone else that's gonna listen to me of course is that,
Richard Thornton:I dunno of anybody who's gonna listen to you,
Justin Bogard:That's okay, I got the microphone and no one else does right now. So you have to listen to every word I say, Okay,<laugh>. I say, wait, I say when you see him come through, I say, wait, I like your analogy with the survey thing. I know we brought it up a couple days ago, but the waves come in sets of three, right? Right. You, you take the last wave and that set, it's typically gonna be the best one for you if you're looking for the big wave ride,
Richard Thornton:Right? So I don't know if you have those, uh, have these out, uh, in Indiana, but for those who are visually impaired here, whenever you uh, cross the street and you hit the, uh, hit the button, that uh, crosswalk
Justin Bogard:Button
Richard Thornton:That's right. This little nasal voice comes on that says, Wait, wait, wait, wait.
Justin Bogard:With the red hand flashing flashing.
Richard Thornton:That's right. So, um, wait,
Justin Bogard:Wait.
Richard Thornton:That's what that, that's our advice today is to wait, wait.
Justin Bogard:Caution, just, just think of a yellow tape running across at a diagonal on all your investment that says caution. Just wait, just wait a little bit. It's a yellow light. You'll know when it's a green light cuz everyone else has already been in it and the bigger players are starting to come through.
Richard Thornton:That's right.
Justin Bogard:All right, Richard. Great podcast today. Thanks for being on to episode number 21, Brought to you by Bright Path Notes who was our sponsor. And uh, that's all the time we got Mo Man. I know it was short. It feels like we get on for a couple minutes when it's actually really like 20 or 30 minutes long
Richard Thornton:Fun as always. I appreciate it and I'm intending to have a good weekend. I hope you're able to, uh, watch a couple games.
Justin Bogard:I certainly will. We got some work to do this weekend, um, on some personal things, but we will get that knocked out so we can have some fun time. Maybe do a pumpkin patch. I don't, I don't know. I hope so.
Richard Thornton:Did you buy popcorn?
Justin Bogard:We did. Good. We did by popcorn.
Richard Thornton:All right. Could I have popcorn for those games?
Justin Bogard:All right buddy, I'll talk to you soon.
Richard Thornton:Bye.
Narrator:Thanks for listening to Be The Bank. We hope you learned something from today's show. If you enjoyed this episode, please rate and review us. Plus check out our Bright Path Notes channel on YouTube and follow us on Facebook and Twitter at Be the Bank and on Instagram at Be the Bank podcast Be The Bank is sponsored by Bright Path Notes. Thanks again for listening.