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In part three of the interview, John Bowens and Ryan Wright of Do Hard Money discuss the potential aftermath of the Coronavirus pandemic on the real estate market, possible opportunities to look for, and how Ryan has used his own self-directed Roth IRA.
John: Let me preface this question with, none of us have a crystal ball. On behalf of equity Trust Company, I mentioned that you know, we’re a non-fiduciary custodian, we’re a regulated financial institution. I know, Ryan, that you certainly from a regulatory perspective, you want to make sure T’s are crossed, I’s are dotted, you’re running a real estate business, you have employees, so on and so forth.
But I’m curious to know, just putting yourself in your shoes as an investor in running a real estate business, and having all the exposure to real estate, you know, what are you looking at in terms of this national and global pandemic?
Obviously, we’re starting to see statistics on C class apartment buildings and properties. We’re starting to see mortgage foreclosure statistics come out. For Barron’s statistics came out, right, that data is starting to funnel in now I’m sure you’re looking at that data and have access to a lot of that data based on what you do.
Where do you see the opportunity for your specific business? And what are you planning for in the future?
Ryan: That’s a great question. Yeah, no crystal ball.
But here’s what I’ll say. Fundamentally, I went through 2008. And that was a huge, huge upset. That was a huge real estate crash. And I learned a few things.
What I learned is the guys that were doing the high-end properties got desecrated. And people like me that were doing the sub-FHA deals actually did okay. It wasn’t our best years, but we actually did okay. So one of the fundamentals, we’ve always said is we don’t do commercial properties, I have a few commercial investments. But for the most part, as an investor, we’re investing in single-family houses, maybe up to a four-plex, but typically single-family houses.
With that, we are under the FHA loan limit, because what we find is FHA, that’s where the majority of the buyers are coming from. So you can look up the FHA loan limit in your area, and you want to make sure you’re buying or lending, you know, 70percent of what that is. If it’s $400,000, you want to be out of what’s the rough math $320,000. You know, so you want to make sure that’s where you’re at when you’re doing your loans.
That alone was the number one thing that saved us in 2008. Because what happened is the high-end properties got desecrated, I bought a house, and the builder had built it, he was $1.8 million into it. And I bought it for $500,000. No one had ever lived in it, and the bank seller-financed it. That’s the type of stuff that we saw. But if you took a house that was like $250,000, it might have gone down to $200,000.
When we say real estate drops or that type of stuff in a crash or worst-case scenario, it doesn’t drop as big, it’s proportionate, right? It’s going to drop a whole lot more percentage-wise on the bigger properties. And it is in the smaller properties because there’s more movement, there’s more turn those types of things.
I’m blown away by what’s happening right now. How can we have unemployment at 10 percent and real estate is flying off the shelves and values have gone up 8 or 9 percent? Just in the last couple of months? You know, so there’s all this stuff? Yes. Is it artificially inflated by the interest rates and that type of stuff? Sure.
Number one: stay in the markets where you know. There’s the majority of buyers that we know there’s the most transactions we know the funding is going to be the easiest we know FHA is going to keep wanting homeownership. So, staying in that marketplace is a key for us, is that the key for everybody? Probably not because there are way different ways to skin a cat.
But that’s been our philosophy standard app, under that FHA loan limit, or the medium price range for your area is a big thing that we like to do. I think that gets you most of the way there.
The other thing that you do is make sure you have an exit strategy. With each one of our properties, we like to look at and say worst-case scenario, if I have staying power, I’m okay. What can I rent this property for? If it’s a down market, what can I rent this property for? And can I hold that property with those rents so that it can come back up?
We had a property in 2008. We took back we turned into a rental property, we made probably a 3 or 4 percent return on our money but six years later, we sold it for $100,000 more than we were into the property because we had the staying power.
And that’s the thing, real estate always goes up, it will always, always, always, always go up.
I saw a statistic that, in the last 10 years real estate went up more than the GDP of every single country in this world except for America and China. That the value of real estate went up more than the GDP of all these countries. And so, we’ll see that the question is, what corrections what happens along the way, and if you have staying power if you have same power and your standard, FHA, I think those are the two keys to success. regardless of what happens in the market.
John: It’s outstanding. And Ryan, I do have one other item on our agenda for today, because you are a self-directed IRA practitioner, and this interview, of course, is supported by Equity Trust, or self-directed IRA investing, that’s what we do. We help investors use IRAs, 401, HSAs, and other retirement accounts to invest in real estate.
Now, the self-directed IRA is, of course, the vehicle, right, that gets someone to that point. If you set up a self-directed IRA, and you put money in it, and you don’t do anything, you’re not going to make any profit. Right. So, the key is understanding real estate investing.
That was the purpose of a lot of what we’ve talked about today is understanding real estate investing, understanding how to find deals, how to put deals together, and ultimately take action, right? It’s about going out and finding the deal. And stepping through it, and learning from your mistakes as well, just like you had mentioned before, which there were stakes on the front end. But in the long run, it ended up being a really great deal.
Could you share a little bit about what you’ve done with your self-directed retirement plans?
Ryan: Yeah, absolutely.
We started just like everybody else and started small, I can’t remember the first transaction, it’s been like 15 years plus I came here if we did a wholesale deal, or if we just waited until we had enough money where we could actually do a lending type deal. I know we did a few fix-and-flips, and then some lending.
Primarily, what we’re doing is lending right now. We’re we’ve got a property we took back where we had to foreclose that we turn into a rental property, but primarily promissory notes is what I’m holding, where I’ve actually been doing a loan on a specific property.
And so that’s what I’m doing mostly with my Roth. I’m a big fan of the Roth. And so that’s primarily what we’ve been doing. I’ve combined that with my wife. I’m using my wife’s and mine, as we make some of these different investments. And in short term, typically lending short term, we like to see our loans six months or less, because it goes back to your question on market fluctuation. I feel like if I have a six-month loan, I can reassess things, and then extended if I want to. But those are some of the types of things that we’re doing is mostly lending.
John: Okay, you had mentioned something about investing in like limited partnerships, or LLCs. Have you also participated in those types of investments?
Ryan: I have, but I’ve actually done that with cash. I’ve done some of those for cash flow purposes to actually help with income with residual income. I do have one limited partnership that I’m looking at that is more of a long-term play.
Basically, for my personal thing is if it’s going to be cash flowing, I typically invest with cash, if it’s going to be a long term where it’s appreciating that type of stuff, I invest in my Roth. And if I don’t need the money, I invest everything into my Roth as well.
I kind of play the game when I have investment opportunities, like Hey, is this going to produce immediate cash flow now for me? If so, I look at potentially doing as cash if it’s not, or if I don’t need the money, then I’m pushing it over into my Roth.
John: I’m really glad you said that because I’ve had investors that will come to us and they’re looking at a self-directed IRA. And they’re thinking almost singular singularly dimensional if you will. So they’re thinking, I have to do every deal in a self-directed IRA or I do no deals. And that’s really not the case.
Some people, they get to a point where they do every deal in their self-directed IRA because maybe they’re in their retirement years. And so, all their profits they make they can take out right away and it’s tax-free.
But other investors are running a real estate business. They need retained earnings to recapitalize and reinvest into more deals and new deals. And some investors I’ve found it’s a ratio of one to 10. For every 10 deals they do outside of their IRA, they do one inside their IRA. Some people it’s five to one, some people it’s four to one, etc.