Darel Daik of Noble Mortgage explains how hard money could be a viable option for investors.

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Transcript

Steve Rozenberg: Ladies and gentlemen, welcome to the Myndful Investor Podcast Show. I am your host, Steve Rozenberg and I am here with my good friend Alex Osenenko-

Alex Osenenko: Well said,

Steve Rozenberg: … And we are here in Houston, Texas. And Alex is coming down and checking out the scenery, getting to know the local people, local talent. And we have our good friend, my good friend Darel Daik here. Darel, thanks for being here today-

Alex Osenenko: Good to see you Steve.

Steve Rozenberg: So little history about Darel and I, we’ve known each other for man maybe 15 years-

Alex Osenenko: Been a while.

Steve Rozenberg: … Yeah, been a while. Done podcast shows together, radio shows, done a lot of speaking together. You do your forecast panel, which we’re going to have in January here in Houston-

Alex Osenenko: Yap, January 8th coming up in Houston.

Steve Rozenberg: … Yeah, Darel does a lot of happy hour networking events, very connected.

Alex Osenenko: So what are we learning today?

Steve Rozenberg: So today what we’re going to talk about is Darel’s connection being a hard money lender. How it ties into the investing world, what is hard money, how do you use it, how do people get hurt with it in all the scary bad things about it?

Alex Osenenko: Very cruel.

Steve Rozenberg: … Is it for the average investor? Is it for an experienced investor? So-

Alex Osenenko: So it’s essentially how to finance a single family investment property because that’s ours-

Steve Rozenberg: Right.

Alex Osenenko: … We are still in a single family investment-

Steve Rozenberg: Single family series.

Alex Osenenko: … Series, yeah. And we want to sort of have this episode and this conversation specifically to understand that all the intricacies of the financing aspect hard money or not, but the hard money from what I hear is the popular way to do it. So maybe we can get Darel, introduce yourself, kind of talk a little bit about your experience background. I hear you own your own rental properties.

Darel Daik: I do.

Alex Osenenko: Yeah. So tell me how you got in the business and you-

Darel Daik: When people ask me that, I always say I got lucky. I got lucky to fall into the mortgage business. I was right out of school. I went and worked for a brokerage house, thought I wanted to be a stockbroker and that just wasn’t working out after six months. And I got a job as a loan officer at a hard money company. And it just came very natural to me for some reason that the lending side and selling loans and so forth. So I did that for about five or six years with the two different companies and then finally branched out on my own in 2003 and started Noble Mortgage. And I absolutely love what I do. I love the lending side.

Alex Osenenko: Wow. Loving what you do is kind of really important?

Steve Rozenberg: Yeah, I mean-

Alex Osenenko: … For success, wouldn’t you say?

Steve Rozenberg: … But not only that, but I mean Darel and I we’ve kind of gone through the hard times of the industry and so to still love what you do after coming through the recession, and what percentage of people do you think, numbers wise or if you could kind of calculate how many lenders were before the procession and how many were standing after?

Darel Daik: Well, especially in hard money, I mean, I would say about 90% went out of business-

Steve Rozenberg: Wow.

Darel Daik: … At least in the local market. I remember they had this mortgage company, Implode-O-Meter online and it was a nationwide deal, every day you could check it and they were adding more mortgage companies that were going under.

Steve Rozenberg: Wow.

Alex Osenenko: I think at the time for a little while I worked at a company called Ameriquest-

Darel Daik: Yep, I know Ameriquest.

Alex Osenenko: … That was, I think one of the reasons, one of the big ones that failed very, very quickly, just walked away. But it’s amazing to see… And by the way, for those listeners who are a little bit younger, it’s 2008 through 2012 or so, right?

Darel Daik: Mm-hmm (affirmative).

Steve Rozenberg: Yeah.

Alex Osenenko: … That’s what we call Great Recession then that’s where the economy took a dive due to real estate essentially. And there’s a lot of reasons, but end of the day nobody was financing homes, nobody could afford their mortgage payments anymore, a lot of foreclosure. And as a result, a lot of mortgage companies went out of business.

Steve Rozenberg: And it’s interesting, I think just case in point is a lot of people that are in real estate now, it seems weird to me, but they have only been on the upside-

Alex Osenenko: Oh, yeah.

Steve Rozenberg: … They don’t know anything about the 2008 timeframe-

Alex Osenenko: Very good point.

Steve Rozenberg: … So to them it’s kind of ancient, not to date ourselves, but we kind of know that there’s an opposite to everything and the pendulum swings both ways and we’ve seen what it’s like on the other side. So a lot of people in real estate right now are kind of like, this is easy. I can syndicate, I can buy houses, I can flip, there’s no way I can lose. And-

Alex Osenenko: Interesting. So this is a question for Darel. Darel, you are in the heart of it right now. What are you seeing if we had to predict next, let’s say six months to three years, what are you seeing?

Darel Daik: It’s hard to predict three years out. It’s even harder to predict one year out, but what’s interesting is real estate is very local, but earlier this year there were signs that the Houston market was really starting to slow down a little bit. We’re getting days on market, we were starting to go a little bit longer, prices were starting to dip a little bit, but now we’ve had about a five month good run. Prices have been increasing, volume has been increasing in the last five months. So right now everything is pointing to a good 2020, it’s an election year, obviously whoever’s in power always just tries to make sure they hold the economy up during that time. So right now the Houston market is looking pretty strong and nationwide is still pretty strong. We have days on market a little bit higher than they were a couple of years ago, but inventory is still unbalanced, we’re less than I think at 4.2 months of inventory right now, which is still very healthy. So we’re in a healthy market right now.

Alex Osenenko: This is very interesting Steve, because we did see the signs of slowing down. I personally had thoughts about maybe exiting some investments, maybe waiting out a little bit, but you’re right. I mean, without going too deeply into the economy and politics, what do you think is causing this recession-

Steve Rozenberg: The drivers?

Alex Osenenko: … Right, we haven’t really had the dip. I think it’s time for the dip or really haven’t had one. How are we surging back up?

Darel Daik: Jobs-

Steve Rozenberg: Yeah, yeah.

Darel Daik: … It’s always jobs. I mean, typically an easy way to look at real estate is for every two jobs created, one house is purchased and when you have strong job growth like we do and we have very, very low unemployment, that’s great for real estate. And what we didn’t have in 2008 where jobs, the jobs were negative and so now we have positive jobs and very low unemployment and people can buy houses and now not just buy a house, it’s the higher end markets doing really well. That 250 to 500-

Steve Rozenberg: Yeah.

Darel Daik: … Is doing really well, that’s the strongest market Houston right now. And then second behind that is the 600 to 900 market. That’s a really strong market-

Steve Rozenberg: Which is real.

Darel Daik: … Which is real, that’s a move up market-

Steve Rozenberg: Yeah, yeah.

Darel Daik: … So, right now Houston is doing really good, run good footing.

Alex Osenenko: So, and then if you had to narrow down to Houston market, not going nationwide but to Houston market, what do you see right now in a single family investing in what realm, what do you see a good slice right now? Would you go higher end right now or would you stay a little bit at a 220?

Darel Daik: It depends what you’re doing. I think if you’re flipping, I think you want to be between 250 and a million.

Alex Osenenko: Oh wow. Okay. 250 and a million-

Darel Daik: Yeah. Yeah, if you-

Alex Osenenko: … And then buy and hold?

Darel Daik: Buy and hold. In Houston, the prices are not as high as in some other markets nationwide. So typically anytime you’re buying and holding, you want to be less than 250, you want to be in that 100,000 to 220 range.

Steve Rozenberg: Yeah, I think one 160 or maybe 180 is a sweet spot, isn’t it?

Darel Daik: Yeah, that’s where typically most people like to go-

Alex Osenenko: Some people go a little bit lower end-

Steve Rozenberg: Some people go a little lower, yeah. They’re just more comfort zone, but I mean if you’re anywhere between 150 and 200 I would say that’s a sweet spot of good renters, good properties, the ages are right, they’re not too old, they’re not dated, the neighborhood is good, so it’s just between… And at least in Houston you’re getting a lot of the all data aligns good between 150 and 200 in general. Good school districts, good houses, good everything.

Darel Daik: Yeah.

Alex Osenenko: I have got you. And we had your son on a previous episode-

Steve Rozenberg: Yes.

Alex Osenenko: … And we broke down his property, and Jett’s property is around what, 150?

Steve Rozenberg: It was worth 180, we bought it for 159, yeah.

Alex Osenenko: 159, so you were in that zone?

Steve Rozenberg: In that zone, yeah.

Alex Osenenko: Very, very cool. So Darel, how did you get started? Obviously you love what you do because you’re helping people. Because if you are not helping people, it would be difficult-

Steve Rozenberg: Eventually he’d wear out.

Alex Osenenko: … Right. It would be difficult. Even property management is a difficult gig because you’re helping a resident or investor and sometimes-

Steve Rozenberg: It’s a balance.

Alex Osenenko: Yeah, it’s a little bit of opposite interests. And so that’s a tough one, but you have to believe that you’re doing a good job.

Darel Daik: Yeah, absolutely.

Alex Osenenko: But in mortgages, there’s a lot of people, or at least back in the 2008 they were not doing the right thing-

Darel Daik: Sure.

Alex Osenenko: … So talk us through what does it mean to you and how do you consider helping people in investment world specifically?

Darel Daik: Well, what’s cool about the investment side, we do mortgages for people that are buying a house to live in as well. But on the investor side, you’re allowing people… People start getting into real estate and maybe they have a full time job, they start dabbling in real estate, they buy a couple of rentals. And what’s interesting is some of them start taking that a little bit deeper and deeper and go further, and next thing they’re doing real estate full time and you see them live in this completely different lifestyle than what they were living before. Before they were at work, 8 to 10 hours a day and strike time to do real estate on the side, but I love it when we take a rookie investor who was in corporate world and eventually retires out of corporate world and starts his own real estate full time and you see him making social media posts. I have all this free time now, I can take my kids here, I can go and take the day off, and walk around in shorts and flip flops and to me that’s a success story.

Alex Osenenko: That actually happens?

Darel Daik: All the time.

Alex Osenenko: That is awesome.

Steve Rozenberg: You’ve got that story of that older gentlemen. I love hearing that story, maybe you could share it with him. I think it’s a great story

Darel Daik: Yeah, he came to us, he bought at the bright time, he bought in 2010 but he wanted to buy 10 houses. He was in his early 80s, his wife was in her early 40s and they had two kids that are 8 and 10, so think about that age difference-

Alex Osenenko: Yeah.

Darel Daik: … So he’s like, “I want to buy 10 houses to leave something to my family. And his name was George and he had $50,000 to invest. And so he realized pretty quickly if you go the commissional route of putting 20% down on every single house, you couldn’t buy 10 houses-

Alex Osenenko: Right.

Darel Daik: … You buy maybe one or two. And so we showed him how to use the hard money route where you can get 100% financing, and he ended up buying eight houses over the course of two years, and all he does is hang out with his kids and he travels with them. He came into our office a couple of years ago out of the blue just to say hi. And he’s like, “Man, I’m living the dream. I love this. I’ve been in Australia for a month with my kids.” It was over the summer and he goes, “Those houses are just paying for everything.” I mean it was a really cool success story.

Alex Osenenko: Can you talk to us about the financing part of the real estate? Because I’m fascinated by this and we assume that 20% is what you need to get into a decent house-

Darel Daik: Sure.

Alex Osenenko: … How do you guys work?

Darel Daik: That’s a myth. And that’s why people use hard money. So the hard money, it’s a more expensive loan, but the loan is built for investors that are buying houses under market value that need to be renovated. So if you’re buying a house that needs to be renovated, typically you’re getting a better deal on it, because you sweat equity there. So what it does is it enables you to borrow up to a hundred percent of not only the purchase price but the repairs and even the closing costs. So you can get into these deals for no money down at all if you buy them, right, you have to be able to find a deal. If it’s a buy and hold rental we will lend as high as 75% of the completed value, what we call the after repair value of the property. So easy example is you’re buying for 50,000, it needs 20,000 in repairs, there’s 70,000 right there in costs. If that house appraises for 100,000 after the repairs are completed, then we would land as much as $75,000. So that’s 100% financing including closing costs.

Steve Rozenberg: And you’re still got 25% equity in the deal. So he’s protected and more importantly the investor is not putting themselves in a bad position and they’re protected.

Darel Daik: That’s right.

Alex Osenenko: Understand. And so that money… So I’m just going to start breaking it down a little bit-

Darel Daik: Sure.

Alex Osenenko: … Bear with me, through for the benefit of the audience of course, but my own as well because I want to learn this. And so, when you find that ideal, let’s stick with 50. You find that ideal, somebody come to you and… Because how do you know the house will appraise after those renovations?

Darel Daik: So typically the investor is working with a realtor and or a wholesaler who’s giving him an indication of what they think the property is worth based on homes that have sold in that area in recent months. Now as the lender, we have to verify those numbers. We send an appraiser out there and we can get a full report from the appraiser who tells us this is what they think the property would appraise for if certain repairs are completed. When we get an appraisal back, we make a loan based off of that.

Alex Osenenko: Do you specify the type of repairs that needed to be completed?

Darel Daik: Yes. So the investor will give us an itemized list of the repairs. If it’s something very, very higher end, we want to see finishes. If they’re changing the floor plan, we want to see some kind of drawing, spec some plans, things like that. So the more detail we get, the better to give the appraiser an idea because houses are typically outdated or they’re in very various stages of disrepair. So the appraiser kind of has to paint a picture in his own mind what the house is going to look like at the end of the day.

Alex Osenenko: I got you. And then let’s say I came to you with plans, you’re going to lend me 50,000 right away to buying the house, or you’re going to lend me the whole 70,000?

Darel Daik: So typically in that transaction at closing, we would fund the 50,000 for the purchase. We would fund the closing costs as well. And then the 20,000 we would hold it back to be distributed to either you or your contractor as the repairs are completed.

Alex Osenenko: So, and then you sort of do inspections-

Darel Daik: That’s correct.

Alex Osenenko: … And then if there’s a specific… I can’t remember the terminology, but you release that money-

Darel Daik: It’s withdraws.

Alex Osenenko: … Withdraw-

Darel Daik: Yeah, so you’re doing the roof and the foundation, you do that first and then we send an inspector out to make sure it was completed and then we issue a drawal for that work.

Alex Osenenko: So let’s work out the best case and the worst case scenario. Talk us through Darel, what is the best case scenario in this particular situation, and what is the worst case scenario for the investor?

Darel Daik: So the best case scenario, and let’s stick to the buy and hold strategy where you’re buying and keeping it as a rental is-

Alex Osenenko: Correct.

Darel Daik: … They buy the house using those same numbers, they have a hundred percent financing from the hard money side. Once the repairs are completed, we immediately refinance them into a 30 year mortgage. Okay, it doesn’t even have to be rented yet, just the repairs have to be done. We do those loans all the time, we do hundreds of them a year and they’re in and out of that hard money loan, about 60 to 90 days. They immediately transitioned into a 30 year fixed interest rate. Right now they’re hovering around high fours, low fives, and they have a fantastic loan. They never have to mess with it again. They’re getting positive cash flow within the first three months.

Alex Osenenko: Wow. So that’s the best case scenario?

Darel Daik: That’s the best case scenario.

Alex Osenenko: And you’re onto the next one?

Darel Daik: Okay. Yes. And you’re onto the next year and you can do multiple deals at the same time.

Steve Rozenberg: Well, let me ask you this, once closing costs and everything’s done, let’s say again, you’re at 25% equity, is there a rule that investors should like to see in that final equity position after they refile out of the hard money into the next one?

Darel Daik: It depends. It’s interesting, everybody has a different model-

Steve Rozenberg: Sure.

Darel Daik: … But we’ve done deals where people are at 100% of costs at the end of the day, they don’t have any equity, but they’re after the cash flow-

Steve Rozenberg: Right.

Darel Daik: … And so it depends what you’re after-

Steve Rozenberg: It depends on the strategy.

Darel Daik: … Yeah. Are you after longterm gains or are you after cashflow? And if they say both, then they don’t know what they’re doing.

Steve Rozenberg: Right. Yeah, exactly. Yep.

Darel Daik: But it’s hard to get both-

Steve Rozenberg: Yeah, exactly.

Darel Daik: … It’s either you want gains in real estate value or you want cashflow. It’s difficult have both-

Steve Rozenberg: Alex, that changes in the price point of property you’re buying-

Darel Daik: Yes.

Steve Rozenberg: … And it changes in the cycle of where real estate is at the time-

Darel Daik: That’s right.

Steve Rozenberg: … Right now real estate, if it’s slowing down, if it’s a buyers’ market, you’re going to get one thing, if it’s a sellers’ market, you’re going to get something else. So sometimes you have to kind of honor and change per what the market is doing. You can’t go in assuming you’re going to have one strategy when the market is clearly doing something else, because someone like him won’t lend you, they’re going to go, “That’s not going to work.” Or I don’t know, do you go that far to go, post you what the strategy is or is that not really your business-

Darel Daik: More on flips-

Steve Rozenberg: Yeah, flips-

Darel Daik: On the flip side certainly, yeah-

Steve Rozenberg: Yeah.

Darel Daik: … If it’s a buy and hold, if they qualify for longterm financing, I don’t care where the property is located, as long as I know I can get them out of it, I’ll give them that short term loan where we’ll immediately refinance him out-

Steve Rozenberg: Yap.

Darel Daik: … The only time we would stay away from a buy and hold as if maybe it was in a small town, there’s no sales. There’s very small collection of sales available and I’m like, “Look, we can’t get you a longterm loan.”

Steve Rozenberg: Right.

Darel Daik: You’d be stuck in this short term loan, which the short term loans are typically six months, maybe a year. So that’s the only thing we look at on that, but on a flip, certainly we look at how that market’s doing especially if it’s a higher end deal. Higher end markets are slowing down right now, there’s a lot of houses that have been on the market in that particular neighborhood for a long time. We’re going to have a discussion with the investor at that point going, “Hey, look at all these houses on the market, what makes you better here?”

Steve Rozenberg: Yeah, because you basically could be not putting them in a bad situation, but you could see a very bad situation evolve and now your money is tied up in that bad situation.

Darel Daik: Yeah. And we’re not in the business of telling people what a good deal is and what a bad deal is. We’re lending money. But if it’s in a market where the market is lots of days on market, it’s a flip, it’s a higher end deal, we might lower our loan to value or we might just say, “You know what, we don’t want to lend in that particular market because there’s too much inventory.”

Steve Rozenberg: Right. Right.

Alex Osenenko: So going back to the worst case, so the best case is I’ve basically performed this purchase and performed the renovations, got refinanced out of the short term into long term mortgage, got a tenant in and cashflow, and onto the next one let’s say… Or doing multiple deals, I got you. What’s the worst case scenario? How do you see people lose their butts, so to speak?

Darel Daik: Well, what’s good about going through a lender, especially if you’re new is you have the… The lender is like a second set of eyes for you. So we’re not going to lend on anything that we think doesn’t make sense in some capacity. Where we see people get in trouble that are new is maybe they don’t go through a formal lending process. Maybe they buy from a wholesaler, and the wholesalers says, “Hey, you’re buying it for this and it’s worth this and it needs this much in repairs and I’ll even finance it for you.”

Darel Daik: That’s dangerous. So now you have the guy that’s not only selling you the house but offering you the loan and you’re believing everything they tell you, and these people don’t know how to verify the value or verify the repairs you could get in trouble. Even maybe the house is worth a lot less made, maybe the repairs are a lot more, which is typically what you run into with a lot of wholesalers. There’s a lot of very reputable wholesalers out there that show you why it’s worth that much, but there’s a lot who aren’t as well. So you have to verify the numbers.

Alex Osenenko: And the wholesalers wouldn’t be those free seminars that you usually go to where they-

Darel Daik: Yes.

Steve Rozenberg: But yeah, there are people that are out there basically finding deals. Like the guy that I bought the house with Jett, he was a wholesale flipper, well rehab. But yeah, I mean basically they find deals that are motivated sellers, they send out mailers, they do all these things and they find people that have an issue that needs to sell. They go in, they negotiate the deal. They either buy the property or they’ll put what’s called an option contract essentially on it. And then they’ll find me and I’ll buy it with the option contract or they would buy the property, rehab it like Ryan did with Jet and then sell the final product. So perfect example is the guy Ryan, a friend of ours that he bought the property, he rehabbed it… So in this theory he could have used Darel as a hard money lender, rehabbed it with Darel, still had undervalue numbers, turned around and sold it to me instead of refining it, he just sold it to me. Darel got paid his money, he got his profit and moved on.

Alex Osenenko: Got it. And then you’re now cash-flowing that profit-

Steve Rozenberg: Right, now the-

Alex Osenenko: … Without having to renovate and.. Yeah.

Darel Daik: Yeah.

Steve Rozenberg: … Exactly. Now the way that somebody could get hurt, another way is that I’m new to this world, I buy a property and I’m thinking, okay, I’ve got three months, I’ve got a three month window and I buy it November 15th where you got Thanksgiving, you got Christmas, you’ve got bad weather, contractors aren’t working. All of a sudden clock is ticking and you don’t know any contractors because you’re new. And-

Alex Osenenko: Or you end up with a bad contractor-

Steve Rozenberg: … Or you get a bad contractor that does a horrible job fixing the property. Now you’re trying to figure out why they want their money, that’s where it becomes this snowball.

Alex Osenenko: So we had Kara on the show-

Steve Rozenberg: Correct.

Alex Osenenko: … And she-

Steve Rozenberg: And Brittany-

Alex Osenenko: … And Brittany, right-

Steve Rozenberg: … Both of them do that.

Alex Osenenko: … And they’re really deep into understanding the renovation itself. They’ve managed the contractors, they can put cement-

Steve Rozenberg: Yeah.

Alex Osenenko: … They can make cement basements and paint and they can do all kinds of cool stuff-

Darel Daik: Were they contractors?

Steve Rozenberg: They’re just flippers.

Alex Osenenko: They’re flippers, but they really get deep into this-

Steve Rozenberg: They’re doing it, they’re on the down and dirty-

Alex Osenenko: Yeah, yeah.

Steve Rozenberg: They’re getting it done.

Alex Osenenko: So they’re all like, do you see a profile of a person who performs these, and not necessarily just flips, but maybe the be are process, the holes-

Steve Rozenberg: The bad.

Alex Osenenko: … We just talked about the bad, yeah. Do you see a lot them have this a little bit of background and-

Steve Rozenberg: Not necessarily-

Alex Osenenko: No?

Darel Daik: … Not necessarily. The ones that end up doing it full time, certainly have to get a grasp of that at some point. But the guys that are doing it part time, maybe they have a full time job and they’re buying some property and they’re going to just build a rental portfolio, there’s lots of good contractors just like there’s lots of good wholesalers. I’m talking about how people get hurt on dealing with wholesalers or contractors, but there’s plenty of really good ones. You just have to vet them-

Steve Rozenberg: Yeah.

Darel Daik: … There’s plenty of bad property management companies and bad hard money lenders out there. So, if you don’t know that side of the business, you’d have to make sure and get the right contractor, the right wholesaler. Because the right contractor can knock out that job very, very quickly. It might cost you a little bit more as if you’re… Instead you being involved in the process it might cost that investor a little bit more, but at least they know they’re going to get done and done on time, and done on budget and then I can move on to the next deal. So I think if you’re new and you don’t know the contracting side, it is very, very important because the biggest risk of buying a property that needs to be renovation is from the time you buy it to the time you get it refiled, making sure the work gets done.

Alex Osenenko: So that compressed that-

Darel Daik: Right.

Steve Rozenberg: And done correctly.

Alex Osenenko: … Controlling that type of area.

Darel Daik: That’s from our standpoint, from the lending standpoint, that’s the riskiest sides. Not only making sure it gets done, but it gets done in a timely manner and done correctly. If it’s completed and it’s not done right, then it’s going to take them more time, the loan’s going to keep ticking and ticking and costing more money and that’s where people can get hurt on a deal.

Steve Rozenberg: And Darel kind of hit on it, there’s a lot to be said with creating your team and getting the relationships, and correct me if I’m wrong, but when you get someone who’s new, you’re a lot more cautious as to opposed to someone who you’ve been working with, they have a known track record. Obviously you’re still verifying the information, but someone who doesn’t know anything, you’re going to be a lot more cautious and conservative on what you do and help them as opposed to someone that you know and you’re like, “Yep, they know what they’re doing. They’re going to kill it.”

Darel Daik: Yeah. I mean, if it’s a new investor, the investor’s going to have a lot more questions up front. We’re going to spend the time to visit with them and also help them create their team-

Steve Rozenberg: Right.

Darel Daik: … Recommend some contractors, recommend some wholesalers where they can find deals. Like I said, it’s all about-

Steve Rozenberg: You want them to succeed.

Darel Daik: … Yeah, we want them to succeed so we can do multiple deals-

Steve Rozenberg: Multiple deal.

Darel Daik: … I would say, 90% of our new investors end up doing multiple deals-

Steve Rozenberg: Right.

Darel Daik: … Maybe they do two, may they do twenty.

Alex Osenenko: At the same time? Concurrently or you mean like-

Darel Daik: Sometimes… No, like typically multiple transactions. Maybe not at the same time. Some at the same time. But typically they don’t just come and buy one rental house or do one flip, typically they’re doing several.

Alex Osenenko: You get excited, you get into this if it works right, you keep doing it.

Darel Daik: Of course. Yeah. And they’re like, “Oh yeah, this is…” The first one is always really scary for an investor-

Alex Osenenko: Because you don’t know what’s coming.

Darel Daik: … It’s like a symphony. There’s so many different players out there. You got the percussionist, you got your trombones, you got your team. And so all these players in real estate, you got the realtors on both sides, maybe there’s a wholesaler, you have the title company, you have the mortgage company, you have the appraiser, you have those… And they’re trying to figure out how all these pieces work, and then they all come together at the end for one closing. And so it’s a little intimidating for someone they first start, but once they get one behind their belt, they’re like, “Ah, okay, now I get it, I wasn’t that bad.”

Steve Rozenberg: Yeah.

Darel Daik: Now they know the process and then when they get to the point with us where they, “Hey, I’ve got this deal, I’ll shoot you the contract and it’s closed next week.” Yeah, sure. No problem. That’s our favorite client. The one we’ve already done deals with, they know what they’re doing, they just shoot us the contract, we have all their paperwork set up, we close and-

Steve Rozenberg: It’s a business.

Darel Daik: … We closed one last week in two days. The guy called us on Wednesday before Thanksgiving at noon. I got to close on Friday. I’m like, “Hey, we’re closed on Friday. So is everybody else in this…”

Steve Rozenberg: Yeah, yeah.

Darel Daik: … So we close on Monday.

Steve Rozenberg: Wow.

Darel Daik: I mean that quick. So, it’s all about who you know and building your team and building that trust.

Steve Rozenberg: What-

Alex Osenenko: Darel, I’m sorry Steve-

Steve Rozenberg: Yeah.

Alex Osenenko: … This is before I forget. I want to sort of, what happens when you… Everything is looking good, this is your third flip or this is good, or not flip maybe purchase, whatever. You open up the wall and you see that there’s a lot more there than you thought-

Darel Daik: Sure.

Alex Osenenko: … What happens next?

Darel Daik: Well, you got to fix it, right?

Alex Osenenko: Right, but let’s say you assumed it was $20,000-

Darel Daik: Sure.

Alex Osenenko: … It’s going to cost you… You got to fix the foundation, it costs you double that. What now-

Darel Daik: So, if your loan is already set up at 20,000 in repairs and all sudden is going to cost 30,000 in repairs, well the investor has to dip into their pocket to pay for those repairs, because it’s not in the loan. So that’s also why from a lending standpoint, we want to make sure that even if I give you a hundred percent financing, you have to have money. You have to have some liquidity for things like that. If there’s a cost overrun or maybe it takes you longer to fix the property than you anticipated, and then you have more mortgage payments along the way. So cash reserves are huge.

Alex Osenenko: Do you take that in 401k… Sorry, maybe that’s a little bit more technical question, but I’m just curious-

Darel Daik: We do-

Alex Osenenko: … Because IRA and 401k a cash reserve-

Darel Daik: … So, they have to be able to have access to it. Can you cash out an IRA? Yes. Can you get a loan on your 401k? Yes. So they have to be able to access it-

Alex Osenenko: I got you.

Darel Daik: … If it’s locked up in a trust and they can’t touch it. No.

Alex Osenenko: But that doesn’t- [crosstalk]

Steve Rozenberg: And that’s a good point that I think people need to realize is just because they can get into a deal with no money out of pocket, doesn’t mean they don’t have any money in their pockets. You have to have money to be able to do these kinds of deals-

Darel Daik: Absolutely.

Steve Rozenberg: … Because it’s not for people that say, “I’ve got no money. I want to do a no money down loan,” which we remember way back in the day, you had no money that’s why you got the loan. You have to have reserves. You have to have the ability that if I said, “Hey man, I got a problem.” Darel is going to go, “You have a problem. You need to get that fixed because your notes come and do.”

Alex Osenenko: That’s a very interesting point-

Steve Rozenberg: Yeah.

Alex Osenenko: … A lot of times you see this get rich fast in real estate-

Steve Rozenberg: No money down.

Alex Osenenko: … No money down, and that’s why I want to qualify that. But then I have the other side of the question Darel, like, “All right, I got money. I got maybe a hundred grand sitting liquid in my checking account. Why as an investor should I leverage you as a lender? Is it the second set of eyes? I mean, is it sharing risk? Why would I use you?

Darel Daik: I wouldn’t say sharing risk, but it certainly is a second set of eyes if you’re first starting number one, but most importantly it’s leverage. Even guys that have 100,000 in the bank, you want to buy 10 houses, 100,000 is not going to do it-

Alex Osenenko: Right, right.

Darel Daik: Yeah, 20% down on every single deal, if you’re buying 150,000, $180,000 houses, you’re going to get three, four houses-

Steve Rozenberg: Exactly.

Darel Daik: … But they’re not going to buy 10 houses. So we have investors that do have money in the bank and they’d like to keep that reserves, but they want to leverage themselves-

Steve Rozenberg: Right.

Darel Daik: … So even if you’re getting a hundred percent financing, obviously they still have that a hundred thousand end of the day to use as a backup. And maybe they don’t get 100% financing every time. If they’re new, they’re typically not going to get 100% financing, because it’s hard to find those super, really good deals where all the numbers work out, but maybe they’re only putting in 5% or 10% on that transaction for their first three or four deals. And then they learn how the game works and they start getting better at finding those transactions and getting relationships with wholesalers and realtors. And then they start getting 100% so they can buy a lot of property with that $100,000 without having it all be sunk into maybe just three or four houses. So now you’re leveraging your portfolio. You’re building much bigger cashflow on a monthly basis just based on that a hundred grand that you didn’t have to spend-

Steve Rozenberg: It’s like that old adage, when you don’t need the money, everyone will loan it, when you need the money, no one will loan it to you.

Darel Daik: Cash is king-

Steve Rozenberg: Cash is King. If you’ve got the cash-

Darel Daik: … You got to have cash in the bank.

Steve Rozenberg: … Yeah, exactly. I remember you and I were in Dallas that time where you actually had to take one back. So let’s talk about-

Darel Daik: Two back.

Steve Rozenberg: … Two back, well I was up there with him. So let’s talk about that side of it. When you actually do have to take a property back from someone and how often does that happen, number one, and what’s the transaction like?

Darel Daik: Well, it’s interesting, there’s a lot of people when they hear about hard money.. Because hard money is typically 10 to 12% interest rate, two or three points at closing. It’s expensive loan and you’re lending 70% so, when I speak a lot and a lot of people say, “Oh, how many properties do you take back? I bet you love taking back properties.” And I’m like, “I hate taking back properties.”

Alex Osenenko: Who loves that?

Steve Rozenberg: Yeah.

Darel Daik: I mean I’m sure there are some loan sharks out there where that’s their model-

Alex Osenenko: Oh wow. Okay.

Darel Daik: … That’s how they acquire real estate, but from my standpoint, we hate taking back real estate because it’s not what we do-

Alex Osenenko: Right.

Darel Daik: … It slows down my whole business. So we don’t take back that meeting, we take between zero and three a year-

Steve Rozenberg: Okay.

Darel Daik: … And a lot of times it’s zero.

Steve Rozenberg: Yeah.

Darel Daik: And so this year we took back those two houses in Dallas and quite frankly we were defrauded by the investor. They were doing the repairs, they weren’t getting permitted, our inspector missed some things on his side, so we weren’t aware of that being done. So they basically came to us and said, “Yeah, we’re giving up on these deals and gave us the keys and walked away, while-“

Alex Osenenko: The investors did?

Darel Daik: Yeah, the investors did. So after we got in there, started looking at it, we’re like, “Man.” The foundation wasn’t done right. They didn’t permit this, they didn’t do this. So we had to completely redo everything that they did, and we have a contractor who’s finishing the houses right now, so it’s going to be fine.

Steve Rozenberg: You’re still working on those?

Darel Daik: Oh yeah-

Steve Rozenberg: It’s been awhile.

Darel Daik: … Oh, it took two months to get permits.

Steve Rozenberg: Wow.

Alex Osenenko: Darel, are you going to lose money on this?

Darel Daik: I don’t think we’re going to lose money. When we take back a property, normally maybe we lose a little bit, maybe we make a little bit. But typically we’ve never taken a knock on wood, we’ve never taken a big loss in anything because we-

Alex Osenenko: Get spread.

Darel Daik: … We keep our eyes on it, and yeah we have that 70% spread on these deals. So unless the market crashes overnight, like in ’08-

Alex Osenenko: Yeah.

Darel Daik: … In 2008 2009 you had houses that we were lending on that were worth $100,000, but by the time you took them back, and got them fixed and put on the market, those houses were worth $70,000 now-

Steve Rozenberg: Yeah.

Darel Daik: … So that’s why lenders were going out of business in 2008 and 2009 because there’s… And then nobody was buying them. So with those, from our standpoint, we just held them. We had a rental portfolio that we created for my company. We said, you know what, we’re not going to take the loss on these houses. Let’s just put a tenant in there and rent them out when the market improves, we’ll sell them. And that’s what we did.

Alex Osenenko: So that’s my question back, how did you survive the 2008 2012? How-

Darel Daik: There was a lot of whiskey and a lot of creative thinking-

Steve Rozenberg: Well, the nights-

Darel Daik: … I wish I was kidding about that.

Alex Osenenko: So part of it is turning those assets that people walked away from into rentals?

Darel Daik: Mm-hmm (affirmative).

Alex Osenenko: Was there other parts? What else-

Darel Daik: We had to get very, very creative on what we did, and we still adapt the strategy. So when we take back a property now, the first thing we do is we go out there and assess it and see if we can find one of our investors that we know and trust that wants to buy it. Hey, you want to buy this house as it is, we’ll finance it for you. If they don’t, then typically we will hire a contractor to finish it ourselves and either sell it on the open market as a retail investment for someone to live in it, whatever. We’ve pursued owner financing on transactions and then we’ve also pursued holding them in a rental portfolio. So we have multiple exit strategies.

Darel Daik: So it depends on what it is and where it is. If it’s a higher end house, typically we’re going to want to try to sell it. But if it’s a good rental and the market had dropped and we couldn’t get our money back, we’re like, “Let’s just rent it out.” So we rented out several houses, we had about 15 houses at one point that we were renting out and just manage the process. And then when the market improved here in 2012, 13, 14, I think we sold most of them in 2016 and we did well on them after holding them and they both paid for themselves that entire time.

Alex Osenenko: Really cool.

Steve Rozenberg: So let me ask you this, if you’re talking to an investor, and I know you’ve talked to tons of new investors, ones that are watching, what advice would you give them? If they’re getting into this and they’re thinking hard money. I like it. I like what I’m hearing. What kind of tips would you give them when they’re getting started, getting their team, knowing numbers, what would you say?

Darel Daik: I mean they need to educate themselves. There’s so many ways to educate themselves, either online or in all these investor groups that are in their local markets, and align yourself with the right team members. There’s people you can network with that would be glad to help you and introduce you to their contractors or their lenders. I mean, you just have to work at it, and make sure you vet out everybody. Because real estate is a great business. I love real estate, but real estate also, there’s an easy way to get burned because most of these businesses are not highly licensed-

Steve Rozenberg: Right.

Darel Daik: … So it’s very lucrative, but it has very low barriers to entry-

Steve Rozenberg: Right.

Darel Daik: … Anybody can be a wholesaler-

Steve Rozenberg: I was going to say-

Darel Daik: … You can just wake up today and say I want to be a wholesaler.

Steve Rozenberg: Yeah, I’m a wholesaler, here’s a card, I’m wholesaling now, yeah.

Darel Daik: Yeah, and then on the hard money side, you don’t have to be a licensed lender in Texas to lend-

Steve Rozenberg: I was going to ask you that, yeah.

Darel Daik: … To lend hard money, unless you’re lending to people that’s going to live in the house as their primary residence, which most hard money lenders don’t. And I mean personally I lend on the conventional side as well, 30 mortgages. So all my team, we’re all licensed with NMLS, which is a federal licensing. But most of the other hard money lenders, they don’t have that licensing. They don’t have to have that licensing-

Steve Rozenberg: They just loan the money and-

Darel Daik: Yeah. So you don’t know who you’re dealing with-

Steve Rozenberg: Sure.

Darel Daik: … Unless you get references and vet that process.

Steve Rozenberg: Right.

Darel Daik: Wholesalers especially-

Steve Rozenberg: Yeah.

Darel Daik: … Contractor, same thing. There’s no licensing for contractors, and realtors have to go pass a test and they’re held to a certain standard. So realtors-

Steve Rozenberg: Appraisers do-

Darel Daik: Appraisers do, yeah.

Steve Rozenberg: Mortgage-

Alex Osenenko: Contractors don’t have licensing here?

Darel Daik: Nope.

Steve Rozenberg: No.

Alex Osenenko: That’s crazy, in California it’s very, very difficult-

Darel Daik: It’s not like that in Texas.

Steve Rozenberg: Yeah.

Alex Osenenko: Wow.

Darel Daik: They did it for a while. They actually had a construction commission prior to the Great Recession, and when the Great Recession hit, you had all these builders implored too, so that government agency shut down because it was surely just a profit center-

Steve Rozenberg: Right.

Darel Daik: … It’s not that they really care about you, they just want to lock taxes, guys that are doing the work-

Alex Osenenko: Right.

Darel Daik: … And so we had no contractors left, no builders left except the big boys, and so they shut down that whole thing.

Alex Osenenko: Wow.

Darel Daik: So yeah, you have to be careful. You can get caught up in it.

Steve Rozenberg: Go ahead.

Alex Osenenko: Well sorry, I just want to sort of follow up on this. How do you go research, maybe you can advice folks who are listening. How do you go find the information on wholesalers and contractors or may be lenders? What would you recommend? Online reviews good enough, talk to references, what would you do to go-

Darel Daik: I think you can start online by Googling their company name and see if they have reviews. I’m big on reviews, I mean that’s how everybody vets restaurants, contractors, everything is online now, pretty easy to find-

Steve Rozenberg: Yeah.

Alex Osenenko: Yap.

Darel Daik: … But I would also ask for references from these contractors and or lenders or whoever, people that have actually done deals with them and actually call them. Some people ask for references-

Steve Rozenberg: I was just going to say, absolutely, get up the phone and call.

Darel Daik: … They get the references, they say, “Great, thanks.” And then they never call them-

Steve Rozenberg: Yeah.

Darel Daik: … Same thing when you’re hiring people, right-

Steve Rozenberg: Absolutely.

Darel Daik: … You got to call them and really talk to them. How many deals have you done with them? How was the process when you’re getting your drawals, did it take a long time? Did everything they tell you up front stay the same? Did they change the fees on you at all? So you got to take the time to have those conversations. Same thing with the contractors, did they stay on budget? Did they stay on time? How many deals have you done with them? So you have to spend the time doing it and you can find there’s plenty of good people out there that you can surround yourself with and create a team.

Steve Rozenberg: Yeah. So I’ve got a question, it’s a little off now you don’t know, but Darel is certified to do DISC profiling and he teaches classes on DISC profiling.

Alex Osenenko: Can you explain to the audience.

Steve Rozenberg: Well, you’re certified. Go ahead and give everyone-

Darel Daik: What’s DISC? It’s personality assessment. So, it helps you understand the different types of person… So there’s several different personality assessments. This one is called DISC and each letter stands for something different, but enables you to understand how a person thinks and how to sell to them and how to speak to them. Someone who has a D personality or a C personality are completely different. So if you can understand that, you understand what you are first, but you also understand who your team is, who your contractors are, whether it’s your employees, your spouse, whatever, it teaches you to communicate in a way that they best understand. Because Steve is a different person than the next guy, he likes to be talked to a certain way. He’s a very upbeat, positive, high I, but-

Steve Rozenberg: Very.

Darel Daik: … He’s a very high I and someone who’s maybe an accountant or engineer is a very, very high detailed person that doesn’t need all the pat on the back and actually spending the time to get to know you type of thing. This guy’s like, “I don’t… Why are you talking-“

Steve Rozenberg: Just data. Give me the numbers.

Darel Daik: Yeah, give me the numbers, give me all the data let me analyze it.

Alex Osenenko: That matrix code, just code.

Steve Rozenberg: Yeah.

Darel Daik: So it’s very valuable in any business, but especially in real estate where you’re dealing with so many different people out there-

Steve Rozenberg: Yeah.

Darel Daik: … So I teach it to all my employees, they have the profile right under their desk. So when they’re speaking to someone on the phone, they try to figure out what their profile is so they can speak to him in a way that makes most sense to them.

Steve Rozenberg: Do you-

Alex Osenenko: Sorry Steve, I’m just curious, how does that relate to a real estate investor?

Steve Rozenberg: Well, correct me if I’m wrong, statistically investors are a certain DISC profile, they’re going to resonate with… And normally they are C’s, is that correct? Is that-

Darel Daik: They’re all over the map really. I mean, they’re all over the map-

Steve Rozenberg: Okay.

Darel Daik: … Most realtors are high I’s.

Steve Rozenberg: Most salespeople are I’s-

Darel Daik: Most salespeople are I’s.

Steve Rozenberg: … My understanding, the reason most investors are C’s at least buy and hold, not the flipping, but the buy and hold because they’re data-driven. Because the numbers are dictating the deal, not the emotion. So if you get a D in the DISC profile, they’re very dominant, matter of fact, get that person out of my house today, rip the doors off, I don’t care. It’s my house, I want my money, get them out. That doesn’t work in real estate. Those are more liquidity things like stock, they can buy and sell, they can control the situation-

Alex Osenenko: Right.

Steve Rozenberg: I’s, not really because they’re bubbly, they’re chatty, they’re they’re sales people, they’re not really investor minded. S’s are emotional, sentimental. They hear the sob story about the tenant or the challenge of what’s going on with the tenant and they’re like, “Oh yeah, they lost their job. They can stay for four months, five months, a year without paying rent.” That doesn’t work either. The reason a lot of them are C’s, my understanding is because it’s the numbers. It’s the data that’s telling them, buy the property for X, Y return, Z is the end result, this makes sense. Let’s move forward.

Alex Osenenko: I think as a property management-

Darel Daik: Yeah, very logical.

Steve Rozenberg: It’s logical.

Alex Osenenko: … I think it a property management company you wish all of your investor clients are C’s-

Steve Rozenberg: Yeah.

Alex Osenenko: … But in reality it’s probably-

Steve Rozenberg: It’s a mix up.

Alex Osenenko: Like you said Darel, it gets across the board and there’s no extremes. I can’t just be emotional-

Steve Rozenberg: No.

Alex Osenenko: … I may be a little bit emotional, right? But I’m also data driven, but you can identify as particular inclination, right?

Darel Daik: Sure. And you can move around the spectrum, right? So if you’re high I, it doesn’t mean that you can’t put your C hat on. It’s just not natural for you. So it may take a lot of energy for you to sit there and look at the data and analyze it because it’s just not what comes natural to you. But also that same person who’s a high C, who’s good at data, it’s very unnatural them to be upbeat and bubbly and have to sell something.

Darel Daik: They can do it, they certainly can do it, but they struggle with it and it’s actually physically exhausting for them. So you take a guy who was a very high C, who’s data driven and doesn’t spend a lot of time socializing. You put him into a networking event, he has to talk to everybody there. He’s going to go home afterwards after an hour and just sit in a dark room and just-

Steve Rozenberg: Like, “I’m done. I can’t deal with this.”

Darel Daik: … Just kind of relax. Whereas me, I’m a high I and Steve is, I can do that every single day-

Steve Rozenberg: Right.

Darel Daik: … I can go to networking functions every single day and talk to a hundred people and it gives me energy as opposed to the guy who’s-

Steve Rozenberg: Drained.

Darel Daik: … Yeah, that guy was… But me sitting down and looking at data all day, I’m like, “Oh gosh.”

Steve Rozenberg: And so how that’s important for him, just like in the property management or any industry that you’re in, sales, doesn’t matter is when he’s talking to someone… If he’s just giving someone like me data data data, I’m going to be like, “Dude you’re killing me, that’s enough. Let’s talk.”

Darel Daik: Yeah.

Steve Rozenberg: … Let’s have a conversation-

Darel Daik: Yeah, yeah.

Steve Rozenberg: … And he’s just pushing numbers. So you have to be able to resonate with the person that you’re in front of. And so I’m curious if that has helped as you’ve gotten more involved and now your team is doing that. Do you think that, that’s helped your business and your model and understanding how to work with different sets of people in the depths?

Darel Daik: Absoulutely. I mean, number one, it has helped us hire people-

Steve Rozenberg: Sure, absolutely.

Darel Daik: … When we’re hiring people, we have to take the DISC profiles, we need to understand what their personality is like, but teaching them how to read people’s personalities, because all of our loan officers are on the phone. So it’s very rare that people come into the office anymore, they want to do it over the phone. You don’t get to see their body language-

Steve Rozenberg: Okay.

Darel Daik: … And so body language is the number one way you can kind of tell how somebody’s profile is, so over the phone if they can determine what their DISC profile is, then they can speak to them in a way that they understand the best-

Steve Rozenberg: Yeah.

Darel Daik: … And that’s what’s valuable. You ever meet someone and you’re just butting heads with them the whole time-

Steve Rozenberg: Yeah.

Darel Daik: … You can’t figure out why. Well, it’s because you’ve have opposite profiles and you’re both speaking in your terms, not their terms.

Steve Rozenberg: Yeah, it’s very… Yeah.

Darel Daik: That’s not how you communicate. You have to speak in a way that they understand.

Steve Rozenberg: Yeah.

Alex Osenenko: Well, I think this was-

Steve Rozenberg: On that note, yeah.

Alex Osenenko: … Incredibly educational-

Steve Rozenberg: Yeah.

Alex Osenenko: … I really appreciate your time Darel, and it was great meeting you and-

Darel Daik: You as well.

Alex Osenenko: … I’m sure, we can get deeper and get more stuff, but those of you listening, if you want to continue the conversation, you can find us in MasterMynd Real Estate Investment Club on Facebook, if you need property management services, mynd.co and if you need money, hard money, Noble Mortgage-

Darel Daik: noblemortgage.com.

Alex Osenenko: Yeah, it’s always a pleasure and thank you very much for listening. We’ll see you next time.

Steve Rozenberg: We’ll see you guys. Thank you.

Alex Osenenko: Thank you. Bye bye.

Steve Rozenberg: Bye bye.