We had a loan payoff last Friday that underscores my post COVID business plan. First some context: I began to (again) make hard money loans for a few reasons when COVID hit my radar. As the Fed pumped liquidity into the system, real yields on risk assets collapsed. But to me, risk during COVID was never higher for multifamily/park owners even as cap rates compressed. Don’t get me wrong, my partners and I owned and still own multifamily and mobile home parks, though we’ve been net sellers for a few years and have bought nothing since January 2020. I needed a hedge.
Both portions of a traditional 60/40 stock portfolio were broken as both stocks and bonds were overvalued. I didn’t have a solution to the stock portion of the portfolio but making short term, first mortgages to investors at reasonable loan to values and high single digit yields solved for the bond portion of the portfolio.
- By lending strictly to investors, we insulate ourselves from exposure to the consumer (tenants or owner occupants) as well. Think, housing as a human right; CFPB, Dodd Frank etc.
- We achieve positive real yields that don’t rely on capital gains. This is my problem with simply buying 10 year treasuries as a hedge. Because treasury yields were anemic and are now just so so, you’re really betting on a capital gain via a flight to quality into treasuries. It’s a Keynesian beauty contest. Not my game.
- The portfolio’s duration is short enough that it’s a decent cash substitute (as a plan A) because it self liquidates as borrowers repay us. This allows for rebalancing and optionality. Obviously it’s NOT cash as there are greater/different risks involved.
- Should liquidity drain from the system (think Lehman brothers part 2, ahem…Deutsche Bank?), a hard money lender making conservative loans might end up owning assets at an attractive cost basis. This is NOT what I want because I want to work with borrowers again and again but it’s not a bad plan B or C.
Returning to last Friday’s loan payoff. Our borrower was a one off landlord. He’s typical of average landlords in America. He’s not rich. His tenant’s rent supplements his income. His tenant stopped paying him and he couldn’t get an eviction. He was not insulated from post COVID related housing risks.
He stopped paying his mortgage. We worked with him and did no immediately file a notice of default because:
- He had listed his house for sale at a reasonable price
- He and his agent had committed to keeping me apprised of the sale process
The house was sold, we were paid off with a healthy margin for error based on our LTV. But I suspect he took a haircut on his sale price because of an uncooperative tenant.
Recent Comments