The Evolution of Private Money

Ed Aloe (00:02):
Welcome to the Real Estate Wealth Podcast, the show about how you can build wealth by investing in real estate. I'm your host, Ed Aloe, founder and CEO of CALCAP Advisors. I'll dive deep into multi-family investing in today's current market. I'll also help you acquire the knowledge and tools necessary to generate passive income for life through discussions with friends and experts in the industry.

(00:39):
Today, I have the honor and privilege of sitting down with Anthony Geraci. Anthony is the CEO and partner at Geraci Law Firm, in charge of firm strategy and development of Geraci's team and culture. Anthony has authored articles on real estate finance and securities, and is a nationally recognized expert in creating mortgage funds and pools. He also holds a pilot license where he enjoys exploring the skies over California.

(01:06):
Anthony, welcome to the Real Estate Wealth Podcast.

Anthony Geraci (01:10):
Oh, thanks for having me, Ed.

Ed Aloe (01:11):
Absolutely. So, Anthony, I listened to another podcast you were on recently, and it sounded like you had a very non-conventional childhood growing up. Would you mind kind of sharing your path and your childhood and what that was all about?

Anthony Geraci (01:24):
I'd be happy to. It's funny. As I think back on how things happened, it's definitely shaped who I am today. My parents divorced when I was 11. We moved around a lot. My father, he was not the most hardworking person in the world, so we moved around a lot from place to place as he decided this was going to be the place for us to be, at least for a couple of months before we moved again. And during all that chaos, it just made sense for me to ... I evened ask him. I was like, "Why am I going to school?" This was probably the 6th school I went to in the 8th grade, and I said, "I don't want to do this anymore." And he said, "Well, you just drop out." I did.

(02:04):
Thankfully, at the 8th grade, you have a lot of the skillset and stuff like that to learn on your own. That's what kind of shaped and fueled my high school years without going to high school was taking books and learning different things. I took my own classwork, if you will, like Greek mythology and, of course, the basics like geometry and math and all that stuff. I got my GED and then went to Wallace Community College in Dothan, Alabama, and then went to Auburn for my undergraduate in history. Interesting foundation. But I would say, at this point looking back, a great foundation to build what I am today.

Ed Aloe (02:39):
Wow, interesting. And now Geraci Law Firm is today, I think, the largest law firm focused on the private money lending industry.

Anthony Geraci (02:48):
You've got it.

Ed Aloe (02:49):
From that interesting childhood, and I'm sure you had many experiences that sort of caused you to grow and mature probably much more quickly than a lot of people of the same age, it sounds like, what did you take from that experience, and how did you choose the path of becoming an attorney from that? Then how did the Geraci Firm end up focusing on private money, which is a pretty niche sector?

Anthony Geraci (03:13):
I'll start with the first one. I honestly did not know what I wanted to do when I grew up. I knew I did not want to constantly look for a job. I learned a lot what not to do from my father, and so I did the opposite, which was law school seemed like a steady choice to make. And one of the impactful people in my life was actually at Auburn. He was my history professor who was also an attorney. It's a funny story. I go in his office and he tells me, almost every single time, "You definitely don't want to be an attorney. Don't be an attorney." And yet, here he is, a history professor and getting his PhD as well. Then he said, "Oh, I won't be in class next week because I got to go back to Texas to work for a client as an attorney and be successful doing that." Funny enough, he told me not to do it, but I ended up doing it anyway.

(03:59):
Then I graduated in 2005, so I've been an attorney now 17 years. And I grew up in a small firm. And learned the ropes, if you will, of private lending, and then went out on my own in 2007. And if you guys remember that one, of course, was the start of the Great Recession back then. Definitely cut my teeth from a business and legal ownership in the Great Recession.

Ed Aloe (04:23):
Yes, the GFC were definitely interesting times, and I want to kind of circle back on that, but first, let's talk a little bit about your law firm. I mean, I know you guys pride yourselves on really being different than traditional law firm and traditional lawyers, and more of a partner, if you will, with your clients. Can you kind of explain the firm philosophy behind that? And I also know you guys do conferences, right? Which isn't really traditional attorney stuff, if you will. Really, I think you've grown a law firm that is definitely unique. I mean, not only are you focused on very narrow niche where you guys are experts in, but really, you kind of have grown the firm and run the firm very different than what you would think of as a traditional law firm.

Anthony Geraci (05:09):
Yeah. Funny enough, our holiday party was Saturday and I was recounting the history of the firm, as this is our 15th year anniversary of being in business, and telling them that the entire firm started at a 47-square foot office and executive suites. And from here, we grew into 20 attorneys and 60 support staff. But one of our core values is being unfirm, which is we don't want to be that traditional law office or law model. And what I mean by that is traditionally law firms, when you make partner, when you're a senior associate, doors are closed. We're just focused on work. We're not going to do anything unique or anything like that. For us, that was everything I did not want to be. Even here, all doors are open, if you will. Any partner's door here you can knock on. I leave my door open unless I'm of course in the call or something like that and anybody can approach me, I'd be happy to spend time with them and discuss anything with them.

(06:00):
And I think that carries on to the approach of with our clients too, is we really see ourselves as partners with our clients. I think attorneys have lost the counselor at law. It used to be attorneys and counselors at law, and now you only see attorney at law and counselors at law. We want to be partners with our clients, whatever they need, we take on their problems as ours. And even if it has nothing to do with the law, if you needed to get a new bank contact or new warehouse lines or if you have a CFO or need some underwriters, we want to help our clients do that. And of course none of that we charge anything for. It's just something we want to be a part of with them.

Ed Aloe (06:35):
Yeah, I think that's terrific, Anthony, and it really is a different feeling, kind of dealing with you guys and going to your conferences and everything you do within the industry has been great. It's been great from an educational standpoint for your clients. I think it's been really good for your firm and your lawyers as well. Let's touch back on, you brought up you started the company or the law firm in 2007, 2008, which is when I started CALCAP, the Great Financial Crisis. Amazing times as I look back, there were so many opportunities but yet a crisis unfolding at the same time. Kind of definitely navigating through those challenges and opportunities. And when we started CALCAP, I kind of looked at the crash in 2008 and said, "Okay, there's a great, I think opportunity here to buy distressed real estate assets and kind of build a portfolio," but the knife was falling, so it was very uncertain times.

(07:30):
We knew if we bought something, it might be worth less a month from now, but we thought where the valuations were, at least on distressed multi-family we were buying back then could probably only go up. I mean, we were literally paying $35 a square foot for 150 unit apartment buildings in Phoenix. Those of all now 10x'd in value. The thesis proved out. It took a while to get there, but it definitely proved out. But at the same time I called that our get rich slow scheme because that's really what it was. And at the same time, my partners and I came out of Vinnie Mac Bank, so we were really lenders by trade. When we started CALCAP Lending, we didn't want to stay in the consumer lending aspect at that point because Dodd-Frank and everything was changing the industry so rapidly.

(08:18):
We said, "Gosh, if we're out trying to buy distressed assets," and there was really a dearth of financing available at that time, we decided let's start a private money lending, which the old days hard money lending, private money lending shop to help other investors, maybe guys like us, maybe smaller than us who are seeking capital to buy distressed assets, which was hard to find. The first four deals when we went to Phoenix, Arizona buying multi-family, Anthony, the first four deals we bought, I could not even get a private money lender to give me money on those deals.

Anthony Geraci (08:52):
I can believe that.

Ed Aloe (08:53):
We had to go a hundred percent equity and this is 2008, 9, 10. We saw an opportunity to not only build assets on one side but then also be lenders and stay lenders because that's what we were by trade, but go into the private money lending route, which we knew nothing about at the time. And I remember talked about in the first podcast when I was bringing Mark Mozilo on to run our private money lending companies, I don't know anything about hard money loans. Would you mind going back to those 2008 days and talking about your experience and describe really how the GFC sort of changed I think the private money lending industry? And I think it really sort of matured it in my mind, right? It grew from a nascent little sleepy hard money shops to really a true industry.

Anthony Geraci (09:44):
Absolutely. And it's funny as you brought that up, I was thinking back to 2008 as well, and it was a very interesting time for me because we had ... Especially we were just a year old at this point in 2008, but it was two worlds for me. The first world of course is if you remember the mortgage implode-o-meter coming up and even all of our clients, and I'll drop some names you and I remember like Lehman Brothers, huge news back then. This was a hundred year old institution just going belly up that had no warning whatsoever. That trickled down to my mortgage fund clients as well who had assets from 2005-2006. If you were cleaning up their balance sheets and also working with their investors to help them recognize the world that is 2008, which is, I'm very sorry, but you think your mortgage fund is stealing from you and everything.

(10:33):
Can I just point you to this mortgage implode-o-meter that has 160 names of much bigger clients that I represent that if they're going under, what do you think is going to happen to our small 50-100 million fund? I was working through those at the same time. I remember 2008, Dodd-Frank came out and as regulators like to do, we're going to overregulate and say, "Okay, we need to fix this." Then we have all these laws that came off Dodd-Frank, the first one being the Safe Act that I remember, that you probably remember as well. We need to get some sort of rating with these guys and make sure we take care of things. Of course, you've got Dodd-Frank now instructing this newly created beast called the Consumer Financial Protection Bureau, newly created, newly staffed, and they're all looking at each other like, "Well, what do we do now?"

(11:19):
And it was a crazy times because I think it took six years before even half of Dodd-Frank was rolled out. I remember during this times, guys are going to react quickly, we're going to have laws. And I think that had part of a chilling effect on owner-occupied. Be that as it may, as you were remembering, rehab and fix and flip and great deals in Phoenix that you guys were in, Las Vegas were just ripe for the picking. Unfortunately [inaudible 00:11:43] of the time too. But yeah, no, it really helps shape what you call the current private lending world.

Ed Aloe (11:49):
Hey Anthony, would you mind explaining just for our listeners who aren't aware what Dodd-Frank was all about and trying to do in as well as the Safe Act just to put it in context back then?

Anthony Geraci (12:00):
Absolutely. And I'll rewind it to 2007. When 2007 happened, you had almost a shock in the financial industry. How were these companies going out of business? And you had a couple of, if you will, influences that were happening around this time. It was basically SISA loans back then, which was stated income stated asset. Basically, and I remember doing this in 2005-2006, it seemed like everybody had a catering company and everybody was making $10,000 a month and I know you remember those times that it was crazy as how did everybody make this money and have this? But this was the name of the game and there were a lot of entities back then, just stated income stated mortgages. You add that to Downey Savings Loan back in the day that was doing what we call 125% financing.

(12:48):
And what that means is you have a value of property worth a million dollars, they were willing to finance 1,000,200 $50,000 and it doesn't take a rocket scientist know, "Hey, this is great in the upturn, but if a downturn happens, things are going to go crazy." When things did hit the fan and things did crash, the government's looking at all these problems like, "Guys, we can't have these problems anymore." Part of the promises was this Dodd-Frank bill passed by of course Senators Dodd, and Senator Frank, which was going to be the cornerstone piece of getting the financial industry back right, for lack of a better word. Part of this was owner-occupied, we need to consider their ability to pay and I don't care whether they're a bank loan or a private loan and we can't have the stated income stated asset deal and we're going to have appraisals, right?

(13:32):
And appraisals was part of Dodd-Frank bill as well. When you rely on independent valuations and you just can't make up value as you go, the Dodd-Frank bill as a result and had our mortgages crashed 30 to 50% if you remember those times. And of course those created the opportunities in Phoenix and Vegas as you know. That's what the Dodd-Frank bill was going to fix were these problems that they saw ramping up from 2004 to 2007.

Ed Aloe (13:58):
And it's funny that you mentioned Dodd and Frank, I think back to Barney Frank, who really was a proponent of everyone in America needs to own a home. Everyone deserves home ownership in America. Those guys were pushing prior to really every lender making loans and a lot of loans obviously got out of control, but a lot of it was these politicians kind of pushing that everyone should be in a home. Then of course now they're coming to the rescue to save the problem that they in some ways created with the Safe Act and Dodd-Frank Act, right? It's kind of ironic when I think back about it.

Anthony Geraci (14:37):
A hundred percent. Something I forgot to mention actually is you actually saw Fannie Mae either went bankrupt or virtually went bankrupt during this time too. I mean, this is the governmental institution that's financing, back to your point, everyone needs to own a home and Fannie Mae's going to be the arm to do it. They went bankrupt in 2008. This was when you could buy shares and everything and the government basically said, "Hey, there's no value here. We wiped it out." To your point, I mean, government had no idea what it was doing back then as well,

Ed Aloe (15:04):
Which you can make the argument they still don't know what they're doing, but that's for another day.

Anthony Geraci (15:09):
Absolutely.

Ed Aloe (15:17):
Let's talk about private money itself and just for our listeners who aren't really familiar with it, sometimes when you hear hard money or private money, which essentially is the same thing, I think it's morphed into the more sophisticated term private money lenders now, but a lot of people think that it's for someone who has maybe bad credit or some other reasons, but that's typically not the case, right? Typically, at least what we see from investors is they have oftentimes very good credit. Can you kind of explain how private money lending evolved in the space and the need for it and why an investor might want to seek it?

Anthony Geraci (15:56):
We could do a whole history thing going back to the ancient times on when money lending was the oldest profession, you even had it codified in the Hammurabi Code, but I'm going to focus on modern times, which is the best way I can explain it is you have this term hard money and it was versus soft money. Well, soft money as what most people understand is a bank makes a loan to a third party and how do they make this loan? They have deposits they can leverage based on banking laws and what do deposits cost them? A fraction, whatever interest they pay their depositors. The term hard money came from of course, well, we don't have depositors and in private lending or hard money lending, whichever term you want to do. How do we get this money? We get them from investors and we pay them a higher yield because they want to earn something higher than what they did in the bank.

(16:43):
And that's on the investor side. Then to your point is well, who would get such a thing? Well, one of the hallmarks of private money lending has been we can close much faster than a bank and anyone who's gotten a bank loan, especially today but even in the last few years understands a bank is going to take 30, 60, 90, sometimes 120 days to close a loan or sometimes it comes 60 days to even get a decision on whether they're going to be willing to make the loan or not. Especially in some deals that I'm sure you've had and other investors and when I'm talking about investors in this case, not investors in real estate, they don't have that kind of time.

(17:20):
They need to close in maybe seven days, maybe 30 days. But I can tell you that deal's not going to wait around for six months to wait for a bank loan. And that's where I think a lot of people use private lending such as course as CALCAP is, "Hey, I've got this deal, it's below market." They need out for a variety of reasons. Maybe the person went through a divorce, maybe they're trying to cash out, whatever their need is. There's this motivated seller behind this and investors got an opportunity and they need that cash in seven to 30 days. They know a bank's not going to close anytime soon, so they turn to private money lending.

Ed Aloe (17:53):
I think that's exactly right. And we always say surety of close and speed of close is way more important to a real estate investor than the rate they're paying for that money to get a private money loan. You're going to be charged for it and it's going to be much more expensive than a traditional loan. But you know what we've seen, and especially gosh, over the last five years with the market as crazy as it's been, a lot of investors would sort of tee up private money lenders like ourselves behind the scenes and then make an all cash offer knowing, "Okay, CALCAP can underwrite and close this loan in 10 days or 15 days or 30 days." Where if I go to Wells or Chase, it might be like you said, months and months and maybe the decision would be no, I think it's very important.

(18:38):
Investors have used it wisely, but really just to secure transactions and the speed of being able to get a deal done in a super competitive market. Let's shift gears for a minute Anthony, and talk a little bit about within the business itself, mortgage funds, and I know you at Geraci do a ton of mortgage funds. You guys actually helped us, I believe with the first fund that we did. When we started out in the business, we were doing old fractionalized lending where when we first started we would just go investor by investor, cobble a few investors together and do a fractionalized loan, which for those of you who don't know, say you have a loan for $500,000, we would literally get five investors each contributing a hundred thousand dollars that would become beneficiaries of that note, right? That's called fractionalized lending, but it's very hard to build a business with that model. We eventually moved to a fund model, which we have today. Can you explain kind of Anthony, how mortgage funds or mortgage pools work and the benefits and/or pitfalls of having these funds for private lenders?

Anthony Geraci (19:43):
I'll start off with there's a lot more benefits in my opinion than pitfalls and let's discuss kind of the structure if you will. It's anywhere range between 25 and a hundred thousand dollars investment. As you kind of say, especially if you look at California, that's not going to do much for a loan for most people. You really need to aggregate funds and that's kind of what a mortgage fund does. It aggregates a funds of number of investors and allows the manager of course yourself, Ed, to take this money, you aggregate say a million dollars and make a loan. Why is this good for investors? Because they get access to deals they probably wouldn't otherwise have access to through people like yourself and also earn a good return on it. You're going to get much higher return through CALCAP or a mortgage fund than you would if you left your money in a bank for instance.

(20:29):
how that works is you invest, and these are securities offerings fully regulated by the SEC and/or state depending on how you're registered and there is an opportunity in the fund and the fund sponsor describes what you're going to do with the fund. Are we going to buy property in Phoenix for instance or are we going to make loans with it? There's what we call private placement memorandum and this is a document that just kind of describes, "Hey, here's what I'm going to do with your money and here's kind of the risk that I see for your money. You should be aware of these before determining to invest with me." To me there's a lot of benefit investing in a fund than say fractionalizing, kind of how you're describing it before, or even owning one note. Let's just say you had that $500,000 and bought the entire note.

(21:12):
The nice thing about a fund is you're usually diversified. You could have, I don't know, $10 million in a fund because you have a lot of investors that invested in this, but you're diversified. There's a number of deals in this fund and so if one goes bad, you still have nine performing deals and theoretically instead of maybe returning 10%, you're returning 8% as the fund of course works out that 10th loan or 10th deal, whatever that looks like. But there's still some return versus if you own a fractionalized note of one loan or one loan whole and that goes bad, you're getting nothing. There's 0% return until you figure out a way out of that path, which I think lends itself to another benefit that I don't think a lot of people, they kind of recognize but they kind of don't, is someone such as yourself, Ed.

(21:57):
I mean, you have wealth of experience in this space as other fund managers do. Not to say that investors can't figure it out, but I can leverage you if I invest in you, right? I'm giving money to Ed and Ed's going to help me figure out what to do with it and he's going to select the deals. I don't have to think about it, I just got to give Ed my money and it just generates returns or generates deal flow, whatever that looks like. Let's just say we have a note, for instance, if it pays off, I'm not looking for the next deal, I'm earning nothing right now when it pays off versus I know someone like yourself, you've got it working 24/7, 365 days a year unless I request withdraw it, which of course every fund has a mechanism to withdraw. Maybe I just want to invest in something else. I see a number of benefits with very low detriments in a mortgage fund situation.

Ed Aloe (22:43):
Yeah, and I think you're right. I think the diversification is really the key one. But it was interesting, Anthony, what we found starting with that fractionalized model was when we did shift over to a fund model, there were a number of investors who really sort of like to touch and feel individual deals and know exactly what's my money being invested in versus putting it into kind of a "blind pool," right? Where you are in effect putting definitely more trust into the manager but you're getting a lot more diversification and your money is always earning something. But it is interesting how there are a certain amount of investors who are kind of anti mortgage fund and really want to do individualized deals still to this day.

Anthony Geraci (23:27):
And that makes sense. I think this is they want to touch it, feel it as you said, kind of have some feeling of control. "Hey, this is mine." I completely understand.

Ed Aloe (23:37):
Yeah, it's interesting you mentioned kind of the space changing and Wall Street coming into the private money lending space, which we definitely saw. We first started doing this business, we were doing fractionalized loans like I said, and then we shifted to a fund model and then over the last few years the fund model kind of shifted again to a best execution model. And when I say that, when we originated a loan, we not only had our fund to put it into, but now we had three, four, five kind of Wall Street firms that discovered the space that were very eager to buy loans. But now with rates going up and things shifting and changing, we're seeing a lot of those Wall Street guys are finicky and so they may have a big appetite today and they may shut their doors tomorrow. I'm just wondering what you're seeing in that realm.

Anthony Geraci (24:31):
I completely agree by the way. Yeah, it is funny. As you mentioned you had five or six different people to sell to. When there's an oversupply of something, that's when things change. We had an oversupply of capital starting in 2016-2017, and you can probably talk almost the same way I can, you probably saw your yields really, really condensed. And I want to say probably before the yields changed and then Wall Street got a little shaky, I want to say we were probably no more than what we call 200 basis points and what that equals to is 2%, more than a bank loan. Historically we've been about five or 6% higher than banks. This was surprising to me of wow, there's such a yield consolidation and yield compression that I don't know where you go from here, but fast forward to June if you will, this year when rates were changing and you saw the prime rate go from three and a quarter to 7%, this is when Wall Street took a pause and I think that makes sense for them, right?

(25:26):
They're late to the party and the first to leave, they're at it for the party and they're ready to go. But when things get challenging it's like, "No, we don't need this. We have 40 other assets producing returns, we're going to pause this space and come back to it later" versus now where we're at, of course if that happens, you're going to see huge contraction and deal flow from the Wall Street side. But that's a benefit I think to investors and also for mortgage funds because if you will, the traditional balance sheet lenders, what mortgage funds are, there's now an opportunity to not only get better quality loans because that's going to happen, right? But also higher priced loans. I mean, you can talk probably more intelligent than I can about what you're seeing Ed, as far as yield spread, but I'm guessing that yield spread has increased the last few months as well as better quality loans.

Ed Aloe (26:12):
That's absolutely right. And you bring up a good point because a couple years ago yields started getting solo, like you said, a couple hundred basis points, 2% above regular loans. And especially I think we saw that on the long-term rental product kind of became in vogue and a lot of the street firms wanted to buy that product because maybe there were three year prepayment penalties in there. They kind of had a longer guaranteed yield for three or five or 10 years and those yields became extremely low, which was then we were glad that we had the best execution model because our fund yields were typically historically much, much higher, 7, 8, 9, 10. And now you saw a couple years ago these long-term rental loans were down in the five handle, four handle, six handle. It was challenging to put that product into our fund. Luckily we were able to find sources in Wall Street that wanted to buy those yields.

(27:08):
Now that is definitely changing. Rates are going up, just they are on the regular homeowner side, on the A paper world, which I think is okay. I'm, it has to. But I think the other reason that some of these street firms have backed off is yes, they have many other arenas that they're playing in and they're always trying to seek the best opportunity at the right time to maximize their yields. But didn't a lot of these guys, Anthony, have their own leverage that is now costing them a lot more money and maybe they're potentially breaching some covenants within those debt agreements that are affecting their ability to continue to buy loans?

Anthony Geraci (27:46):
Absolutely. And you even see cancellations, right? We have a maturity date usually on these lines, what we call warehouse lines of credit, which is basically one bank getting a loan from another bank or mortgage lender getting a loan from a bank and during uncertain times, funny enough, things change, but this doesn't change. We saw this in the last recession. When things get difficult, this is when banks really pull back. They are very risk adverse and they don't want to do anything. It's kind of a downward effect when banks either restrict or cancel their lines.

(28:19):
If there's no up flow from these mortgage lenders, there's not anywhere for these deals to go, then that effect is these deals either get canceled or go to a balance sheet lender. Those are really the only two exits for those deals. Yeah, there's been a huge constriction of capital as you said, it's kind of a chain effect. Even the BlackRocks of the world get capital from banks and everything like that. When the world changes if you will, you see a huge constriction of capital. What was ever flowing is now a trickle I think in the space right now.

Ed Aloe (28:49):
Right. Then you add on that kind of deal flow slowing down because everyone was in shock with the rate increases and the market sort of in flux if you will, where sellers still think a property might be worth what it was three or four months ago and a buyer saying, "No, I can't pay that much today." I think you have a combination of a slowing real estate market, rates going up and everyone being a little more cautious in what they're doing.

Anthony Geraci (29:17):
You and I again grew up in the last recession and I started seeing not exactly the same, but it's funny how every recession has commonalities and you start seeing housing prices increased 40, 50% year over year and to me it's unsustainable. I remember talking to the chief economist for Fannie Mae and he said it's a very simple concept, if you will, but it's hard to explain. When your median price buyer can't buy that median price house anymore because they can't afford it, things have to change because when that entry level house has to go that median price buyer and they won't pay, well, that entry level person can't sell that house to get their next house and it's all a chain effect.

(29:55):
And again, I think The Fed see that as a tool. When they raise interest rates, they know they're going to slow the economy. I saw some of the signs, I'm sure you did as well because we lived through it. If I was advising our clients, "Guys, you may want to take a look at this, this is unsustainable, consider your loans." And during this time too, Ed, I'm sure you saw them, like we had some private lender out there, a hundred percent financing, 6% loans. I'm like, "Guys, I don't even know how you do that. Maybe I saw this movie before, but it may come and haunt you."

Ed Aloe (30:24):
Probably half the guys in our space, Anthony, are not old enough to have lived through the last downturn, and so they don't understand how the cycles work, I think that's part of it. But yeah, I agree with you and it was interesting, and I'm sure you saw it during COVID where we're going, "Gosh, this pandemic has hit what's going to happen to the real estate market?" And things went the other way. I can tell you as an apartment owner in some markets we own, we saw multi-family values nearly double over that 2-3 year period of covid, which as you said, it's not sustainable, right? But then you saw some bridge lenders, people making loans based on those values, which I think some of those guys will be in trouble. If you were lending 80-85% on something that doubled in value, that's now coming back down because they are coming back down. I think some of those bridge lenders are going to be in trouble. Anthony, where do you see the economy today in your opinion? Are we headed for a deep recession? Where do you think we are?

Anthony Geraci (31:29):
That is probably the $64,000 question to bring up a very old game show. It's difficult. Right now, I mean, we've been talking about recession, I want to see it for two or three years and there's definitely some underpinnings of it. You start to see that interest rates have increased. And I temper that too, of course, Ed, you and I were around for the last downturn, which for those who don't remember, rates were not always three and a quarter percent. Rates were around seven or 8% in 2005. This, if you look at historically rates aren't terribly high. We don't have that post inflationary time of the '70s where rates are prime is 12%, we're still going to be around 8%, which is historically average. Obviously it feels high since we're at three and a quarter, but I would almost argue that was artificially low due to a couple of things that were happening between 2008 and still out of the Great Recession.

(32:20):
Then boom, pandemic happened. I factor that, and we just had a huge Q3 GDP growth. Now I'm no economist, but if GDP is growing, technically that's not a recession. With that said, you take a look at Powell. What I've actually enjoyed with Powell versus other Fed chairs is he really telegraphs his moves. Today I believe the recording of this podcast is going to be the next meeting of FOMC. We should have another rate increase. He's telegraphed that as 50 bits or half percent and I would be surprised if it's anything else. Nice thing is we will know probably a month before they meet kind of what The Feds are going to raise it. So far he has been very consistent on that. It's going to continue to raise. What does that mean, if you will, to the average person?

(33:04):
I mean, we're seeing historic debt, and I say historic as in the last 15 years, right? That's a long way of me saying yes, we are definitely going to hit a correction. I estimate personally Q3 of 2023 of 10, 20%, maybe as high as 30%. I don't see what we experienced in 2007, 2008. You don't have those stated income stated asset loans that you and I grew up with. You still had this, if you will, some semblance of sanity. Zoom out. If we even take a look at two years ago and housing prices increased 40%. All we're really saying is that if you go pre pandemic, there's still a 10% raise in housing prices, even with 30% correction. It's going to feel like a correction, but at the same time, if we look far enough away, I don't see a huge impact personally. That's how I see things, Ed, how about you? What do you see in the horizon for us as far as correction and economy?

Ed Aloe (33:59):
Well, I think The Fed's going to continue to raise rates, which they've been very explicit about. I think historically they tend to over correct because they come in too little too late and then they over correct it to try to tame inflation, which they're very intent on doing, like we said, down to the 2% level. I think they're going to over correct, which I think never results in a soft landing. They always tell us there'll be a soft landing, but I think there'll be a harder landing than The Fed is predicting. That's just my personal view. But again, to your point, what that looks like is unknown. The big wild card, which was never a factor in the past, but it is now, is how much will the government step in to try to "save everyone?" And that's a big question mark.

(34:48):
And will they step in to save? I think they will. They've proven in the past to do that, so it's definitely going to be interesting. But to your point on rates, home loan rates breached over 7% I think last month. They've come back in a little bit. But same thing I was thinking, gosh, historically, if you told me 7% over the last 30 years, that's a good rate because my gut feeling was rates are probably historically like about 8%. I actually Google'd because I was curious, I actually Google'd the average home loan rate over the last 30 years and it's seven and three quarters.

Anthony Geraci (35:20):
Oh, wow. I had no idea.

Ed Aloe (35:22):
Yeah. Everyone has been very spoiled over the last several years being the borrowing and the two handle, three handle, which is far below historical norms. Everyone from homeowners to corporations have been living on that free money sugar high, which is now coming to an end. There'll have to be some corrections that we see based on that, which let's be honest, I mean, we've been in an up market for 15 years. I mean, you and I started our companies when it was at rock bottom, and we've really just had the tailwinds behind us this entire time. Is it natural to have a cycle, another correction? Yes. I mean, I would argue that we're far overdue. Typically, real estate corrections happen every 10 years, plus or minus, and we're now going on about 15, so.

Anthony Geraci (36:12):
This may sound crazy, but I'm looking forward to a correction. Honestly, while I'm thinking it's a soft landing, if it's a hard landing, I won't be disappointed either. And if it is a hard landing, those times will come again. And that can only benefit investors in the long run as well of course benefit the economy as a whole. Because one of the anchors to me is the median income. That's the average income a person makes that can't far outpace home prices. To me, those are just a natural link that are easy to find, and to the extent it does, it has to reel in somehow. Correction to your point is long overdue, but also I think there'll be some opportunities for funds, investors to really harness the downturn.

Ed Aloe (36:51):
Yeah, I totally agree with you. There will definitely be opportunities. A natural resetting has to happen, and it's just part of the business and real estate cycles that we see. And it's good. You get too much fat if you will, built into the system and it just needs to be cleaned out.

Anthony Geraci (37:08):
Absolutely,

Ed Aloe (37:08):
And that's what recessions do. It's a resetting, if you will. I hope today's show inspired you just a little bit and would like to thank my guest again. I'm excited to bring you more episodes with interesting and informative experts to help you navigate your way to wealth and real estate investing.

Credits (37:38):
Thanks for listening to the Real Estate Wealth Podcast. The Real Estate Wealth Podcast is produced by Gusto, A Matter Company. Our producer and audio engineer is Jeanette Harris-Courts with support from Gabe Gerzon and Susan Rangel. Maia Laperle is our writer. For show notes and more information about this podcast, visit EdAloe.com, and for more information about CALCAP Advisors, visit us at www.CALCAP.com or follow us on Twitter, @CALCAPAdvisors.

Ed Aloe (38:18):
I'm your host, Ed Aloe, and thank you for listening.