HUGE LOSES COMING: Investors are Betting on Appreciation with Horrible Short Term Debt Structures

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good morning good afternoon good evening

folks michael’s uber one rental at a

time and we are so lucky to have our

weekly expert and tv star laura morby

how you doing laura

great how are you doing i’m doing very

very well thank you very much for being

a part of this i enjoy our conversations

every week especially because you have a

long history in real estate much like i

do so we’re gonna we’re gonna go back


we’re gonna talk about just how fun it

was to be in real estate in like


so before the crash

do you remember just how fun it was

everybody was making money it’s just a

good old time oh yeah if you had

if you were a realtor a loan officer you

were just

swimming in money you sneezed and you

sold five houses


also like homeowners were just you know

cashing out all of getting all these

crazy helocs and buying mercedes like

act like when people make jokes about

people getting key locks and buying

mercedes and taking european vacations

um i saw that i sold p-locks so

um and i know what they did with it and

they told me what they did with it so it

just yeah people were just living it up


yeah it was funny because it i mean i

was in real estate so about that time we

only had like seven or eight houses but

you go to real estate meetups and they

were jam-packed oh yes right i was going

to meet up the same meetup i went to

like 03 that would have 40 people and it

might have had 150 people in it in

october every everybody was making money

people i don’t know if it was the same

in arizona but where i lived in the bay


people were flipping contracts because

they were buying like where i live is a

condo community that was built in that


and people were flipping the contract

three or four times before the condo was

built and making 50 grand a pop it was

crazy yeah yeah 100

because it was just i mean especially if

you’re going to talk about new builds

too like that’s

something that it was almost impossible

to get you’d have lines out the door

when they were announcing that they were

going to release a couple more lots


it was it was just it was just a lot so

and then as we get closer and closer to

the peak to keep the party going what we

what i saw is the debt structure started

to change right you instead of getting

30-year loans because interest rates

were going up you would get adjustable

rate mortgages and interest only and

then you would get the really toxic

teaser you know the 2 and 28 where you

had a teaser eight and then it would


um and that that last year was a lot of

fun but it was all built on bad bad debt


i mean yes

yeah i’m laughing at the type of

loans that people got that anybody

thought was a good idea or could

oh my gosh

yeah you remember those days it was yeah

it was fun until it wasn’t oh yeah i


and what’s funny is oh my gosh i

yes yes crazy just unhinged almost yeah

well the reason i brought this up today

is um much like you and you and your

husband olivia and i are accredited

investors which means we get pitched

lots of um you know invest in my

syndication invest in my multi-family

all of these things right right

i got a pitch the other day

that screams single family 06 so let me

let me kind of

take the pitch and see if it’s any

similarities to housing because i think

it’s exactly the same

first off the person pitching it to you

oh hi little one is she right there

she said hi hi corbin are you just off

camera yes

if she wants to come on camera she can

but if not it’s okay

she’s okay all right well uh sorry i got

distracted by a cute kid uh so uh the

pitch i got was hey i’m buying this

really big class a class a so let’s

let’s be clear class a apartment

hundreds of units at a 3.5 cap

which in multi-family speak is a very

low cap rate um

let’s just say it’s fully priced or

fully valued

the first line of the pitch was i expect

cap rates to go down to 2.75

i’m like

really i mean you so so first off that’s

crazy second off it seems like single

family because don’t you remember single

family everything goes up i’m buying now

i’ll refi later it doesn’t matter that’s

that’s like the first red flag do you

remember that yeah of course yes okay so

now the

not a coup de grace they are getting

what um in the multi-family space is

called bridge debt meaning very short

yeah they’re getting interest only

and they’re going to be forced to refi

in two or three years i think it was

three years on this one right

and um

and again they keep pitching well cap

rates are going to go down cap rates are

going to go down and they have a bad

debt structure

this just feels we’re just we’re not

doing the same thing in resi or

residential but it seems like the sins

and the stupidity in oh six have now

moved to multi-family and i i’m like

what are you doing you’re you’re gonna

lose all of your limited partners money

it’s crazy



i mean yeah that is what was happening


just single-family residential

i mean that to be honest that’s exactly

what my dad did my dad did that same

exact thing he was like i’m gonna

build this big

you know two million dollar house and

i’ll get a construction bridge loan

and he was told

hey this is gonna continue to appreciate

we’re selling these faster than we can

build them

you’re going to be fine

and so as he’s building it he had it for

sale nothing happened nothing happened

and then by the time he had to refi to

permanent financing

the house was worth a fraction of what

was included yeah and then back then you

can mess around with appraisers yes

he just got another appraisal another

appraisal another appraisal that someone

gave you what you wanted

got permanent financing for 2.3 million

and then


that was in february and by july the

houses were 600 000. oh

like case yeah like in the toilet yeah

so like he was lucky enough that he

didn’t lose it

from the construction loan but he ended

up losing it after that yeah

and the reason this is so bad is this

general partner who’s out raising this

money is probably gonna get it

and again i did some math on my daily

financial news this morning we assumed

500 knoi we talked about three and a

half going to 2.75 or going to four and

a half which i think is far more likely

what’s gonna happen if it goes up to

four and a half is

essentially there’s gonna be two options

in three years one he’s gonna go have to

go back to the limited partners and

raise an additional 2.3 million dollars

yep which is possible or two he’s going

to have to sell the building and

basically uh after transaction costs

he’ll walk away scot-free

uh the lps will lose 100 of their money



be very careful when you’re

anytime you assume right your model

assumes price appreciation yeah i want

you i want you to remember the housing

recession the great housing recession

yeah if your model is built

on those assumptions and horrible

that structure interest only short term

don’t you dare touch those you are going

to light your money on fire and it’s

going to be painful would you agree

100 yes

yes this is like a double whammy of bad

yeah it’s just and you’re gonna again

this is the crazy thing you are going to

feel so good day one oh i’m a part of

this class a apartment in this fancy

state it’s all brand new 98 occupied i’m

a genius three years later you’d be like

terrible yes where’d my hundred grand go

where’d it go


yes this is oh that like that makes me

like almost feel like my heart is racing

i’m gonna have a panic attack and

nothing’s even happened yet but yes

don’t assume don’t make a massive

investment or any sort of investment

based on future market predictions that

you don’t

you don’t know for sure

yeah let’s just go

remember our conversations from zillow

last week or the week before what was

the number one thing they did wrong they

overpaid yep

this is the same thing oh my

god money at acquisition that’s just the

rule you know like how

how well you buy whatever it is

determining whether or not it’s a good

investment or not yeah and if you

overpay that point of acquisition which

again this syndicator was proud of hey i

i got the deal i overpaid i out i out

bid wall street well oh god

really that’s that’s oh no that’s that’s

that’s a good thing really you’re you’re

the highest bidder i know all right and

then he’s gonna be terrible that’s just

bad right and then again people are

going to be so happy to be a part of it

and then a you know three years from now

again it might work out if if cap rates

go from three and a half to 2.75 you win

i don’t know what the odds are laura but

they’re not great yeah they’re pretty

low yeah i mean i was going to say that

i was like maybe you know and then i was

like no it’s like slimming on here you

know the only thing i could say

but yeah


yeah i mean seriously i mean think about

that the 10-year treasury is at what 1.5

at one point do you go to one point at

what point do you take zero i mean if

you have an apartment building making

2.75 or a treasury at 1.5 i think i’m

taking the treasure given all the other

risks and apartments let alone if the

ten year goes up to two and a quarter

are you kidding me

what a nightmare i’m i’m nervous for

this person and they feel bad for

everyone who’s investing so well you got

to feel bad for everybody investing

because the general partner’s not going

to have any money in the deal or very

little they’re going to get paid fees up

the wazoo for acquisition and management

they’re going to be fine

but every lp i mean listen to the daily

financial news the last five minutes we

do math and the lps lose 100

if the cap rate only goes to 4.5


nothing like a little something to make

you sick so

good thing that you pay attention and

you knew right away absolutely not run i

mean can you imagine if you got excited

about that my gosh

terrible so yeah folks this is happening

across the board i see many many many

many deals that are like this now

because again the last couple years what

we’ve had so surprise cap rate

compression which means they’ve gone

from six to four they’ve gone from seven

to five you made a lot of money yeah but

but again the fed made you the federal

reserve took rates to nothing they threw

gazillion dollars in the market you got

lucky right fed is extracting themselves

from the equation

you’re not going to get lucky twice so


and again if you need a reminder go look

and see what happened to residential

because that is the same thing that’s

happening in multi-family today right

laura 100 yes it’s exactly the same

exactly the same awesome so be careful

be careful yes

yeah sorry it’s okay it’s real life it’s

perfectly okay so laura how can people

follow you because you have an amazing

instagram page um my instagram is just

my name more more be no spaces but yeah

i would love that awesome thanks laura

thank you


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