Impact Investing: What Is The Cogo Capital Credit Box?

Impact Investing: What Is The Cogo Capital Credit Box?


Well you guys for those of you that have
attempted the impact investment podcast before welcome back I saw a lot of new
people registering for it yesterday so we’re excited about that we love to grow
this database people that are attending our podcast we hope you find it useful
and educational so we will continue to do it as long as you guys are enjoying
it absolutely yeah so Eric’s gonna give us a few updates on the market we did
not do a podcast last month so we’ve got a lot of things to catch up on so we’re
gonna just kind of bring us up-to-date on what’s going on in the marketplace
right now and then we’ll segue into some things we want to talk about about the
fun some real estate stuff yeah so let’s do that let’s do a market update markets
continue to edge higher on the backs of the job market especially low interest
rates and increased optimism and regards to trade specifically with China the Dow
Jones 22.4% for the year SP 500 is sitting at 27 point 3 and the Nasdaq
beating them both out which is typical at 29.8% so a 30 percent year is huge
you know how long that lasts nobody really knows but it’s definitely been a
robust year for the equities markets Treasury yields continue to widen which
is also a very positive thing the three month coming in at one point five six
the ten-year coming in at one point eight five in the thirty year coming in
at two point two six so while the Treasury yields do continue to widen
it’s easy to see why the majority of the investing public is yield starved as
they say the big things that happened since our last podcast 266 thousand new
jobs in the month of November far surpassing estimates needless to say
that is huge especially since we’ve been sitting at this 50-year low for
unemployment for some time now so for us to see these huge numbers continue to
come by way of the job market is is really phenomenal
this is really cool Heather Saudi Aramco is going public today and at a 1.8
trillion dollar valuation Wow 1.8 trillion okay this is good so they’re
edging out Alibaba which is you know the Chinese Google if you will edging out
them for the largest IPO in history in world history so a pretty big day for
that for those that don’t know Aramco produces and pumps Saudi oil to the rest
of the world they only floated 1.5 percent of their shares to the public
markets 1.5 that’s it so 0.5% to Saudi citizens and residents and 1% to
institutional investors even with that very very small float of shares they
raised twenty six billion dollars putting their valuation right at 1.8
trillion which is six hundred billion dollars more than Apple and Microsoft
rounding out the only three companies in the world with a market value or a
market cap over one trillion dollars some potential headwinds really not a
lot of the FOMC meets today for their last policy meeting of the year it is
anticipated that they’re probably not going to signal for more interest rate
cuts to come but we’ll we’ll see how that plays out this afternoon you know
something to watch something I’ve been watching the Fed the Fed continues to
pump you know 60 to 70 billion dollars worth of liquidity into the markets on a
monthly basis topping out or surpassing the four hundred billion dollar mark
which is interesting to be that aggressive in their liquidity policy
when the economy’s humming along so nicely the Fed says it’s not
quantitative easing although it sure looks a whole lot like it so interesting
and definitely something to watch moving forward to see if they continue to keep
this policy going but needless to say banks and lenders
across the world are seeing really really high demand and are meeting that
demand which is a good thing and consumer spending is still humming along
well with rates staying low it has created a lot of opportunities for our
funds because as some of you may know we are active in the real estate market in
our local market and one of the things that we target are first-time homebuyers
and with the rates staying low and there is so much opportunity for people that
are looking to purchase a refinance it’s been really good for our fund in
the ability that we’ve been able to sell these properties so you know and that’s
a great segue because one of the things that we’ve been talking about a lot
about at our company and I think you’ve probably experienced this because I have
a lot of investors that are looking at either buying notes or going into the
fund one of the big questions I’ve been getting a lot of is you know what’s
gonna happen with the market what are you guys gonna do how are you gonna plan
if the market shifts and you know there’s a lot of opportunities when
markets change I think things are still fairly good right now especially in the
markets that we’re buying these real estate assets and but it’s important I
think for you folks to understand what our credit box is and what we encourage
our students to go look at when they’re buying these properties the credit box
that we follow when they’re trying to get loans through kogo which these loans
are the loans that we fund on the fund and this is the credit box that we
follow when we’re buying these properties so I think it was it’s an
opportune time to talk about that because I don’t know about you but I’ve
been getting a lot of questions about that
I’m not almost-daily and it it’s good to point out that our credit box changes as
a lender you know depending on what’s going on in the marketplace our
underwriting standards continue to evolve just depending on what’s going on
so I think Heather’s going to touch on some changes that we’ve made why we’ve
made them and how it’s not just self-serving although obviously you know
you you have to act in the best interest of your lenders which for us is our
investors but I think she’s gonna touch on why we change and how that benefits
the borrower not just not just a lender yeah well I
mean one of the things that we pride ourselves on here too is as a lender
it’s not also important for us to only you know get these yields for our
investors but it’s really important for us also to set our borrowers a first
success and be able to be strategic in the event that the markets change so you
know one of the things that we feel real strongly in is we only lend on
residential units one to four units the ultimate sales price cannot exceed the
FHA maximum and I’m going to go into these things a little more in depth as
to why we feel this way square footage on the home doesn’t exceed 2,800 square
feet it cannot be bigger than a 5-bedroom 3-bath and is not more than a
half an acre and if you look up on the screen we’re gonna put a PowerPoint up
we actually have a link to the FHA loan limits every area is different I know
that in the Spokane market I believe it’s about three hundred and forty
thousand and the reason that we we follow those guidelines with the FHA
limits is it’s easier to sell them so as a borrower if you get into a pickle and
you find it you know hard to sell it you you can adjust if you’re staying under
that FHA limit and as a lender you know you’re more secure buying a note that is
structured that way so we’ll go into a little bit more detail about that we do
believe that real estate regardless of the market cycles that there’s a place
that brings consistent and timely returns so we will still continue to be
in real estate one of the things that our CEO Lee strongly believes is in a
downturn market it’s a huge opportunity for investors
so always align yourself that you are in a position whether you’re investing in
our funds or trying to do this yourself that you’re in a position to take
advantage of opportunities in a downturn market because there is a lot of
opportunity for that you can think of it as a box economists call it the fat part
of the curve real estate investors call it the sweet spot where most of the
buyers are or properties sell the fastest and where your margins margins
can be the greatest I think one of the key things there is selling these
properties quick when you’re staying within this box its box on this criteria
the properties sell fast there’s more buyers in that area and
whatnot coma capital is putting our focus on the sweet spot this is our
credit box and this is to maximize your profit with our five-point criterias
system so again sales price at or below FHA cap this is the Federal Housing
Administration and it has a maximum loan amount in each real estate market the
reason that we say to stay under that cap is because if you don’t then you’re
going into a jumbo loan and your your our pool yeah your buyer pool goes down
immensely I think Lee was saying that 80% of homebuyers are FHA approved right
that’s huge that’s the that’s the biggest one yeah for sure and we’ve seen
that what the houses we’ve sold in the Spokane market mass majority of
homebuyers are looking for a home under this capped amount if you’re selling a
home it is where you want to be because it has a greatest potential for a quick
sale FHA loans bring homeownership in to reach for first-time homebuyers this is
a huge one we typically aren’t buying houses where the sales price is higher
than two hundred and fifty thousand at least in our market that’s a great sweet
spot for first-time homebuyers it’s also important because homes above the FHA
cap are statistically more likely to experience drastic fluctuations in value
so your higher end homes you know number one your buyers pool is much smaller but
when the markets fluctuate those are typically where you see those those
values drop and we see it all the time you see it right now look at Orange
County California and look at South Florida look at New York City look at
the high-end real estate markets they’re always the ones to swing the standard
deviation is a lot a lot higher in those markets than it is in a place like
Spokane Washington or Denver Colorado or you know Salt Lake City absolutely so
property types 1 to 4 units and under 2,800 square feet
single family and small multifamily real estate is your best bet when there is a
market uncertainty small unit properties mitigate the risks you find in large
multi-unit properties we do not encourage people to go over for units
and that’s for doors that could be duplexes are included in that
four-plex something of that nature well anything over if I’m if I’m from correct
on this anything over for is commercial yeah yes okay yep so a whole different
whole different ball game different ball game
the old adage don’t put all your eggs in one basket is increasingly true in the
current evolving market this is important when you invest within these
parameters you can attract a larger segment of the market including again
FHA buyers this increases your ability to appeal to more people so again
property types need to be one to four units and under twenty eight hundred
square feet twenty hundred square feet that doesn’t mean that if we get a
borrower that comes to us that has borrowed five times from us and they’ve
got eight hundred credit and they’re gonna put fifty thousand dollars down
that we wouldn’t consider looking at a house as thirty-five hundred sweet
thirty-five I can’t talk today thirty-five hundred square feet but
these are the parameters that we go by and there’s always exceptions to the
rules property types fix and flippers will
find that rehab costs and extended work schedules can bloon in bigger properties
I’ve seen that happen we’ve actually experienced that here at the corporate
office and we quickly got out of those houses as fast as we could and went back
down to our nitty-gritty yeah have you ever heard of the the the real estate
investor that finds out that their their property needs a new pool yeah that’s a
problem yes as property size increases so does the risk that a property will
turn into a money pit and I we can vouch for that
with time in rehab and time on the market creating a huge drain on
resources and that’s one of the things at least in our local market where the
fund is investing in real estate we find that those higher end homes they’re
harder to sell and they take longer the people that are actually purchasing
those homes are a lot pickier they can afford to be and so they just you know
the amount of time that those things sit on the market until you find that right
buyer just drains you from a holding cost standpoint true so no more than
five bedrooms and three baths Millennials and boomers are the two
segments expected to dominate the market in the next five years both are looking
at smaller homes Millennials because the starting out and boomers because they’re
downsizing I can attest to this too I am about to sell our 4,000 square-foot
house our kids aren’t there and quite honestly even if our kids were a little
bit look younger I would rather be vacationing and experiencing things than
being you know married to this home that we constantly are cleaning and mowing a
lawn so I do see that I think a lot of people are downsizing and that’s another
big reason that you know we believe strongly in sticking with these sizes by
no bigger than five bedrooms three baths and then the 2,800 square feet I think
that is a true statement their property size less than a half acre land price is
a fickle thing it is harder to assess value acreage is often the first feature
to forego for buyers seeking to economize and both boomers and
millenials are looking for smaller acreage boomers because they’re getting
older and millenials because they’re just starting out boomers dread the
upkeep yes and expensive acreage the millennial generation is seeking
community and great swaths of land make that a more distant goal all this makes
these grand estates harder to sell and I agree with that 100% you know one of the
other things with acreage you’re typically dealing with septic sand wells
and things of that nature those those those two items there make it more
difficult to sell to so you know this is really all about getting into properties
where you can make a profit but you can also sell them really quick but again
you can also adjust if the market changes and hold it as a rental you know
if you stay within these guidelines these properties will cash flow in the
event that the market changes and you can actually taint change the strategy
and that’s something we look at as fund managers we meet on a weekly basis on
the properties that we purchase there have been times where instead of selling
something as we’re going into winter we know that the prices are going to come
up in the spring we put a tenant in it for six months get it get it cash
flowing and then wait till the market comes back up but if you’re buying those
high-end homes and you’re going outside of these guidelines it makes it very
difficult to you know change your course and go down a different strategy it does
and you know why are we why are we getting more specific with the
underwriting guidelines yes yes it’s it’s it’s
for our own you know risk abatement if you will but it’s also for the success
of the borrower but when we have long expansions like this when the when the
economy is growing for you know ten plus years you’ve got new real estate
investors coming into the marketplace constantly more and more and more well
the deals the deals become harder to find the more real estate investors that
are there bidding these deals up and some of these real estate investors are
brand new right so they’re they’ve made a commitment to be a real estate
investor so they want to get deals done so what they do is they their personal
underwriting standards stretch and they get themselves into deals they probably
shouldn’t have or maybe they get themselves into a deal but that deal
isn’t going to be able to exit very easily so us as lenders it’s in our best
interest it’s an or investors best interest and it’s in the borrower’s best
interest to be very specific with the underwriting guidelines so everyone is
on the same page and we give everyone the best opportunity to get into the
deal and exit the deal and get the investor paid successful absolutely I
mean if you follow these guidelines you will have multiple exit strategies if
you get to the end and you can’t sell it you can always readjust hold it as a
cash flowing property and we’re seeing this in servicing one of the things that
you may not be aware of is we actually service all of our own notes and we do
outside servicing I think we service about four hundred and fifty notes right
now we have seen more requests for extensions over the last two months
which tells me that either you know they’re not getting the projects done or
they’re getting the projects done and they’re not being able to sell them at
least if you’re following these guidelines you have other options you
don’t have to just sell it because you get to the point where you’ve held it so
long your profit is eaten up you can’t lower your price now you need to
consider okay can I turn this into a rental can I sell it on a lease option
if you follow these you will have those options you’ll have a higher chance to
be successful in but one thing the one thing to really point out here is we’re
not lending out the bank’s money and via a line of credit
we are lending out our investors money via our private equity funds our
investor are looking for yield with safety key
word there being safety when you start to see requests for extensions on loans
go up it it makes investors it makes investors a little nervous hey why is
this bar we’re not able to access this property you know or what is the chances
of them exiting at a profit at this point so it’s it’s really not in
anyone’s best interest for you know to see extensions rise are fiduciaries to
the investor right so it is very important to look out for their best
interest first and foremost but the best interest of the borrower and the
investor are aligned with each other so it’s just our job as facilitators to lay
out the platform so make that as easy as possible no absolutely and the other
thing to mention is there’s a lot of opportunity right now with 30 year loan
products for rental properties we actually can offer that to our borrowers
and so it’s in our best interest to originally structure the deal in a way
that makes them qualified to exit the original alone maybe it was to rehab it
and purchase it now they’ve got it cash flowing we have a 30-year product for a
rental property that we can easily refinance them into yeah so there’s like
you were saying people are yield starved right now there is huge institutional
money out there that are offering you know longer term paper thirty-year paper
but the key to that is from the time that you buy it and structuring it in a
way that you have the ability to refinance into those so and we look at
it from a you know as fund managers and managing the fund we also look at it as
worst-case scenario if deals are structured this way if we ever have to
step in and take a property back there’s more opportunity for the fund or a note
buyer to stabilize the property cash float or something like that right and
we have to be in the best position possible to exit that property if the
borrower couldn’t rank which is critically important you know so
everything everything is about a hedging risk right and this is when we see the
market really start to heat up and heat up which it is it’s hot right so I mean
these markets are up 30% and they’ve been doing extremely well for the past
decade so as as the returns get higher and higher and higher so does the risk
and for most people at least the customers that we serve the investors we
serve they are more concerned about the downside risk than they are about
hitting a home run so we’re more concerned with a risk profile because of
that yeah and this is a company-wide initiative I mean you you if you’re a
borrower or a broker and you’re calling into kogo looking for funding this is
going to be the same message you’re going to get there
but I think it’s really important and pertinent to talk about it in relation
to the funds because a lot of the members of the fund are people
potentially looking at putting money into our equity funds have asked you
know what is your guys’s plan how do you guys manage a shift in the market and I
don’t know that everybody understands how much management goes into this fund
I mean there are weekly meetings that are met on and that’s in regards to
servicing we look at the overall portfolio we look at problem accounts if
we have them okay is there is there some kind of common denominator and this is
where guidelines like this evolve from we look at you know maybe it the common
denominator is deals that are above the FHA cap that are getting in trouble
because they don’t have exit strategies so it is a moving target it’s something
we talk about on a weekly basis we meet on all the properties I had one this
morning that my acquisition specialist was ready for us to purchase I ran the
numbers and the numbers didn’t make sense so I’m asking more questions
but you always have to be active and strategic and ready to shift and change
direction in the event that the market changes because we all know what’s gonna
happen we do and the more likely it is going to happen your your more concerned
about the exit then you are the acquisition because no one has a crystal
ball but you really need to be thinking okay when this loan matures what type of
economic cycle are we going to be in what is the what is going to be the
buyers climate and being able to forecast that perfectly is impossible
but it’s it has to be on the forefront of your mind
just because you have a good deal today well how good is your exit 12 or 24
months from now yeah so again these are the guidelines
we follow from a borrower broker standpoint but this is also the
guidelines of the fund if you’re interested in deploying capital in a
passive way the funds are a great opportunity you’re basically investing
in the same real estate asset as notes and real estate but you’re not having to
lift a hammer and deal with tenants and toilets and deal with a note not paying
it’s very passive if you’d like to talk about that you can call Eric or I of the
office and we can set up an appointment to talk with you mortgage and more
information the funding number is 888-259-3826 and then the other ones in
san josè so I don’t know about you I’d like
to go to San Jose right now since it snowed today here but you can visit our
website at funding tor calm and you can actually get more information about that
or get signed up for it absolutely we’d love to see you there yep and again
reach out to Eric and I would love to schedule an appointment to talk with you
more about our real estate equity funds thank you everybody happy holidays happy
holidays

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