557: The Community Bank Advantage for Real Estate Investors

SHOW NOTES FOR EPISODE 557: THE COMMUNITY BANK ADVANTAGE FOR REAL ESTATE INVESTORS

Relationships are the truest form of currency — and banking is no exception!  In today’s podcast, attorney, broker, contractor, real estate investor and Chief Credit Officer of First Foundation Bank Chris Naghibi shares the strategic advantage of working with community banks for your real estate investing.

What You Will Learn

• How mastering underwriting skills can help you succeed in banking and obtaining mortgage loans
• What the key value-add advantages are for real estate investors using community banks have over Big Box banks
• Why understand risk assessment is critical for all real estate investors
• What investment criteria Chris uses to generate $700 in monthly cash flow on single family rentals with mortgages
• A major tip that will help you get your mortgage loans approved in your retirement
• Where you can find properties with the highest ROI
• Why Chris finds the single family rental market to be the most lucrative real estate investment asset

About Our Guest

Chris Naghibi

Chris Naghibi is the Chief Credit Officer of First Foundation Bank (NASDAQ: FFWM). He is also the Founder and CEO of Black Crown Inc., a disruptive collective that handles home purchases and commercial and multifamily real estate brokerage for high net worth individuals. Chris has 20+ years of experience and has accrued $20B in closed transactions and $10M in recovered costs for clients.

As a licensed attorney, real estate broker, general contractor and author of a forthcoming book on financial literacy and entrepreneurship, Chris aims to provide free financial education that allows people to take control and democratizes fear in the financial world.

More About Chris

• His father was in the mortgage business
• Chris did cold calling for his dad at the age of 14 – he had a deep voice
• He saw people do well in the single family space
• His father didn’t always come out as well
• Over time, Chris wanted to learn more
• So, Chris left his father’s company when he turned 18 to find an opportunity to learn more about real estate
• He also wanted to learn about other real estate asset classes, especially multifamily and commercial real estate
• Chris ended up becoming an underwriter for multifamily and commercial loans
• He found that his company had insight into the many aspects of finance and real estate but didn’t know how to bring them together for a broader purpose
• Chris eventually became the Chief Credit Officer for a Southern California bank

Diverse Background

• He credits his diverse background with giving him a deeper insight into all aspects of banking, business and real estate investing
• It helps him better assess risk and relative risk for real estate investments and even business lending, to some degree
• He calls his background schizophrenic
• For a savvy real estate investor, it makes sense
  • He’s been on…
    • the financing side
    • the banking side
    • the real estate side
    • the legal side
• A close friend and mentor helped him get into real estate and flipping
  • He likes working with his hands and did a lot of the rehab work himself
  • He wanted to get discounts so he thought he would get his contractor’s license
  • He checked it out and saw that he met all of the criteria
  • He got his contractor’s license
• With his law firm, he does a lot of pro bono work
  • It’s his way of giving back
• Chris and his sister also have a real estate brokerage
  • They are franchising that
    • Offices in Oklahoma, Texas and Southern California
• The bank is doing great
• He feels blessed to be working in all of those fields
• And he still has time for his wife and son

Investing in Real Estate

• He started investing in single family homes, not in California but in the Midwest
  • 10-12% cash-on-cash return
  • He was able to get a 4 bedroom 2.5 bath home for around $100,000 (now it’s $100-250,000
  • He has got into multifamily and commercial properties
    • However, he’s very picky about these properties
    • He expects good returns
    • Right now he can get diversification of risk on a single family product and better returns
• This is an interesting season
  • Real estate values are really hot and so polarizing in some ways
  • We’ve had artificial interest rate deflation
  • We’ve had an unprecedented series of global events like the pandemic
• It’s very difficult for buyers
• It’s even more difficult if you are investor
  • Where do you go to get reliable information?
    • Moody’s
    • Costar
    • Refin
    • Zillow
  • Predictions last year were for 3-5% increases in home prices – some places experienced 24-27% increases
  • There also saying the same thing for next year with the fed holding interest rates, no more than a 75% basis point increase until 2023
  • That’s why he is cautiously optimistic
• Here is his investment criteria:
  • He never buys a property that is not cash flow positive on day one
  • Before the pandemic, he was buying 2 properties a year (2 single family) and look at least at one other property type
    • This year he has only bought one
      • Single family house in the Midwest
      • Bought it off-market, from contacts
      • Purchased it for $258K and it appraised for $265K
      • Cash flows at $700 per month after PITI
    • He has slowed down
    • He’s not worried about his net worth – only cash flow
    • As long as it’s cash flow positive now, he doesn’t care if the market takes the value down
• Not only are home prices skyrocketing, but so are rental rates
• Chris is currently holding on to cash, staying liquid, for potential buying opportunities ahead
• Also, cryptocurrency has a key role and even NFTs and the possibility of federal regulation

Chris’ Diversified Roles

• Chris is a busy guy:
  • A banker
  • CEO of Black Crown, Inc.
  • Real estate broker
    • Mainly manages emails that come in during the day
    • Much is automated
    • His sister really runs the day-to-day parts of the business
  • Real estate investor
  • Attorney
    • Most of his practice is pro bono work
    • It takes place after regular business hours or on weekends
    • Chris’ father is the office manager at the law firm
  • Podcast host (works on it at night)
  • Author (currently writing a book) – (works on it at night)
  • Social media company
    • Content team – His sister’s company
    • She manages all his content production
• He sleeps only 4-5 hours a night
• He has 9 total calendars
• He taps into people he knows and trusts
• The more successful he becomes, the more he believes he should bring up the people around him
  • If you’re successful in a vacuum, it means nothing
  • He wants to help other people
• He loves his wife and son
  • At the end of the day, he wants to know that his son could one day say, “My father helped others to do well”

True Mentorship

• He is trying to work on his appreciation of the “younger generation”
• He looks at the younger generation and sometimes sees a disconnect
  • He sees, when he offers to help them, that they see it as an insult – suggesting that they can can’t do it on their own
  • He’s having a difficult time coaching and mentoring this generation in a professional environment
    • He sees them either feeling entitled to the next level early or
    • Not appreciating his help in the context of them seeing the benefit to their future by receiving a little more help along the way
• He sees “true mentorship,” not the stuff you pay for online, as connecting with people – the truest form of currency
  • Relationships are truly powerful

The Role of a Community Bank

• “Big Box” Banks
  • In order to grow and scale. Big Box banks have to narrow down exactly what they are looking for
    • If you don’t meet their criteria, for example in lending and referencing FICO scores, you get the next lower down rate or you don’t get a loan at all
    • They have to do that for scalability
  • If you have a high net worth individual, they will often give you special, “private banking” service but that does not pertain to the majority of customers
• Local Community Regional Banks
  • You’re not calling into “call centers”
  • When you call in, you are actually talking to your own personal banker
    • Especially in the multifamily real restate space
    • You don’t have to have a lot of money to get the personalized service
• He’s been declined for service from Wells Fargo once or twice himself
  • They didn’t understand his balance sheet
  • He’s a real estate investor
    • Having more than 10 mortgages, you’re perceived as being a “higher risk”
      • Agency securitizers in the secondary market are not going to give you loans because they can’t sell your loam off in the secondary market
        • You need a “portfolio lender”
• The value  proposition for a community bank is the relationship
  • Relationships are the truest form of currency
    • Banks know this
    • In order to scale their business, the better service they can give you, the better you are going to feel and the more people you are going to share your experience with in the local community
    • A community banking customer is usually in the same city and same county
    • You have the same primary goal as the community bank – to grow and scale your business
      • In a partnership capacity, why wouldn’t you want to work with someone you understands what you are going through, who reads the same news you read every day, and who drives to work in the same area as you?
        • Some may think that a small bank is not as secure but, in reality, they all carry the same FDIC insurance
        • They all have capital requirements
        • Before he was in a community bank, he had reservations, but now he appreciates it
        • We all deserve better
        • The question is, does your bank value you?
          • Every one of his customers can get his mobile phone number just by calling up the bank – he encourages his clients
          • As a customer, you have access to the people who are making the actual decisions
  • They want to see you grow your portfolio
    • Because they are trying to grow their assets and balance sheet too
    • They aren’t worried about the secondary market
    • They are more malleable in relation to their rules
      • The overriding document that community banks have is what their credit decisions have to be typically aren’t based solely on agency (Freddie/Fannie) guidelines – they can be flexible
      • As an investor, you have lots of things to track and they understand if something may occasionally slip through the cracks
      • Whereas Big Box banks put a lot of weight on FICO scores, a community bank recognizes that there are a fair number of hight networth individuals who have low FICO scores
      • One of Chris’ best clients is a guy who invests in single family homes in depressed markets
        • He owns so many homes (possibly hundreds of homes) that the big guys won’t touch him
    • Banks should be lending in their regional areas
      • Some banks would make loans in certain areas, even if it is an area they are supposed to serve
      • If they are taking money in, they should be putting it out in the same area
      • Chris recommends that you go into your local bank and ask what you need to do to get a loan in that area
        • A good bank should share that information

Biggest Mistake(s) Real Estate Investors Make With Their Banking Relationships

• A lot of real estate investors think that their banks are their equity partners
• You can’t think of it as a great investment opportunity and why wouldn’t someone want to invest in this?
• Banks are not in the business to be your equity partner
  • They are in it to make a safe and sound loan into your investment
  • They are only providing the debt and they want to make sure that, in the worse case scenario, a repayment that they will recapture
    • It is not their money
    • It’s a depositor’s money
    • They don’t want to be in a position of making bad lending decisions – that is the number one reason why banks go under
      • It’s bad lending decisions
      • They need to make good safe and sound practices when it comes to making credit decisions
  • They are looking at what you are doing from a risk perspective, not from an investment perspective
    • Even though you may know there is no risk, you have to play the game
      • You have to meet the metrics that the bank needs
      • You need to ask the bank what you need to get financing, what the options are and really explore that relationship
    • If you get upset that the bank doesn’t have the same investment mindset that you have, it’s not because they don’t understand your business, it’s because you’re not appreciating the limits that are put on them and that credit policy

Advice for Old Dawgs Seeking Bank Funding for Their Real Estate Investments

• Having to get mortgage loans when you are retired can be a big challenge
• And it’s one of those challenges which is hard to understand
• When you have a W-2 job, it is definitely easier to qualify for a loan
• Real estate has a lot of tax benefits
  • The number one problem Chris sees is that your taxes show that you don’t make any money
    • But that’s after depreciation, after amortization, after interest deductions, after all these great tax deduction benefits
    • That’s one of the reasons you invest in real estate in the first place
      • Passive income
      • Taxed at a lower basis
• You need to get with a bank that knows what you’re doing – a real estate investor bank
  • His bank understands real estate investing
  • They will look at your schedule of real estate owned
  • Figure out what your tax deductions really are
  • The Big Box banks won’t do that – they will go with what they know
    • You don’t fit the mold of 90% of the applicants they see who have a W-2 job
  • Chris understands because he has faced the exact same situation
• Whether you have 3 properties or 100, the cash flow could be what you live off of
  • It doesn’t matter how old you are
  • You need to deal with a bank that understands and can work with you

Value-Add Tips for Real Estate Investors

• In the later stages of your life, refinancing and background there are somethings that will help you and your bank relationships
• You need to know your plan and how things will play out
• You need to first have a good understanding of your debt and financial position
• Also, if you want to grow and leverage your assets, getting involved in multifamily and commercial properties will be less of a problem with banks
  • The reason why is that you typically have an entity bar or LLC where you are a guarantor as a managing member
    • As a result, the first source of your payments will be the cash flow of the property for the bank
      • The second source of your payment will be the LTV, the equity in the property (in the worse case scenario, they can take the property back)
      • The third source of your payment is your “sponsorship” and how much your showing each month on your take-home tax return for cash flow becomes such a smaller impact to the lending decision, that it’s not even common to be looked at with significant detail so long as your net worth and your experience and your background is there

His Future

• His son is his most compelling factor – the highlight of his world
• Chris and his wife waited until they were older to have a child
• They weren’t even sure if there were going to have a child
• Financial literacy is very important to him – he feels we don’t do enough to educate our kids in that regard
• He has made that a passion project for him
• He wants to look at how he can give back and teach his son the same
• Success isn’t a destination – it’s a journey
• He wants to make that something he does with his son

Rap-It-Up

• Favorite real estate book:  Rich Dad Poor Dad by Robert Kiyosaki
• Favorite business book: Multiple Streams of Income by Robert G. Allen
• Most valuable web site for success (other than your own): Apple News
• Favorite app: Sneakers and Instagram
• Favorite quote: “Relationships are the truest form of currency.”
• If you lost everything – all your assets – and had to start all over, knowing what you already know, and you only had $1,000, what would you do to re-launch your real estate investing business? I would get into real estate wholesaling. I would continue to build that up until I was in a position to buy a piece of real estate and work from there.

How to Reach Chris

• He is on every social media platform: @ChrisNaghibi
• DM him on LinkedIn

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