Our Story: Evolution from Owning Rentals to Private Lending

Trapped rental equity to $6.1M in private fix and flip loans

Back in June of this year, I released a post Why We Sold Our Rentals in Jacksonville Florida outlining the reasons my wife and I started selling our rental and multifamily properties. 

We began selling our rental properties soon after March 2022, when the Federal Reserve started raising interest rates to combat inflation. 

When interest rates go up, asset values go down, especially the value of assets that are backed by large amounts of debt (commercial, residential, cars, companies with high levels of debt, etc). 

Further, with taxes, insurance, and repair costs skyrocketing along with property prices, our equity was getting trapped in our properties, while our cash flow returns were decreasing each year. 

Our thinking was to recast this trapped equity that was earning 2-3% ROE into higher returns, (at least 10%+). Getting out of rentals would also free up more of our time.

Our hypothesis was that due to higher interest rates, housing demand would slow, inventory would build up, and prices would come down over time. With housing affordability at its lowest point in history, we didn't think the upward trend could continue any further. The market was losing steam due to higher rates. 

Higher risk and lower returns is not a good investment strategy. 

This was a controversial post to make at the time, but this hypothesis seems obvious now, with inventory increasing more than 100% in many areas within just over a year and prices leveling off, and in many areas, coming down 5-10% from the peak.

We now know many large investors and friends who are dumping their Airbnbs and long-term rentals because they no longer have enough cash flow.

So, today, I am giving you an update on the progress of what has happened since we sold our rental portfolio and what we did with the trapped equity (that turned into cash). 

We Opened A Private Lending Fund - Momentum Private Lending. 

At Momentum Realty, agents are passionate about production, profitability, and wealth building (and of course, customer service). 

Way too many agents work too hard for too little and don't have a path to get out of the sales treadmill. Momentum exists to help agents through this. The typical evolution of a successful real estate agent is to start as a top salesperson, and evolve into an investor in single family properties (rent or flip), and then onward from there.

Naturally, because Brittany and I have purchased more than 230 units in our career, and we openly share online what we are up to, and agents come to us for advice on their investments. 

Time and time again, we found agents did not have enough cash to buy properties to renovate and sell. This is a problem.

Most broker/owners don't have any money to lend and their brokerages don't make enough money to get a line of credit. Or, their broker/owners simply don't invest or know how to. So most broker/owners are unable provide this very important value-add opportunity that naturally aligns with agent growth and wealth building. 

The First Loan. 

One agent asked me for a loan at the beginning of the year for a fix and flip project, and due to the timing of cash that we had from selling our rentals and not seeing many good opportunities out there, I just took the leap of faith and said YES. 

To get comfortable, I used my network to find three other top fix and flip loan portfolio managers around the country to evaluate how to draft the loan documents, what risks to look for, and best practices in underwriting.

I spoke to a lender who managed a $5M loan portfolio, $25M loan portfolio, and $75M portfolio - all for private fix and flips. 

What each person gave for advice all rhymed, but one thing was clear: you need rock SOLID loan documents, personal guarantees, proper insurance coverage, and an underwriting process. I also picked up every book I could find online about private lending and beefed up all my documents and processes. 

Closing on the first loan was a HUGE value-add for the agent being in the Momentum Realty ecosystem. This was the start to the company's evolution into something more. We are putting our money into action helping agents - not just being a great platform for agents to affiliate with as a brokerage. 

The deal was solid, the agent needed the money, and giving the loan would help them make more profit. To feel OK doing it from a risk perspective, at advice of the mentors, I used our title company attorney to draft the loan docs. 

It was a win-win situation. The agent is making money on an opportunity found, and we also have a path to evolve from owning a rental portfolio to owning a loan portfolio. 

Math Comparison - Rental Equity vs Private Loan

After the loan closed, I did the math and realized that I also made more profit on that ONE loan in 6 months than I made on owning 5 rental properties for TWO years. 

My returns jumped from 2-3% annual cash flow returns on equity to up to 18% annually (generally 12% I/O loans and 3 points origination for 6 months, depending on the deal). 

This move generated up to a 5x multiple on my returns versus the trapped equity and got me out of the risk of being "long" on housing prices. 

Even better, the time to service the loans and underwrite the deal is much less work (or at least, less frustrating). Time spent is another very important variable as I have three kids under six years old, and time is sacred. 

Where The Portfolio Is Today. 

Since January 2024, I've generated 23 private fix and flip loans (approx. $6.1M in loan originations using my private capital) for our agents, and the agents will NET approximately $1.1M on those flips. This is incredible! 

The agents are netting on average $47,826 per fix and flip that I've funded. 

THIS is exciting. Agents have the confidence that they can execute on their offers because they can call Momentum Realty leadership who will help them when they find an opportunity. 

AND - when agents learn how to flip properties, they become much more experienced, which benefits the customers they serve. In better helping their customers, they get more referrals, which helps their sales business grow faster. The flywheel at work!

My role today is personally helping the agents underwrite the deal, estimate repairs, and even go out to properties to walk through them, when necessary. It's fun! 

What I have found is that most deals aren't a deal, but approximately 1 out of 20 deals sent to me are rock solid deals and should be funded. That 1 out of 20 makes all the difference and is well worth the work. And the loans I deny, really help the agents avoid making a BIG mistake with their money and time. 

Outlook Today. 

For now, our outlook is not clear on where the housing market goes from here.

I suspect prices will come down some, since while the Federal Reserve is chopping overnight borrowing rates, housing affordability remains the core issue. Meanwhile, relocations have slowed and employment is slightly deteriorating. The number of residential sales has hit recent lows (even lower than 2008). 

It's a really interesting time to be in the market during these transition years of switching from the hottest market ever and back into a more normalized market.

It's a time to go in with eyes wide open and realize you must change with the market and find the opportunity in it.

If you just sit still, and continue doing the same thing, you are more likely to get run-over, or potentially lose your gains. Instead, we look to go with the flow of what the market is doing, versus trying to overcome it.

As we say at Momentum Realty: swim with the tide, not against it. 

Photo of me and Brittany electronically signing for a closing of one of the loans :)

and then celebrating after!