FULL TRANSCRIPT
‍

‍

slava (00:01.848)Hello and welcome to another episode of Smart Humans. I'm super excited for today's guest. Love to be able to talk to an industry expert and today we're talking to Matt Rodak from Fun That Flip. Matt, thank you very much for joining.

matt_rodak (00:15.342)Thanks so much for having me Slava. Great to be here.

slava (00:17.888)Absolutely. So we always like to start with the same first question, which is how did you even as an individual? You know at what age and how do you even get into alts? Tell us that back?

matt_rodak (00:27.974)Yeah, so I like to think I was one of maybe the early adopters of alternative investing. I somehow got turned on to, I think it was just a newsletter at the time called Lend Academy run by a guy named Peter Renton who I think is one of the OGs if you will of Alt Investing but he was closely following I think two of the companies that were on the cutting edge of this, Lending Club and Prosper all the way back in 2011, 2012 when they were kind of coming out of the great financial crisis and looking for different ways to put credit.

together for consumers. So for those that may not be aware, there was these, they called them peer-to-peer lending platforms all the way back in the early days and somehow got turned on to Peter's kind of thing and was following it. And it was back in the days where you could look at these consumer loans and see what the person was using the money for, whether it was putting a pool in their backyard or paying for a...

a kid's wedding or consolidating credit cards and start to invest as I think as little as 50 bucks in these consumer loans. And kind of get a credit card interest rate return at least on the face value. And obviously these things tended to be binary where you'd either get all your money back in interest or like none of your money back in no interest. So started to see kind of a blended return of the nines to 12%. But that was kind of my entry point. I was probably in my...

early to mid 20s and just something that I was interested in doing and that was pretty cool from a technology and how credit was being created and formed in this new mechanism. In some ways was one of the inspirations for how fun that flip got started, which I think we'll get into a little bit later. But yeah, I started having kind of a small portfolio of these consumer loans and really just kind of intrigued by one, it was something new and two, it was a way to deploy capital.

In a space that was uncorrelated to the stock market, which I'd just seen a tremendous amount of volatility kind of through that 2006 or 2008, 2009 period. So as I was seeing my small 401k at the time, take a wild roller coaster ride, I started to think, man, what's maybe some other ways to de-correlate some of my portfolio into things that are less sensitive to, you know, called the whims of the market, if you will.

slava (02:42.916)So over time from 2011 when you started reading that newsletter and got into some private credit to today, obviously you're an expert in real estate with your platform. Can you tell us about any of your personal evolution in terms of allocation across the various asset classes? For example, do you put your personal money all into real estate now because you're an expert or do you put some into private credit or are you putting into collectibles or art or are you pro or anti crypto?

you know, where do you go in terms of now pre IPO investing? Are you an early stage, late stage avoid it? Just give us the whole thought on how you like to think about it.

matt_rodak (03:18.802)Yes, certainly I think kind of my core thesis is to definitely stay focused on things that I understand well. So real estate checks that box, I live and breathe it. So I do have a fair amount of my personal investments in both investments that we make available to investors on our platform. So like to say, eat my own dog food, if you will. So I have a fair amount of my both retirement accounts as well as personal liquidity, if you will, deployed into investments on our platform.

I also do some private syndications with real estate, more multifamily and kind of more equity type deals with some folks that I've gotten to know over the years. So real estate makes up a big part of my portfolio. I've also started to get, early stage startups is another thing that I feel comfortable in, having started a business and kind of know what to look for, both in terms of business thesis as well as kind of founding teams.

Got involved with a Angel List, came out with a new product a couple years back called a Rolling Fund. So, involved in a Rolling Fund, focused on PropTech, so still kind of tangential to what I know well. And then I do some one-off investing, Angel investing, again with some of those companies that I learn about through the Rolling Fund and some other accelerator programs that I've got some connections into.

And then recently, and maybe we'll get into this a little bit later too, but recently made an investment in the manufacturing business of all things. So starting to take a macro view on I think what's going to happen with kind of the reshaping of global trade and I think see some opportunities, particularly for some reshoring back in the US around manufacturing. So had the opportunity to take a position in a machine shop in Ohio with actually an old high school buddy.

that I think has some interesting opportunities as I think some significant investment in manufacturing starts to happen in a pretty meaningful way back in the United States. So crypto, I dabble in crypto, I think more just so I have a reason to keep my eye on it. And I wouldn't say it makes up a big part of my portfolio, but I think the other kind of thesis that I like to follow for me personally is I like assets that either produce cashflow or the underlying businesses have a path to produce cashflow.

matt_rodak (05:33.846)So I get a little less excited in things that are more appreciation driven from a valuation perspective. So I've not done a lot in art and some of the other things that I think for a lot of different reasons are still compelling for a lot of good reasons, but just not something that I've necessarily developed a strong enough thesis around to model out from a return perspective.

slava (06:02.744)So you're a great person to help educate us in the audience. So when you say you stay away more from the speculative assets, but you really like the cash flowing assets, can you give us a little bit of color around why that is and why you make that decision?

matt_rodak (06:18.026)Yeah, I mean, I think some of it has to do with, I have a finance degree, right? So it's easier to kind of model out, at least, someone told me this earlier on, which I believe the only thing we know about financial models is that they're wrong, but at least has something that you can start with on what could this thing potentially be worth if certain projections or assumptions prove to be true over time. So a piece of art, I guess, is a good example. It doesn't produce any

real value to the economy at large in terms of, you know, increasing efficiencies or production or goods and services. And its value is largely derived by what someone else is willing to pay for it. The converse of that obviously is that it's a very scarce resource. There's only one of it in existence, at least one original, you know, pieces of that. So the valuation of that becomes harder to kind of, I think, model out in terms of how many people are going to want

that one thing at some point in the future. Which I think is just as a finance guy, difficult for me to make a bet on based on, a lot of different things that are going on. I think where it gets interesting is, the things that are kind of on the margins, like I think wine is a good example of that, where you could argue it doesn't produce any real cash flow or value from efficiencies or production value, but there's maybe a case to be made that.

There's always going to be people that want to drink said wine. And it also has some of those scarcity elements like art does, right? Which is something that I'm starting to kind of get a little bit more interested in. Also just from a, you know, personal interest perspective of learning something more about something that is somewhat interesting. So I think like a lot of things there's, you know, investments are somewhere on a spectrum where like our investments are very cashflow focused on our platform. And there's, you know, less beta in what that return profile is likely going to look like.

And then on the other end of the spectrum, there's, you could even argue maybe the startup world or the art world where incredibly high beta, both in terms of return profile. And I've just found a little bit more comfort in understanding what my risk return profile is on things that tend to have a little bit more of a cashflow profile.

slava (08:29.944)Super interesting. And then you mentioned the manufacturing investment. That's pretty unique for sure. How is that structured? Is that a cash flowing almost like a creative real estate play or does that look more like a venture startup play? Can you give some color as to what an investment like that could look like? Or even the one you actually did, what that was structured like?

matt_rodak (08:50.89)Yeah, I mean, I think it's maybe a combination of both. It's a profitable business when it was purchased. I think it could be just a nice cash flowing business kind of in its current form. I think what got me excited about it is the growth potential for that business. So it looks almost a little bit of like a traditional real estate. You can put a cashflow model against it kind of in its current form with some reasonable year over year growth.

But, for example, it's in Ohio, in Columbus, Ohio area. Honda's made some big announcements around investments in electric car and battery manufacturing. IBM recently announced, or Intel, I'm sorry, recently announced, I think, a $20 billion commitment to that area for chip manufacturing. So, yeah, so this kind of speaks to kind of the macro view on reshoring some of this.

slava (09:42.04)Yeah, that was huge.

matt_rodak (09:48.642)higher tech manufacturing that I think is gonna continue to trend for a decade or more into the future. And this particular business is, I like to say it, it makes picks and shovels for the manufacturing companies. So to the extent there's growth in the bigger picture of manufacturing, to the extent this operator can find an angle into servicing these other types of businesses in terms of tooling.

could be a huge growth opportunity as well, right?

slava (10:20.344)Great, so is the idea that the manufacturing plan is X size of capacity and are they not fully utilized so you could try to get more out of it or is it to try to create more expensive products so to make more money out of each cycle?

matt_rodak (10:36.862)Yeah, I mean, I think it's a very small family run family operated business that was, you know, was bought out. Right. So I think it's, you know, its current existence was, you know, almost think of it as a lifestyle business for that, you know, particularly family operator. And I think, you know, still to be determined on the overall strategy, but the strategy is just let's find some new customers, right. And, you know, get some good year over year growth, which compounds.

you know, in the face of what I think are a lot of tailwinds for, you may not have to work that hard to get new customers because these new customers are going to be looking for these types of services that are already local to the area, right. In a just in time environment. So, um, yeah, I think it's less about truly, you know, optimizing what's there is, is more so of just like, can we do, uh, can we do more of what we're doing in, in a new, new opportunity set, which is evolving, uh, you know, quite rapidly in this particular,

slava (11:13.764)Sure.

matt_rodak (11:35.266)part of the country, right?

slava (11:37.22)And given, thank you for sharing about the manufacturing investment. That's interesting just as a new concept to discuss on the show. Um, how are you given to your real estate knowledge or we're going to ask you your perspective on the market here in a second at like a hundred percent level, how are you allocating your a hundred percent across your kind of investments? Personally, are you like, you know, 99% real estate and one percent other, or is it some other percentage?

matt_rodak (12:04.746)Yeah, my financial advisors don't like this question. I'm probably overweighted to real estate. I'm probably like 65-ish kind of real estate, probably another 10 or 15% of what I consider to be venture. And then I work in a high-risk business as it is, so I keep probably a fair amount of cash just as a rainy day fund for the family and call it sleep at night money. But yeah, it's primarily...

I've got some publicly traded equities and things like that and some IRA and retirement accounts and health savings accounts and things like that, but I'm mostly in the private markets with most of my investable capital, if you will.

slava (12:43.492)Interesting.

slava (12:48.96)And is that purposely avoiding the public markets because you feel like you could do better with it in the private markets? Or is it because you feel like the public markets were just like overinflated and due for a correction?

matt_rodak (12:54.244)I just got it.

matt_rodak (13:00.042)has more to do with just the time and attention that I have to actually study and understand what I'm investing in. So I'm in real estate all day, every day, and understand kind of the ups and downs of whether it's cap rates or interest rates, or what opportunities look like from a buy side perspective. So I don't have to do any additional work on, is this stock trading at the right price to earning ratio? What does their balance sheet look like? How levered up are they?

you know, how reliable is the dividend, you know, whatever you're going to look at from a public equity perspective to put a valuation on, on a stock or a, or a fund. Um, and frankly, I'm just less interested in those things as well. So, um, to me, it just, you know, it's, it's easier for me to, I think, make smart risk adjusted decisions in, um, you know, parts of the investment ecosystem, if you will, that I just already have a baseline, um, arguably maybe competitive advantage or, you know, additional knowledge to, to make.

good investment decision. So it's not a knock in any way on the public markets. It's just I don't have enough time to really dig in there to the level that I'd want to feel good about investments that I'm making. And even some of this, interestingly, even another answer my financial advisors don't like is most of my public equities are like real estate related public equities, like REITs and different things like that. Because there's certain REITs today trading at 85% of book value, which I think is tremendous value.

slava (14:08.077)makes.

matt_rodak (14:25.942)just knowing what I know about what's likely going to happen to those underlying assets. They're going to be fine in my view.

slava (14:32.98)I mean, there's definitely something to say to stick to what you know, and clearly, you know, real estate and all the derivatives of it. So I'm sure that's working for you. Next question is quite open ended. So take it where you want. But given all your knowledge about real estate, how do you feel about the current market? Where do you see the opportunities? And you could take that question, however you'd like. What are the pros? What are the cons? What are you bullish about, bearish about? You know, how do you navigate, you know, let's call it this market for this year?

matt_rodak (15:01.386)Yeah, and maybe I'll speak about kind of the sectors that I invest in. So I think from a real estate perspective, I continue to be incredibly bullish on what I'll call residential real estate. So I think if you look at some of the fundamentals of housing supply, right, were incredibly undersupplied from a number of places for people to live, both in the, to for sale, right, to own space, as well as for, you know, from a rental perspective. And what's driving a lot of that is

There's a lot of talk, obviously, about the millennial generation, good or bad. And the reality is, is just if you look at the numbers of it, it's the largest generation that is entering peak earnings, starting families, having big life events around triggers that typically create household formation. So from a demand side of the equation, I think there's going to be a lot of tailwinds for single family housing, as well as to some extent, maybe,

I'll call it smaller multifamily, right? You know, two to four unit type properties where people want to both own and live and potentially rent out some of the home that they live in. So and I think behind that is the second largest generation coming behind them that are going to, I think, have a lot of similar traits around getting married later in life and starting families later in life and paying down college debt later in life to all be able to be in a position to own homes.

So the demand story, I think from a fundamentals perspective for residential real estate is strong and will continue to be strong for quite a bit of time. The supply side is also interesting too, because we've underbuilt, depending on kind of who you follow, anywhere from two and a half to five million homes over the past, call it decade, coming out of the great financial crisis. So it was very hard to get financing and really for the builders and others to develop enough conviction.

in the market to build homes. And that was compounded with additional shortages of land to build on in a lot of markets where the people have the jobs and wanna live. In an increasingly challenging regulatory environment around permitting and getting the types of density to add the amount of housing that we really need to support our growing population. So all of that is to say that it's unlikely that even where we're at today, and I think we're starting to see this play out,

matt_rodak (17:25.183)The market to get too out of whack from a home price appreciation perspective to the downside. I think we saw it get really out of whack to the upside. And arguably what the Fed has done over the past seven to eight to nine months is going to prove to be healthy, I think, for the housing market overall. But we're under a million active listings right now from a for sale housing perspective. And the number should probably be closer to 2.2 to 2.5 million, which just speaks to the

I think to some extent, some of the challenges that we have from an overall supply side of single family housing perspective. So long way of saying, I think there's going to be a lot of opportunities, particularly if your money's long enough in single family housing to generate some really positive returns either through fixing flip loans like we do or owning single family rentals or owning

matt_rodak (18:20.178)doing private investing to people that are building or renovating houses. So a lot of different ways to play the space. But I think if you've got the stomach for maybe some of the ups and downs that are going to be natural of any kind of cyclical business, long-term fundamentals of housing, I think are very good. I can't speak to some of the other asset classes in commercial real estate. I think office and some of those hospitality and retail, I think have some challenges just given the way that

people are living and working and I think we'll probably take some time to sort out. But I think if you're in the residential space, there are certainly some opportunities for I think a pretty long tail going forward. On the venture side, I think, yeah.

slava (19:05.084)Sorry, sorry, really quick. You mentioned less than 1 million active listings, but then you said 2.2 would feel like, let's call it an appropriate number. Is that 2.2 based on historic trends? Is that where historically is the right kind of listings number?

matt_rodak (19:20.714)Yeah, I think, yes, historical trends is a function of households, right? So, and part of this is being caused by, frankly, we just don't have enough housing supply. The other challenge is, and there's been a thesis around what's called a mortgage rate lockdown, where, so if you owned a home over the last two years, you've probably refinanced into a 3%, sub 3%, 3.5, 4% interest rate.

And now that mortgage rates are a tick over 6% today and were as high as, call it seven and a quarter kind of in Q4 of last year. Even if you want to move houses because you need the extra bedroom or, you know, you're ready to move up into your dream home versus your starter home. It's a really difficult trade to trade out of your 3% mortgage into a six or 7%. So 70% of people that buy a house are also listing a house.

Right? So most people that are buying a home are also moving out of a home. And if those people aren't moving out of their home to buy a new home, all of those listings don't happen. Right? So part of it, I think is this premise around a mortgage rate lockdown where people just don't want to trade a 3% rate for a 7% rate or, you know, 6% rate.

I think the other part of it is just the volatility that we saw in the mortgage environment over the past nine months is like there's just not enough certainty. I don't even know what I can afford, right? Because I don't know if my mortgage rate is going to be 7% or 6% or 8%, right? So we're starting to see that settle off here a little bit as we're getting, you know, I think some better trend lines around inflation and what the market thinks the Fed is going to do as a result of inflation. So I think we're okay from a...

you know, housing perspective, if we land somewhere in the mid to high fives, low sixes, as long as it stays there, right? Long enough for people to have some confidence to go list their house and to go look and to understand, you know, what kind of price point they can afford based on that mortgage rate. So.

slava (21:19.316)What's your prediction? What's your predictions on that in terms of where mortgage rates are headed, where fed rates are headed for 23?

matt_rodak (21:27.134)Yes, I'll plug a podcast that I listen to every day, which I think is another question that you have. There's a really good podcast called HousingWire Daily. And they have an analyst called Logan Motashami, who also puts out a weekly, really nice post on kind of all things housing and mortgage rates. So I'm borrowing his work, and hopefully you won't mind this. But I think we land probably somewhere, you know, in the mid to high fives.

from a 30-year rate perspective towards the middle of this year. I think there's two things at play there. There's obviously the Fed funds rate. There's also what's called mortgage rate spreads. So the more volatility in the market, the wider the spread is between the 10-year treasury and a 30-year mortgage. So the 10-year and the 30-year mortgage are trading probably 70 or 80 basis points wider than they normally do.

matt_rodak (22:26.154)the Fed kind of come off their terminal rate of four and a half to five. We could still see, you know, another 60 or 70 percent or 60 or 70 basis points in spread compression on the 30 more 30 year mortgage, which would put us kind of in that mid to high five range, which I think could happen, particularly if the market starts to realize what I believe is true, which is there's a good story around housing from a supply and demand fundamentals. So your credit risk or your valuation risk of the underlying

house that you're ultimately putting that mortgage on isn't exposed to potential negative or significant negative HPA, home price appreciation.

slava (23:05.165)So that, um, uh, 70, 80 beta-spoilants, um, it's able to compress because less volatility. Is that- was that what happened?

matt_rodak (23:13.674)Less volatility and just, the financial markets work just like any other market, right? They're supply and demand. So as more supply of capital is looking for a fair risk adjusted return, globally, the 30-year mortgage and the 10-year treasury have always been an asset that generates a lot of capital supply into. There's been so much dislocation.

over the past seven or eight or nine months that capital has either gone into just cash, and we're just going to hang out in cash because we don't know what's going to happen, or it's been chasing other opportunities like other assets that may be mispriced because of the volatility. And whoever's allocating that capital believes there's a unique opportunity in the market to get an arbitrage on a risk-adjusted return because that market's not pricing

I think a lot of that stuff is starting to work its way out of the market. And we're going to see some of these more traditional tried and true, if you will, investment products come back into a revert to their mean effectively on what their spreads are over a risk-free premium, which is the 30-year mortgage primarily tracks to a 10-year treasury. So I think we're going to see that as we always have kind of trend back to trading over whatever basis points it typically trades over the 10-year.

slava (24:37.022)Got it. So maybe less of the crazy money during the zero interest rate environment into Tesla and more going into this. And this is how it'll all evolve. What was the name of that podcast again? It was Housing Wired something? Got it.

matt_rodak (24:51.59)HousingWire Daily is the name of the podcast. And they do a really nice job on that podcast. Logan's on there once or twice a week. They also have some other people that are in prop tech and kind of the trends of real estate. So it's a good one.

slava (25:05.228)listeners and I are always looking for more information. So let's transition. Thank you for sharing your predictions. Let's transition to Fund That Flip. So you obviously have a lot of knowledge because you started our company and our CEO in this real estate world. Can you tell us about you know what it is and how investors can get involved with Fund That Flip?

matt_rodak (25:25.694)Yeah, so we have a, I guess you could describe it as a two-sided marketplace business. So part of our business, we are a big part of our business is we're out in markets looking for experienced real estate investors that are focused on the single family fix and flip new construction space, right? So these guys are, and gals are people that are buying properties typically in some type of distressed or value add situation.

They're going into the property and they're making renovations or we do a fair amount of new construction financing as well, building new homes. And they need capital to both acquire the home or the land as well as capital to make the improvements or additions or build a new home on that particular plot of land. So

Part of our business is finding the people that are doing that, verifying them, underwriting them, looking at the asset that we're going to ultimately make a loan on, and then issuing a first position mortgage. Very similar to what you would get as a consumer if you went to a bank or a credit union with title insurance and all the fixings to make sure that you got a properly perfected first position mortgage. So a big part of our business and operations is focused on finding these types of operators that are...

full-time in the business of creating housing supply and obviously making money in the process. And then what we've done, which kind of goes back to the Lending Club and Prosper analogy that I used earlier, is we've created an online platform where individual investors, so long as you're an accredited investor, can participate in investing in these loans that we originate through our origination business. So you can go to fundthatflip.com, you can see all the different loans that we funded, you can review.

the appraisal, the statement of work, the photos, the write-up, the credit score of the person that we've made the loan to, and invest as little as $5,000 into that individual project, and earn a percentage of the interest, so these are debt investments, earn a percentage of the interest over the life of that loan. So they're typically nine to 12 month loans, again they're secured by a first position mortgage. Right now they're paying interest rates in the nine to I think 13% range.

matt_rodak (27:41.054)You know, so like I said before, it's something that I like because it's for my portfolio because it's asset-backed, it's short duration, it's high yield, which I think is, you know, three interesting things that you usually don't get together. You're usually trading one of those things away. So this is, I think, an asset class that offers, you know, both the short duration, the asset-backed and the high yield, which has for us made it a pretty easy product to get people excited about over the years.

slava (28:11.16)And can you give us some perspective on your size or scale, maybe some metrics or any numbers you could share?

matt_rodak (28:18.538)Yeah, so we did a little over a billion dollars worth of originations in 2022. Yeah, and in the history of the company now, I think around two and a half billion. So we've been around going on seven years at this point. So yeah, we've seen about everything there is to see in kind of this space.

slava (28:24.31)Amazing.

slava (28:40.436)And what's like the average origination approximately?

matt_rodak (28:44.794)The average size of the loan is I think right around 400K. Not all of that is dispersed at the point of origination. It's released as different milestones are hit on the project, which is another thing that we service that we provide to our passive investors is oversight and servicing and risk management throughout the life of the project. But yeah, they range as little as $70,000 or $80,000 loans for maybe a smaller home in the Midwest somewhere.

We also do some larger development deals where, you know, the guy may be building, you know, 14 town homes, right, on an infill lot in Charlotte, North Carolina, that may be a five or $6 million alone. But each of the individual units, you know, has an outsell of, you know, call it, you know, four or five, $600,000, depending on kind of, we like to stay in the median part of the market, right? So we don't like to be too far on the upper end of the market or too far on the low end of the market, but.

Where do we think there's gonna be the most amount of buyers for that type of property from a price point perspective and like to play in that space?

slava (29:49.764)So what was that range again of what the sweet spot is for where most people buy? Oh, gotcha, gotcha. Yep.

matt_rodak (29:55.05)It depends on the market, right? So in like, yeah, in like Charlotte, for example, that maybe half a million bucks, right? For a, you know, a starter home or a move up home in Boston, it may be 1.1 million, right? In terms of, you know, what you get for your money in different places in the country.

slava (30:12.492)And I know you mentioned the minimum is 5K, which is very approachable for any investor, not anybody, but for accredited investors who are listening. Is the average something like 10 to 15 or something?

matt_rodak (30:24.662)Yeah, per investment, it's around, I think, 12. And average deployment per investor is around 100 in, I think it's right around 100K. So.

slava (30:35.904)Oh, so the average investor is doing around eight investments.

matt_rodak (30:39.53)Yeah, eight to 15 investments, I think, is typically where it's at. So I think it's like anything else, right? If you, you know, and we have a 12 step guide on kind of helping people think through developing their own investment strategy. But I think it starts with like how much you want to allocate to the space, right? And then, you know, maximize to the extent you can diversification across that allocation, right? So that if you got a hundred grand on our platform, that means you could invest in 20 different deals.

I'd rather see you take that 100 grand and put it into 20 deals than put it in one or two because you're

slava (31:14.464)Yeah, that was gonna be my next question, which was, do you have kind of an optimization of diversification? How many you need to get into? Is it 550 or is it based on which markets and how would you determine like what's the right amount for getting diversified?

matt_rodak (31:31.466)Yeah, I think 10 is probably a good place to start. So like anything else, I think the more diversification, the better. The trade-off there is obviously you've got more deals to keep an eye on and different things like that. But I think that's a worthy trade. We also have two other products in market that kind of have some built-in diversification for the investor. So we have a product that's called the Residential Bridge Note Fund, where an investor can make its

It's a debt investment, so it's got a fixed maturity date, a fixed coupon. An investor can make, let's say, a $25,000 or $5,000. I think our minimum on that product is actually $1,000. So you can make a single investment, and then we use the proceeds from the raise of that debt instrument to redeploy into these individual deals through the same security that you'd invest in if you're doing one-off deals. So.

If someone was to invest in the residential bridge note fund today, I think they'd have exposure to north of 300 individual projects. So one of the things we heard over the years from our investors is, I like the asset class. I like the exposure. I like the return profile. I don't really enjoy going through and picking 20 different investments and managing all those and cycling my money back in when they repay. Can I just give you 100 grand and let you guys do that for me? So the residential bridge note fund was kind of a...

you know, I guess listening to our customers and trying to create a product that fit their needs. We've got another one called the pre-funding note fund, which upgrades very similar, but that capital is used to originate loans and fund construction draws before they get syndicated, you know, completely on the platform. And we've got a third product in the works that I'm very excited about that we should have in market sometime late in Q1, early Q2, which is structured more like a REIT. So,

private REIT, so more of a traditional kind of equity investment, your time horizon and lockup period in that fund is going to be a little bit longer. But there's some other benefits that we can provide from a tax perspective as well as from a leverage perspective to help after tax returns and also help provide different risk profile but give people an opportunity to potentially earn a slightly higher return as long as they're willing to trade some of that additional risk.

matt_rodak (33:54.772)with leverage that we may put on the fund as well.

slava (33:57.428)Got it. And is that the main difference between the other managed products and like the potential product?

matt_rodak (34:02.194)Yeah, it'll be the tax treatment, it'll be the leverage, and it'll be the lockup period, right? So your money's gonna be locked up for three to four years, whereas the other products typically have a nine or 12 month term on them. So there's some built in liquidity, if you will, to the debt instruments, where this one's gonna be a little bit of a longer commitment from a time perspective.

slava (34:17.729)Yep.

slava (34:23.964)20 minutes back you said, hey, if your money's long enough, I think you'll make money in single family real estate. And then here you're referencing time duration again. What is long enough for being able to make money in real estate? Is it six months, one year, two years, 20 years, you know, a century? What is that, you know, long enough over under threshold that people should be thinking about?

matt_rodak (34:50.314)Yeah, that's a really good question. I think I would think long enough to mean, long enough to ride whatever cyclicality may happen in the market. Right. So I think if you made an investment back in 2006 and could have held that through 2020, you would have done very well. Right. You bought arguably at the top of the market. The market fell out. But if you held it all the way through 2020, 2021,

you probably still had a reasonable IRR, right, over that 15 year period. So that's a very long time horizon. I think that's not what we're talking about here. I think that was a very exceptional kind of event that was driven by a lot of things that the regulators, I think, have done a nice job solving for to make sure that we don't find ourselves in that type of a situation again. But long enough to ride through, you know,

Real estate is a cyclical business, right? And it's driven by interest rates and a lot of other things. So I think as long as you're willing to kind of go through a cycle, which typically is 12 to 24 months, you know, from an IRR, that is if you bought, if you get involved at the top of a market, again, if you look at the long-term trends of real estate, they're always right up into the right over a, over a long enough time horizon. So

That's what I would say is you don't want to be in this type of an asset class if you think you're going to need the money for some reason in the next 12 months because you may be into a situation where you're forced to sell in the down part of the market. Whereas if you could have held on for another 12 or 18 months, you probably would have come out okay.

slava (36:36.008)Are we maybe then talking like three to five years is let's call it. Long enough to see a cycle. Great. And then.

matt_rodak (36:40.094)Yeah.

matt_rodak (36:46.97)And if you're in that, you're also then benefiting by buying in the down part of the cycle, which is going to help you kind of on the backup, so long as you're right in the right type of investment product that is capitalized to play in whether the market's up or down.

slava (37:02.424)So I as the stock picker, how am I supposed to choose those 10 investments? You know, you told me I should diversify into 10, you know, put five or 12 into each. Obviously you have a managed product now because some of your customers tell you they don't wanna do the picking. But educate me on the podcast here, how am I supposed to decide what to pick?

matt_rodak (37:25.162)Yes, I like to start with developing a thesis around, where do you think housing is going to do well? So for us, we look at a couple of things. Where are the jobs and the people going? So where do we think there's going to be employed people that, so long as they're employed, they're going to need a place to live and have the means to pay for a place to live? So this isn't.

a big secret or rocket science, right? The smile states as they're called, the Southeast, mid-Atlantic areas. We like Boston a lot because it's got a very diverse economy around healthcare and education and startups and venture-backed and private equity. I think first is start with a perspective on either based on what you know or what perspective you have, where do you think the people and the jobs are gonna be at?

And then from there, you can kind of zoom in a little bit more on the actual asset. Right. So we like to look at a couple of different things. Loan to value ratios is really what it comes down to. So what is the loan? How much money is out the door on day one relative to the value of that property at day one? And how much money is going to be out to the property once the property is completed? And do we think there's a reasonable amount of margin for error?

And do we think there's a reasonable believability in that valuation based on what we think the market will bear for that home? So I think next thing is look at that and rule of thumb is you kind of want 80, 85, 90% LTV from a cost basis kind of at day one or obviously lower is better. And then we're typically in the 60 to 70% range on.

once the money is fully dispersed and the home is completely renovated. So you've got a 30, 35% margin for, you know, air, if you will.

slava (39:20.56)Meaning that if it's a million dollar home, you gave them a $650,000 loan. So that's 65% of loan to value. And for some reason there's a shock in the system and that value of that home goes down to 800,000 from a million. There's still coverage if for some reason they're not paying their loan because you still have the asset, the back set, right?

matt_rodak (39:42.206)Yep, you got 150 in that example, you got $150,000 of equity cushion above kind of our attachment point from debt, which is enough to recoup probably guys stop paying interest, there's gonna be legal fees to recover the asset to foreclose on it to sell it right so starts to increase your probability of not only recovering your initial principal balance, but also hopefully enough to generate a return on that investment as well right.

slava (40:07.588)Great, great.

matt_rodak (40:09.246)And I think just to finish that point, I think the other thing that's important to look at is these are, you know, in some ways, I like to say they're small business loans, right, that happen to have collateral behind them. So if you're thinking about making an investment or a loan to a small business, you'd want to do so in a good operator, right? Somebody knows how to operate their business. So looking at their prior experience, looking at their credit score, I think is a decent indicator of like, does this person know how to run their business and pay their bills on time and manage their credit?

So we provide a decent amount of information as well on.

slava (40:40.076)That operator diligence is on the platform.

matt_rodak (40:42.666)Yep, yeah, so we'll list out the project they've completed with us before. We'll try to provide links to other projects they've completed that maybe aren't with us. We'll let you know what their credit score is. So, I think if you have macro, what markets do I want to be in? A little bit more micro, does the asset make sense? Do the attachment points, are the different points in time over the project make sense? Do I believe this guy or gal can execute the strategy they've laid out to create value? And if you can get comfortable.

with all those three things, and you look at obviously, what am I getting paid for this risk? Am I getting a high enough rate of return relative to other places I could put my money? And yeah, it's one of the things I like about this space is most people own a home, have owned a home, understand how homes are valued, particularly in markets that they live in or travel to or what have you. So it's a very intuitive asset class to kind of understand, ultimately,

the value and the underlying value of the property that is collateralizing ultimately your capital that you're deploying, right?

slava (41:46.156)And the biggest risk is the default, right? That they're not paying their loan, is that right?

matt_rodak (41:52.882)Yeah, so yes. And when I talk to investors, I like to say that this is, the risk here is certainly lots of principle, like any investment, right? You can always lose all of your money, and you should go into any investment with some expectation that's a probability that's greater than zero. In this asset class, the probability of your investment going all the way to zero is relatively low, because we have that first position mortgage. There is a real.

Tangible thing right whether it's land or a home in some state of disrepair on the other side of that It does become a liquidity risk right where if the guy stops making interest payments You're not obviously generating any current return on that Depending on the state it could be 12 18 24 36 months right to you know go through it a Notice of default process a judicial foreclosure process they get the property back and then list and sell it process so

I like to say there's a pretty high probability that we're going to get all or most of your money back. But again, if you need that money, counting on that money for tomorrow or at the date the loan matures, proceed with caution, which is another reason for diversifying. If you got that 100 grand across 20, you may have one or two that get stuck. Now you got five or 10K kind of stuck, but your other 190 has been repaying in liquid on a somewhat...

predictable basis, if you will.

slava (43:21.22)Is there some sort of predictive measure of how often you're having an issue with one of the loans? Is it 10 or 20 percent or some sort of number like that?

matt_rodak (43:33.514)Yeah, so we post all of our default statistics on our blog. So every month we post how many loans are 30 to 60 days late, how many loans are 60 to 90 days late, how many loans are 90 plus days late, how many loans are in foreclosure, both on a percentage of dollar and unit count basis. Historically, that's kind of run in the five to 10% range across all three of those different buckets.

We have seen an increase in what we call loan extensions. So the guy took out a nine month or a 12 month loan and now he needs another three months or he needs another six months to really kind of complete and finish that project. Some of that is, we've all heard about the supply chain challenges and getting windows and refrigerators and stoves and copper and all those things that go into a house have certainly been challenging over the past really since COVID and some of that is starting to correct itself. But

What hasn't caught up completely is the permitting offices in a lot of these local jurisdictions. You need electrical permits and plumbing permits and building permits and certificates of occupancy. And a lot of those government offices were backlogged for a number of different reasons. Some of it, COVID caused and some of it caused by just the amount of additional building that's happened over the past two years. So we're seeing more of our...

borrowers are still making good progress and we still have conviction in to get to a good outcome. Just need more time as a function of either supply chain challenges or getting the appropriate permits in place from the local jurisdiction. So I think around a third of our book right now is in some state of extension. Worth noting that we don't give people extensions that aren't current on their payment or aren't making good progress on the project or aren't otherwise behaving.

the way that we'd expect a good counterparty to behave. But so long as we continue to believe in the project and the person just stuck for a reasonable reason, we're inclined to give them some additional time to work it out.

slava (45:37.668)I love the transparency and the fact that you have all those stats on the site. That's super helpful for the investor as they're doing their research. So that's awesome. An obvious question here, how has the rising interest rates been impacting your business? So I can see potentially going both ways. So we'd love to hear what you're seeing and what's happening.

matt_rodak (45:58.25)Yeah, we've always said that we're somewhat interest rate agnostic as our business, right? Like if interest rates are really low, like they were over the past couple of years, we can play in that space. And the result is our borrowers pay less for the money and our investors make a little bit less of a return. We operate in a pretty efficient market at this point in terms of how things get priced.

I think what's been challenging for the market at large over the past nine months is really has to do more with the rate of change. So we went from practically a zero cost of money environment to a four and a half, 5% risk free rate in a really short amount of time. So that's caused kind of, I think, challenges on both sides of our business in terms of for our borrowers. You know, you think about

they're buying houses, right? So they're buying house from someone typically that's selling out a foreclosure or a divorce or someone died and then you get rid of the house. They're not sure what they can buy that house for because they're not sure what they're gonna be able to sell that house for because they're not sure what their buyer is gonna be able to pay because they have no certainty around what's the 30 year mortgage rate gonna look like, right? So the rate of change has just created a lot of uncertainty, I think for our borrowers in terms of

ultimately, what's the right price to pay today into a very kind of uncertain 9 to 12 months from now? So, we've seen a lot of them slow down in terms of their buying activity, which obviously creates less opportunities for us to fund. The other side of that is just from our risk posture perspective is we have the same questions, right? We don't know what they're going to be able to sell the house for 9 to 12 months from now. So, we've started to take a more conservative approach on our...

our underwriting, right, from a loan to value perspective and a pricing perspective. And then our investors, and we work with a handful of institutions as well, similarly, their cost of capital has gone up and they've got different opportunities. So they're demanding different risk return profiles. So I would say over the last eight to nine months, the market's just been trying to find its new level. And once it levels off, the market will form around it. And I think that's just what people are looking for.

matt_rodak (48:17.238)right now is some confidence in what the future is going to look like so that they can plan and make decisions appropriately. So we're starting to, I think, see kind of the end of that now is we're, like I said before, starting to see the Fed and inflation posture a little bit differently in terms of rate of change going forward. So and that's showing up on the consumer side, right? Purchase applications for homes bottomed out over the last couple of weeks and are now starting to trend back up. So-

People are starting to come back to market and want to buy homes and want to get mortgages, which will hopefully get the flywheel spinning again on just liquidity in the market is what's needed. We need active buyers and sellers telling us what they're willing to pay and transact at.

slava (49:05.516)Great, so last question in this segment. So you mentioned some concerns about commercial or office or residential, sorry, or hospitality or retail, but single family, residential, you're still very bullish on. Any other points of view on the 2023 outlook?

matt_rodak (49:21.994)Yeah, I mean, I think specifically to housing.

slava (49:26.248)Yeah, specifically to real estate and what you know about.

matt_rodak (49:30.61)Yeah, I mean, I think it'll be a year where, you know, winners are made and people that maybe were doing things that were a little bit too brazen are, I think Warren Buffett has a saying, you don't know who's swimming the trunks down till the tide goes out. So I think it's safe to say the tide, the tide's kind of gone out. So I think we're going to see a fair amount of consolidation kind of in the space that we work in, either in terms of, you know, businesses kind of

pitching their wagons to larger platforms or shutting down shop and those customers having to go elsewhere for the services that they were previously providing. So I think 2023 across the real estate spectrum will be where the strong gets stronger if they can do some of the right things and position their businesses in the right ways. And maybe that's the optimist entrepreneur in me, right?

matt_rodak (50:27.618)to challenging times, but yeah, I think what the industry just went through over the past six to nine months was real and to some extent cleansing. And I think we'll see how that plays out across the sector at large in 2023. I think it'll be a down year from a transaction volume perspective with particularly in the first half of the year with the trend line starting to come back to what I consider to be something more normal by the end of the year.

with kind of the disclaimer that 2020 to 2022 were not normal years, both on the more to the upside, right? So I think maybe to summarize it, I think we kind of revert to the mean in terms of all things, particularly residential real estate in 2023.

slava (51:14.22)Yeah, you mentioned that before. It seems to be a consistent trend. So the listeners wanna be as smart and knowledgeable as you, which is gonna be hard to do. And you already shared one of your nuggets, which is the housing wire daily. But what is it that you're reading, listening to, watching that makes you as knowledgeable as you are in the space?

matt_rodak (51:35.198)Yeah, so the housing wire was one, I guess I've said before, I'm more of like a macro guy. I like looking at kind of the big picture and then developing more specific theses around that. There's another newsletter that I've been getting for a while called the Daily Shot, which comes out with, it's the first thing I read in my inbox in the morning and it's a lot of different macro, kind of there's a lot around housing, there's a lot around manufacturing, there's a lot around interest rates.

a lot around the venture world. So I like to start there to just kind of see where the trend's going at a macro level. And then, depending on what I'm interested in or what's applicable to our business, double clicking through that to develop, whether it's an investment strategy or a go-to-market strategy or whatever it is. So that's a really good one from a macro perspective that's very objective and kind of data driven. But it's a consistent set of data, right? On a daily basis that helps you kind of

connect some dots on where things may be going.

slava (52:36.548)That's a great one. Thank you for sharing those. And then the last question we always ask everybody, which is, you know, three years out from today, what's an investment you would make today? And the more specific and tangible that you can make that investment, as opposed to just some theoretical idea, like invest into single family homes, you know, will be an investment you would recommend today that three years from now we can look back and say, yeah, that was a great idea.

matt_rodak (53:04.35)Yeah, so I'll try not to kind of repeat myself. I'm obviously biased on real estate. And I think if you can find an angle into single family real estate, and there's a lot of different vectors there that I think can be attacked, and there's a lot of cool platforms that enable this in different ways in addition to ours that I think are worth exploring. I hit on the manufacturing thing. I think there's a huge opportunity in, I'm calling it North America, because I think there's some really cool things in Canada and Mexico as well.

as things get reshored. But there's these other types of investments called, I believe they're called scout funds, where you can put money into a, usually it's an individual operator that's just raising money to go buy a business. And they focus a lot on small manufacturing businesses. So there's enough of these guys that are looking for capital that you can interview and get to know and even help shape their strategy.

slava (53:51.297)Oh, sure, sure.

matt_rodak (54:00.586)that if it's something that you want to do a little bit more hands on, I think small manufacturing has some interesting opportunities, particularly with how fragmented and private, you know, and how much space there is because at a certain size, they're too small for the big guys to pay attention to. So there's some, you know, interesting arbitrage opportunities there. And I think that, I think, go ahead.

slava (54:26.511)If I was going to ask you for single family real estate in North America to pin you down to one city, which one would it be? And if you want to go, yeah, just one. If you need to stretch it out to three, I'll take three.

matt_rodak (54:38.346)I really like the Carolinas. Pick an MSA that's sizable in North or South Carolina and I think you're gonna be okay.

slava (54:50.58)Nice, I love that. I didn't see that coming. That's great.

matt_rodak (54:53.586)Yeah, I should have plugged maybe Ohio, Columbus and Indianapolis or two other markets that were very bullish on. I am, I grew up in Northeast Ohio, but Columbus has a lot of momentum. Yeah.

slava (54:58.9)Aren't you from Ohio?

slava (55:04.684)That's awesome.

slava (55:08.492)That's great. Yeah, no, you're seeing a rejuvenation from your youth for all the manufacturing coming back. Well, Matt, thank you so much. This has been a great conversation. We've covered so many topics. You started out with telling us you it all began in the early 2010s with the Lending Academy, you know, newsletter, you love cash flowing assets as opposed to speculative assets. You surprised the listeners with over 65% of your worth going into real estate. You're super bullish on the residential.

real estate, single family, but you're not so much so into the commercial office, hospitality or retail. You gave us a lot of great facts, like less than a million active listings, which was news to me. And then obviously you already gave us some nuggets as some great things we should listen to, like the housing wire daily.

Your prediction there from listening is that we'll see mortgages in the mid fives and that we're going to be seeing compression between the 10-year treasury and the 30-year mortgage. You obviously told us about how you do your origination framework and what we should be looking out for as investors. There's also the ability to pick on your site or you have managed products, which is awesome. I really appreciate your transparency with us about all the data about how all the loans are performing. Then obviously you finished up by telling us your predictions for the future and told us that Carolinas is where it's at. So thanks, Matt.

matt_rodak (56:28.846)Appreciate it.