A few weeks ago I was having a Zoom chat with Josh Heintz of LendingOne (also this edition’s sponsor), and I suggested to him that they should talk to Blanket about putting a partnership together. Of course, I’m not the genius that I think I am, and they had already thought about this long before my suggestion. That partnership was announced at the kickoff of the Broker/Owner conference last week. LendingOne is now the preferred lending partner on the Blanket platform. Congrats to both teams! This is great news not only for them, but also for PMs who partner with Blanket and provide the Blanket platform to their investor clients.
But aside from that specific partnership, I think there is a lot more to discuss about this topic, especially in light of my recent push to have property managers think of themselves more as asset managers than simply property managers.
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Door Growth Through Existing Owner Addition
Traditionally, the way to grow doors at your PM company has always been about signing up new owners. Sure, a small subset of PMs have experienced large scale growth by having some clients who continue to buy new investment properties, but that’s mostly an outlier. The average PM company has to go out and add new owners to experience any significant growth of their portfolio.
I think we may be entering a new era. And I say that with some degree of hesitation, as I’m always the first person to cry BS when someone claims that there’s a paradigm shift occurring. So while this might not be a paradigm shift, maybe it’s at least something along the lines of a “minor renovation” of our industry. I’m not the only one talking about PMs viewing themselves more as asset managers than property managers. This is a meme that is spreading throughout the industry, and it feeds directly into a mindsight shift that leads to more growth from existing clients.
The rationale is pretty clear: it’s a lot easier (and cheaper) to grow doors by convincing people who you’re already doing business with to buy more properties than it is to convince brand new people to be your clients. It also tends to have a snowball effect. It’s difficult to convince someone to be a landlord for the first time, and it’s still difficult to convince them to intentionally add a second rental property to their portfolio, but once they start to see the wealth build, it’s pretty easy to convince them to keep on adding more and more properties to their portfolio. Once you get over that initial hump, it’s a smooth ride after that. So three doors becomes thirty, and five doors becomes fifty. This isn’t a common path for PMs to grow up until now, but there are PMs I know who have used this model to great success. They’ve just been outliers up until now. And the great thing about these rare PMs who have used this model is that their UAC (Unit Acquisition Cost) is much lower than those who are using paid advertising and pay-per-lead models to acquire new doors. It’s easy to see why. There isn’t really much expense in convincing an existing client to add a new door.
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The asset manager mentality aims to change this and make this rare business development model a much more common path to growth. The idea is to show your clients how their wealth is growing and how their life is benefiting from the rental property they already own, and parlaying that into adding new properties that will further boost their net worth and their passive income. This has been a more difficult task in years past. If you’ve ever tried to prepare a proforma for an investor client the old fashioned way in Excel, then you know what I mean. Even if you have a beautiful spreadsheet template created for this purpose, it was still an hour long ordeal to gather all of the necessary information to plug into the cells in that spreadsheet to generate a solid projection for that client. Technology and data warehouses have changed all that. Now, if you’re using a platform like Blanket, you can generate a proforma for your clients in seconds. All of the data pulls in automatically from your PM software, the tax records, mortgage records, publicly available pricing data, etc. And you can even do it for potential properties. A few clicks and a potential investment property has a full projection of the next 5, 10, 30 years. You can literally walk a client through their past performance and their potential performance on a dozen new properties in the span of a ten minute conversation with no prep time required. Maybe that’s not a full paradigm shift, but it is certainly a game changer of some sort.
The Funding Problem
Of course, there is always the issue of how the investor funds these deals. And that’s where the Blanket partnership with LendingOne comes in. If I had to place a wager, my guess is that 80%+ of PMs and Realtors out there have no idea what a DSCR loan is. Most PMs are still steering investors to traditional mortgage products, or for larger investors, to regional banks and credit unions where they can get portfolio loans. And if Realtors and PMs don’t know about the DSCR alternative, then that means the average small time investor knows even less about it.
DSCR (Debt Service Coverage Ratio) Loan - a real estate loan where approval is primarily based on the debt service coverage ratio of the property rather than the borrower’s personal income or creditworthiness.
So what does that mean in plain language? Basically, if a rental property brings in $2,000/mo in rent, and the mortgage payment totals $1,500/mo, then the DSCR is 1.33 (the property earns 33% more than it needs to cover the loan). I haven’t gotten into the details of what LendingOne requires, but I’m assuming it’s somewhere around a 1.2 coverage ratio, so a deal like this would likely be approved. And deals like this aren’t all that hard to find. I logged into Blanket’s platform and picked four properties at random, and all four would qualify. The only catch is that you need to have 20% down. But that’s not all that big of a barrier for many of our clients. Of the four properties I picked at random, three of them cost under $250k, so the cash required for these deals is not extreme.
You can also purchase the properties directly through your LLC, unlike traditional mortgage products that want that property in your name. Timelines are usually crunched down also, so you can say goodbye to the ridiculous 60-90 day closing timelines that are so frustrating, along with the absurd personal financial documentation that has been required ever since 2008. I’m sure I’m not the only one who would buy a lot more property if it didn’t involve dealing with traditional mortgage lenders and their approval process that closely resembles medieval torture methods.
Market Matters
Of course, your individual market is a huge part of this. The properties I found on Blanket’s platform above are all in markets like Indianapolis, San Antonio, Atlanta, etc. These are relatively affordable markets, even after recent price run-ups. You will not be able to find deals that cover the mortgage plus an additional 20% in markets like Southern California or Seattle. Or at least not many of them. So, like I said in my last article earlier this week, if you’re in those markets, the next few years are going to be a lot harder for you than it is for the rest of us. But most of you are doing business in markets where these deals can still be had. While 2% deals are largely a thing of the past just about everywhere, deals that can cover the required margin for a DSCR loan are still relatively common in a lot of the country.
But that’s not to say that you can’t still benefit from this even if you’re in a more expensive market. One of the great advantages of DSCR loans is that they are not covered by RESPA because they are not considered consumer loans, they’re business loans. This means that if you’re in Los Angeles and you act as a good asset manager for your client and tell them that there’s a great deal to be had in Dallas, TX, you can get paid a referral fee that isn’t insignificant by referring them to a DSCR lender. And if you’re using Blanket, that DSCR lender will be integrated directly in the platform now with the LendingOne partnership. You can find the deal and the loan right from your own co-branded platform and even provide a quick proforma for the property with a click of the mouse.
If you’re in a more affordable market, as I am, the advantages here become even more obvious. Just on the first page of the Marketplace in Blanket’s platform, I found 8 properties that fit the DSCR criteria and are in my own service area for my PM company. So I can not only get referral fees on these deals, but I can then manage the properties for those clients in my own PM company. That’s a negative unit acquisition cost. I am literally being paid to add doors to my management portfolio in that instance. And that’s before I collect any management fees or leasing fees. Think about that. Maybe now you’re seeing what I mean about a pretty significant shift here.
Convincing Clients
Obviously, it’s not as easy as I just made it sound. Sure, it’s easy to find the deals and the lender now, but I still need to convince a client to take the deal. So, how do we do that?
Newsletters - you should be sending out a monthly newsletter to your entire database (both clients and leads) which includes available deals and information on financing them; LendingOne even has a done-for-you newsletter partnership option for this; I haven’t tried it yet, but it damned sure looks like a great option to take this off of our plate (we’ve been doing our own in-house newsletter up until now); I’m planning on moving forward with them taking over our investor newsletter shortly
Owner account reviews - you should be doing annual account reviews with all of your clients; I don’t care if they’re “just” accidental landlords, everyone wants to grow their net worth; accidental landlords just need a little extra push to get them to the point of having the courage to make an intentional investment instead of an accidental one; schedule a call with every client around the anniversary date of when you started working with them and go over a proforma of their existing property and then discuss potential opportunities for growing their portfolio; talk about the ease of financing with a DSCR loan and how easy it is for them to find deals on the Blanket platform (you are providing them the Blanket platform, right?); discuss 1031 exchanges if they can get a better return on their money than their currently owned property; you may even be able to get an owner with one expensive rental to exchange it into 2 or 3 less expensive homes and grow your door count that way
Webinars - I recommend doing quarterly webinars for your clients and leads; those webinars can cover a wide range of topics, but you can also include discussion of good deals in your area and how to finance them
In short, you just need to take the opportunities that you already have to reach your current audience and educate them on why this is a good idea. The great thing about it is that you’re not trying to sell something to someone when there isn’t an obvious benefit to them. This is honestly a no-brainer for anyone who has the down payment cash. I don’t even like to invest in real estate because I prefer to diversify outside of my own industry, but even I’m tempted to take advantage of how easy these vendors have made this nowadays. This isn’t like the old days when you had to have wholesale connections to find off-market deals and then deal with hard money lenders and portfolio loan refinancing. Deals are easy to find online, and DSCR loans are now a normal part of the mortgage industry. They’ve essentially operationalized the locating and financing of these deals. Frankly, you’re doing your clients a disservice if you’re not talking to them about this all the time.
Not a Sales Pitch
I know this seems like a sales pitch for both Blanket and LendingOne. But the reality is, Blanket isn’t paying me anything for this article and doesn’t even know I’m writing it, and while LendingOne is an advertiser with us, they’re finding out what’s in this article the same time you are. I would have written this article regardless of any advertising dollars, simply because it’s newsworthy in light of the new Blanket/LendingOne partnership, and because it ties in perfectly with my push for PMs to take on asset manager roles. Like I said above, this is just a no-brainer.
I don’t write paid articles for this publication, but I will always point out things that are newsworthy in our industry and things that I think you need to be considering for your business. Since I work with a lot of vendors in this industry, and since I have advertisers for this publication, that means that sometimes the article content will line up with an advertiser or a vendor I work with, but rest assured, I will NEVER write an article unless it actually reflects what I think. Anyone can pay to be an advertiser, but actual articles always reflect my own personal views. Count on that. So when I tell you that you need to take a look at this, I mean it.
Response from Rob Hahn
Last article was a discussion on Rob Hahn’s presentation at Broker/Owner and some differences in how Rob and I viewed the coming year or two in economics and property management. Rob recorded a video a couple of days ago responding to that, and I think it’s a fantastic watch. We still see things very differently, but I always enjoy a good debate with someone who is honest, has a sound epistemology, and knows his facts. We may disagree on how to apply those facts and what the outcomes will be, but Rob is a formidable debate adversary, and I’m looking forward to continuing conversations with him in the future. His response is below, and of course, don’t forget to subscribe to his Substack. I read every issue.
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