Ahead of the Curve | Chris Hanson, Hanson Capital Group

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Kevin sat down with Chris Hanson of Hanson Capital. He learned a lot about Chris’s story in building Hanson Capital since 2008! His inspiring bootstrap story was a true testament to adapting to the market. Chris also shared how he built their real estate investment business and what data drives his decision-making. Kevin also got to learn a little about the Hanson Capital team and how they built their flat, attitude-focused culture.

Chris Hanson is the founder of Hanson Capital, an emerging manager focused on private equity real estate and private lending. Chris has been actively involved in the industry since 2008 and now manages over $150M in assets and over $60M in equity. Chris' depth of knowledge and expertise in managing a diversified portfolio of asset types allows him to opportunistically shift focus to capitalize on inefficiencies. The primary objective at Hanson Capital is to challenge the traditional investment paradigm and to provide access to exclusive real estate investment opportunities.

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Episode Transcript:

You’re listening to Lender Lounge with Kevin Kim, a podcast dedicated to the private lending industry. I’m Kevin Kim. And my goal is sit down with key figures in the private lending industry to talk about their business and their personal lives. We’ll get their takes on market conditions, the industry at large, and their personal stories. Overall, I really want to learn more about how they started and grew their businesses. So whether you’re a lender, a borrower, be a vendor, an investor, or anyone just interested in learning more about private lending, this podcast is definitely for you. Thanks for tuning in and enjoy this week’s episode of Lender Lounge with Kevin Kim.

Kevin Kim: All right, guys, welcome to another episode of Lender Lounge with Kevin Kim. Today, we have a very special guest, Chris Hanson with Hanson Capital. We just left a epic session of networking and having one too many drinks at our Captivate Conference, and got to know Chris pretty well and wanted to have him on the show right away.
So Chris, please introduce yourself to our audience and give us a little bit of information about Hanson Capital.

Chris Hanson: Hey, Kevin, thanks so much for having me. Good to connect again so soon. Hanson Capital started in 2008, kind of vertically integrated investment company. We’ve got three main buckets. We run funds for debt. We run funds for value-add assemblage, both multi-family and industrial focused. And then we develop ground up kind of opportunistically. Right now we’re building the build-for-rent, detached, low density product. Those are kind of the three main buckets. That’s Hanson capital in nutshell.

Kevin Kim: Fantastic. And so you guys are famously known for being on both sides of the business, right? Very few companies are still… Like, some guys start out building and they transition to debt, or some guys start in debt and transition to equities. You guys are famously known for doing both, right? What did you guys start with? Was it being a builder or was it being a lender?

Chris Hanson: Good question. We started out buying foreclosures in 2008. I was buying for myself and kind of saw a void in the marketplace to start doing service providing and auction management. The Phoenix, Arizona, which was the first market we were in, Phoenix Foreclosure Market had like 15 trustees down at the courthouse steps. And it was a lot. Our list was published nightly, the old go drive it first thing in the morning, take pictures, show up at the steps. You’ve got to have checks in hand. So I saw an opportunity to create a business to provide that service to investors.

And shortly thereafter, I had an investor who said, “Hey, do any of your other customers want to borrow money?” He was a well capitalized guy. And I started lending as a lost leader. In those days I was paying him a fee doing 18% interest-only loans, doing all the servicing and not taking anything on it. I considered a lost leader to facilitate more auction transaction business, but it got me into the banking business. And prior to starting the real estate acquisition, I had been in mortgage banking.

Kevin Kim: Ah, okay. So that’s what I was going to ask you. What kind of mortgage banking were you doing before all of this?

Chris Hanson: Wholesale mortgage banking with Wells Fargo.

Kevin Kim: Oh, man.

Chris Hanson: Yeah, in-

Kevin Kim: You were in the trenches then.

Chris Hanson: … ’05 to ’08.

Kevin Kim: Oh, man.

Chris Hanson: I was doing that.

Kevin Kim: You saw the worst times.

Chris Hanson: Best or worse, you know?

Kevin Kim: Yeah, yeah, yeah.

Chris Hanson: It depends on how you look at it, right?

Kevin Kim: ’05, it was crazy. You’re also just running around trying to figure things out from ’05 to ’08 because everyone was like, “What the hell’s going on?”

Chris Hanson: Yeah, that was a… And I was fresh out of college in ’05.

Kevin Kim: Nice.

Chris Hanson: There was a lot of money being made in mortgage. I thought it was easy. And then went after the foreclosures. The first house I bought is kind of a funny story. I was making a good amount of cash and I was spending it at a pretty a good pace as well. I quit mortgage in February of ’08. Kind of saw the writing on the wall of, “This is going… Get out of there.”

Kevin Kim: Right. You walked out. You weren’t laid off?

Chris Hanson: Yeah.

Kevin Kim: Okay.

Chris Hanson: Yeah. No, I decided it wasn’t for me. We were prime product. We weren’t like subprime guys or anything.

Kevin Kim: Right.

Chris Hanson: I was dealing at a wholesale level, so I wasn’t frontlines doing the no docs, stated liar loans and all that kind of stuff. But I just wanted to get into the real estate stuff. I’d always wanted to get over there. So I cash advanced a credit card to buy the first foreclosure house.

Kevin Kim: What? What was it like? 32% interest?

Chris Hanson: The BofA… And they still send those letters now. And then they send you that letter like, “Hey, if you can write a check…” A convenience check they were called. So I wrote one of those for like 50 grand and bought a $36,000 house. I sat there at the first house and watched the, “Oh, we need to get a carpet. We need to paint.” I had no idea what I was doing.

Kevin Kim: But that’s a pretty interesting way to… It’s a very different story than compared to a lot of our folks who jumped in. I mean, common story is you get into the auction game, right? That’s a very common story.

Chris Hanson: Yeah.

Kevin Kim: ’08, ’09, a lot of guys started the business with buying house on the courthouse steps. I mean, we still have clients are doing that approach and then transition into lending. But the fact is that you did it as a single investor. I mean, you’re so young. You’re 25 and you jump into this space, head on, with enough… I mean you the bravery to… I think it’s courage. And only a young man would do that, right? You’re not going to do that in your adult years. But a young man is going to take that risk. But you, literally, you’ve never built a house before. You would never flip the house before. Tell me about that. You were sitting there watching them repair the house?

Chris Hanson: Yeah. Yeah.

Kevin Kim: Did you know how to hire contractors or were you doing it yourself? What was the story there?

Chris Hanson: I actually learned a really tough lesson in that business. But I called guys off Craig’s list. I mean, at that time, probably at all times of the foreclosure business, you walk into something and who knows what you’re going to find, right?

Kevin Kim: Right. Right.

Chris Hanson: I had a house that clearly needed carpet. It was probably like a crack house or something prior to. And I hired a guy off Craigslist. He kind of was a Jack of all trades. You kind of fumbled through that stuff and figure out like, “This guy’s not a good vendor. This guy just took my head off on something. Oh, this guy’s a little more reputable” and learning to negotiate through that stuff. I just kind of had to figure it out the hard way. I didn’t have anybody coaching or given me instruction. I would say, this is pre all of the kind of fake influencers and real estate gurus and everything.

Kevin Kim: Right, right, right, right.

Chris Hanson: Because that wasn’t really a thing back then.

Kevin Kim: 2008, we’re still reeling through it, right?

Chris Hanson: Yeah.

Kevin Kim: Being at the auction steps was actually not really a move. Some guys were doing it always, but ’08 was when it started. You saw some classes pop up.

Chris Hanson: But they weren’t educated people.

Kevin Kim: No, there was no teaching.

Chris Hanson: They weren’t teaching you how, right? They were making money, and that was that.

Kevin Kim: Right.

Chris Hanson: And then just the pace at which that was going in ’08, it was still depreciating.

Kevin Kim: Right.

Chris Hanson: So at that time, I think Phoenix was selling 3,000 houses a day.

Kevin Kim: Wow.

Chris Hanson: Were on the list, the daily list of foreclosures. Now, they wouldn’t all sell, but there was 3,000 homes a day to sort through in an Excel sheet. We’d assemble it all from the different trustees and kind of aggregating all that data, figuring out how to underwrite and analyze it and figure out what our targets were. It was a lot of work. It was fun. It was interesting. It was exciting. For me in that age, I didn’t have any money so I was playing with kind of borrowed money.

Kevin Kim: Right.

Chris Hanson: And then people that were around me watched and said, “Hey, can I get in on this?” We didn’t even realize that I wasn’t good at it yet. It was like the third or fourth deal we had already owned by the time we sold… The first one I did, I made money, but I decided we needed a realtor. If the realtor helps underwrite the properties, I’ll be in a better position to buying and make it more efficient. Well, the realtor figured out after a week or two of me saying, “No, that’s too high. Well, we’ll just say the ARV or the retail value’s higher, then Chris will buy it. We’ll get a listing.” So my second and third deals, I was way underwater on in the bridge. I didn’t understand.

Kevin Kim: Right. And so you’re going in this as a kind of like trying to figure it out young guy, and there is no education out there.

Chris Hanson: Right.

Kevin Kim: And you’re learning this while you’re doing it, and you’re going to have your bumps. You’re going to take your lumps. When did the lending component kick in? Because you said that there was a high net worth investor in Phoenix that said, “Hey, I’ll lend you some money” or something like that. Is that how it started?

Chris Hanson: Yep. It was 2009.

Kevin Kim: Okay.

Chris Hanson: I started buying in mid to late ’08. And by the end of ’08, I provided a service. I bought a Prius. I wrapped it with a bidding service.

Kevin Kim: You were now very professionalized by then.

Chris Hanson: Oh, yeah.

Kevin Kim: Yeah. Yeah. Yeah.

Chris Hanson: Well, I was paying 3 grand to these guys to buy me a house.

Kevin Kim: Right.

Chris Hanson: That was the buy fee. You pay 3 grand for somebody to stand there. I bought three houses in about a month and I’m like “$9,000 to go stand there and say, ‘I’ll pay this much’ that’s not going to work for me.”

Kevin Kim: Right. Right. Right. Right. Right.

Chris Hanson: So we started a bidding business. I cut the price in half. I wrapped the Prius with $1,500 bid fee. I put stickers at every house that was a good house every day. “$1,500. Quit paying 3 grand.” And kind of built a customer base. One of those guys said, “Why aren’t you lending?”
Ironically, one of our other friends, Noah Brocious of Capital Fund, that’s about when he was starting.

Kevin Kim: Oh, okay.

Chris Hanson: It’s small world. That’s why Noah and I know each other go way back. So we started lending money. And that facilitated more auction business. We ended up getting some institutional clients that were like Wall Street guys that were early kind of going in and buying the houses.

Kevin Kim: Is this in ’09?

Chris Hanson: That was probably in ’10. So we started lending in ’09-

Kevin Kim: Hold on. This is interesting because that’s been the theme on the show, right. Wall Street didn’t really jump in until ’15. So tell me more about that.

Chris Hanson: Oh, yeah. That’s not accurate at all.

Kevin Kim: Tell me more about that. How did that play out?

Chris Hanson: Yeah. I think the earliest guys were some guys that came out of the west coast, the Bay area actually. They started buying up… In Phoenix, there’s an area called Maryvale. It’s central Phoenix, urban a neighborhood, not a high end area. And the houses were 200, 300 grand in ’08, ’07. And they were down to like 15 to 25 grand.

Kevin Kim: Oh wow.

Chris Hanson: I mean, these things just cratered. We had a guy who showed up and he wanted to buy those. And we were buying two or three a day. There was kind of a demographic of people that would typically buy and trade in those. It’s a kind of a Hispanic area. Those guys were getting pissed at us. “Why are you buying the houses? You’re coming in and over paying.” And we’re like, “We don’t know. We’ve got this guy. He wants to buy them all. We think he’s an idiot. He doesn’t get it. A $20,000 house, he’s going to lose an AC, it’ll costs him a quarter of the house.” Well, he had put a fund. He was one of the early guys. And the other group that we worked with at that time was called Treehouse Group. Have you heard of them?

Kevin Kim: Yes.

Chris Hanson: Treehouse Group was later backed… And I think this started in ’12. They were backed by Blackstone in what has been-

Kevin Kim: They’re on the buy side though, right? They were buying the houses.

Chris Hanson: Yeah. They were buying here and 28 other markets. But Blackstone came and put a billion behind them, which stretched-

Kevin Kim: That’s true. Actually, the point where we was talking about on the shows has always been about the lending business, then jumping in on buying loans.

Chris Hanson: Ah, got it.

Kevin Kim: But buying houses, yeah. I mean, I think I started seeing it in ’12. We had clients coming up to us in ’14 saying like, “I’ve been buying houses for Blackstone or BlackRock or some rock or some stone for the past few years. Yeah, that was definitely interesting because they’re kind of doing it now. They’re doing it again. But like-

Chris Hanson: Yeah. Well, my friends bought… I talked to my friend on my way to the office today. He’s still buying on behalf of the institutions. He’s bought 70 homes this week.

Kevin Kim: That’s crazy.

Chris Hanson: In Phoenix for instance.

Kevin Kim: Oh my goodness. Okay. So 2012, there’s active Wall Street capital buying homes and it’s just in the market, right?

Chris Hanson: Mm-hmm (affirmative).

Kevin Kim: And you guys are clearly doing well. At the same time, you’re making loans, right?

Chris Hanson: Yes.

Kevin Kim: You’re, still kind of following the track of a lot of our listeners and clients and a lot of our success stories is basically real estate investor turned hard money lender back then. And it was truly hard money back then where the rates were 12.2, and 13.5, and that kind of stuff, it was… you know. When did the lending business really start, like getting serious start taking off as opposed to the loss leader approach?

Chris Hanson: It got real serious in 2009, because we got a letter from the Department of Financial Institutions saying “You need a license for this activity.”

Kevin Kim: I remember that. Anthony was telling me because he was part of the lobbying effort early on when it came to the licensing rule change in Arizona.

Chris Hanson: Got it.

Kevin Kim: Oh my God. The state of Arizona, I mean…

Chris Hanson: Yeah. They forced us to get licensed. After we got licensed, we put a fund together. We registered a PPM and raised the money.

Kevin Kim: That early?

Chris Hanson: Yeah.

Kevin Kim: For private lending?

Chris Hanson: Yeah. And that was probably in ’11. That was our first debt fund before-

Kevin Kim: Dude, you’re like one of the old heads, man. That’s awesome. There’s not many… I mean, a lot of lenders from back then, not many of them are around. A lot of them have shifted gears, gone to other industries, gone to commercial. So that’s cool.

Chris Hanson: So that fund paid our LP’s 12%.

Kevin Kim: Wow.

Chris Hanson: And we were originating at 18% and keeping the fees. That went well just through-

Kevin Kim: Just in Phoenix, too, right? It was just that…

Chris Hanson: Yeah, just in Phoenix at that time. It went well through about ’14 when our rates started to just crater. We went from being a market in 2000 to 2008 where you could charge 18.5, to now we’re a 12.9 market inside of just a few years there. It just didn’t pencil to keep the money out in that situation and then in that structure.

Kevin Kim: [inaudible 00:16:41]. It didn’t make any sense.

Chris Hanson: Yeah.

Kevin Kim: It started in 13 when things started to get pretty frothy.

Chris Hanson: Yep.

Kevin Kim: Yeah, it was tough to keep up with some of these more… That was when guys are going national, right?

Chris Hanson: Yeah. Exactly.

Kevin Kim: We started seeing some banks and financial institutions back some different groups, and rates started to climb down. I remember that, but it was still double digits. And then nowadays, I mean, where I am, it’s like we saw first 7%.

Chris Hanson: 7, 8. Yeah. We were irritated when we dropped down to 10 to 12 to match California, frankly.

Kevin Kim: Right.

Chris Hanson: So we shut that down in ’14. I think we wound that down because it was just we were chasing the bottom and just pencil the time. Now we never quit lending. We just kind of reverted to what a lot of hard money lenders do before they get their fund going, right? We would find a borrower and we’d find an investor and we’d pair them up and keep a spread. And that’s actually what we did from ’14 through I guess mid ’20 when we started-

Kevin Kim: It makes sense though. I mean it’s a transitionary period from a lot of perspectives, especially considering how early you started.

Chris Hanson: Yeah.

Kevin Kim: Right? Because you didn’t jump in when rate compression started. You were in the game. And we’re talking 15%, 18%. So it’s kind of like, how do you pencil this long term, right?

Chris Hanson: Yeah. And it was influential for me because a lot of my clients at that time were guys that had lost a lot in ’08 and were kind of starting over, and then they were borrowing from me. So I had a lot of guys who were a lot more experienced and intelligent in both real estate and banking than I had been at the time that were kind of… They were customers, but I got relationships with a lot of those guys and learned what they were up to and what worked and what hadn’t. Even some of them, one of them, a notable one in Phoenix, was a hard money lender. Wells Fargo had given him $100 million dollar line and the whole thing blew up. I mean, [crosstalk 00:18:53].

Kevin Kim: Yeah. I remember when Wells Fargo’s gave those lines up. You were really, really cool if you got that line. But then all of a sudden they all kind of fizzled out. Those lines were tough.

Chris Hanson: Yeah.

Kevin Kim: But let me ask you this though. Okay, we’ve covered kind of the 30,000 foot view of Hanson Capital story in lending. Now, right now, currently you guys are very active in building and investing in multifamily and industrial real estate and we’ve worked with you on that side of the business. When did that started for you? Because you’re a home builder. You’re buying houses, you’re building houses, you’re flipping houses. When did you start realizing, “Okay. Multifamily commercial real estate is where I should be concentrating on.”

Chris Hanson: Yep. There’s one more ruffle in this. I was always a big fan of the real estate side of the business.

Kevin Kim: Sure.

Chris Hanson: It wasn’t until I was wholesaling and buying multifamily units. I’ve bought and sold about 3,000 multifamily units. And during that same time, like ’12 to ’14, ’15, I was buying doors in Phoenix for 10 to 15 grand. I could tie up a building for 2 million bucks and resell it for 2.2 million bucks before I had even closed on it. So I was always more focused on real estate. It was in ’14 as we wound on the fund, I took on a partner, Tiffany. She wasn’t a partner then. She was an employee. And I had her kind of focus on the lending business while I continued to do the real estate stuff.

Kevin Kim: Ah, that’s the story.

Chris Hanson: And then I would fund the lending business with the extra money, because as deals got tighter, well now I’m sitting on a bunch of cash, I keep deploying it in the lending.

Kevin Kim: And in ’14, multifamily value-add was on fire. It was awesome back then.

Chris Hanson: Yeah, it was really good. The banking business was good. I think we got licensed in California in ’14 actually. So we were lending in California and Arizona ’14 to ’16. I got approached by a private equity group in ’16 that was looking for capital, like kind of a hard money lender startup. Some guys that were from conventional banking that were getting into the business and some VC guys that merged. There was four partners. And I won’t name names because it didn’t go how they wanted it to. I sold them our lending business in ’16 and went full-time real estate. I sold them Tiffany with it in a sense because I sold them the whole company, all the staff. We had like 15 or 16 people in the company at that time. And eight of them were lending, eight were real estate.

Kevin Kim: You’re just ahead of the core on everything. I mean, selling companies does not… It just started happening mainstream. This is awesome. I mean, you were one of the first couple of people to sell their business in our space.

Chris Hanson: Probably. It wasn’t a big number. I mean, it was a 7-figure number, but it wasn’t an 8-figure number.

Kevin Kim: Right. But it’s still the fact that it happened, right? Because it wasn’t considered. It wasn’t even discussed that early in this space.

Chris Hanson: Well, yeah. I mean, back in the early days of lending, it was such a cottage industry, right?

Kevin Kim: Yeah.

Chris Hanson: We didn’t have a lending home or any of these kind of big tech backed groups. It was all private guys. It was actually private lending. Now, we kind of still carry the name, but it’s…

Kevin Kim: Yeah. I mean, in ’14 and ’15 is when you started. That was like, I always joke about the advent of crowdfunding in FinTech, right? And then they started coming to our space.

Chris Hanson: Yes. It was the JOBS Act, right?

Kevin Kim: Yep. Yep. ’13, ’14 was the JOBS Act. And then the advent of crowdfunding. And we saw a bunch of VC back companies emerge. Some of them made it. Some of them didn’t make it. A lot of them didn’t make it.

Chris Hanson: These guys loaded up… The company was producing a lot of money at that time.

Kevin Kim: Good for them.

Chris Hanson: Healthy portfolio. And these guys loaded up a bunch of corporate overhead and 6-figure salaries for all the partners and everything. And then they just fell flat on their face on the fundraising side. And you’ll appreciate this with the legal background. Zach, who’s in-house council for us now helped navigate my side of that transaction.

Kevin Kim: Nice.

Chris Hanson: Their council put a clause in there that said, “Hey, if there’s…” There was a carryback component. “If we don’t meet a couple of these covenants over the first 12 months, Chris has unilateral decision making to unwind the transaction. And for no penalty either. Substantial down payment, that’s his to keep.” I’m like a very aggressive term.

Kevin Kim: Right.

Chris Hanson: And at the end of the first year, probably two weeks before, I was doing our taxes and our CPA was like, “Hey, I’ve got to write down the balance of this. Hold that note, because you didn’t apply an interest rate to it. You just let them pay an earn out.” And I’m like, “Geez, that’s odd. Being a banker, I probably should have applied interest.” So I sent them an email to check on, “Hey, how are we doing?” They weren’t very far off. It was several hundred thousand they had to pay per year. They were just a little light. And they took my email, which was just a, “Hey guys, let’s circle up. How can I help?” They took everybody in the company in the conference room and said, “Hanson’s taking the company. Are you on his side? Or our side?”

Kevin Kim: Are you overreacting?

Chris Hanson: So all these people leave and start… I get all these phone calls and text messages, like “You’re taking the company?” And I’m like, “I don’t want anything to do with banking.” I’m like, “No, I’m not taking the company.” Well, once they rang that bell, we had a couple more conversations. And then Zach, and we got some other council, they said, “Hey, if they go make a deposit today, you lose that right. Now you’re kind of conflicted with these guys. Not real bad, but we think you should exercise that option and then go continue to the conversation.”
So I did and we went and finished the conversation. And long story short, their funding hadn’t materialized anywhere near the extent that they thought it would. So they weren’t going to-

Kevin Kim: You were just sitting there asking a small question. It wasn’t-

Chris Hanson: Yeah, it was just a piece inquiry. “Hey guys, can I help? I know you…” Because I was a partner.

Kevin Kim: Yeah.

Chris Hanson: I still owned part of the company with them. I was an LP to them essentially.

Kevin Kim: Right.

Chris Hanson: I was on their board. I had some involvement. Well, long story short, I got the company back with $2 million in the portfolio or something. It was just like, they ran the thing into the ground, I got the company back. I made Tiffany a bigger partner, a substantial equity partner. And we rebuilt the company. And that was at the end of ’17. ’18, ’19, ’20, we’ve been really after them-

Kevin Kim: Well, let me ask you this. What was it like to jump back in ’17? Because the market was so different in ’17. I mean, it was a weird time. I honestly believe ’17 was the weirdest year for me because you had these crowdfunders and FinTech companies causing all kinds of havoc, but you also had the institutions buying up a bunch of paper. So it started to look a little bit… It was a kind of a weird time. It wasn’t what it is today where a lot of the FinTech companies kind of exited the space. What was it like jumping back in?

Chris Hanson: We were a little more hybrid at that point. We loaded up some brokers, got some envelopes in the shop. And we did some brokering instead of just originating our own funds. We kind of ran a hybrid to the civic and atheist and those kind of groups. So we ran a bit of a brokerage model while we picked up steam with our own capital.
It was a company that I didn’t want when I sold it in ’16 because I wanted to be the real estate investor. But it was a company that I got back in ’17. And this was like a year to the day. So I had a year off out of the business. And then it was like, “Ah, I didn’t like that. I like having a lending company. I like being involved in the lending space. So I missed it. Now we’ll never get out again.”

Kevin Kim: So you did miss it. It was nice to get back in?

Chris Hanson: Yeah. Yeah, it was very energizing. I had renewed enthusiasm and it was kind of like, you don’t realize what you had until it’s gone, situation.

Kevin Kim: Right. Right. Right. Right. Right.

Chris Hanson: Like, coming to your guys’ event in Vegas, I just love the space. We love the industry. It’s a very simple business. At a high level, it’s a simple business where arbitrage and capital we’re fulfilling a [crosstalk 00:27:50]-

Kevin Kim: It can be a simple business. Some guys over complicate it in my opinion. I feel like this industry is getting a little bit over complicated to some degree.

Chris Hanson: Well, we had a lot of years to figure it out.

Kevin Kim: We do. We do. It’s been 20 years now since the space has been kind of… But it still needs to figure what it… I mean, there’s still a lot of confusion I feel like. With new products coming in, I think it causes the confusion, right?

Chris Hanson: Right.

Kevin Kim: This whole DSCR craze is… I mean, throwing us for a loop a little bit because we were private. We were short term. Everything we were doing was short term. And then all of a sudden, now this permanent financing jumps in. So it causes us a little bit of kind of like what is going on? Who are we? Identity crisis, right?

Chris Hanson: It’s been interesting. That DSCR product for example, I mean there’s a lot of new stuff that’s hitting the market and you’ve just got to be able to adapt quickly, figure out if it’s going to fit into your product offering, figure out what your real value add to the marketplace is.
One of our slogans is we make money easy, right?

Kevin Kim: Mm-hmm (affirmative).

Chris Hanson: And that is twofold. We make it easy for borrowers because we’ve been at it for a long time. We have our processes down really well. We service in-house. Some groups like to outsource. Some groups like to run really lean. We like to have the whole team in-house and kind of own the customer experience from start to finish, from they make a loan inquiry to their payoff. They’re dealing with somebody in our office. They get to have those relationships. We’re just a relationship driven in group.

Kevin Kim: Right.

Chris Hanson: It’s fundamental to kind of how [crosstalk 00:29:29] your business.

Kevin Kim: Yeah. I noticed that. When I met your team, it’s like you guys are very focused on that. You want to be in control of the borrower relationship and the investor relationship. A lot of folks have taken the third party route, and you guys have done the hard stuff in building it internally. Does that also ring true on the real estate side? Because that’s a much heavier lift, right? It’s a very complex business. You need a lot of people when it comes to doing an equity shop. I mean, it’s just a lot of work.

Chris Hanson: Yeah. I will say we’ve been in… I’m historically a multifamily guy.

Kevin Kim: Right.

Chris Hanson: We use third-party management for multifamily. I also have assembled portfolios of SFRs, residentials that are different places. I use third-party management for that stuff.

Kevin Kim: That’s property management though, right?

Chris Hanson: Yeah.

Kevin Kim: Okay.

Chris Hanson: Property management, I have been reluctant to take in house. And I have a lot of friends that own thousands of doors. And I feel like they’re split 50/50. I think half of them are solidly “You can’t use third party. Nobody cares as much as your own employees will. It’s got to be a team effort in-house.”

Kevin Kim: Right.

Chris Hanson: I have the other guys that say, “Hey, there’s got to be a third party, because if I own a business and I’m raising LP money, property management is almost conflicted, right? Because they make money. There’s maintenance people involved. They’ve got to make money out of that business.” So I kind of lean on that for our multifamily stuff.

Kevin Kim: That makes sense. It’s a common strategy I would say.

Chris Hanson: Yeah.

Kevin Kim: Yeah, I would say it’s [crosstalk 00:31:04].

Chris Hanson: Because then we’re aligned. We’re really big on alignment. With everything we do, we want our partners to be aligned. It’s great that they trust us with their millions of dollars, but we want them to know and sleep well at night that “Hey, Hanson is on our team because he’s got a carried interest. He makes money when I make money. He doesn’t also own the property management company that’s making money off me every time we turn the unit, right?

Kevin Kim: Right.

Chris Hanson: So I kind of subscribe to that method, but it’s difficult to get the result I want from a third party. I have friends who have thousands of doors and they’ve got a three-man team and they just manage the managers. And then I have friends who have 150 employees to manage 2,000 doors.

Kevin Kim: Right.

Chris Hanson: They’re all making money. They’re both right in their own ways. So it’s different. We like to control the accounting. We like to control the money. We’ve got CPAs in-house. We’ve got legal in-house. Our industrial stuff, we generally manage internally because I’m sure you know, Kevin, but a triple net industrial single tenant deal is a little easier to manage than a-

Kevin Kim: Pretty easy. That’s probably one of the best investments to be in right now.

Chris Hanson: Yeah.

Kevin Kim: One of my clients told me, “Kevin, don’t buy houses. Don’t just buy it. If you can do it, triple net, industrial, single tenant. You will never be happier…” You can’t keep your hands on it right now. That’s the hard part.

Chris Hanson: Yeah. The returns that we see out of… Well, the industrial fund that you guys put together for us, I mean the returns that we’re projecting for our LPs are high 20s, low 30s. And we’re being so conservative. I can’t hit that. I can’t hit that in the debt space.

Kevin Kim: No, unless you’ll labor a day in hell. I mean…

Chris Hanson: I mean, even then, if I’m originating at 10%, I’m not going to get 2 to 1 leverage on that.

Kevin Kim: Oh, it’s happening, my friend.

Chris Hanson: Where’s the intro, now? We use lending as the conservative bucket.

Kevin Kim: Exactly. You don’t want no leverage. I mean there’s some pretty aggressive leverage happening. It’s transitioning away from other industry sectors looking for yield. It’s starting to get a little fraught on that side of things too because as you know, there’s leverage everywhere now. And it’s starting to get aggressive on that side because they want proprietor.

COMMERCIAL BREAK

Back to the industrial stuff right now. I like to get your thoughts on this. We don’t have a lot of folks that invest heavily in industrial on the show. It’s mostly from a lender standpoint.

Chris Hanson: Yep.

Kevin Kim: On the industrial, where are you guys allocating capital? Are there certain sub states of the United States that you prefer? Because I’ve been told by a lot of professionals like “If it’s just industrial in the US right now, it is just bonkers.” Or is it that more within certain regions?

Chris Hanson: I take a macro approach of, “I want to have exposure to the Sunshine States. I’ve always liked…

Kevin Kim: In the United States. Yeah.

Chris Hanson: That praise didn’t even exist until two years ago, right?

Kevin Kim: Yeah.

Chris Hanson: I mean, I never heard it before that. But I like following population. Because for me, real estate is all supply and demand. It doesn’t really matter what anybody tells you. If you’ve got a place that nobody wants to be, you can build the nicest thing there and nobody’s going to buy it, right?

Kevin Kim: Right.

Chris Hanson: Phoenix has been lucky. Phoenix was kind of the shining star during COVID.

Kevin Kim: Oh, yeah.

Chris Hanson: Same with Florida, Texas. I subscribed to this theory that as our baby boomer population kind of ages out of the workforce and really gets into retirement, they don’t want to shovel snow. So there’s kind of a demographic shift or geographic shift from the Northern states to the Southern states. And that has been bolstered by, I think an aging population and a whole number of other things. So we’d really like-

Kevin Kim: It’s really density dynamics and geographic shifts for individual people. Are you looking at the same macros when it comes to, for example, like corporate decision making? For example, like the Amazon?

Chris Hanson: Yeah.

Kevin Kim: Whenever Amazon puts a bid out, you start seeing investors starting to speculate on which city are they start allocating capital. And then they kind of like feel stupid when missed the mark. We started seeing the same thing when Oracle shifted gears, or Tesla said, “We’re going to announce a factory here or there.” These kind of things, are you following those macros? Because that can be more of a challenging thing to follow, right? Because it’s kind of speculative.

Chris Hanson: That’s more speculative. I’m not a speculator, Kevin.

Kevin Kim: Mm-hmm (affirmative).

Chris Hanson: I have a very simple approach. Two parties is two industrial value add. Two components. If it has these two things, I’m a buyer. And we are cleaning up. And we’re getting a lot of industrial brokers and smart money going into that fund you guys help put together. We want to buy infill product that is below replacement cost, because as pricing gets silly, residential, good point.

Kevin Kim: Right.

Chris Hanson: It’s way over replacement cost right now. Things always tend to equalize or come back to equilibrium at some point. I want to buy below replacement cost and I want a below market rents. So I take a patient approach. We will do any lease term from zero to five years remaining with the rents below what the market is. So Phoenix rent is… And I just know this stat. CBRE put out a report in March, which is surely outdated at this point. But five year anticipated rent growth for industrial real estate is 37% in Phoenix, which is better than 7% a year. And it’s probably increased since then.
So we throw out the rent growth, but we take that top list of industrial markets and we know why Arizona. So I’m giving you a long way to answer. I pay attention to the news, but I like to break it down even easier.

Kevin Kim: Pretty simple.

Chris Hanson: California’s too expensive. Arizona’s a lot cheaper. The truck time of running from the Long Beach port to Phoenix, they can make that round trip in one day. So if it’s five times the price to buy industrial real estate near the port and it’s 1/5 the price in Phoenix, we’re going to start having companies that see that make sense.

Kevin Kim: It’s already happening. It’s already happening.

Chris Hanson: [inaudible 00:38:42] cost, right?

Kevin Kim: Yeah, yeah, yeah.

Chris Hanson: That’s why Phoenix is boom.

Kevin Kim: I’ve already spoken with people… I have some friends in e-commerce and they’re shifting gears to Phoenix, Nevada. Not Las Vegas, but outside of Las Vegas. Shipping times are practically the same. They can… Amazon have no problem supporting you.

Chris Hanson: They make up that transport cost. It doesn’t cost anything.

Kevin Kim: Right. Right. Right.

Chris Hanson: And the trucks going back to the ports are practically free because the ports still need to be there. So they’re really only paying a one way deal.
A friend of mine owns a big multi-state regional recycling company. He ships all of the paper product that they process back to Long Beach from Phoenix. And it’s essentially free containers. It’s like 200 bucks, 300 bucks. They’re barely covering gas because they need to get stuff back there. And he’s a beneficiary and they put it on the boat over to China for kind of final processing. So I pay attention to logistics, but I don’t take the news of, “Oh, Tesla’s going to be here. I’m going to go speculate and buy up a bunch of stuff [crosstalk 00:39:45].

Kevin Kim: Right. You’re looking at the core macros.

Chris Hanson: I like fundamental economics. That’s kind of my approach.

Kevin Kim: I like it. Now I want to shift gears a little bit because we had been on a… You and I and another client of ours were on a podcast. Oh, no, a webinar about main street investors. One thing you said during that episode struck me is that you have very much a wealth building passion, right? For your investors.

Chris Hanson: Mm-hmm (affirmative). Yep.

Kevin Kim: It really motivates you to build wealth for your investors. I want to talk about that real quick because it’s not really a common… We have folks who talk about wealth building as part of their kind of approach, but they’re more money manager types, wealth advisors, asset manager types. They’re not real estate people, right?

Chris Hanson: Yep.

Kevin Kim: Once in a while, you’ll see it with an influencer here and there. But for people in our space, it’s not really a common discussion point. Let’s talk about that real quick. How do you take that approach for your clients? Is it a combination? Are you looking at both that in equity or is it purely real estate? How do you deal with that with your investors?

Chris Hanson: Yeah. I think unique to myself is that real estate has given me so much freedom to do so many things not only for myself, but for other people.

Kevin Kim: Right.

Chris Hanson: And I literally had nothing, like I started with nothing.

Kevin Kim: Credit card advance.

Chris Hanson: Yeah. Didn’t come from the wealthy family, didn’t get any of the advantages.

Kevin Kim: Right.

Chris Hanson: I had a lot of smart people that have given me advice over the years and I didn’t always listen to it. I’m kind of one of those guys that needs to go do things. And I had a really smart family office buy a building with me in ’13. And they said, “Chris, you got to stop selling these.” I could have wholesale that building and made 400 grand and that would’ve been all the money in the world to me. That would’ve been a lot of money to me at the time. Not that it’s not today, but it would meant more. And they talked me into owning it. They were kind of… I’ll say the start of that concept of the real wealth is created from owning things, right?

Kevin Kim: Mm-hmm (affirmative).

Chris Hanson: You can be a good, hard money lender or an MLO if you’re getting into the lending space or good at fixing and flipping houses or flipping buildings. All that stuff creates income. But income is you need it, but it’s kind of worthless at the end of the day, right? I want real wealth creation comes from appreciation.
Now, I’ve been lucky to ride a pretty good wave from ’08 through today in real estate. We’ve played with a lot of things. And that’s really where we get the fulfillment. It is helping people that are smart people. They make good income, but they don’t know how to invest their money. I think we talked about in Vegas, we keep a metric internally of the millionaires we’ve created. People who literally were not a millionaire. Now they are. And they attribute that to, “Hey, I invested 200,000 with you in ’14 and now it’s seven figures, that kind of thing.

Kevin Kim: Right.

Chris Hanson: I get a lot of passion from that. I bring a lot of people in close to me as you met a lot of my team. All those people are with me for a relationship. I’m teaching them that knowledge. That’s the approach we take with our investors is, “Hey, multifamily development is speculative,” right? I mean, with all the stuff going on in the world in a two to three year deal cycle, that’s a risky bucket. But instead of just going to your traditional wealth manager and he says, “Okay, you’re going to put 10% into bonds. We’re going to put 20% into blue chips and play that game,” we kind of developed our own. We didn’t do it intentionally as we started in lending in ’09, or fixed and flipped in ’08. It just kind of those businesses have matured. We’ve learned new skill sets as we’ve matured as a company. And now we use debt as this is our safe cash flow with relative liquidity through the fund.
Value add is kind of opportunistic. It’s going to do a better return than debt and it should be low risk. And then development’s kind of our risky bucket. So we have that conversation with people when they’re interested in investing in real estate. We focus more on what’s their needs and what their wants and what their path is supposed to look like, and we tell them where we think that might fit into one of our buckets. And if it doesn’t, which is not something you’ll hear from guys who manage money very often, we’ll tell them we’re probably not the right fit. Because we talked to them about “What kind of liquidity are your needs? Do you have a long term horizon? Or did you see an infomercial and you want to get rich quick? If that’s your goal, we’re not right, you know?

Kevin Kim: Right.

Chris Hanson: We hit pretty good returns. We’ve been on a great run, but we stick to fundamentals. We were talking about the macroeconomic stuff. And we take a long term vision on the real estate side at least, that if the market shifts down, which we expect it will at some point, we’re a lower leverage. We don’t max out our leverage and we’re prepared to weather it. That’s why we focus on our buy price.

Kevin Kim: Right.

Chris Hanson: Our business model’s not predicated on finding an idiot to overpay. We want to own things. And that’s kind of the mindset we take to investors and say, “Here’s how we play in real estate. Here’s what we’ve done. Here’s what we think we’re good at.”

Kevin Kim: Here’s how you’ve succeeded but within relative conservative confines. And that’s something that’s going to keep you… I mean, you already had a long term career in my opinion, I mean, starting in ’08. But that’s going to keep you 20, 30, 40 years probably. There some folks in the space that have been here 30, 40 years now. And I see that kind of approach. I don’t know if you met the man at our shows. The legend in California, his Uncle Chuck, he’s been doing this for 40 years on the debt side, right?

Chris Hanson: Uh-huh (affirmative).

Kevin Kim: He was always telling me like… Now that we’ve been through a couple times, I know exactly how to approach these things. Your answer’s always conservative, right? Never over lever. Never trying to look for that idiot buyer. You’re really trying to play it safe. And that’s how you keep in this game for a long time. That’s awesome. I mean, I think that everyone who has that approach is going to have a long road of success. And I really wish that for you guys. I think you have the right team too. Everyone’s has a very similar mindset and they’re all relatively young. I’m looking forward to see you guys grow in the space.

Chris Hanson: Yeah. It’s going to be fun.

Kevin Kim: It’s pretty awesome.

Chris Hanson: Yeah. It’s going to be great.

Kevin Kim: And I want to talk about the team real quick though, because I got to meet I think most of them. Tiffany. Man, she’s awesome. And Zach, that guy’s a smart guy. What was really interesting though, was the culture that I noticed. And it wasn’t like outward where you see values posted everywhere, but that was a strong culture amongst the team members. They were all looking out for each other. They were always communicating with each other. Talk about the company a little bit in terms of what are some of the company cultural aspects that you guys have built over the years?

Chris Hanson: Yeah. One of our core values is that it needs to be fun, or we’re not going to do it.

Kevin Kim: Okay.

Chris Hanson: Now that doesn’t mean “Well, we don’t feel like doing our accounting this month so we’ll just skip it,” right?

Kevin Kim: Right. Right.

Chris Hanson: But it means that we’re going to pick things that we’re passionate about. So when we decided, “You know what? It’s time to put the fund structure again for debt and we’re going to go after that.” That’s because we made a decision as a team. One of the people you met on that trip named Ellery, Ellery just had her one year anniversary with us three or four months ago. She’s pretty junior to the team. She’s fresh out of college. She’s like early 20s.

Kevin Kim: She was holding her own. She sat next to me at dinner. She was [inaudible 00:47:41]. Yeah.

Chris Hanson: She’s a rockstar.

Kevin Kim: And she’s very passionate about the business. That was an interesting part about her. And she knew a lot about the business. For a first year, that’s hard to achieve.

Chris Hanson: Yeah. And Tiffany, I’ll give Tiffany credit for this. When we were hiring for that role, there was a guy who was several years senior to Ellery. He’d been at a couple good banks. On paper this guy was awesome. But we met Ellery. Ellery was an athlete. She was a captain of her crew team at… Oh God. Now I’m blanking. At Good California University. We met with her and it’s just like, “Man, this girl has a kick attitude.” We just trusted her. We had faith in her.
We only had room to hire one, but we said, “You know what? We’re going to hire two.” Now, we’re going to hire the guy that works on paper. And then we’re also going to hire her and give her a part-time capacity. And then we’ll see if there’s a job there. We’ll kind of give her a chance. If we take a chance on her, we’ll see what happens.”

Kevin Kim: Right.

Chris Hanson: Well, inside the 90 days we had fired the guy because he just made horrible decisions. I mean, just downright, “What are you thinking?” Long story short, we got rid of him. He just had that “I can do it” attitude. So that’s a key component of our culture, is we want to work with people who get results. They don’t make excuses. They ambitiously go after things and figure out how to learn, how to do stuff on their own. I’m not micromanaging people.

Kevin Kim: Right.

Chris Hanson: Tiffany’s not micromanaging. We’ve got a team effort and we reward our people internally with company process. So the real estate side of the company does really well. The debt side of a company does really well. And we all work even though there’s a few of us that take pay from both companies. Ellery’s only on the debt side. Chris Pike, Zach, and I get paid from both, but we all work in all the companies because we’re all learning. Our goal is to build wealth through real estate. Ellery’s got a front row seat to industrial and multifamily real estate. So our company is very flat from an org chart standpoint.

Kevin Kim: I noticed that. I very much noticed that.

Chris Hanson: Yeah. It just, I encourage groupthink. We have a lot of meetings, not to a detrimental level but we like to bring multiple pay into it. The other thing that’s kind of unique is that nobody in our business had a background in banking or real estate prior to joining the company. So we look for ambition and attitude, because nothing we do is rocket science. You get a lot of the kind of career bankers and people in that path that get focused on pedigree and school and which bank they worked at, and all that kind of stuff. That’s an employee mindset that just isn’t as valuable to us. I want the self-

Kevin Kim: You’re looking for an owner mindset.

Chris Hanson: Yeah. I want the self-starter. The guy who wants to own things, you know? So we will be around for a long time. I’ll continue to stake the company. But the next layer of the company, you met. Zach and Chris are taking over the company. I’m done in a couple years.

Kevin Kim: Nice. You couldn’t have picked a better group. Those guys are awesome.

Chris Hanson: Yeah.

Kevin Kim: That was the interesting component of it. Zach. I never seen in a company where GC is principal, right? It’s very, very rare to see the general counsel’s also a partner in the company.

Chris Hanson: Yeah.

Kevin Kim: Usually, they have their general counsel, they’re not thinking that way. But when I speak with him, he has a principal mindset. And it’s very rare to find in a lot of companies. I commend you for giving that opportunity to him. Was it him who asked for it? Or did you just bring him on as a friend, as a partner? Or how did that work out?

Chris Hanson: Zach helped me with the first litigation we ever had to deal with. We had mutual friends. Back in 2010, I think it was the first deal. He’s been kind of outsourced general counsel for me probably since ’15. And then his practice, he came from a practice that he was a principal at. So he already had the business owner mindset.

Kevin Kim: Right.

Chris Hanson: He’d been pushing on me a bit to get into real estate. We work with so many attorneys all the time. I feel like I’m almost qualified. I could sit for the bar and see how it goes.

Kevin Kim: You’re probably better than most of us, honestly.

Chris Hanson: I probably know enough to be dangerous. So I just said, “Hey, you don’t know anything about real estate other than the transactional stuff, but you see your side of the invoices and you see my side of the deal regularly. Why don’t you come give this a shot?” He jumped in with two feet.

Kevin Kim: Nice.

Chris Hanson: He sold out of his practice and came and took a role internally. I believe in letting the people in the team invest alongside me. I lead every… Another core value; we don’t ever put an investment out that we’re not putting our money into.

Kevin Kim: Oh, really? Every single one? You’ve got [crosstalk 00:52:56]?

Chris Hanson: I’ve got money in every deal we’ve ever done with the exception of some of the loans that we do. If they’re not done in a fund, if you, the individual, Kevin, buy this loan, obviously, I have money in that, right?

Kevin Kim: Yeah. Yeah. Yeah. It’s trust deed investment.

Chris Hanson: But I used to have a policy that if you didn’t like the loan and you wanted out, like if it defaulted, I’ll write you a check, I’ll take you out. Because I kind of kept lending because I really liked when the default happens. It’s one of those situations where “If you pay me as agreed, I make money that’s good for me.”

Kevin Kim: Right. Right. Right.

Chris Hanson: “If you mess it up, I make more.”

Kevin Kim: Right.

Chris Hanson: I still offer that. I don’t guarantee it anymore as we got… We’re too big for me to guarantee it.

Kevin Kim: Right, right, right, right, right. It’s cool, man.

Chris Hanson: But yeah, I think the culture is so critical that I’ve learned a lot of things the hard way. I teach the people in our company the right way, I think. And we have a lot of advisors that we bring in and we have round tables with… Everybody in the company is welcome to that meeting. So we kind of let people self-select where they want to go. I tell anybody when they start, “This is the job you’re being hired for. I’m not going to hold you back. If you can add value above that, I have one request. You’re going to have to help fill the seat that you’re leaving for the next seat, the next seat up.”
And that culture kind of lets people know, “Hey, I may start at 50,000 a year in processing, but I have potential to create value here. It will be recognized. It will be appreciated. And I’m treated as a peer from day one.”

Kevin Kim: You’re not creating any kind of cabs on there.

Chris Hanson: Yeah.

Kevin Kim: And let me ask you this. How big is the team now?

Chris Hanson: 14.

Kevin Kim: Okay. Still pretty lean, considering. I mean, you guys are very much… The level of control you guys want to have, it still must have a few Jack of all trades, guys who can do they’ll do a little bit of everything?

Chris Hanson: Yeah. I mean, unfortunately, yeah, we-

Kevin Kim: Maybe fortunately though. The thing that we’ve learned here is as you run into cycles of people leaving, redundancies are important, right?

Chris Hanson: They are. It’s critical.

Kevin Kim: Having someone who could do the accounting but can also do some processing. Close alone, close the property. That may be useful in a pinch, you know?

Chris Hanson: We cross train our accounting department. Everybody in the accounting. We have five people in accounting type capacities, but our financial analyst knows how to do the staff accounting work.

Kevin Kim: Right.

Chris Hanson: Because it’s just, hey, we also have a very flexible travel on holiday schedule. You know what I mean?

Kevin Kim: Right.

Chris Hanson: We’re not keeping track of, “Oh, you’ve used three hours of BTO this month. Use what you need and get your work done.” We’re often around the country and getting done what we need to do and taking care of each other. We’ve got a great culture. I think that’s very [crosstalk 00:55:50].

Kevin Kim: Yeah. I definitely noticed it. For a company that’s been around as long as you guys had, I was really impressed with how not only young and energetic but also how tight-knit everyone was. They have a very, very good feel about they were really having each other’s backs. And that’s very, very rare to see when you see a company as long as you guys have been around, right?

Chris Hanson: Yeah.

Kevin Kim: And so, that’s awesome. You guys told me this in Vegas, but shout out to Tiffany. She’s basically the brains of the operation I hear, so she’s the one that gets shit done.

Chris Hanson: I’ll give her all the credit. She runs lending, right?

Kevin Kim: That’s awesome.

Chris Hanson: She runs that business.

Kevin Kim: That’s awesome.

Chris Hanson: I help and I will participate as I’m needed. I focus on fundraising. I like meeting with investors. I like having this kind of discussion.

Kevin Kim: Right.

Chris Hanson: “Hey, why do we invest in this? What do you like about that? What are you doing with your money?” I mean, I live, eat, breath, and sleep to talk about finance, talk about money, how we can capture opportunity. That’s my thing.

Kevin Kim: Cool.

Chris Hanson: And she’s an excellent operator and she runs a really great ship.

Kevin Kim: Awesome. Well, I want to shift gears real quick. We don’t have that much time left, but I want to get your thoughts because you’ve been actively involved on both sides of the business, the resi market specifically. In my opinion, I think it’s strange right now. It’s so white-hot. There’s so much demand. You see how on fire the DSCR stuff is. On the flip side, I have mortgage banker, friends, and clients who told me “We’re a little bit worried,” right? The conventional guys, A-paper guys. What are your thoughts on the markets that you are in for residential? Because it’s an interesting time.

Chris Hanson: I’m in the Texas market, Dallas Fort Worth specifically. Houston and Phoenix from a residential capacity. I actually spent the last two days in Houston and Dallas with one of our partners. They’re named Highland Homes, largest home builder in Texas. I want to say largest privately owned in the country. It might be the fourth largest in the country, largest in Texas, something like that. But they’re going to build 4,000 homes this year.

Kevin Kim: Wow.

Chris Hanson: Very, very big company.

Kevin Kim: In the DFW arena area only? Or Houston? Was it Houston that you said?

Chris Hanson: No, they’re all over Texas. They’re based in Houston. They’ve got offices in Dallas. So we flew in on Wednesday morning to Houston to look at a multifamily site that they’re going to build for us. And then we flew to Dallas Wednesday afternoon. I actually was with their CFO, Dan Miller. He and I sat next to each other at dinner, Wednesday. Really, really sharp individual.

Kevin Kim: Mm-hmm (affirmative).

Chris Hanson: These guys, they’ve been around for, and I’m going to get it wrong, 30, 40 years. I mean, it’s not a new company. They’re a long time Texas home builder. My partner in multifamily development is also a home builder. He sold a warehouser for a very good deal in ’08 at the peak. So I’ve got a lot of builder network kind of friends. And I get input from those guys when we travel and work on stuff. I fall solidly into what I’ve seen in the headlines the last few days saying the same thing, “Residential’s on fire. It’s not a bubble.” So I’ll put my flag in the sand on that.

Kevin Kim: Okay.

Chris Hanson: I don’t see this crashing.

Kevin Kim: Right. Right.

Chris Hanson: Because they look at it from production, historic production. And right now with what we’re building today, we’re only building about half of what we were building in ’07. The home building wasn’t what blew up ’08, right?

Kevin Kim: No.

Chris Hanson: It was our debt.

Kevin Kim: Yeah.

Chris Hanson: So the home building engine for the country pretty much shut down in ’08. And if you look back at charts from the ’40s, you look at the number of homes we produced. Dwelling units, right? And that’s what we track in multifamily. Same thing. Dwelling units produced versus demand of population growth in any market. That’s how you can tell what’s going to happen with your values. If you ever have more dwelling units coming online than population need, things get soft. When you’ve got more population coming in than dwelling units being produced… We’re producing like 25 dwelling units a day in Phoenix right now. And we have 300 households a day moving to town. Weird. Our market is skyrocketing, you know?

Kevin Kim: Mm-hmm (affirmative).

Chris Hanson: We are not building at the capacity that we have historically been at. Historical average, and I’ll get the number wrong, it doesn’t matter, but let’s just say it’s 10,000 units per year. We’re at like 5,000 right now. So we’re not building at the capacity we need. Now pair that with what I brought up earlier, where I think we have a population geographic shift down to these markets, that’s just exacerbating the problem in those markets. So I think residential can have challenges in certain areas. I wouldn’t want to own in Michigan, right?

Kevin Kim: Uh-huh (affirmative).

Chris Hanson: I wouldn’t want to own in the Northeast and some of those kind of areas that are struggling economically. But I’d love to own in… California is always good, right? I mean, there’s just so much draw there. But Carolina, Tennessee, Florida, Texas, I mean anything in the south where we have population that’s shifting there, we’re going to continue to need housing.

Kevin Kim: And that’s been the debate, right? It’s always been the debate on the builder’s perspective, like inventory, right?

Chris Hanson: Yeah.

Kevin Kim: We have inventory as a problem. It’s never going to be solved. We’re not building enough units. On the flip side, from the mortgage perspective though, it’s so frothy. The rates are weird. I can’t say anything else, but weird because they’re up and down, up… And then you have this DSCR product in our space that is going to explode. My prediction for it is we’re going to see like loan people dumping into it eventually. It’s a [inaudible 01:02:11].

Chris Hanson: We’re going to see what?

Kevin Kim: I think loan people’s going to jump… The major A-paper shops are going to take it themselves. And it’s going to be-

Chris Hanson: Well, that’s what I’m actually scared.

Kevin Kim: I hope not.

Chris Hanson: I would get more scared at that point. But I mentioned my buddies who bought 70 houses this week on behalf of one institution.

Kevin Kim: As another point, I mentioned on another episode is the institutions are buying up a massive quantity of rental homes.

Chris Hanson: And they still don’t have a fraction. I mean, they have like 1% of rentals units.

Kevin Kim: Okay. Well, you see that in the news, right, when BlackRock buys a small city in Texas? It starts to make you like “What’s going on here,” right? Are they trying to make us into a nation of renters? That is what frightens me of like, is it going to be some kind of weird eventual crisis? Not like ’08 with a credit crunch, but is it going to be a weird ownership crisis?

Chris Hanson: So for years of being a guy who sources and does acquisition and resale to institutions, I can tell you since that got big in ’12, I’ll say is when it really picked up steam, there hasn’t really been a period where we’ve ever been able to satisfy the demand of those institutional buyers. And I can tell you from knowing guys who work platforms for Blackstones and BlackRocks and things like that, those guys have capital they have to deploy, right? I mean, they’re going to deploy it and they’re calling and going, “We’re going to change the underwriting model.”
Now, instead of needing a 4 cap, we’re going to drop to a 3.7. Now the new buy box is 3.7, go get the inventory. So you have these just giant pools of money that are trying to get into the space. And I think that’s why you can say the housing market as a whole, but that’s not really the picture, right?

Kevin Kim: Right.

Chris Hanson: That’s the USA Today headline, “Hey, the housing market’s up 17%.” Well, a $5 million house in a luxury area is probably not up 17%.

Kevin Kim: No, that’s not.

Chris Hanson: A $300,000 entry level home probably is up 25%, right? So when you get into general statements, I think you can get into trouble. But the lower end of the housing market where I think we have the most exposure from having people without equity is going to get more of this kind of less equity in the game, less skin in the game transaction stuff. My opinion from the institutions I’ve worked with over the years is if that ever crumbles, there’s going to be a vacuum of money waiting to pick up distress there. There just isn’t distress there.

Kevin Kim: That’s true. They are getting ready for it.

Chris Hanson: Right.

Kevin Kim: Everyone I talked to in distress side is getting ready. They’re never going to actively say they’re ready to go, because there’s not much steel flow right now.

Chris Hanson: Well, everybody got ready for all the distress from COVID.

Kevin Kim: I remember that.

Chris Hanson: Tell me how those funds we’re given, right?

Kevin Kim: Basically, we didn’t have a crisis in that regard.

Chris Hanson: Well, that’s because we just printed more money than we [crosstalk 01:05:18], right?

Kevin Kim: It’s true. That’s true.

Chris Hanson: Which is another reason that’s bolstering prices. I don’t know. We could talk for hours on the inflation concept and where all that goes. But I feel like housing is still a good place to keep money.

Kevin Kim: And that goes to our final question from the show. We always ask this at the end of the show. Bullish, perish for private lending, right? Private lending as an industry in the next three years. What do you think?

Chris Hanson: Bullish.

Kevin Kim: All right.

Chris Hanson: I mean, [inaudible 01:05:46] used to get good technology and good money. Smart money is entering the space. Now, that could be hard on the small guys and the guys trying to break in because as the leaders get more established and more efficient, that makes it hard. And I could be in that group that gets pushed out unfortunately, as it gets more mainstream. I don’t think that’ll be the case, but that could even be the [crosstalk 01:06:11].

Kevin Kim: You made a point. I was thinking about that. As it becomes standardized and commoditized… It used to be really easy to jump in if you were a new lender. Today, it’s a little harder.

Chris Hanson: It is.

Kevin Kim: It’s easy to fund, but it’s still harder to kind of like grasp the concepts now. I feel like it’s going to get harder and harder over the years in mortgage. What do you think?

Chris Hanson: As we get more groups that want to put bigger chunks of money… I saw some of the guys at your guys’ conference. I’ve never been a big conference attendee. I like to go check them out if I’m trying to learn a new space, but I saw the guys that were reminiscent of me 10 years ago. They run a small, hard money lending deal. They’re getting into the space, but they have no idea how much they don’t know. It’s a tough time to enter the business. When I got in, anybody could do it. “Oh, you want to borrow money? Great. I can find some money. We’ll lend it to you.” It was so easy compared to today.

Kevin Kim: Yeah.

Chris Hanson: Now you’ve really got to show up with an A-game and have some sophisticated banking and legal understanding, or it would be a hard… The barriers to entry, they didn’t use to be there. We used to say that there’s no barrier to entry. There sure is today. I think that only gets worse.

Kevin Kim: Okay.

Chris Hanson: So bullish on the industry, but maybe bearish if I was an individual trying to-

Kevin Kim: Jump in.

Chris Hanson: Yeah. Go plant to flag and create an A-game.

Kevin Kim: So we need more of those educational resources. There’s some groups that are doing it for new lenders, but definitely need to encourage it because the market needs to grow. And we only grow by having new operators jump in and few things.

Chris Hanson: Yeah.

Kevin Kim: Well, cool man. You know what? This has been a fun one. I always enjoy talking to you, Chris. I really appreciate you joining us on the show here. I think it’s all the time we have for today.

Chris Hanson: Right.

Kevin Kim: And for our listeners, this is probably going to be out a little bit after our Captivate show. So if you were there and you met Chris, it’ll be a good time to catch up with him here. And we’ll see you on the next one.

Chris Hanson: All right. Thanks again for having me. I really appreciate it.

Kevin Kim: All right.

Chris Hanson: Anybody listening can find me at hansonre.com.

Kevin Kim: There you go. hansonre.com.

Chris Hanson: Thanks, Kevin. Talk to you soon.

Thanks for listening to Lender Lounge with Kevin Kim. I hope you’ve enjoyed this episode as much as I did. If you did enjoy, please leave us a 5 star review on your podcast platform, and be sure to follow our show to be notified of new episodes. If you’re on YouTube, don’t forget to smash that like button and hit subscribe for more content from all of us here at Geraci. Lender Lounge with Kevin Kim is available on all podcast platforms. Referrals really help us spread the word so please send this over to someone you think might enjoy it. See you next time. This is Kevin Kim signing off.