Host- Trey Stone
Guest- Jeff Welch, Third Coast Bank
Third Coast Bank
Jeff Welch’s Contact Info
Houston Livestock Show and Rodeo
Jeff and Trey have worked together on loans in the past. Jeff did the loan for Trey & Erika’s home. They’ve also looked at investment deals together.
Jeff Welch is a commercial lender & Vice President of Third Coast Bank, located in Humble, Texas with branches in San Antonio, Beaumont and, Dallas/Ft Worth. They have 1.8 billion in assets and have grown from a small, community bank but pride themselves in serving local communities who are often overlooked by big banks.
Jeff was a quarterback at Sam Houston State University but his collegiate career was plagued with injuries. This thrust him into the world of banking. He always wanted to be involved in real estate and the entrepreneurial aspect of investing was appealing to him. He took an internship at a bank and graduated early to start his banking career. From there he got into community bank lending. Third Coast Bank offers a diverse product where they can meet the needs of C&I manufacturing, real estate investing, etc.
Values: Relationships, Company Culture, Small Businesses
Jeff’s favorite aspect of his career is the relationships he forms. His customers are his friends and he values those relationships. Jeff & his company build deals with relationships in the forefront. Third Coast Bank wants to be a resource for you and work with you on all of your needs- not just a one-time transaction.
Trey also values relationships and expresses the importance of staying in contact with your network even when you don’t have a deal to work together. Long-term relationships are a really important and key ingredient for success vs. one-time, transactional relationships.
Trey found the youthful culture of Third Coast Bank to be unique. Jeff expands that they have an energetic CEO and the company focuses on meeting the needs of small businesses in their community and helping them prosper. These values became really evident through the PPP loan process.
Third Coast Bank kept up with some of the bigger banks. They did just over 3,000 individual PPP loans which totaled over 506 million dollars in funds provided. This accounted for 50% of their total asset base in PPP loans. Jeff recalls a 30 minute conference call announcing the opening of the PPP loans and even though no one asked him and his colleagues to go into the office they all got in their cars, headed to the office, and worked tirelessly through the PPP process to serve their customers.
They worked late nights, early mornings, and skipped days off throughout the month of April to serve their community. Jeff is proud to say that his portfolio of customers received their PPP loans in the first round. When the second round opened he also helped 40-50 additional small businesses. He’s very proud of Third Coast Bank for meeting the needs of their community during such a difficult time. Jeff attributes the success to the culture and the leadership of the bank.
*PPP was a program that was offered by the federal government to help business owners. It wasn’t a loan that you could get and do “whatever you want with it”. The idea was to keep people working and employed even when businesses had to be closed and they had no way to bring in revenue in order to prevent them from losing their jobs. This allowed them to pay their mortgages, rent, groceries, and take care of their families during this time.
Trey reflects on the experiences of colleagues in his network during the PPP process. He explained that they really found the support through their local and regional banks vs big banks because those were the people who were willing to put in that extra work. The people who got the money before the money ran out were the ones whose bankers were willing to work the evenings & weekends to keep up with the changing parameters of the loan program and to process all of the paperwork to make sure everything was done right. He commends Jeff for his hard work to serve the business owners and community.
To Trey, this is the perfect example of why long-term banking relationships are really important. In the beginning of Trey’s career he started investing with Fannie Mae. Trey describes it as a nameless, faceless entity and government-sponsored enterprise where there isn’t a personal relationship.
A mentor gave him the advice that there would be a time in his career where if he can’t pick up the phone and call someone local who knows you and understands your properties then you’ll be in a huge bind. At that point, Trey started to build relationships. He explains that finding a banker in a local or regional bank needs to be part of your strategy as a business person as you’re building out your team because those are the folks that are there for you and that can understand whether you’re a good borrower and take that into account in the underwriting process during a challenging deal. Challenging deals can be the most profitable deals.
Advantage of Local or Regional Banks
Having a contact at a small bank or medium-sized community bank is invaluable when there is a need for your business. Jeff recognized that people were struggling and his clients expressed that if they couldn’t get the loan it meant staff lay-offs and potentially closing the doors. The team at Third Coast took that personally and did what they needed to do to make sure the community received the funds they needed before the funds ran out.
Aside from the support in a crisis, this relationship is invaluable because oftentimes certain aspects or variables of a deal won’t fit a big box product like you would find in big banks. To qualify for their loans you have to fit perfectly into their little box. If you get a little bit outside of the line, it’s pretty much a decline and there’s nothing you can do about that. On the community bank side of things, they pride themselves on being creative and finding unique ways to underwrite or structure deals that may not be conventional requirements for other loans.
They work with their borrowers, especially their existing relationships, to make any deal happen that they can. Sometimes some of the deals that are harder to structure and don’t make the most sense on paper end up being the most lucrative ones for investors. Third Coast Bank recognizes that as well and really thrives on having relationships in place to help with some of those deals.
Trey has an example of this type of deal with his personal home. As a real estate investor you have this catch-22 where even if you make millions of dollars per year, you don’t necessarily have it as taxable income. This is great because you have depreciation tax which is a “paper expense.” Trey calls it a “paper expense” because no money is actually coming out of your bank account.
The tax code states that your property is going down in value every year that you own it. It gets closer and closer to functional obsolescence each year- which means that it will eventually get worn out and have to be taken down. In reality, Trey has never owned a property that hasn’t gone up in value while he owned it. The write-off is a great tax benefit for that reason. Trey takes the depreciation expense as required under the tax code and it typically wipes out the income from that property on paper.
A lot of times Trey can make a 7 figure income in a year but still report a loss for tax purposes so he doesn’t owe any income tax on that money. The catch-22 comes in when you go to a big box retail bank to get a loan on a multi-million dollar home, they ask for a W-2 and pay stubs. When you explain that you’re self employed, they want to see your tax returns. In this scenario, on your tax return you show a net operating loss.
They look at the big net carry-forward loss for tax purposes and understand it as you’re losing a lot of money. You then have to go through round after round of underwriting to show them the cash flow and the loan just doesn’t happen. Trey ultimately came to the conclusion that he needed to take his business elsewhere. When he went to Jeff for this loan, Jeff was able to look at it as a local banker who could get to know Trey and his assets, see how much equity he’s built up, look at the cash flow generated, appreciate this type of client and provide the loan. During quarantine, owning this house has been a life-changing experience due to all that’s available on the property for his family. He owes this to Jeff because had he been stuck working with one of the big box banks he wouldn’t have gotten the loan done to get into this house.
Jeff says that they see this scenario all the time and is happy that he was able to get it done quickly so Trey and his family can enjoy their home.
Depreciation Tax Code
Trey is not unique in applying the depreciation tax code to his investments. It is an expense that all real estate investors can write-off on their taxes. Trey reflects on a colleague who invests in real estate but doesn’t own any of the deals himself. He can’t claim depreciation and owes 40% in taxes on his investments each year.
If you could keep twice as much money in your net income after you pay all of your bills, it’s a huge difference. If you bank the other 40% that you never saw because it went to the IRS, then that money can build up over time and earn more money.
Warren Buffet always says “Compound interest is the single most powerful mathematical principle known to man.”
When you’re not only getting that compound interest by building equity in your properties but you’re also re-deploying your earnings into more properties but on top of that you’re doing it at twice the rate because you’re not giving half of it to Uncle Sam, it’s a huge multiplier effect that moves the needle so far. If you deploy this as an investment strategy a couple decades before you retire, you will probably end up with 10-15x more than your overall net worth and retirement money due to compound interest. This is why it’s important to start planning early.
Jeff explains that he has a rental property and enjoys some of the benefits of depreciation and write-offs from that. He thinks a lot of people are skeptical to get into it because they don’t see how it can provide as big of a benefit by rolling equity into the next investment and building compound interest. It’s very achievable and Jeff has had many clients who start off with 1-2 properties and have grown. One of his clients grew from 1-2 rental properties to 45 properties in 4 years. That client now sits back and has residual income from rental properties and writes off depreciation from all of those. You also get to write off maintenance on your properties. When you have the right strategies all of this is doable.
Advice for Investors Right Now
Jeff’s advice to investors is to have a good quality banking relationship with someone who can help you. Being able to secure the financing you need to invest in these projects is critical especially if it’s going to be something that you can continue to do. A good contact at a bank can guide you in the right direction and walk you through structure, especially a first-time investor. Trey elaborates on the current market and how high prices were in 2019. He advises that you can’t be fear-based because an opportunity as a buyer doesn’t come along all the time and right now there is opportunity. You have to be willing to put money into deals when the market is distressed. As a banker, Jeff agrees that this is a good time to invest. From a profit standpoint, the most critical aspect is finding the right property at the right price and there are a lot of those opportunities popping up recently. Depending on your risk-averseness and entrepreneurial mindset, right now seems to be a good time to invest based on market activity.
Trey reflects on families whose names are household names: Rockefeller, Carnegie, etc. He says that in most cases it may not have been their initial business that propelled the family to that level of wealth. It was the fact that they built some modest level of wealth building a business and then took advantage of a big drop in the overall economy. They bought tons of assets while they were on sale. As the economy bounced back, suddenly those assets were worth astronomically more than what they paid and that’s how they built massive levels of wealth. These days, people think it’s all about technology and internet-based businesses. Most of us don’t have the skillset and background to build the next Facebook but we do have the ability to use common sense and buy assets in a down market at a discount.
By interviewing guests on his show, Trey realized a common theme that successful investors and leaders in his network share: they all have a passion for giving back to their community. When asked about his passions along these lines, Jeff shared that he and his wife actually met volunteering for the Houston Livestock Show & Rodeo. Jeff has been a member for about 7 years and his wife has been a member for about 5 years. They met when they served on the same rodeo committee. They’re passionate about giving back to the kids and the charities associated with the Houston Livestock Show and Rodeo. They’re also passionate about animals. They like humane societies and no-kill shelters.