EP #12 - Rental Property Loans 101: What Every Investor Needs to Know

In this insightful episode, Jacob and Mike are joined by Steve, a seasoned mortgage professional, to unravel the complexities of financing real estate investments. The trio delves into the intricacies of investment property loans, emphasizing the importance of building a solid team and understanding the diverse loan options available. Steve shares valuable insights on debt-service coverage ratio (DSCR) loans, shedding light on eligibility criteria and common scenarios where they prove beneficial. The conversation also touches on interest rates, loan-to-value (LTV) ratios, and the critical role of appraisals in real estate transactions. The episode culminates in practical advice for new investors entering the real estate market, emphasizing the need for due diligence, team-building, and learning from mistakes. For those navigating the real estate financing landscape, this episode provides a comprehensive guide and actionable tips for success.

Connect with Steve:
https://stevedoesloans.com/

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Join The Waitlist For "Rental Property Investing 101":
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Connect with Jacob:
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Website: https://www.cashflowsaga.com/
YouTube: https://www.youtube.com/@cashflowsaga
Twitter: https://twitter.com/cashflowsaga

Connect with Mike:
Instagram: https://www.instagram.com/realtormichaelmagno/
Website: https://themagnogroup.com/
YouTube: https://www.youtube.com/@realtormichaelmagno

Transcript

Nancy: 0:00

This is the Financial Freedom Fighters Podcast

jacob: 0:13

Welcome everybody to the financial freedom fighters podcast. I'm your host, Jacob Sandoval. I have with me, my cohost, Mike Magno, and we have a treat for you guys today. Uh, we have a very special guest. He's actually my lender and a good friend of Mike's as well. We have Steve Wiley joining us on the podcast. Say what's up, Steve.

steve: 0:38

Hey, how's everybody doing today? Good to be here.

mike: 0:40

Awesome. Thanks for, uh, thanks for joining us, Steve. And we, uh, we appreciate

steve: 0:44

Yeah. Thanks for having me.

mike: 0:45

sharing some knowledge with us today.

steve: 0:47

Of course. Thanks for having me.

mike: 0:48

Awesome.

jacob: 0:48

So why we have Steve on the podcast today is, you know, I have a lot of conversations. Mike has a lot of conversations with people. And one of the most frequently asked questions that I get from aspiring investors is Just understanding the financing process of it and, and how to get a loan and being really intimidated by that process. I know when I did my first deal, I was completely in over my head and had no idea what was going on, the documents, all the terms, the underwriting, the debt to income, all this stuff. And so it was incredibly overwhelming, but I had a great lender, um, who is Steve and he held my hand through the entire process. So. This is going to be great. We're going to do investment property financing one Oh one. And Steve's going to take you the listener through this. So by the end of this episode, you're going to understand financing pretty well, pretty well. But what's also unique about Steve is he is also an investor himself and an investor in the market that Mike and I both. Well, Mike is a realtor and investor in, and I invest in, um, so he owns, I think it's about, it's 14, is it 14 units right now, Steve, or

steve: 2:02

It's 13 total units right now. Yeah.

jacob: 2:04

okay. 13 units in Cleveland. So he has a pretty sizable portfolio in Cleveland. So Steve also had the knowledge to not only advise me through the lending process, but also give me his perspective as a Cleveland investor as well, which was. Quite a treat kind of going into that market. And, um, so Steve, without further ado, I'd love you to, for you to introduce yourself, uh, to our listeners and, you know, just talk a little bit about your background and how you got into real estate.

steve: 2:31

Yeah. Thank you. Uh, great lead in. Yeah. Uh, Steve Wiley here. I'm a mortgage lender and a prime lending based out of our San Diego office. Uh, my website, if you want to check it out, it's just stevedosloans. com. Super easy. Um, I got into real estate in my early thirties. Uh, give you a little background. I grew up in rural Pennsylvania, you know, pretty low to middle income. Fantastic parents, but we never really talked about money, never talked about investing, but you know, my mom cleaned houses My dad was a factory worker and they taught me a lot of great things And you know inspired me to go to college and whatnot, but never really talked about like financial security or money at all Right. So in my mid twenties, I moved out to San Diego A very high cost of living area and I was having a blast and, uh, all of a sudden I'm in my early thirties and I'm seeing guys I'm working with in their fifties and sixties that are doing the same thing I'm doing, living paycheck to paycheck and I'm thinking, this can't be it. Like, I have to figure this out. You know, I can't be like my parents who are going to survive based off my dad's pension from being at the same factory for 45 years. Um, you know, like I have to figure it out. How is this going to work for me in life? Right? So, um, I was in a different industry at the time. I was general manager of a couple of camera stores here in San Diego. Shout out to George's camera. And, uh, yeah, basically I, I was, I was doing okay financially. And I thought, you know, if I could find a place where maybe it's a two on one with like a granny flat in the back and like a house in the front, I can live in the granny flat and rent the front house out, that would be perfect. Right. So the woman I was with at the time. Uh, she was an architect, very well connected. Um, we were just recently engaged at this point and we found a four unit property that was a standalone house in the back, small 600 square foot, but you know, great unit close to the beach, within a mile of the beach in San Diego. And then a building with three units in the front. And we, uh, it was the very first place we even ever looked at first place we ever put an offer on in 2011. And, uh, we got it. And now all of a sudden it was go time. And it was like, what am I doing? I knew nothing about real estate at that point. Right. So worked out perfect. The back unit, uh, the back standalone house was empty. We moved in there and as tenants moved out, we, uh, just, you know, renovated the front, brought up the, the, the rents to their, you know, the market value. Um, I still fully recommend this way of going about it. We did it with an FHA loan owner occupied. Great way to get involved in real estate is to buy a multi unit, live in one unit, rent the other ones out. So we did that in 2011. In 2014, we ended up splitting the relationship super amicably, and we kept the property as an investment. She did her thing, I did my thing. I stayed in San Diego. Uh, 2016, I decided, you know, I'd like to own more real estate, but San Diego had grown quite a lot in that five years, so I started looking at other areas around San Diego. It was a little daunting to own something in a town I didn't live in. Um, so I wanted to keep it within like, you know, a short drive, five, six hour drive, ended up buying a four unit in Tucson, uh, which I still to this day have amazing property. Um, you know, amazing performer on that guy got a smoking deal on it at a good time. Uh, and that's a four unit property there. And then that was kind of the opening of the door to realize like, man, you can really do this anywhere. Like you don't have to be in the town that you're investing in. Like, it was such a mindset that I never believed in until I actually did it. And I realized if you have a good team and you have a good realtor and you have a good management company and they can connect you to contractors or you have good contacts with contractors, you can really do this anywhere. So fast forward to 2019, 2018, 2019, I started looking at other areas and a lot of Midwest cities kept coming up. And I just put out to my social network, you know, who's investing in any of these areas. And a couple of friends from Denver. We're investing in Cleveland and working with Michael and March of 2019. I flew out and met Michael for the first time. And right away I was like, this dude is legit. I was like, just had a great feeling about him. Like we got along great. We went to a Cavs game. Uh, you know, we, we had a great time and I thought this is somebody I would love to work with. Let me test the waters by buying one duplex here. Uh, so 2019 I bought a duplex in Cleveland, real affordable. Um, 2019, the end of it or so, my partner for the San Diego property started talking about wanting to sell the San Diego property. Um, at that time, I didn't really see a means for me to buy her app. It had basically doubled since we bought it in 2011 to 2019. I thought, you know what? I'll cash out on this. I'll look for more passive income. Of course, hindsight's always 2020. We went through the roof from when we sold it in 2020 to 2023 in San Diego, but you know, I didn't know that at the time. Um, but I did a 1031 exchange and ended up buying, um, six properties, 13 total units in Ohio as a result of that 1031 exchange. So that tells you the difference in money, right? I sold literally 50 percent of one property in San Diego. To buy six properties, 13 units in Cleveland, and it was great. It's more passive income and whatnot. I've still seen appreciation, you know, not as strong as San Diego, uh, but I've gotten more passive income. Um, and then in, uh, last summer I ended up selling one of the duplexes just to kind of liquidate some capital. I had one that needed some more work than I wanted to do. So current holdings. Um, 13 units in the Cleveland Parma Lakewood area and four units in Tucson all while mind you still not owning my own primary home and renting a house like a block from the beach in San Diego. So, you know, you can do it.

mike: 7:50

And Steve did flip one house this year too. So

steve: 7:54

And I did flip one house this year too. Yeah, totally. I did that in Akron area. Um, and actually Mike, you don't even know this. The reason I was in Pittsburgh last weekend is I just signed docs today. I'm buying a, a complete gut project in Pittsburgh, um, in the South side. So, um, still interested in Cleveland and that area and everything, but this opportunity came up and I just had to jump

mike: 8:14

have a friend who's an agent in Pittsburgh? You should have said something.

steve: 8:17

Uh, this is all like an umbrella team where they provide like. The agent, the, the, the short term financing, the contractors, like it's wild. Like they're going to, we're going to turn a four, one into a four, two and a half. Their time to complete the work is 45 days. And we hope to be in and out of the project within three to four months

mike: 8:34

equity investor in that.

steve: 8:36

Basically. Yeah. With this one.

mike: 8:38

Yeah. Jacob actually is doing an equity investment down in Cincinnati right now too.

steve: 8:42

Oh, cool. Nice.

jacob: 8:43

Eight, eight, eight unit down since that

mike: 8:45

and then I don't know if you guys saw this week, um, Diana posted a couple of, uh, uh, stories on, on Instagram, but I, I bought another house this week. So

steve: 8:55

Nice.

mike: 8:56

it's an Akron. Yeah. Uh, yeah. Well, it's funny. It, it, when I made my offer on it, it was to rehab it. I already have somebody interested in buying it from me already as is.

steve: 9:07

Oh,

mike: 9:07

So I may just wholetail this thing, make, you know, 12, 12, 13, 000 and move on. So we'll see.

steve: 9:14

Yeah. Why not?

mike: 9:15

But yeah, that's a, that's a good story for another day. The banks are just dumb.

jacob: 9:19

So

steve: 9:20

Jacob, how many are you up to now?

jacob: 9:22

I'm still at six. I'm still at six. Um, but like Mike said, I did partner on this deal, um, in Cincinnati and that was an eight unit, but I, I'm just an equity investor in that deal. Um, but I did join, um, an Airbnb coaching program. So I'm, I'm thinking about diving into the world of Airbnb this year. Um, and the reason why I'm doing that is because everyone is so afraid of Airbnb, the Airbnb bust. And, yeah. I feel like for me, that's like the right signal to kind of jump into it. So we're looking at a few different places for Airbnb. The one that we're kind of really interested in right now is properties in and around Yosemite. Um, it's such a great national park and there's just so much heavy traffic there. So we're thinking about that right now. Um, my wife is excited about that one as well. So, um, so that's kind of where we're. Looking right now, just to kind of jump into the Airbnb space and it's, it'll be in California. So that's like new as well. Not that that matters, but, um, for Airbnb, I feel like it would be nice, um, if it's a little bit closer, but, uh, anyway, that's, that's, that's a little aside from all the investing that we are all doing, ladies and gentlemen, but back to you, Steve, we could simply have you on as a guest, uh, just for the investing side of things. Um, you've done everything, house hacking. You've done a 10 31 exchange, which, you know, we can explain deeper in another episode, but that's a way to kind of defer your taxes, um, and to invest in more real estate and you did a flip as well, out of state investors. So Steve, you're, you're the Jack of all trades when it comes to real estate. we could dive into so much of that, but I want to be respectful of your time. And I also want to stick to the topic of what is the, you know, the episode for today, which is how to finance your investment property. So I'll kind of start with this, Steve. It's been a very turbulent time, uh, the past couple of years with respect to interest rates and, and financing and things like that. And when I talk to a lot of people, they're just so afraid of the high interest rates and there's, you know, they're, they're just very much like, Oh, I'm just going to wait for the interest rates to come down. So let's kind of start there. Like, what's your perspective on obviously the past two years. Your perspective on 2024, um, kind of what, what do you do when you talk to, you know, aspiring investors when, you know, there's such a heavy emphasis on the interest rates and things like that. So like, let's start there with kind of the macro environment.

steve: 11:41

Yeah. Perfect. Uh, yes. Obviously rates, they didn't only just go up, they went up quickly. Right. We were sitting at historic lows, you know, three and 4 percent for investments. And all of a sudden we went to seven and eights in like a 12 month span. Like that is shocking to people. Right now we're kind of settling back down, you know, a lot of investor loans, high sixes, low sevens, DSCR and stuff. We can touch on that later. They're going to be somewhat higher. Right. Um, but I think people are in the mindset now that it is kind of a new norm for now. Um, I don't have a crystal ball. Nobody does. Speculation is that rates are going to dip a little bit more this year as we head into the election and whatnot. Um, as odd and weird as it sounds, there's a lot of positives with higher rates. It's less competition. Um, you know, you don't have as many people out there looking to buy. You're not having to bid, you know, 10, 15 percent over asking price. You're not having to waive all your contingencies. Um. If it cash flows now at seven and a half percent, you know, two things are certain, you know, that rents aren't going down, you know, rents are going to continue to go up year over year over year and rates are eventually going to drop and they're going to settle. So even if you're kind of break even at seven and a half percent, it's still a smart investment. It's still a good time to just acquire. And, uh, basically, you know, that your rents are going to go up, your rate's going to be able to go down when you refi it. And if you're cash flowing now, you're going to cash flow even that much better then. So. Some people are scared. Some people were on the sidelines, but like the actual, like hardcore investors I work with about 75 percent of the loans I do are investors. Other 25 percent are people buying their primaries. Um, but a lot of the investors are just in acquisition mode right now.

mike: 13:17

I was going to say, you make, you made some great points in there, Steve. I, the one, the one thing I wanted to throw out there is, you know, you know, when we're recording this now, it's, you know, it's, uh, the CPI data came out a little hotter than they expected. And I've been in the camp of, I don't believe the rate cuts coming in March. I've been, I've been saying that for months, uh, people won't call me crazy. I don't think we're going to see a rate cut till at least June from the Fed. And if you've, if you watch the bond markets and I do, you know, the bond markets are what actually make, make more impact to the mortgage rates. You know, the, uh, the two year, the tenure I've ticked back up again. So, um, you know, the tenure was back up above 4 percent this week. So I think the,

jacob: 13:57

That's a, that's a, that's a Mike Magno, hot take a Mike Magno, hot take

steve: 14:02

Yeah. And if I can add, uh, you know, we're still very short on inventory is the problem, like historically as rates went up, prices went down. But we didn't see that this time because of the complete lack of inventory. So rates went up, prices in some markets went down, but not a lot of markets like here in San Diego prices have been going up continuously even with the higher rates. So it did diminish people's buying power, but guess what's going to happen when those rates drop? Prices are going to go up even quicker now because you know people are used to having this much buying power, right? And if your rates lower and your buying power remains the same, that means the prices have to go

mike: 14:36

So you guys ready for a, for a mind blowing statistic. I was on, I was on a call yesterday 78. 7 percent of the mortgages in this country right now, less than 5%, less than 5%. And of those, uh, 59 percent are less than 4%. So, I mean, that's just, um, the inventory is a problem. We've talked about it on previous episodes. Um, you know, I've got other statistics. I could talk about my market here, but you know, I was on that. I was on a call yesterday and I saw that and I was like, wow, that's unbelievable.

jacob: 15:11

that alone just gives you signal that the market's not crashing. You know, it's like a very different environment than we were in 2008. And I think there's a chunk of homes that are just own free and clear as well. Right. There's just like, there's a, there's a ton of homes that are just on free

mike: 15:27

Yeah, there's a ton of that. And then I'll throw out one more number for everyone. Uh, and this is just in my local market. This is a five County snapshot of the counties that I service in December. Of 2023 and this is single family home. So it doesn't include multifamily, but this is single family homes. There were 3814 properties for sale in December of 2023 for that same month in, uh, what was December of 2014, which was considered a balanced market. Statistically, there were 11, 900 homes for sale in those same five counties. So you got 75, almost 75 percent less inventory than you had.

jacob: 16:06

we'll kind of take it back to the financing, Steve. So all, when I got in contact with Mike, you know, I think, and again, this kind of highlight highlights the power of building a strong team. Right. And I think that team starts with an investor friendly agent. When I got hooked up with Mike, an investor friendly agent is going to be incredibly well connected and they are going to. Also be connected to the rest of your team and they can help you build the rest of your team. And if your investor friendly agent is a top performer, which Mike is, of course, he's going to know other top performers. And so the first thing that Mike did is he referred me to Steve as the lender. And so I chatted with Steve and much in the same way that I hit it off with Mike, you know, I instantly hit it off with Steve as well. And he made me, you know, less scared about the financing process, just in general in what I liked about Steve was. Your ability to explain things very simply. So for the benefit of our listeners today, can you just give us a broad strokes overview of the financing process? Assume that I've never done an investment property loan. I'm calling you up for the first time. I got referred by Mike Magno. I'm like, Steve. I don't know what I'm doing. Can you help me out a little bit?

steve: 17:28

Yeah, yeah, for sure. Thanks for that lead. And for the kind words, man, you were a pleasure to work with, too. I think that's why I relate so easily to people in this is because I've done every side of the aspect. You know, I've bought, I've sold, I've rehabbed, I've owned investment properties, I've owned my own primary, which I don't right now, but I have. Um, so, you know, I, I can relate to people's fears and I can kind of talk them off that ledge because it is a daunting task. I mean, it's pretty much the biggest purchase you're ever going to make in your life is, is anything real estate. And of course, as you do it, you know, a few times you get a lot more familiar with it, but you're right. A lot of the people that we're working with are first time investors. A lot of the people listening here are first time investors. So The most important aspect is building the foundation. Just like building a house. The most important thing of this is building the foundation, building a good team. Um, you know, having an agent like Michael, having a lender like me who can kind of help you and hold your hand through the process. Um, the first step we always do is we generally have a conversation, figure out what your goals are. Um, as much as you want to work with a lender, who's giving you a great rate. I'm interviewing you and I want to work with, with borrowers who are going to respect the team. And, you know, we need to make sure we have a commonality and that we're going to be a good fit because if not, it's just, it's just not worth it for either of us. Right? So we have a conversation, we figured out, you know, what are your goals? What are your hopes? What are your dreams? Uh, what are you looking at? Um, more broad stuff, right? And then we, we'll talk a little bit about income and whatnot, but I don't really focus on that during the initial conversation because what we really want to do is first get an application in the system. The application is definitely the starting point. Um, any, the big, the biggest thing you're trying to figure out is like up to what dollar amount can you borrow, right? Basically that's, that's the thing. And there's a few things involved with that. There's the interest rate. Um, but mainly it comes down to, to the acronym DTI, which your listeners may or may not be familiar with. It's debt to income. It's a ratio of your overall debt versus your overall income. So on the debt side, you look at the subject property, the subject loan that you're taking on. Um, You know, if you already have a place in mind, it's a property, but usually we're doing a pre approval without a place in mind. So we're just looking for a dollar amount that you can qualify up to right before you really start looking for properties. Um, so you're looking at the acquired debt from the property, which is, uh, your principal interest, taxes, insurance, and HOA, if there is one. Uh, you're looking at any other debt. You have student loan debt, other real estate, you own car payments, child support, credit cards, all that's on one side of the equation, and then the incomes on the other side of the equation and with most investment loans, you want that ratio to be around like 40 to 45 percent or less. Um, so then basically we kind of work backwards and we say, okay, so here's, Like the maximum amount that you can qualify for on a per month scale, it all comes down to your monthly debt to income. And then we say at this given interest rate, knowing that the property taxes is this amount, knowing that the, uh, you know, we can estimate your insurance is this amount. Is there an HOA? Oh, there's not great. We don't have to worry about that. Um, then we can basically say, okay, here's your maximum monthly payment for all things combined. And then we take that and we say, okay, this is the dollar amount of a loan that you're approved up to. Um, there's a lot of different kind of steps and phases. I won't go too deep into it unless you want me to, but if it's like a standard W2 earner and everything's like. pretty good to go. We can generally offer a prequalification letter just based off of the application. Um, if it's something where somebody self employed and, uh, they make a lot of bonus income, they've switched jobs a lot, they've had some gaps, then we might need to dig a little bit deeper before we can give the prequalification and get some other additional information going. Um, but yeah, basically I get that prequalification done one way or the other. I get that over to Mike. Um, start looking at properties or whatever. Um, and then once you get an accepted offer, then it becomes go time. And Mike and I have some really good strategies to, to get you to that point. Um, by doing like, you know, to be determined underwriting scenarios. So we can write a shorter escrow period, a quicker closing time, super attractive to a seller. Um, plus if they see that you've already done the entire underwriting process, you might get the house, even though yours isn't the higher dollar amount offer, because it just looks more solid. A lot of sellers prefer that over a higher dollar amount. So Mike and I will strategize, work with you together to figure out, okay, what's the best exact strategy for you in particular? Um. Yeah, once you get the, once you get the offer, then we basically turn that application into an actual loan number. Um, if we haven't already collected all the documents we need, we'll get documents. We'll send everything to our processing team. Let me separate real quick processors and underwriters too. The best way to think about this is the processor is on me and the buyer's side and the underwriter is on the money's side. So we're all one team, but we're kind of. We're kind of working together, but also like not, if that makes sense. Right. So the processor is the one who's basically like, Hey, we need to make this package look as great as possible to submit it to underwriting. And then that's a huge help, right? Because they're going to walk us through like, okay, we also need, um, you know, maybe we need some additional asset accounts or whatever it may be. Um, so then we'll work together. We'll get everything together. It'll go to underwriting. A lot of times underwriting says, cool, this is a great packet. Let's, let's get it done. Sometimes they'll come back and they'll say, Hey, you know what? We have an issue with this, this, and this let's get this stuff corrected. Uh, and that's why working with a really solid team on the lending side too is really, really important because if those issues do come up, you need to know how to fix them quickly, especially if we're working on a 30 day close to escrow. Um, You know, maybe something came up that we didn't discover at first. There's additional debt somewhere or something, you know We can always flip it to a different loan product Flip it to like a DSCR loan or something if we need to a bank statement loan You know, there's a lot of different things that we can do on the fly if you have a good team But yeah, that's basically that and then you end up with the property

jacob: 23:17

We, we went really deep there, Steve. So I'm going to, I'm going to, I'm going to walk us back a little bit. So we can kind of double click into a few things, um, just for, for the listeners here, so taking it back to pre approval, right? So. So effectively when you're working with an agent, that agent like Mike is not going to take you shopping for properties until they have a pre approval in hand, which is, you know, a lender kind of signing off on you as the buyer to say, Hey, this person can afford up to this amount, which then kind of sets the whole process into motion. And so you said what triggers a pre approval or what. You know, give us, you know, the bank, the ability to pre approve you is submitting that application. Can we talk about that application and what should the listener expect, you know, to fill out? I know that we kind of talked about the documents, but. There's like, let's talk about the documents so that people can kind of get prepared. I think that when I first did it, I was like, this is quite a lot of documents and it took some time to pull together. Now that I've done it a few times, I always have it ready. Uh, but for the first time, you know, uh, investor, that might just be kind of a, a little bit of a shock to like kind of pull all that together really quickly.

steve: 24:19

Yeah. Yeah. So at Prime, we make it as easy as we can. I mean, our application process is very straightforward. It's all online. You can upload docs online. Um, you can send them through secure email if you like, um, you know, whatever's easiest, but the application pretty straightforward. 20 minutes or so for a borrower to do it. Um, there is a difference between a prequalification and a preapproval. Also prequalification, um, how can I say this? Doesn't have as strong of a backing cause it's just basically based off of what the applicant gave us on the application. We've not yet verified docs, but usually that's enough for real to work with you. That's enough for a seller to let you into places to show and whatnot. A pre approval is a little bit different where we've dug deeper and we've basically verified all the income. We've verified the docs, but for our purposes, let's just basically go with like prequalification as the term. Right? So, um, generally the documents you're going to need is, you know, two years, tax returns, uh, two years, w twos. Uh, 30 to 60 days of pay stubs, two statements for asset accounts, a copy of a driver's license. If you own any other real estate, uh, the most recent mortgage statements. Um, if you don't roll in your escrows, you'll need the interest, excuse me, the, uh, the taxes and the insurance statements for any of those properties. Um, if you own additional properties and we're qualifying rental incomes that those provide, we might want the leases. Um, but those are the basics really to start. It's mainly the first step is really the income calculation. So I kind of like to do it in stages to not completely overwhelm the clients. And I generally just start with. Tax returns, pay stubs, W 2s. That's it. Once we get the income dialed in, then we can kind of move on to the other stuff.

jacob: 26:02

Okay. Absolutely. And one thing I'll say here is. When I first got connected with Steve, I really felt as if, you know, he wanted me to be successful and that was kind of an aha moment for me. I think when you're just going through this process for the first time, you think of this, the bank as this entity, you know, that really that's faceless and doesn't really care about you as a person or as an investor, but that's definitely not Steve, you know, he's a very warm person and he just. Took the time to really explain all this to me. So that, that was the first insight for me is the lender. They generally want you to be successful because they need you to pay back the loan and they're giving you in, but they're also giving you insight as to like, they don't want you to get over your skis. They're giving you a budget that they are calculating off of, you know, tons and tons of people that are doing this. And so they know the guidelines within which you should operate that you maybe as the investor, you don't know. So that's one thing the lender wants you to be successful and they're going to give you a budget that you can work within that is well informed, right? Because maybe the first time investor doesn't necessarily know what their budget is or should be. So I think that's just like a very helpful data point for you to be like, Hey, this is what I think you should be shopping for in kind of this, this range.

steve: 27:37

Yeah. And if I may, uh, you know, a lot of this isn't lender by lender. It's all federal guidelines, right? So when we say we want the debt to income ratio to be a certain number, it doesn't matter if you use me, if you use your local bank, if you use whatever you use, those numbers, if you're using like a Fannie or Freddie product, they are what they are like, I can't change them. Um, no lender can change them. Right. So, um, thank you. I love what you said there. Um, my goal is definitely to get you to close the loan because you know, none of us get paid if you don't get the loan closed. And also to like, I don't want to just do one loan with you. I want to help you build your empire. I want to get you to the level that Mike and I are at. Um, or that other bigger investors are at where, you know, you're, you're, you're buying places every year and you are just churning and getting to the point where you can generate enough wealth for you and future generations that, you know, that's my main goal. Um, growing up is with some, as somebody who didn't really have a lot and didn't really have any of that stuff. The thing that excites me most is working with somebody else who kind of comes from the same type background and is like, you know, I want more for my life. I want more for my family. I don't want to work forever. Like, I don't want to retire when I'm 75. Like I need this passive income and stuff to really work. And that's like, nothing makes me happier in this industry than getting people like that in that mindset of like, you can do this and you can make passive income doing this and get longterm generational wealth through real estate. You know, cause it's, it is somewhat daunting, you know, if it was easy, everybody would do it. Right.

jacob: 29:06

Thank you for that. Steve. That was a very, very motivational and inspirational. I'm going to transition us to a very quick and kind of funny story, but obviously it's related to the, to this process. Um, I was living in an apartment in Pasadena and these people were crooks. The property managers for this building were crooks. Me and my wife, we lived there for about eight months and we moved out and they charged us thousands of dollars in damages. And we had lived there for eight months. Property was perfectly fine. They were charging us for all types of damages. I said, on principle, I'm not going to pay this back on principle. So after ignoring all the requests, they sent me to collections. They sent me to collections and that really hurt my credit score. And I'm someone that had a very good credit score, you know, my entire life. And this single, single thing dropped my credit score. A hundred points, a hundred points. And I was like, you know what? It's fine. It's whatever. This is me just being like, you know, I'm not going to pay that back. I'm not going to pay that back at this point. I'm going to buy my investment property, uh, with in Cleveland with Mike and Steve. And Steve takes a look at my credit and he's like, Hey, Jacob, uh, what's going on with this? Uh, this, uh, your credit score here that we look like we have a little bit of an issue. I was like, Steve, it's fine. It's fine. I'm gonna, I'm just gonna, I'm just gonna, it's not that big of a deal, right? And Steve was like, no, it's a little bit, it's kind of a little bit of a big deal that your credit score is, is much, much lower. And so Steve, I just want to pass it off to you. I don't know if you remember that situation very well, but my point here is I want you to kind of touch on the fact that credit is obviously such a big, important part of this. And you coached me through that situation. If you don't remember, like you, you kind of walked me through that. You gave me a lot of good tips and I'll pass it over to you, but I just want to like, talk about that specific story.

steve: 30:59

Yeah. Thank you. Um, yeah. I mean, your credit score is hugely important, right? I mean, it shows how responsible you are with money. And, but it's not always, I want to say it's not always like the fault of the, of the person with the credit score. I've had other instances too, where people just didn't even know that they had like, you know, an outstanding medical bill that, you know, they probably never got the bill for, and they had no idea that they dropped their credit score, you know, 60, 80 points or so. So generally when somebody does the application, You kind of have a feel of what they think their credit score is, you know, through the conversation and when they complete the application and when it comes in and it's significantly different, then we kind of look at it and say, okay, what's going on here? And there are paths to recovery really quick. Uh, there's things you can do to get like rapid rescores done. Um, you know, I won't go into like full detail about it, but there are, there are ways that you can repair a credit score pretty quickly. Um, remind me with your scenario, I forget, what did we end up doing?

jacob: 31:52

Yeah. So I was being stubborn. I said, Hey Steve, I'm just not, no, I'm not paying that. And I don't, I don't think that I should pay that. And you're like, yeah, but if you really run the numbers on it, your interest rate is going to be like 70 basis points higher. And it's like, if you really do the calculation on that, you're going to pay so much more in interest over time. If you then just pay this 4, 000 that you owe to them. But then you counseled me further. You said, Hey, listen, a lot of these collection agencies. Um, you said they'll, a lot of times they'll just settle with you for, uh, an amount that's much, much lower than the amount that you owe. And so you gave me a script and he said, Hey, I'm, I, w what, what, what can we settle this for today? You know, just tell me that. And, uh, I'm not paying the full amount. You said, be clear. I'm not paying the full amount, but tell me what as low as you can take. And I think I settled for something like much, much lower. I think the, the total was like 4, And I think I ended up paying like 1, 700, something like that. And so I saved a ton of money because of Steve's tip. They cleared it off my, uh, credit report and everything was fine and dandy. But just in general, I, you know, this is me not understanding how impactful that was to the kind of entire loan process and how big of an impact it was going to have on my interest rate. And if you, you know, take that across 30 years, how much you're going to end up paying, because you just. We're stubborn and he didn't want to settle with the collections agency. And so Steve, you know, materially saved me a ton of money by kind of coaching me through that situation.

steve: 33:26

Cool. That's awesome. Yeah. Yeah. And, and, you know, and there's, there's, we do have scripts for that to help you out and everything, uh, that, uh, you know, to basically get like a charge off letter and then you do a rapid rescore and that's how you quickly, um, up a credit score.

jacob: 33:39

Yeah, absolutely. My credit score went back up a hundred points. Everything was right with the world. So Steve, we're going to do some rapid fire questions here. I think there's just like a lot that goes on to the lending process. And, um, so I'm just going to throw a bunch of questions at you, but the intent is, you know, just kind of more rapid fire, right? So what is Fannie Mae and Freddie Mac?

steve: 34:00

So those they're same, same, but different. They're two federal programs. Um, they are kind of like your starting point. So especially for investors. We'll look at Fannie and Freddie. If for some reason you don't qualify for those, then we'll move to, um, like a DSCR loan or something, different product, but Fannie and Freddie are always going to be the best rates. The difference between the two is pretty minimal. Um, we'll price out and see which one has the better rates and, uh, cost. Um, Fannie, a lot of times has a slightly lower cost, but also is. A little bit more, uh, difficult and being able to qualify like rental income from the subject property. Um, you know, they have like weird things. Like, if you, if you don't own a primary residence, you can't use the rental income, or you can only use a certain percentage of stuff. Freddy's a little bit more, um, versatile with that. So think about. It really to the borrower side, it doesn't really make a difference. Fannie or Freddie, you're getting the same basically federally backed loan. It's a conventional QM loan. Um, but your loan originators should basically look at the two and say, okay, which one has the better pricing and do we qualify for that?

jacob: 35:00

Okay. Okay. Thank you. Is there a limit to the number of loans that I can take out?

steve: 35:05

Uh, yes and no. Uh, there's a limit to the number of like conventional QM loans you can have. Uh, it's 10 per person and that's a culmination of both primary residence, second home and investment properties. Uh, if you get to 10, then you start looking at non conventional loans like, uh, I keep saying DSCR loans, but that's my next go to, um, after, after a conventional runs out, or if you don't qualify for it. Um, and then what a lot of investors do too, is they play two player mode. So if you have a high earning partnership and you both qualify individually, do every other loan in one of your names, if you financially qualify for that. And then as a married couple, or as a team, you can have 20 loans.

jacob: 35:41

That's a nice hack. That's a nice hack, especially for our listeners that are out in the Bay Area, working in tech jobs. If you are married or you have a partner. Yeah, just split out the loans and you can get up to

steve: 35:53

And you can both still be on title. Like you, you can be both on the title for the property, but just have the loan in one of your names and then, yeah, like literally just go back and forth or do 10 under one person, do 10 under the other, and that's a great way to build a

mike: 36:04

And in Ohio, if you're married, it's a dour state. So they own a third of it anyway. So it doesn't really matter, but I always tell people, let's get one loan. I get a lot of calls from people will be like, what do I do when I get to 10 loans? How many of you have now? Zero. Okay. Well, let's get one.

jacob: 36:20

That's let's let's get one. Let's do one first it's so funny people are always like I haven't opened my LLC yet I'm like don't worry about that right now. Don't worry about that right now It's

steve: 36:32

I honestly, like from, from my perspective and you'll get a million different opinions on this. LLCs are kind of useless in this game, honestly. Like in my opinion, like it doesn't, it doesn't really protect you. You can protect yourself just as well through insurance. It's really hard to get lending. I mean, that's a subject for a whole different episode, but like, to me, it's like new investors worry about it way too much. Yeah.

jacob: 36:53

Exactly. And we'll spend two seconds on this because I 100 percent agree with you, Steve. And it's a question I get a lot from new investors, which is I want to own my rental properties in an LLC, one rental property per LLC. And I'm like, you guys don't understand how complex you're making this. And when I see people do it, even the people that think they're doing it correctly or doing it 100 percent incorrectly, because one, they have the title. Of the property in the LLC. So they buy it through the LLC, but they get their loan. They're financing in their name wrong. Can't do that. Right. That completely invalidates LLC altogether. And they get their insurance in their name as well. Just regular old, like landlord policy. And so any lawyer worth their salt, if they see that the property is held in an LLC, but the financing is held in somebody's name, that LLC Pierce, the corporate veil of that LLC is Pierce. And if you are going to buy an LLC, you have to, and see, you correct me if I'm wrong, but you have to, at that point, get commercial financing. You have to do a DSCR loan and, and the financing is just worse. There is just, it's just worse. You know, like you're not going to get 30 year fixed typically. And that's just, it's just worse. So anyway, I'll get off my soapbox, but I agree with you, Steve. Um, don't overcomplicate it. If, if, if you're doing your first deal, it's fine to do in your personal name, just get the adequate insurance. Uh, but this is a, this is a, this is definitely an, uh, can be an entire episode for another day, but on that topic, Steve, you mentioned this a couple of times. What is a DSCR loan?

steve: 38:26

DSCR is an acronym for debt service coverage ratio. So it's a way to qualify. It's only non owner occupied. You can't do it for primary residents. Um, it's basically a way to buy a property without any consideration of personal income. So it's based solely off the cashflow of the subject property. There's so many different DSCR. So I'll just give you the general broad, like there's so many different variances of the same type alone. Um, Okay. Generally, they want the property to cashflow and about a one to one ratio. I have some that'll go down to a 0. 7. The rates are higher. Um, but they want the overall expenses to not really exceed. Like the money that you're bringing in basically, right? They want it to cashflow and they do generally require a little bit, well, sometimes a little bit more down payment. 25 to 35 percent is the norm for any DSCR loan, but honestly, even conventional, if you're doing multi unit it's 25 percent single family conventional, you can go 15%. I don't have any DSCR lenders, any, any products, excuse me, any DSCR products. Um, that will go less than 25 percent on a DSCR loan. And some are 35 percent down because it is a riskier loan for the bank. You know, they're not checking your personal income. It's all based off that property. Um, there are some other things behind it. Like it doesn't work for rural properties. They want it to be, you know, uh, not, not rural to the point that it's like out in nowhere because then it can't comp it. Um, you know, it's a lot harder for them to figure out like what should this rent for, right. Um, and they also don't want to get stuck with those type of properties. And, uh, the rates are a little bit higher, but not a huge difference. You're usually like one to 2 percent higher. So it's a good product for people that either don't qualify for conventional lending, really big with self employed and self employed borrowers. I can't even tell you how many DSCR loans I do for realtors because realtors are making good money. They have the money, but they're writing everything off to make it look on paper, like they don't make much money, which is smart, you know? Um, so people that, you know, are business owners and do that kind of stuff. Um, People that recently quit jobs or change jobs might not qualify for conventional. We'll go to DSCR as our next step. Oh, let me add one thing. DSCR loans to generally do have a larger minimum loan amount. Like most DSCR loans, um, 150, 000 minimum loan amount that I, that I at least have in my arsenal. I do have one that will go down to a hundred thousand. Um, but, uh, you pay a little bit more of a premium for that.

jacob: 40:49

yeah, I want to pause here. You want to say something

mike: 40:52

I was gonna say, I do have one guy that has a, that has a pro a program. They'll go down to 50, 50, 000 for the loan on a DSCR, but it's one person, one very specific investor that buys those loans. So.

jacob: 41:05

so I want to be, I want to pause here. Um, because there's the DSCR loan. And then there's just kind of like DSCR calculation, uh, right. And so that's obviously related to the DSCR loan agnostic of the loan. DSCR is just a metric or a calculation that you, the investor should be aware of because it kind of speaks to the health of the deal. And to kind of recap what Steve said, when they're calculating DSR, they're trying to understand once you take the income of the property, right. and you take into account the expenses as well for that property, typical expenses, what is left over in relation to your debt payment, The bank wants to see a very healthy spread there. Um, I think a normal spread or a healthy spread would be, you know, 25%. So you have 25 percent kind of above and beyond what that debt payment would be. And that's an important metric too, because it speaks to, it tells you the investor that there is, you know, meat on the bone for this deal. If you're DSCR and maybe some rental property calculators like mine, I automatically calculate that just to see if this was a DSCR loan, even though I'm not getting DSCR loans, would it qualify? Because that tells you that you're holding yourself to a standard of a, of a deal that says, okay, if I could, this deal could finance itself effectively. Because it's that good of a deal. If the DSER is below 1. 25 It's probably not that good of a deal and that's fine, you know, because over time that deal is going to get better as the rents increase. But I just wanted to kind of like separate those two things, DSCR loans and DSCR, just like the general metric itself, which is important for you, the first time investor to kind of know. Um, so we'll kind of move on with our fire round question, Steve, if I'm somebody that's just kind of looking in Zillow or looking in Redfin and, you know, they have the interest rates that, um, that are there that they input in their kind of calculations, how come if I see that interest rate, but then I go to talk to you and I'm getting an investment loan, the interest rate's a little bit higher. Why, why is that?

steve: 43:09

Yeah, I mean, there's so many different components of interest rates. Um, you know, a lot of times when you see those interest rates online, it's an absolute best case scenario. 820 credit score, 50 percent down. Um, you know, it's, it's, it's like an absolute best case scenario. So don't be surprised even on a primary if it's slightly higher. Um, But, uh, yeah, investment, investment loans are generally going to have a higher interest rate than a, um, primary residence, uh, because those are the first properties that people default on. Nobody wants to lose the house they live in, but if times get tough and you own three houses and you live in one and the other two are your rentals, guess what mortgages you're probably going to stop paying. Um, so that's why investment loans are always going to be a little bit higher.

mike: 43:49

Unpopular opinion there. I, this drives me bonkers and I understand what Steve said, but the bank is so not levered when it comes to investment properties. That drives me bonkers. Like I can go like locally here. I have a couple of guys that do a 0 percent down program for a owner occupied conventional loan. Right. And. You're completely a hundred percent levered, but yet you, you and I go buy a property with 70 percent leverage. And yet I have to pay the higher rate because that's a riskier loan. I, like I said, I just, I've always had a problem with that and I don't know.

jacob: 44:26

That, so the, the kind of main takeaway there, and this was a learning for me as a new investor as well in, in Redfin and Zillow, they're showing you like owner occupied rates. And those are just generally, like Steve said, they're always, always lower, generally speaking. Um, and Steve, I don't know, like, you know, correct me if I'm wrong, but I've seen, at least when I compare, it's like, it could be anywhere from like 70 bips. Uh, a little bit more sometimes up to a percent higher, uh, but anyway, that's just kind of the takeaway. Don't look at Redfin. Don't look at Zillow, like talk to an actual lender, get a sense. Cause it's very specific to your situation, your credit score, like Steve said, all that. Um, Steve.

steve: 45:04

May I add one thing to that real quick? Uh, it's, it's also not just the lowest rate. Like if you're just shopping for the lowest rate, I'm probably not the guy you want to work with. And I weed that out like really quick in the conversations. I have that conversations with every person I talked to before they even do an application. I say, look, if you're, if you're just looking for the absolute lowest rate. Go to the Walmart of loans and go to like some crappy online shop where you have a call center where you never get to talk to the same person twice and everything, but if you want to like actually build like something and still get a very, very competitive rate, that's going to be darn close to what the lowest rate is, but actually like. Work with the same person all the time consistently be able to close within, you know, 25 to 30 days instead of 45 to 60 days and actually get a property. Cause I mean the lowest rate in the world, if you can't get an offer accepted because nobody respects that lender is worthless because you're never going to get to use that rate.

jacob: 45:55

Yeah. 100%. That's That's a really great point. And I do want to emphasize it. You as the brand new investor should put a much higher value on the people that you're working with, especially when it comes to the lender. Um, that is going to just be like so minuscule. The difference that you're going to save in rate is going to be so minuscule in terms of the relationship and how effective that lender is. And that is just, you should put so much more value on that. Um, I know that if I sent Steve a deal because me and Mike found something, Steve would respond immediately. And we'd be like in process of like getting that deal funded and things like that immediately. And so it's like. That level of kind of service is something that you should place a much higher value on and not, you know, 15 bits that you're going to save an interest rate. If you go to like Joe Schmo lender anyway, Steve, I know we're, we're, we're coming up on time and I want to be really speculative time. So we're going to hit you with a couple of questions and then we'll like have one final question around it out. What is. LTV.

steve: 46:58

Loan to value. Uh, so loan to value is, you know, it, it's the, it's how much you're putting down basically, right? So if you put 20 percent down on a property, your LTV is 80%.

jacob: 47:08

And typically the bank is going to allow of an LTV.

steve: 47:12

Uh, yeah. So, so for non owner occupied, uh, you can go down to 15 percent on single family, 25 percent on multi unit, uh, generally get a lot better pricing at 20%, even on single family. Um, and generally the more you put down, the better the rate you get.

jacob: 47:26

Okay. Okay. Last, last question here before we head to kind of like the closing question, can you just like explain to the listener, the appraisal process and And how that, you know, kind of like works in, into the deal and some of the complications that can happen with appraisal. Um, I know that this is one of the things that I didn't quite understand really as a beginning investor. So,

steve: 47:46

Yeah. Yeah. Let me lump together appraisals and inspections. Cause they're in essence kind of doing the same thing, but for different parties, right? So. An appraisal is required in almost all situations. Once in a while we'll get an appraisal waiver, but very rarely, um, appraisals are almost always required. Inspections are your choice as a buyer. Um, you, you can choose to get it or not. In my opinion, you'd be absolutely foolish not to get it. Um, an inspection is for your use to make sure like that the property doesn't have serious issues. The appraisal is for the bank's use to make sure the property is worth what the contract price is. Um, A better way to kind of say that is they're not trying to necessarily figure out how much is this house worth. They're trying to figure out, is it worth what's on this contract? So they're not trying to like exceed it by a lot. They're just trying to say like, you know, if you, if you're under contract for 300, 000, um, they don't need to say, well, this, this is worth 360, 000. They just want to say, yeah, this is worth 300, 000. Now let's say it comes in and it's only worth 280, 000. Now there's an issue. Um, There's what they call an appraisal gap, and there's a few ways to handle that If you have a seller that is really a good seller that wants to work with you And they want to save the deal and whatnot you can negotiate the price you can have them try and lower it or meet somewhere In the middle, but say you really really want the house and the seller is very adamant like no we're under contract for 300 How does this work? Let's use the example of a 300, 000 purchase with 25 percent down so you were gonna do a loan of 225, 000 75, 000 is what you're coming in with, right? So now let's say it only appraises at 280. You're still doing a loan for 75 percent of that, right? So now your loan is 210, 000. So now you have to come in with 90, 000 because you have to come in with the 25 percent of what the appraisal amount is. And then the appraisal gap. Between the appraisal and the contract price. So you have to be really mindful of appraisal gaps because that is a hundred percent out of the buyer's pocket, basically.

jacob: 49:45

yep.

steve: 49:46

You can only finance up to what the appraisal states, the value basically.

jacob: 49:50

absolutely. Absolutely. So just wanted to make sure to touch on that point because it is an important thing to understand. Depending on the property, this could be an issue if you've overbid on the property, particularly, right. If you've overpaid, this can turn into an issue. And that's just something that you as the new investor should be prepared for. But if you have an all star team like Mike and Steve, they'll coach you through it. And they'll probably flag it to you. Like Mike on certain deals, Mike's like, that's going to be an issue here. The appraisal gap, right. Cause you're, you're just, you're just, people are overpaying for the property. They're going to have, they're going to have to fill that gap. So. Steve, we're at a minute left. Um, just want last question. What is your advice for people that are just thinking about jumping into the real estate market for the first time in 2024?

steve: 50:32

Uh, yeah, I mean, man, there's a lot a minute, huh? No, um, build a good team, you know, be very comfortable with your team, build a good team, um, identify what areas you like, work with somebody who's local to that area. If you're not familiar with that area to identify, you know, what. Don't get blinded by one paper numbers. You might see properties and you think, wow, like this is cash flowing so well, but it might be in a D class area or something. Um, be really mindful of stuff that you might not even consider like property taxes. Um, like, man, one thing that I didn't realize in California, we have what's called prop 13 and. When you buy a place, that's your basis for your property taxes for the life of owning the place. That property can triple in value and your property taxes never change. That doesn't happen anywhere else. So that was such a wake up call when I got my first reassessment in other areas and was like, Oh, that's like a lot of my profitability. So be mindful of that. Um, you know, all expenses, like, you know, Be mindful of like, you know, how much are you paying in utilities, you know, multi units, you're paying for stuff that's not individually metered, you're paying for lawn care, you're paying for snow removal, whereas single family, you know, you're not, but maybe you're cash flowing better with a multi unit. So you can eat those costs. Um, but yeah, just do your homework. Um, don't overthink things. Don't get paralysis by analysis because you're like, you know, trying to figure out every aspect of it. A lot of You're going to make mistakes along the way. It's never going to be perfect the first time, but hopefully your mistakes are minimal. Your gains outweigh those mistakes and you have a good team that can back you up.

jacob: 52:01

Boom, boom. Thank you so much, Steve. If one of the listeners hears this. And they're just like, I need to work with this guy. I need to, I need to get a loan from Steve. Where can people get in touch with you? Steve?

steve: 52:13

Yeah. Just jump on my website. It's www. stevedosloans. com stevedosloans. com. That's the easiest way. You'll find my phone number, my email address, everything on there. Um, yeah, that's, that's the best

mike: 52:26

How did somebody not have that URL already?

steve: 52:29

right? Like unbelievable, right? Like, I know I was blown away when I got that. I've only had that for like three years too. Right? Like I didn't get

mike: 52:35

Right. That's what I mean. Like you just got into, you just got into the, the, the lending side of the game, you know, a couple of years ago. So for, for no one to have that URL, I'm just, I'm just flabbergasted by that.

jacob: 52:47

All the, all the lenders, Steve's out there. They're just, they're just napping. They're just, they're not worried. They're not working as hard as

mike: 52:52

No, they're, they're, they're asleep at the wheel for sure.

jacob: 52:55

Steve, thank you so much for all of the value that you've given our audience today. We're going to wrap up the episode. We're going to let you go, but this has been an amazing episode. I hope you learned a lot about investing. Um, and you know, financing your investment properties, I'm your host, Jacob. You can find me at cashflow saga, Mike, where can people reach out to

mike: 53:17

Uh, you can find me on all the socials at Realtor, Michael Magno. Uh, it's probably the easiest way.

jacob: 53:22

we are the financial freedom fighters. We'll see you in the next episode. Peace.

Nancy: 53:27

Goodbye