Hello and welcome to another episode of Passive Real Estate Investing. I’m your host, Marco Santarelli. Interesting topic today. Don’t get thrown off by all the acronyms in the real estate industry. It’s full of acronyms. Today we’re gonna be talking about something called a D-S-C-R loan. Don’t worry, if you don’t know what that means, you’re gonna want one. You’re gonna love it. It’s not for everybody, but it is definitely a powerful, powerful leveraging tool. If you’re looking for mortgage financing, to start your real estate portfolio, grow your real estate portfolio, and expand and leverage what you have. To summarize what we’re gonna talk about today with my returning guest, Aaron, is a mortgage loan product that will allow you to buy rental income, residential rental income properties with a very light, relatively speaking, very easy qualification. That means that you can get these loans and as many, theoretically, an unlimited number of these types of loans with a very, I’ll say it, easy qualification criteria because it’s really not you qualifying or your income qualifying.
In fact, you, it’s almost like a no documentation loan. It’s the property that’s qualifying. The only thing you need to prove at the end of the day, as you’ll find out in this interview, and I’m kind of like letting the cat out of the bag to some degree, but we’re gonna dive a little deeper into it, is you’ll need decent credit. The better your credit, the better the rate. But just decent credit. And of course, the down payment, if a down payment’s required, and it usually is, but down payment capital. So your reserves or your asset is the down payment capital to invest and, and just decent credit, credit score, credit profile, the rest of the qualification predominantly comes down to the property itself. And of course we can help you here with that at Norada Real Estate Investments. That’s what we do.
That’s what our team will help you with. Our team of investment counselors, we’re gonna counsel you, guide you, hold your hand, figuratively speaking, to invest in the right markets. The best markets with income producing rental real estate. And these properties, a lot of them, if not most of them, qualify for this type of mortgage financing. So it is a good alternative and sometimes a better alternative to your traditional financing. Your Fannie Mae, Freddie back mortgages known as conventional financing. There is a time and a place for each type of mortgage financing. And if this makes sense for you, which it can, and at some point it will. It’s not, I think a matter of if it makes sense. But when it makes sense, then this is something that can help you build and scale and grow your portfolio. And we have a lot of investor clients that invest in rental properties through our network, through Norta real estate that end up using this type of financing.
In fact, in my conversation with Aaron who I’m interviewing here today, he was saying that about 60% of his mortgage loan financing right now are these DSCR loans. So you would think it’s the other way around, or the majority would be conventional, which is usually the case. But today, for whatever reason, a lot of the loans being written are these non-conventional type loans called DSCR loans. And the terms are very similar. Sometimes they’re even better. So anyway, not to steal too much thunder from our interview. I’m gonna jump right into it. I hope you enjoy it. If you have any questions, reach out to my team of investment counselors here at Norada Real Estate. You can go to our website at noradarealestate.com. And of course, if you have questions about real estate or investing in general, go to the home of the podcast at passiverealestateinvesting.com. That is it for me. Let us jump right into the interview with Aaron. So I hope you enjoy it.
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Well, it is my pleasure to welcome back to the show. A veteran of the show, someone who’s been on the show for about, what, seven, eight times now. I can’t even count. I’ve lost track. But Aaron is an interesting character. You have to meet him and you’ll know what I mean. But he’s been a veteran since 1997, not just a veteran on this show. And he is been a mortgage lender since 1997 with a focus on real estate investors. And he does thousands and thousands of loans. He’s very, very good at it. He has a substantial team that I personally worked with as well. But his staff is fantastic and they help him finance real estate loans for investors all over the country and probably even beyond. He’s been married 28 years. He has four children. He has got a few grandchildren now. Aaron, welcome back to the show.
It’s kind of interesting to hear you say that when we think back on all the shows we’ve done seven, eight shows since 2012 or 13. <Laugh> to think of where I was as an individual there just even personally to where I am now, is pretty wild to think. Man, it’s kind of, it’s cool to have taken this journey with you and document it via the show every so many years. Yeah. Or if so many months depending upon the, the, the time of what’s happening.
Yeah, yeah. We’ve been doing this a long time. It’s been interesting to see you evolve and mature. I’ve been doing this almost 21 years, actually in two months. It’ll be 21 years
21 Years running the podcast?
No, 21 years.
Oh, the industry,
In the turnkey in the investment real estate space, specifically helping other investors, but turnkey investment property specifically. So Norada Real Estate Investments, again for the record, launched in January of 2004.
See, I started working with real estate investors in 2023. So we’ve been both, ’cause I got in the industry in 97. Yeah. But then, you know, you start off doing refi’s cause that’s all you’re, you’re a broker shop. And then I started finding the real estate investor coming into Arizona from California in, in 2003. Yeah. So 21 years working with real estate investors. We’re both, we’ve both been slugging it out that nearly the same amount of time with investors.
Yeah. And there’s, I won’t mention any names, but there are you know, one or two individuals out there that claim to have been, you know, the first or before me or whatever the case is. And that’s absolute, you know, bs the only other company out there at the time was the Reddick network. And similar, very similar, but not exactly the same. They were different.
There’s that one. And then unless you went and bought the tapes from Carlton Sheets, I think that’s about <laugh>. It’s about the things that were out there.
Yeah. But Carleton was just education. They were just selling, you know, the, the binder with the education that they weren’t moving property. I didn’t want to get involved in that. I just wanted to be the property provider at the end of the food chain. You know, spend all the time and money educating yourself, you know, back then and forever. But then when you’re ready to pull the trigger and actually invest in rental real estate, residential real estate, you know, I wanted to be there as an educator, but really the property provider. And that’s, that’s how the whole idea came to be. ’cause I had investors coming to me all the time saying, Hey, can you help me? You know, I see you’re buying a lot of property, whatever. And I said, Hey man, I don’t have the time, but I’m willing to help and I don’t buy everything I look at or underwrite. So here’s some property. And then I thought, oh man, this is a business opportunity here.
So, yeah. And, and here we sit and here we sit 21 years later, bro.
This is awesome.
Yeah. 21 years later. So Aaron, we have a very interesting topic today because this is a mortgage loan product that a lot of people don’t know exists or don’t understand it. And they don’t realize that the benefits of this loan product is incredibly powerful as a, a leverageable tool that investors can use to start their portfolio, grow their portfolio, leverage their portfolio, and just keep stacking and building their real estate empire. And when they listen to this episode and they realize what the benefits are and how they can utilize this product, they will realize that there’s a lot more opportunity out there than they realize. So this is fantastic. In fact, I’m in the middle of doing one of these DSCR loans right now. I’m on the finish line with it. As you know, we talked about this before. And, and I just wanna share it with our audience, our, you know, share it with the world. So let’s start with the most fundamental basic question of, you know, there’s always these acronyms in the industry. There’s, you know, real estate has thousands of NA acronyms. It’s crazy. But we refer to it as D-S-C-R loan. And so I’m gonna ask you to tell everybody what is a D-S-C-R loan?
Well, the acronym itself stands for Debt Service Coverage Ratio. So you try and break it, break it down. You know, for the majority of the people that that would have listed this podcast, they’re gonna get, you know, your conventional loan, which have a debt to income ratio. So you’ve got certain amount of income coming in, you just have a certain amount of payments going out. And you have to do a calculation, see what percentage of your payments are being are into your income. You typically go on to be, you know, under that 50% mark with what your monthly payments are versus your monthly gross income. Well, when you’re talking about the debt service coverage ratio, it’s very, very similar in the sense of what’s the ratio of income on the property and how much debt service do you have on, on a monthly basis.
Very much like what you’re doing on a debt to a debt to income ratio. But it’s a different calculation. Instead of being 50% of it, like what we’d be talking about in most, most cases, for a person buying a home as a single investor using their income, you’re gonna look at this as what’s the property’s ability to generate revenue and how much will you have to be able to service the expenses on it? And for the most part, the most common calculation you’ll find is that we need to have a 1.2% or 120% of the cost. Cost. So if, let’s just say you’ve got a a thousand dollars a month payment that covers the principal interest, taxes, insurance, and that’s your monthly expenses, a thousand dollars, if that calculation is accurate, it’s not gonna be the exact dollar, not big. You should have about $1,200 a month in monthly rent to be able to have that property qualify for this, this program.
Now the qualifying, this program is not just the property’s ability to generate revenue, it’s also gonna look at your credit and it’s gonna look at your assets. ’cause You need to have the assets to purchase it. Can’t just go in there and say, Hey, this rents for enough. And then them just say, go, we’ll go ahead and finance 75% of it, let’s say, if that’s the number, we’ll still have to figure out where’s the, the 25% coming from, you know, for the down payment. But for the most part, it’s qualifying your property based upon what it’s, its ability to, to service the debt with a little bit of margin. But what it also does for you, the real estate investor, it kind of helps you underwrite it. ’cause If somebody’s gonna help put up the, put up the majority of the capital to buy it, and they’re gonna underwrite and verify, it’s gonna generate enough revenue for you to be able to service the expense that helps you in your underwriting pro process to decide whether or not you want that product or that property.
So, in basic terms, how does this differ from a traditional loan? Traditional meaning like a conventional loan?
Well, conventional loan, you’re going to be the, the monster difference. The big, big, big difference is your conventional loans cap you at how many, at a certain number of finance properties, typically 10. So you, Marco Elli can have 10 finance properties under the name Marco Santorelli. So you can have your primary residence and nine investment properties. But let’s say you turned your primary residence into investment property. Now you can have an 11th property as your primary. There’s no limit down to you have when you’re financing a primary. But then when you’re talking about debt service coverage, coverage ratio type of loan, they, most lenders don’t have a a limit on that or a cap. I mean, you can do 50 60 of these transactions. The other aspect of it, when it comes to comes to that cap, you, you, you can also get it in your LLC.
The majority of them want to write the loan to your LLC, not to you individually. So now you have, in some cases, not all cases, not all lenders are the same. But in some cases, at least the ones that we do you’ll have a nonrecourse deal ’cause it’s to your LLC. And it’s based upon the property’s ability to qualify, not necessarily you. So if it’s being written to your LLC and your LL C’s, basically the borrower, it doesn’t appear on your credit. So now if you decide to buy something individually using a Fannie Freddie loan down the road, it’s not appearing there. So it’s not impacting your ability to use those types of loans. This one’s strictly to your LLC and it’s strictly an LLC loan. It’s not, it’s not showing up as something that you have as an obligation for you. That’s probably the biggest differential. So the ability to keep buying and expanding your holdings and your LLC is the borrower and the owner of the property. And you have that protection that you’re seeking in for an with an LLC anyway.
So one of the main differences, but the main difference between a traditional or conventional loan and the this type of loan, the a D-S-C-R loan, we need to find a new name for it, I think is that the property is what is really qualifying for the loan. It’s not you as an individual and whether you can afford that loan from your income. It’s the property’s ability to afford and qualify for the loan based on its income. Meaning its revenue, correct.
Yeah. The property’s ability to generate revenue to repay the loan. Now you’re still gonna look at, okay, you’re the main member of the LLC, are you credit worthy? Can they trust that you’re gonna have the type of mindset to pay it back? And where are the, where’s the funds coming from for the down payment, closing costs and reserves. They are gonna look at that. So there is some still qualifying on your piece of it, but when it comes to the income piece of it, that’s out. You don’t have to dig up W twos, you don’t have to get out tax returns, you don’t have to get out any of that stuff.
So, what factors do lenders consider when approving you for a D-S-C-R loan?
So as the individual and what they’re looking at, they’re gonna look at your credit history, they’re gonna look at your credit profile, they’re gonna look at your credit score. That’s gonna play a part in it. There, there comes a minimum, you know, I believe it’s like a six 60 or six 80 credit score, depending upon who you’re going through. You’re not gonna be able to get one of these loans. If you have a credit score below that, and as your credit score goes down, your is going to be some cost adjustment or some rate adjustment associated with it. The other is, where’s the money coming from? Can’t just come outta thin air can’t be borrowed. It’s gotta be show assets that you already have. Why would that be? Some people say, why can’t I just borrow the money? What do they care? Well, if you’re borrowing the money from somewhere, it’s gotta be repaid somehow.
Right? Well, if we’re barely showing that this property generates enough revenue to cover the cost that it has to pay the DSCR loan plus taxes, plus insurance has a small margin, is it generating enough to pay back the other loan? It may not be. Therefore, now, now we have a draw on it that that’s more than it can produce. No lender wants to put themselves in a position where you now have a greater expense than what can be serviced with the debt that they’re giving you. So the debt that they’re willing to incur, or at least to offer to you as the, the the person who runs this LLC, they wanna make sure that it’s not putting this upside down. ’cause The last thing they wanna do, and a lot of people say, well, they got 25% equity in it. Why would they care? Yeah. This is a lender. That’s their business. Their business model is not to be a property manager. It’s not to take properties back. It’s not to go through that whole process. It’s to loan money and get paid back interest. That’s their business model.
So who is this loan ideal for? Like who would want or need a D-S-C-R loan when they could go get, you know, a conventional loan?
Well, there’s a lot of folks out there that maybe they can’t get a conventional loan because the way to, to verify their income may not be the easiest thing. Right? They may have just completely changed how they get paid. Let’s say you got a person who has been getting paid a salary plus hour plus a bonus for 20 years, but now their company just made an opport an offer to go and become a full commission employee and said, Hey, if you just take half of the, the business you’ve been creating for the last however many years, you will double your income. So it’s a no-brainer for you to switch to a commission income, right? Because your income’s gonna go up because you’ve already have a track record, but we don’t have a track record of you having commissioned income. So you wouldn’t qualify for a regular loan.
This is a perfect loan to go in and, and get into. If you have that documenting your income, that won’t follow the regular ability to repay with the Dodd-Frank Act. Another person to be your self-employed person that maybe writes everything off. Mm-Hmm, <affirmative>. Another would be somebody who achieved 10 finance properties. That’s gonna probably be your most common person. 10 finance properties with their conventional Fannie Freddie type loans. Now they’ve got money, they wanna expand their holdings, but they can’t qualify because they have too many, too many properties financed in their personal name. Now you can do it with an L with a, with a LLC. And I will caution you, anybody who’s listening to this, you can talk to a dozen lenders that do this, but many of them don’t think about the LLC piece. They don’t think about whether or not this is going your credit.
If it’s one of these types of deal where you’re not sure of it, ask. And if they say yes, it goes on your credit, I would go look for somebody else because you’re, you’re literally not getting the benefits of what you’re looking for and doing this. You’re gonna already have to deal with a D-S-C-R loan. You’re already gonna have whatever the, any benefits and drawbacks, then they throw it on your credit On top of that, it’s kind of defeating the purpose, part of the purpose of getting it. So a person wants to build their LLC holdings and have that bit of a that layer of protection that an LLC is supposed to offer, then use it. You’re already doing the DSCR loan. You might as well take advantage of that opportunity too.
So, you might have touched on this, but in terms of documentation, like tax returns, maybe bank statements, whatever else, documentation, which, you know, when you get a conventional loan, it’s pretty laborious. You’re getting asked for pretty much everything under the sun. How does documentation requirements compare with one of these loans versus a conventional mortgage loan?
The only real documentation differentiator you’re gonna see is on the income side of it. We don’t have, we don’t have to have any of that. And because of that fact, it does cut back a lot of the paperwork. ’cause Where people probably have the majority of their, the two things that they probably have to document the most is income and assets. Well, if you have the assets sitting in the bank account, not hard to do. If your funds are having to come together from a bunch of different bank accounts, well it’s gonna get laborious just like you had indicated. But tax returns, pay stubs, W twos, K ones bank, all that kind of information can get extremely laborious, especially if your money comes or your income comes from multiple sources. So cutting out that side of it, the tax returns and the pay stubs and the W twos and the K ones and the banks 10 90 nines, that right there cuts out the majority of the labor most people have to do.
So, is it a fair statement to say that it’s easier or maybe even much easier to qualify for a D-S-C-R loan than a conventional loan?
I’d say it’s significantly easier
The only thing that you run into is what’s the appraiser have to say and what’s the property really going to rent for? And you’re gonna have to get the confirmation from third parties. You may have a lease, but I mean, let’s just be blunt here. We’ve had some places where they, hey, hey, we got this great lease. It’s, you know, $1,500 a month lease, but when it gets surveyed by an appraiser, there’s not a single house within 20 miles that will rent for any more than a thousand. So you got a question, what’s with this $1,500 a month lease? What makes this one different? We have to dig into that because if that’s what’s helping you qualify, and in reality there’s not a single residence in that entire area, that bed, bath count trim, all that similarities of that property and you can’t get that much rent. Just know that that’s gonna be an uphill battle. Yeah.
And these are great for short-term rentals too. Your Airbnb type properties.
When you’ve got a program where they’ve got a way to be able to show those Airbnb type products and how they get done. Because you know, again, you gotta qualify. How is that that going to work when you’re talking about Airbnb? But what’s also interesting is all your Airbnb areas, you can get the DSCR you need looking at from a long-term perspective. Mm-Hmm <affirmative>. But put it to work as an Airbnb and now look at where you’re at. So just know that you’re gonna take more of the conservative approach on the qualifying of that property.
Yeah, yeah. This is probably not true in every location, but many short-term rentals, your Airbnb rentals will have a higher DSCR ratio, therefore it qualifies or well qualifies for one of these loans versus going after a conventional loan. Because with a conventional loan, you can’t look at the rent that you’re gathering from the short-term rental, the appraiser. And in the appraisal, you’ll have your long-term lease income numbers. And so if Fannie or Freddie are looking at the income, which they don’t value it based on the income, but if they’re looking at that, it might be an issue knowing that your monthly rent is 1500, but as a short term rental, you’re generating six, or not six, but let’s say 3000, like more than twice as much. That lends well to the DSCR loan doesn’t help you with the conventional loan.
Correct. And if as long as you have a way to document that and they’ve got a product for that, it’s, you know, there are some lenders out there and their dscr won’t do short term, some will. So it’s just a matter of making sure you’re going to the right source.
Right. Yeah. It just comes down to that ratio. You know, what is your debt service coverage ratio? If it’s high, the property qualifies. As long as you don’t have bad credit, you should be good to go.
As long as you have bad, don’t have bad credit. And you’ve got got the assets for the down payment and reserves.
Yeah, exactly. In terms of loan to value, like how high of A LTV or loan to value you can get on a D-S-C-R loan and interest rates. How do those compare to conventional financing or any other financing?
So for the most part, you’re gonna see 75% loan to value. I have seen some sources that in specific scenarios they’ll go to 80%. So that there, it’s not unheard of to an achieve an 80, but it’s not something that’s just easily given out all the time. And as far as, what was the other question? It was the,
Well, the, the mortgage rates, like the interest rate and the loan of value.
Interest rates. That was right. So we, you just talked about <inaudible>. Now the rates are very, interestingly enough right now, very similar to what we’re giving on your conventionals. There’s not a lot of difference, not a lot of difference in the rates and not a lot of difference in the cost. Very, very, very close. If not, some few cases I see actually be lower in rates and costs.
So, when you look at restrictions on the property for a D-S-C-R financed property, are there restrictions? Are there certain scenarios where they don’t want to lend or finance a property? Like for example, let’s say condos or a certain type of condo, non-warrantable condos
They still look at that. They still look at the non-warrantable thing as something that we have to go through a lot of steps to see if it’s something that they will do. Non-War tools are typically very, very hard to finance no matter what because of the nature of what it’s, so we have to look at this from the perspective of the lender is what if we have to take that back? What if we have to own that asset? Is that an asset we want to own? How easy is it to unload an un non-war condo? So if a lender has to foreclose on something, they have to consider how quickly can they unload it. A non-warrantable condo is harder to unload than most other things because not just anybody can qualify for it. You can’t just walk in as an owner occupied or an investor to buy that non-war condo. It’s a hoop jump and it’s a narrow window of people that can buy it. So when you look at it from that perspective, it’s how quickly can somebody who has to own it unload it when they don’t wanna own it?
Right. Interesting. Okay. So to kind of summarize this DSCR loan, what would you say is the most attractive benefit or benefits to real estate investors? Because I’m listening to you talk about it and I’m familiar with it and I’m thinking, the first phrase that popped into my head is that this is more of an easier qualification type loan. It’s potentially less work, but requires less documentation. As long as the property meets the criteria and it qualifies. You should be able to qualify without a problem as long as you’ve got, like I said before, good credit and you know, the down payment or the assets as you call it, to qualify for the loan. But there’s really not too much more outside of that. You know, that you’ll, you’ll always have some conditions that you have to fulfill, but correct me if I’m wrong, it’s a much easier loan to qualify for and there are no restrictions or caps at 10 mortgage loans. So you theoretically could have an infinite number of these loans. As long as you keep finding properties that meet the criteria, the qualification criteria, you can, you know, continue to build and stack your real estate portfolio.
E exactly everything you just said is reality. Other little nuances, right? They’ll only do certain loan sizes, right? They on to go, I believe in some, some lenders minimum, minimum loan amounts, 70,000 some’s a hundred thousand. So you gotta look at that and say, okay, what kind of profit am I getting? Your documentation’s gonna be lighter. Your ability to qualify is gonna be easier. And if for some reason, let’s say an appraisal comes in and the information you receive and it doesn’t quite meet the criteria, it’s off by three or four points, put a little bit more money down, that’s really it. Just drive the loan size down enough to where it does fit with where it needs to be and buy the property. ’cause You may say, well, according to what the appraiser says and what I know is two different things guys, appraiser are still humans.
I know people would love to hang appraisers for the slightest mis miscalculation. I get it. Believe me, I have to deal with ’em all the time. They can be a frustrating group of people, especially since I have to keep one degree of separation from ’em. I can’t get involved and have a conversation with ’em. And then a lot of times they don’t listen to reason, but it might be a little bit more money. You end up closing on the deal, you end up having the property and now you have a little bit more cashflow than what you’re getting before. But there are ways to make it work. You just have to, and you also have another set of underwriting eyes on this thing. Make sure you’re buying a property. We’ll do what you want it to do.
Right. Well, here’s an interesting question. Let’s just say you have a first time real estate investor never bought a property before, or at least not a a rental. How, maybe it’s a two part question, but how would you explain the advantages and disadvantages of going the DSCR route versus a conventional loan? If they had a choice between the two, would there be a better choice between those two?
I would measure it out both with that first time investor. So first time investor. Also know there is a lot of Di Sierra lenders that won’t lend to a first time investor and there’s a lot that will. So there is that. So you’re narrowing your field on who you can borrow from in that respect. Secondly, I would take a look at it and say do your pre-qual when you submit a pre-qual us, you go to aaron chapman.com and you click on the apply now button and you fill out the data, fill it all out and my team will look at it and say, Hey, you got two options. You got the DSCR option. You got the personal loan option. Your choice if you wanna go this route, here’s what it looks like. You wanna go this route, here’s what it looks like. And you can measure the two out.
And like I said, sometimes DSER lands better on the things that most people will ask about first when it comes to a lender. Now the first things outta most people’s mouth when it comes to a lender trying to figure out who they’re gonna work with is what’s your rate and what’s your cost. That should not be the first things, but you’ve been programmed to think that since you’re programmed to think that that might be one of those things that you weigh out. And now, and again, it does work out where Dscr is a little bit cheaper. But that barring that, the only thing is how much paperwork do you want to give? And if you wanna give a pile then let’s do it this way. The other thing that I would say is if you’ve been listening to a lot of podcasts, you’ve been subscribing to a lot of the philosophy of I need to have an LLC, I wanna put up my LCI want be protected.
DSR is definitely a the better route to go because you can get a loan directly to your LLC. There is no due on sale clause. There is no having to try and get a lender convinced to allow you to transfer it. We do know you can do that when it’s a Fannie or Freddie loan as long as the LLC members are the same as what’s on the the loan. But that’s another hurdle you don’t have to endure. Just literally buy it close and set it and stack it into your little warehouse of businesses and keep moving forward if that’s how you wanna approach it. Right. I’ve also seen where you’ve got multiple people buying together. Here’s where it gets really kind of cool. Let’s say you’ve got two or three borrowers and usually you got two or three borrowers wanting to buy a home together and they’re gonna go conventional.
You’re gonna go with the person with the lowest credit score, right? So everybody’s gonna be affected by that one low credit score. But if you have two or three people together in an LLC, you can literally have the person with the majority ownership. Let’s say it’s third, third, and third. You have one person with 34% and two others. A 30 say 33 a piece. Well the person with the 34 might have the seven 80 credit score, but the other guys have six 80 Guess who you go with? The guy with the, with the, with the majority ownership in some cases. So now you get the better interest rate, the better terms, the better everything. Better qualifying ’cause you’re going off the seven 80 credit score instead of the six 80.
Okay, interesting. So when it comes to DSCR loans, are there any risks, strong word, but are there any risks associated with those loans that you don’t typically have with conventional financing?
The only risks that I can think of off the top of my head that would be different than conventional finance itself would be, you can’t really get a good pre-qual upfront. You can get a pre-qual, but you can’t in the sense that we’ll qualify you and say, Hey, we did the, the, the numbers. We know you have the credit, you know you have the assets, you can move forward and go buy it. But not until you get the paperwork on the property, you know, if the property’s gonna qualify and you may have the risk of having an appraisal done and appraiser starts to contradict what you believe the rent’s to be on that and then you run into that problem. That’s an expense that you might have to take on that you weren’t prepared to and then let it go. Now when it comes to that, you could still have that same risk with a, with a, you know, regular conventional loan.
The appraiser could say the same thing, but you’re qualifying based upon your income. That’s probably the only real major risk difference is you’re waiting on data from the property to make sure you fully do qualify for it. But outside of that, nothing comes to mind directly as to any other real big risk of you putting time, energy, and money into it. And the other thing is to get an appraisal, it’s not what you want. You still would wanna walk away anyway. Too often people get inspections and appraisals and they still move forward to close on something ’cause they’re like, ah, I’m already a thousand dollars deep between appraisal and inspection. I’m gonna go ahead and close. I’m like, no, you paid the thousand dollars to not do something you shouldn’t do. That’s a verification, right? That’s an underwrite for you. For you. If we’re just gonna spend a thousand dollars to keep doing what we don’t wanna do, we’d be doing a lot of dumb stuffs. Yeah.
What about risks or risk factors after the close, you know, you fund it, you take possession and you move on. Are there any associated risks with the SER loans that you don’t find with conventional financing?
Nothing any more than conventional that I’m aware of. I have not heard of anything that, what a person would see as a potential risk there. The only other thing you do have, and I probably, we probably could have brought this up, many of ’em will have prepayment penalty. You can’t pay it off any, you know, most of ’em are gonna be five year prepayment penalty. So you’ve got, let’s say it’s 5% of the loan balance. If it’s a a hundred thousand dollars balance, you got $5,000 prepayment penalty in the first year of that penalty, you’re gonna pay the full 5% if you pay it off in the second year refinance. However you do that, you’re gonna pay 4%, which would be four grand. Third year would be 3%. Fourth year would be 2%. Last year of the fifth year would be 1%. And after that fifth year it goes away and you don’t have that penalty.
Now that’s one of, that is one risk that you, you have there that you will never have a conventional because the Dodd-Frank Act said you can’t charge prepay penalties to anybody getting conventional financing. But when you’re talking about this, it’s a business purpose loan. It doesn’t fall under the Dodd-Frank Act. So they can charge you that. Why would they do that? Some people ask, why would I, why would I be charged with this? Why would I need this? But when a lender puts the money up to close on a loan, there’s a lot of expenses they still have that’s not passed onto you and they need to make that back in collecting interest from you. And it can take 2, 3, 4 years to get there. So that’s why they set that up. That’s how they recover some of those expenses that they had when you stop and you pay it off too quickly. Right.
Okay. So just a couple questions, just macro, big picture. You know, interest rates seem to be changing lately, almost on a daily basis.
<Crosstalk> Oh, pretty, pretty significantly. And it’s happening quickly.
Yeah. And I, I, I actually couldn’t, I don’t, I don’t understand why. I mean, do you have, do you have a read on why rates have been bumping up almost every day here for a while? Like I thought they would be coming down by this time.
Well, if, well let’s, let’s do some share chart. ’cause We talked about this one before. We talked about it actually quite a ways back when it come to what was driving the rates. And this is, this is all Aaron Chapman stuff that I’ve been following and I’ve been preaching on and presenting and all that. So we’re going to look at the the mortgage backed securities chart itself. And this is the interest rates being, it, it, they trade on a moment by moment basis when it comes to this particular pool of funds. And what I’m showing here, here is all the way back to, let me see here.
But for those people who can’t see your little chart here, just describe it, you know, in, in a kind of a descriptive format so people know what the gist of what you’re saying is.
What I’m showing you here is a is just like a stock chart. You’re gonna see what they call Japanese candlesticks. A day’s worth of trading, right? Shown here evidencing how much money goes into this, this particular security and how much goes out on a day-to-day basis. As it goes up, the chart goes up, the interest rates go down ’cause there’s money going in, more money to lend meaning lower costs or lower interest rate as it goes down, that means interest rates are going up ’cause money is leaving. So what I’m showing you is all the way back to when they started quantitative tightening in 2021 and then of course it started to fall off ’cause there’s less and less money coming from the Fed. Then went down to a level and we got these two, these three lines. We got a orange line here if you can make that out.
And two yellow lines that I have drawn here and I’m actually make one of these lines a little bit bigger so it’s easier to see, oh, I can’t. So what they represent is the day they announced quantitative easing, which is the bottom of the line, they valued the security the day they announced quantitative easing. This is the day, the end of that day’s trading. This middle line was the end of that day’s trading. So they had a big trading day and then the orange line references the day the Fed actually started quantitative easing by putting money into it. So that’s why I zoomed out to show you that zooming back into this, we start seeing where it’s hit these lines. This hit that, the value of that security the day they start, they announced quantitative easing, meaning the Fed said we’re gonna start putting money in.
That’s when the rest of the world started putting money in to invest with them. It bounced off it, that was our ceiling. What’s interesting, we get into August, I believe it was August 2nd, where the mortgage backed where the stock market took that major hit thousand thousand points. Well, it broke above that line that we had established as the value of the security the day they announced quantitative easing and it rammed all the way up and turned around and reversed the next day. That’s when I went back to measure out what happened. And it actually lined up with the end of the value of that security the day of, the first day of quantitative easing, at least the day of announcement. So that was our next ceiling. So we got to that ceiling again, I’m gonna zoom in here. Got to the top of that ceiling again over a period of time.
And when we achieved it two days later this day right here represents the day the Fed dropped interest rates a half a percent. Everybody believed that the feds dropping the rates, rates will go down, but actually created an inflationary move by dropping the rates that much. So the federal fund rate is the rate that the banks get to borrow from the fed for reserves that also should bring down the cost of things for, you know, your short term loans such as your credit cards, your cars and things like that. Because of that, that created an inflationary environment. A little bit inflation rate ’cause they dropped it so much. And what we’ve seen here is a lot of trading to the negative, a lot of money leaving these pools, therefore interest rates going up. Why would that be the case? We have a lot of bond funds out there shorting the mortgage backed security and why are they shorting the mortgage backed security?
‘Cause They believe that we are in a lot more inflationary environment than we should be because of this. The other thing that they, they’re looking at is the fact that we have way too much debt as a country. They’re pushing our, our deficit higher and higher and higher with the amount of money that’s being thrown out into other countries. And we saw the whole big political mess that’s happening with North Carolina versus money that’s going over to Iran and money that’s going over to Israel and money that’s going over to to Ukraine. Because of all that, we now have the market saying we’re gonna, they’re shorting the long-term bonds because of what’s happening there. Our deficit needs to get more under control. Our, our federal spending needs to get more under control. Until that happens, I think that we’re gonna see interest rates continue to go up.
Now one of the things I did show you, and I’m gonna go back to it real quick here is where I believe it’s heading in the form of this channel. So I mark these channels out to kind of see what’s the trades gonna be like, where are are bond traders apt to buy and where are they apt to sell? Well, they’re apt to buy when it hits the when it hits the bottom of this channel. They’re apt to sell when it hit the top. And let’s, and I marked this out back in this area here and it’s been falling that pattern. So we just went into our part right now. We just hit a a a a cell pattern. We’re gonna go back to selling, but we’re also laying landing on the day right before the election. So I think also people are baking into the fact there’s been enough Wall Street bets cast for us to have a Trump presidency that has affected the markets and the mortgage backed securities negatively pushing rates up. ’cause They believe that that would be something they’ll push stocks up like it did when Trump got elected the first time. If you remember that we were watching that election, I’m like, there was a lot of speculation that the stock market would crash if if Trump got elected. It did the exact opposite. ’cause I was sitting in Tennessee preparing to lock and I’m like, oh wait a minute, he got elected, I’m not gonna lock and I should have locked because the market, the interest rates spiked and the stock market went up too.
Okay, so where do you, so where do you think mortgage rates are gonna go based on who wins the election <laugh>?
I think personally believe up either way, really honestly. Interesting. I think it’s gonna go up either direction. Okay. because let’s think about this. If we have a just, and I’m going off of what happened with 2016 election 2016 when Trump got elected, stock market jumped and the bond market took a beating that’s gonna push interest rates up. If we have a Harris Waltz presidency, we know what happens with with with US dollars. It goes overseas like crazy. It just gets scattered all over the place because it’s only gonna fall the pattern of what we had. And we just had for the last couple of months. What’s this been since September 16th all the way to now. They’ve been, they’ve been shorting this. Yeah, they’ve been shorting it because of that fact that we can’t stop throwing money out the, out the window.
Right. Yeah. Yeah. Okay. Interesting. Well, let’s let’s wrap it up here. One, one last question to kind of summarize and tie a bow around everything. If you could summarize what a D-S-C-R loan is, but more importantly the benefits of a D-S-C-R loan. So someone listening to you and I today are thinking about you know, should I look into it or should I, you know, go and get a D-S-C-R loan for my next investment? Or maybe I’ll, you know, go and look for my next rental property right now because of what I just heard today on the show. How would you explain or summarize the advantages of a
D-S-C-R loan For everybody listening.
Biggest advantage is you don’t have a cap. So it’s not like you can get 10, they talked about the 10 golden tickets or 10 Fannie Freddie loans, conventional loans. The other is you don’t have to worry about what your personal income is. You get the underwriting from a third party to tell you this property will generate revenue and the, and you get to put it in your LLC and it doesn’t show up on your credit. Those are the top five reasons. Now, if you’re talking to a lender and it happens to not be me, which would first shame on you second, if you do happen to talk to a different lender and they can’t say that it doesn’t report on your credit or they can’t do it in your LLC, you’re talking to the wrong lender because you wanna be able to put that in your LLC if you’re starting it that way, do it that way and then follow it through and start building up your LLCs assets and therefore your assets and you get to it, you don’t own it, you just direct it. And that’s what the ultimate, that’s to me, that’s the ultimate control. You don’t have to own anything, but you have to direct everything.
Yeah, for sure. Good stuff, Aaron. Well, I appreciate you coming on. Why don’t you just let everybody know where they can find you.
aaronbchapman.com is the best place to go. And I’ll have Bri get ahold of you, schedule a call with myself or a key team member and we’ll, we’ll go over how you qualify for this and how we structure your business. There’s a lot more to it than just, I wanna pre-qualify. There’s a lot of structuring your business to make you successful as a real estate investor. And lemme just tell you, I’m not so concerned about the first deal we do together. Second or third. I’m concerned about the 12th. I need you to be successful. Marco needs you to be successful on 1, 3, 5, 7, 9, so we can get you to 12. When you get to 12. It changes your entire outlook on your future and your family’s future. And that’s where our focus is.
Love it. Love it. Well, Aaron, thanks for coming back on the show. This has been great. Just hang out and wait for me to finish up. But that is it for today. I appreciate everybody listening to the show. If you are interested in finding out what properties are available in our pipeline, especially those that qualify for a D-S-C-R loan that meet the qualification criteria for a D-S-C-R loan, get in touch with one of our investment counselors If you don’t already have one and you know, we provide free strategy sessions, just get in touch with my team and we’ll be more than happy to talk to you about this loan product as well as all the inventory of residential income producing property that we have in the different markets around the country. Just go to noradarealestate.com, N-O-R-A-D-A, noradarealestate.com. And if you have a question for me or my team about real estate investing, you could also submit that from our website at the podcast website at passiverealestateinvesting.com. And remember to subscribe. It only takes you three seconds and that way you never miss a show. That is it for today. Thank you for listening and we will see you all on our next episode.
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