Hey everyone, and welcome to Passive Real Estate Investing. I’m Melissa Nash, your guest host jumping in for now. Let’s dive in. Welcome back to the show, Aaron Chapman. Once again, I’m so grateful to have you here to drop some major real estate lending knowledge. So for everybody that’s listening out there, you probably know this name. And we have Aaron on here a bunch. So here we are. Let’s get started. Welcome to the show.
At this point, I should just have my own couch. I would think.
<Laugh>, you might as well.
Which I don’t mind. I say just, you know, get me the one that I like that the comfortable ones that got the built-in recliners and the charger for the phone. I’ll just kick back and say something now and again.
<Laugh>, well you know what, you’re so refreshing to have on the podcast because you are a investor friendly lender, but we never talk about interest rates. We never talk about the boring blah, blah, blah stuff that you would think that we’re going to be talking about when I mention we’re talking about financing and a lender. So you are a breath of fresh air. Who knows what we’re gonna end up talking about today, but you always keep it exciting.
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Thank you. And if I, I do get that compliment a lot from clients who are calling for the first time. You know, they’re, they’ve been recommended to two, three lenders. They have those phone calls, they send out emails or texts or whatever, Brie schedules the call. ’cause I’m literally back to back all the time. And usually I’m like the last person they talk to ’cause Brie’s the first that they may contact with. But they might get the other lenders on the phone before me. And by the time I’m done thirty, forty five minutes later on that phone call, they’re like, I’m like, Hey, is this kind of what you expected to have? Like, no. In fact, we didn’t even talk interest rates yet <laugh>. So we talked about everything else, like, would you like to talk rates? I go, no, actually we’re really good. Are your rates any different than anybody else?
I’m like, not if they are, it’s very little. So they’re like, yeah we’re just gonna go with you. So it’s really kind of cool to have a really awesome conversation unrelated to the normal stuff, but extremely related to being a real estate investor. People think that the banker, at least the, the bankers in my space believe to be a lender in the real estate space. You need to give everybody the same information you give to anybody buying real estate. But being a real estate investor and a business owner in reality, which you are, is a business owner, the CEO of a real estate business, you need to have different information in my opinion. And as a result of that, we get a very long conversation with everybody that we have a comm, a new contact with. And it ends up building building relationship, which I think is the most important thing. You’ve gotta have two things in life. ’cause Well, there’s two things that make life worth living and only two things you take from this life, relationships and experience. You get to have both on that call and then we get to develop that over the time of the business that we do together, which you and I have done since what, 2014, 15?
Yep. Yep, exactly. Well, and here’s the thing is that’s a, people ask me questions before I pass ’em off and give recommendations over to you and your team or whatever other team members I’m introducing them to. And people ask me those questions like, you know, the interest rates or this, this, that, whatever. And we kind of go through that and I go, look, at the end of the day, the lenders that we’re introducing you to, number one, they are investor friendly. In fact, I mean, I would say what 90, 90% of your loans are with investors. And you guys all have very similar rates, very similar when you punch the numbers and get down to it. There, there, there’s really not a huge difference. If you wanna save $5 a month on your loan, you know, it’s, it’s very minor, but it’s all about relationships.
And so that’s why I always say the first thing that you do when you’re thinking about becoming an investor is talk to an investor friendly lender like you and builds that relationship because this is a long-term strategy. You know, I’ve never heard an investor say, Melissa, I wanna buy one property. We wanna buy multiple, we wanna grow a portfolio. And you want somebody on your team to help you do that, to grow, to go to different states, to strategize. So you need to jump on the phone with somebody and see if you like Aaron <laugh>, right? Maybe you don’t, I dunno, I think you’re pretty awesome. I think you’re pretty cool. But build those relationships.
It’s possible for people not to like you, no matter how likable you try to be. But the relationships definitely are important. And also knowing what motivates those lenders to do that. You may not want to do business with me. It might be a state I don’t do business, or it may be just something that we don’t get along. There’s nothing wrong with that. But be cautious of who you work with, whether it’s us or someone else, and know their motivations. I had a client of mine that came to us after multiple transactions. Again, like you said, they wanna build and he was building, but he went at it from who is the cheapest that I can get the quotes from. And he did it that religiously. We finally called and he needed a bunch of refinances done because we went with what we thought he thought was the cheapest.
And he went with what we thought was the easiest and the quickest. Well then all of his properties were set up on these types of loans that seemed to be really good at the time, but were definitely not good for him over the long haul. The guy was in his late thirties, he had called me with problems. He said, you know, they’d set me up on all these deals and because of the movement of the market, I’m now found that I’m not making the money I thought I should be making. At the end of the day when I balance everything out, my income, the income of the properties, total expenses. He goes, I’m $1,100 upside down every single month. He goes, I’m in the hole all the time. He goes, I’m stressed outta my mind. We had to go in and undo, I think it was about four or five loans, I’m trying to remember.
So I, it was through, it was 2017 when I did this. We undid these loans and it cost him for every loan. By the time we were done, he was about $25,000 in costs to undo all those loans and redo them, but get him into a more favorable position. You know, that poor son had a stroke on the way the, the week he was supposed to sign on all those loans. He was that stressed out because he went with what he thought was the right way to go about business. Who’s the cheapest, who’s the most efficient? And they were about, how do I close business? ’cause This guy wants cheap, so I’ll give him cheap. He ended up really, really screwed himself ca cash wise on his monthly. And then on the expense of having to redo all those loans differently within what I had, would have directed him. And he came to us anyway. Luckily his wife was a nurse. She was able to get him to the hospital, get TPA on board. They were able to take care of him. He made it add that stroke just fine. He signed that month, got his life squared away. But guys, save yourself the headache. Save yourself the problems of following the wrong path and possibly having a stroke.
<Laugh>. Oh my gosh. Yeah. You know, you need to be working with a lender, obviously, I think you’re amazing. But there’s other lenders out there that people can talk to and that aren’t.
That aren’t as loved and there’s not as amazing just so we know. But they’re out there
<Laugh>. Very true, very true. But you know, we want people to use lenders who are experienced. And that’s the biggest thing is I don’t even know how many loans that I have personally helped investors do with you, Erin, but it is a lot. And so with that, you’ve kind of seen it all. So what’s the weirdest thing that you’ve seen either on a loan application or that killed the deal when you’ve worked with a client and you’re getting there towards the closing table?
Well, I would say there’s a couple that stand out in my mind. One that got me is just, you know, the third parties or the third parties wanting to demand some things. And it wasn’t, didn’t kill a deal, it killed future business because they co okay, so we referred a couple deals to you. So now what can we expect from you later? I’m like, guys, I’m a licensed loan originator. We can’t do that. Right? That we can’t legally pay you per transaction. I can’t, there’s, there’s an issue there that caused a lot of things. Gar, the Dodd-Frank Act prevents that I’m not gonna lose my business or put anybody at risk or charge a buyer more just so you can make a few more bucks. There was that, that affected long-term business with somebody, which is fine. We, we stood our ground and that’s how we’re gonna handle it.
The one that was kind of the, the most interesting death of a deal was, I’m at closing, money is at the closing table we’re trying to fund. We’d already release the money. We can’t record. The seller wasn’t signing. So I called the seller up. I’m like, bro, what’s going on? How come, how come you’re not signing? We’re done. He’s like, dude, I just got word that they’re building a luxury apartment building right across the street from this house and it’s gonna affect the buyer because it’s gonna affect him. It’s gonna affect the outcome of his, his deal, the way that they’re planning on doing this. He goes, I know this outfit and how this is gonna work. He goes, it’s not gonna work out for, well work out well for him. I’m gonna shove this house in my personal portfolio. I’m gonna sell, sell him another one where he doesn’t have this future problem.
I’m like, wow, okay. And you and I have worked with this guy he’s a, he’s a, he’s a friend of ours out in Indianapolis. I’m like, that’s awesome when you’ve got a person who’s willing to do something like that. Now it sucks when you don’t close a deal, but it doesn’t matter. I’m gonna close one the next month. I’m not, I’m not living in that kind of world that if I don’t close a deal that month, I can’t bread my table. I know some people may look at a loan origin. It’s like, okay, Aaron’s doing, you know, taking on a hundred plus applications a month, got this other guy doing like three or four, I’ll get more attention from him. But if a deal’s starting to go sideways and you need his attention, you need to take a look at something and maybe give you some ideas as to whether or not you should purchase this.
You’re not, how is it gonna be when the guy needs you to bread his his table versus somebody who’s like, Hey, you’re one 40th of my income that month. Right? Do you wanna take that in consideration of who you’re working with? And, and in that scenario, we’ve had several where an appraisal comes in, I’m looking at some stuff, the the personal for me of inspection. Like, ask these questions. I’m not gonna tell you don’t buy it. Ask this question, this question, this question and this question of your seller and see what you get. They got the answers to those questions. They didn’t like ’em to cancel the deals. I end up talking my client, giving my client the information they needed to not close even though I had already put all the resources into it. I’ve already paid my staff, they’ve already got their hours booked into it. I put the hours out. I can’t charge anything. I’m losing money on the deal. But I can’t have them close on something without me saying something. I’m not gonna tell them what to do. I’ll just give them all the information so it’s glaring in their face. So if those are the things that I’ve seen cause a deal to go sideways.
Yeah. And I think that’s really important because you know what the red flags are to look out for because you’ve, you and your team have done and seen so many transactions and having many people involved, having eyes on your transaction is really important. You’ve got the inspector who’s gonna be, you know, going through the house and trying to find everything wrong with it. The appraiser, we talked about appraisers last time we had you on, and they’re gonna be looking out for you. And then you also have the lender who’s looking at other things that these people aren’t looking at. And then you have your third party property manager looking at the deal as well. So I think everybody together that’s, this is why real estate is such a team sport. We’ve got all of these people looking out for you. So you’re not alone and you’re not doing it alone.
A hundred percent. And that’s, that’s where you gotta be sure you have the right people. ’cause There’s some that don’t. I know of people right now there’s lawsuits going because of people that didn’t have people’s best interest. I know of one guy who fled the country because of how many people were after him because he didn’t have other people’s best, best interests in mind. And what we start to find is when you have everybody else’s interests in mind over your own, yours get taken care of as a result.
Yeah. Yeah. So, okay. So if somebody wants to go from one rental property to 10, number one, how does an lender like yourself see that? How many properties can somebody finance? And what’s the path that you would tell somebody for that Who, who plans on scaling?
So if you wanna scale and you’re really, really serious about it, what I would com, what I would suggest a person look deeply into is to setting up your your family trust. If you are intending to do that, get your holding companies, start working on your LLCs and start purchasing with the LLCs, utilizing the DSCR products. That is your debt service coverage ratio. If the property rents the gross rent is enough to cover the principal interest, taxes and insurance on the payment, then we can get that loan funded. And you of course have to have the cash. We gotta prove that and we gotta show a, a good credit score outside of that. We don’t have to look at your income. There is not a limit presently published for that. I know that they’re looking at it from what I’m hearing, the rumblings in the industry.
So get what you can of that while they exist. The one thing we do know of what it’s called, a non QM product, a non a non-qualified mortgage. You can kind of look at it kinda like the ALT A or the subprime of the, the nineties and two thousands. Those had a shelf life. These may have a shelf life as well. The other thing that I noticed when things happened in the market, like what CO when COVID hit there was guys funding these kind of loans and they couldn’t fund ’em at all. When COVID hit, I could still fund Fannie Freddie loans. I couldn’t fund any of this kind of loan during that timeframe. And it was about a year before they came back. So that being the situation, take advantage of these. Get as many as you can to your LLCs and you gotta be careful what lender you’re working with on that.
Some lenders will still report to your credit and say it’s a loan to you. If we are doing it where I’m at to your LLC, it doesn’t report on your credit is not to you, it’s to your LLC. Therefore you can still get loans with Fanny and Freddy. So let’s say you do eight or 10 of these DSCR loans and they shut it off. Now you can’t get anymore. You can always go back to Fannie and Freddie and get your other 10. So if you have a primary finance conventionally, you’ve got, let’s say eight DSCR loans, now you can go get nine more conventionals. Where does that put you at? Right? So you should, you’re now sitting at 18 transactions. That’s pretty significant. But if you started just with Fannie and Freddie, you started getting those full, you’re reaching that ninth one, you got one more and then they shut off all the DSCR you’ve killed, your business is pretty much done at that point. I knocked that over and I caught it when I wasn’t even looking <laugh>. So, so you pretty much, your business stops, take advantage of what you can to scale now and keep scaling as as, as best you can.
Yeah. Oh my gosh, I love that. And and one of the things that I didn’t necessarily intentionally do when I was growing my own personal portfolio is historically the DSCR loan had a higher interest rate. Yes. When we were looking at, when the rates dropped after COVID, especially when people were just locking in crazy low interest rate loans, everybody was going crazy and buying conventional loans. We weren’t even talking about DSCR loans because you know, if somebody could lock in a three and a half, four, four and a half, 5% interest rate loan conventionally, we were like, yeah, do it. You’re gonna cash flow more. And so one thing to consider too is right now, Erin, can you tell us what are the differences between the DSCR loan and a conventional loan?
So the DSCR are very similar and sometimes better depending upon the loan size. So this is a private label security. It’s not backed by Fannie Freddie. It doesn’t have that, that indemnification capability of something goes wrong. So they’re on their own when they do these loans. There’s no, there’s no backup. You’re not getting mortgage insurance on these things. These are just a private label type of instrument out there on Wall Street that they want to be able to attach towards houses. But there comes a point where they, where they don’t wanna keep doing them as far as a loan size because it’s not, not cost effective for them. You start to get the, they drew the line in the sand of 150,000. The loan amount drops below 150,000. They’re gonna hit you a bit with costs and rates. It starts to climb at that point.
So it’s not as competitive with Fannie and Freddie when you get below that. Now we do have some sources at 125 they’ll still still be very competitive. So 125,000 loan, again, that’s the loan. So that’s 80% of the value at the max. 75 is pretty common. So 125,000 loan or higher, you really are not gonna have any chance below that to get a rate. Similar to Fannie and Freddie, when you start going between a hundred twenty five, a hundred fifty, you start to see potential risk there and anything above 150, you start to get better opportunity. Now the larger the loan, the better the outcome for this DSCR investor. The reason being, think about how each loan gets put together when they put it together. You have to have a certain amount of audit that’s done when it’s when it’s completed. You have to have it securitized. You have to, they have to then put it in for servicing.
That’s about probably $3,000 or more in cost that they put on the lending side to that. Now you as the buyer have to pay a title company. A lender like such as myself who goes through the underwriting process to processing process. You gotta pay people to do all your paperwork for you to make sure that you are lendable. It’s not something you know how to structure. We structure that for you. So you’re paying us to do that job. So all those costs you do at the closing table have nothing to do with what I just referenced. That three plus thousand that’s paid for by the pool. So every transaction has to go through all that and have those costs. So think about that. That administrative process, they have to do that expense. They have to put out, the only way they get reimbursed is by collecting payments from you.
Well if you did an $80,000 loan, it’s gonna take a couple years or more to get their money back. But if you did a million dollar loan, it’d be a couple of months and they get their money back in the interest charge, right? So see how the difference lies in that. But if you have a million dollars released, they’re still only putting out three plus thousand dollars for all the labor work and all that stuff to get it all securitized and get it set up for servicing. But they’ll do the same thing for the 80 grand. So if you had a million dollars that you put into the pool and it got released in a hundred thousand increments and let’s say it’s three grand a piece, that’s 30,000. You have to pay out in expenses before you start collecting. But if that same million dollars went in, it got released one time, you only put out 3000.
So you can see the difference. So that’s why you might see a difference in cost because of how much it is to get it set up and get their money back slowly. Then they also have a prepayment penalty. When you have all those those DSCR, they’re very, very common. You can get buy them out, you can spend money, get a higher interest rate, take a shorter prepay. I’m like, guys, what are you gonna do in five years anyway? The property’s not gonna go up enough in value for us to be able to get cash out. And if you’re just doing a ance for rate, I think you’re nuts because you need to be able to develop enough equity in it that to cover the costs unless you wanna pay out of pocket for nothing. So in five years, I’m all about the five year prepay. Take it and ride this sum out. It doesn’t matter. That’s why they put that in there. Keep you locked in so they can collect. Now when it comes to what was the what now we gotta go back to the question. ’cause I just started going off and <laugh> remember as long as I get going on something, I don’t even know if I answered the question.
No, that’s perfect. No, I can’t remember what the question, I think…
It might be the difference between the two. So there was there…
Yeah. Yes. The different, you’re right, it was the difference between the two…
Correct. Okay. Yes, because they we’re talking about interest rates. So interest rate, when you go above that 150,000, the rates are gonna be very, very similar. We, the higher you go, the better it gets. One thing’s very interesting about the DSCR versus the conventional. Conventional requires 25% down for a two to four unit purchase. DSCR will do 20% down. What’s also interesting is the rate on the DSCR often because of how expensive two to four units are, is a lower interest rate than the convention will be with a higher down payment. The only rub there is that it has a prepay. And to me that’s not an issue whatsoever. So sometimes it can be a much better deal.
Yeah, definitely. Well, and especially again, like I said right now where the DSCR is so much easier too. And so if the rates are like almost the same, if not better, the structure is with the DSCR, we’re gonna put the property into an LLC and there’s way less red tape. I mean, gosh, the last DSCR loan that I did, because, you know, I buy properties and so I have all my information and everybody has my information and they’re really quick and simple to do now. ’cause It’s all there. I think the loan that I did with you guys, I, I honestly wanna say like maybe I’m guessing, but it felt like two and a half weeks you guys were like, okay, we have everything. Let’s, let’s kind of close. And I was like, wait a minute, where’s the underwriter asking me for my blood type and going through my background check, I was like, this one’s actually really easy. So is that common and I’m self-employed, you guys. So is that common and is it easier for an investor who’s self-employed or a W2 employee to get a DSCR loan?
Well, it feels a ton easier because again, you’re self-employed and your tax return situation is rather complicated. And what I’ll tell everybody, the more complicated you make your business life and your financial life, the more complicated your loan becomes. So just know we’re only taking cues of how ma how, how much you wanted to create is the we have to open up and look at. So, and you’ve got a lot of. So it would definitely be something that would feel a lot easier if we’re not asking about your tax returns or your entities, your companies or where the income’s coming from here and here and here and here. Very easy for us. Now here’s where it gets complicated. We have to figure out that debt to service, debt service coverage ratio on that loan. And it changes all the time. So with you, it’s a, it’s a debt to income ratio and we’ve got a big range and that range doesn’t really matter that much.
I mean, just stay below a certain level and we can fund the loan debt service coverage ratio. You have to stay above a certain level, but every level has a different price and it changes the interest rate and the cost every level. So you have to go to a different product every single time. It changes within the range. So I could lock your loan and then all of a sudden we have a blip in the DSR that drops it just a couple of points. Now I have to, we have to switch that lock to a different product and it changes the pricing on it and it could go up, go down, whatever. And it gets really complicated on our end where it’s just this, this pinball going back and forth. I quoted your rate, I locked rate. Oh crap, we just got the update on what happened with your taxes.
Or it’s not that rate anymore. It goes to this rate. Oh your insurance guy forgot to do this, he has to add this to it, that change it, we gotta go do this to the rate. So it’s it becomes really a very complicated thing for us. But it is a much better thing for you on the financial paperwork side of it. It’s just that little cork with the DSCR itself. So sometimes we won’t lock it until we have the appraisal in hand, the tax cert in hand and your insurance quote and bound by your insurance agent in hand. So we know the exact numbers we’re working with.
Okay, that’s a great thing that you brought up there. So normally when we were doing so many conventional loans years ago, I would tell people, go get your pre-approval. You know, I’m not even gonna really take you seriously as an investor until you have a pre-approval in hand. You’re ready to go. Now what’s interesting is with A-D-S-C-R loan, we don’t have a preapproval in hand because I’m like, Hey, talk to the lender, get everything sorted. Make sure that you can get a loan. But can you, what you guys are looking at to qualify somebody, are you looking at the property and, and what does the property need to look like as far as is there a percentage of cashflow that you’re looking at on that property? More about that.
That. So we do have to still look at the credit of the individual and make sure that it fits within a certain range. You know, there’s still scores that they wanna go by ’cause that’s the only way they can guarantee they’re gonna get repaid by the, what the individual’s have habits have been in the past. We gotta look at their, the funds that they’re using to close where it’s coming from that it is their money. We’re still playing that same game. But it comes to the property. We’re definitely gonna look, look heavily at the appraisal and especially what the appraiser says it’s going to rent for if it’s not presently rented, even if it is presently rented, we still want the appraiser to con, to confirm that the lease agreement that was provided to us does match with what’s in the area. So even if you have a lease agreement from a seller, it says, Hey, we have it rented for 1800 bucks.
You’re like $1,800 on a thousand square foot home with two bedrooms, one bath. That’s pretty significant, right? He’s like, why would somebody pay 1800 bucks for that? Well then we have the appraiser go out and they’re, do an eva do an evaluation of it. He’s like, yeah, that specific neighborhood they rent for 16 to 1900 then it makes sense to us. But if he says no, the average rents there are 12, we’re gonna question it. Is your, is your seller pulling a fast one? Is he trying to sneak something in on you to get you to buy a house? You shouldn’t, right? So then we’re gonna look at that DSCR ratio based upon what the appraiser says when it’s that big difference. And there’s a reason too, and we’re saying, hey, your rent, your, your payment on this thing is $1,300 a month and the appraiser says they’ll rent for 12.
You’re an upside down DSCR. We can do it, but we’re gonna have to do an exception on it and we’re gonna have to punch you for about a half a percent rate. Do you wanna do that? Right? So that’s where that kind of thing works. The other is, you know, waiting for the tax information to come in. Sometimes tax authorities have things differently than what you can find on the internet. We gotta confirm that ’cause it could be higher. The insurance right now is really a big thing for us all because that’s way more expensive than that has ever been. One thing we’ve also noticed is that insurance companies in the last year or so have been required to have replacement coverage. Not, we used to get away with just enough insurance to pay off the loan. Now it’s replacement coverage of the dwelling, right?
You can’t just cover the dwelling cost used to be dwelling cost coverage or it used to be enough to cover the loan. Now it’s full replacement cost because of what happened during COVID. So if you remember during COVID we couldn’t get materials, places were shut down. There wasn’t the shipping, there wasn’t the production. They were shutting down manufacturing as a result of all of that cost to construct went through the roof. All those materials are much more expensive. So your insurance policies went through the roof because when you have a total loss and they gotta fix it, that’s much more expensive it is to go buy it. So you can buy a completed house sitting there much cheaper than you can build it. That’s why the replacement people are really, really about replacement coverage right now. And that is why.
Well, you know, when I hear about that and when I saw that change happen, yes it changed the numbers for people on their proforma, but at the end of the day it actually protects you more as the owner because now like most likely you’re gonna get more payout from your insurance company. You’re not just gonna get the loan paid off because then that kind of sucks as an investor to lose a property and like, yeah, cool, the loan got paid off but what if you wanna rebuild it? You still want to own a property. And that was the whole point of this is to build your portfolio.
Well think about the equity you had in it.
You’re gonna replace, right, most of the time you’re at least 20% equity and if you’ve had it for five years, now you’re at 40% equity and it just pays off the loan. You just lost 40% equity on a 200,000 house. That’s 80 grand vaporized, right? Nobody wants that. Yes. It’s amazing how shortsighted people get when they’re so focused on cash, on cash return. Like, well that affects my cash on cash. Well think about what happens if you lose that house you are now, now we’re affecting everything. Not just your dang cash on cash. You don’t have cash on a cash anymore. Now your equity’s gone. You’re gonna have to rebuild something or let it sit there. But now you have a burnt down house and you have the city saying you gotta clean this up. You can’t just let it sit there. So you gotta take the money from the, from the the the insurance company pay off your loan. But now you have a 30 to $40,000 bill to clean up the mess that’s there and scrape that that yard and scrape that whole lot out. Then what do you rebuild outta your pocket? That’s where it starts to get to. Crazy. So people don’t think ahead like that. They’re just, they’ve been so oversold. What’s my rate? What’s my cash flow? What’s my cash on cash? What’s my cap rate that they forget all these other things.
Yep. Oh my gosh Aaron, you said that so perfect. I’m so glad that we brought this up because that actually is a huge thing. People always say the things that they’re worried about or what their fears are. And my answer is always like, well you know, insurance will help with that one if there’s a natural disaster. That’s one thing that people are always concerned about these days ’cause there’s so many natural disasters out there and I’m like, well you know, you’re gonna have insurance so you’re protected. But having that full replacement cost actually should make you sleep better at night. That is actually a good thing. And I definitely think it’s worth paying for. Even if your lender isn’t making you do it, I think it’s a very good idea to add it to save your protection of your property.
A hundred percent. Save that equity armor all the equity up you can protect what you can control, what you can control for as long as you can control it.
Yep. That’s perfect. So, okay, so we talked briefly about self-employed people. A lot of people that I talked to, I’m like, Hey, I’m self-employed too. And they assume that they can’t get qualified to buy investment properties. And so do you look at people a little bit different if they’re self-employed or W2? Does it even matter since we’re mostly talking about DSCR loans right now.
It doesn’t matter even who talking about conventional loans, what’s funny is how many people call me up or I would have conversations with, you know, I’d really, really, you know, love to buy real estate, but I’m not W2. I’m like, why is that a problem? And they said, well, you know, just, you know, everybody says you have to have a W2. I said, I’m self-employed. It’s like, do you make money? Do you have an income? All this? Yeah, you, and we’ll take an ana an analysis of it. It’s like, dude, yes we can close your deal all day long. It’s, it’s not that they don’t qualify when they’re self-employed, it’s just the lenders they talk to are lazy as hell. That’s the biggest problem. Loan originators, people ask me, I mean, only loan originator on my staff. There’s only one. And I have, I have a staff of all operations people.
It’s because I’ve just traditionally seen, they just don’t wanna do certain things. They wanna take a phone call, hang it up and get paid. That’s it. And we have to do a lot to prepare a real estate investor really. And especially the self-employed real estate investor. It’s a ton of work. But that’s where we focused our time, our energy. And we really, really enjoy that, that part of it. Because we don’t do it just once. We’ll do it an average of eight times for one person. So it’s tough for the first one, easy for the other seven. That’s where we go about that way when it comes to people saying self-employed, make it harder to get loans. It’s not that hard. It is. People not wanting to do the work or understand what it takes to analyze a self-employed borrower. It can be extremely complicated.
I’ve had artists, I’ve had sports figures, I’ve had people that just get paid by royalties. They take advance on royalties on stuff that hasn’t happened yet. That is the most complicated crap I’ve ever seen. And one of them, he bought 10 houses in three, in three states that closed on the exact same day. It was the toughest thing I’ve ever done. It was 1800 pages of, of tax returns. But we did it. And you know, I was hoping to be able to get more deals from him, but you know, he decided that was too hellish. He didn’t wanna buy any more real estate. But it was hellish for us too. Right. But we had, we had the, we had the thing mapped out at that point. But just, you know, to illustrate it is tough. And I like the fact we do the tougher stuff. ’cause That keeps the competition down.
Yeah, for sure. I mean, I know if somebody’s got something a little bit more complicated, and like you said, there’s not a lot of people out there willing to do it. So I’m like, ah, I think you better talk to Aaron.
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Well, there’s a lot of younger people in the business that got in after the crash and there’s a lot of people that got in just before that’ve been in it less than five years. There’s no way they know what they’re doing to touch that kind of stuff. And that’s the thing that, yeah, I caution a lot of people, if you’ve got a person who’s been doing this for less than 10 years, you really gotta wonder if that’s somebody you wanna go to for your real estate investment lending. I’ve been at this for 27 years. We’ve seen a lot of swings in 27. I’m coming up on 28 years in this game at the end of this year. So we’ve seen a lot of things in the market over that period of time. And we can pretty much predict, we can’t predict with remarkable accuracy. I used to be able to do that before quantitative easing, but now we, we pretty much guess how it’s gonna work out and we’re pretty accurate.
Yeah. Perfect. So, okay, Erin, I have one more question for you and this one I was gonna ask you another question, but this one’s fresh on my mind because I was actually talking to somebody the other day and I think this is a more common question because I realize how many times I’ve answered it. So let’s just get it out right now. And basically she said, you know, I live in Los Angeles, I live in a really expensive area. I rent here, I want to own my own home here. And I’ve been saving up to buy a house here, but it’s just not really getting very far. And so she said, I think I wanna invest in real estate. So we’re talking about affordable markets in the Midwest and the south, and just to kind of get some investments going for her and start kind of generating that income and all, all the things, all the amazing things about real estate. And then she said, my biggest fear is that I’m gonna buy some rental properties and then all of a sudden I disqualified myself to be able to buy my own main residence here in California. So can you just answer what you would say to that person?
So one of the big things that people used to freak out about was like, okay, I’m buying all these rental, these, these investment properties, but I’m getting to property number 10. I’m not gonna be able to, to finance my own homes. Like there is no limit to how many houses you have finance in your personal name that will block you from buying your own primary. Fannie and Freddie will always have a primary residence finance availability for you if you qualify. It doesn’t matter how many real estate, how many houses you own, they’re and how many are financed. They don’t have, they, it could be unlimited at that point, but when it comes to qualifying, if you’re buying rentals that pay for themselves and they create cashflow, which is what you should be doing, things that you can keep reasonably rented the entire time you own it, you can raise rents on it and they will appreciate if your business does that.
And we can show that they’re paying for themselves. You can still qualify to buy a property for yourself and not have those really appear as a deterrent as far as income is concerned or any sort of impact on your income because those are taken care of themselves. Now, where a person get, can get it can get a little bit hairy if you get too crazy with your tax returns if you start trying to write off everything as an expense on that property. Now there’s, there is stuff like bonus depreciation and cost segregation, those things, those are different than saying every time I go into that town, I’m gonna write off everything that happens to do it. And I go to that town all the time. So I write, I, I like to buy real estate where I vacation, be cautious about trying to spend all kinds of money in there and write that all off because you’re in that town and now you have this negative income on those properties on your tax returns that negative income goes against, goes against your income.
Speaker 3:
So you’d be cautious about this. So when you’re doing your Schedule E on your real estate or on your taxes and you’re showing the, the income and the expenses on that property, you can go to a point of having a negative income on it or a zero income on it because of the depreciation, therefore no taxable income to the government. But if you get to a point where it’s negative income because beyond the depreciation, that’s where we end up into in a problem. We end up in a major issue at that point. And we are, and, and we have to count that against your, your income. Doesn’t mean that it’s gonna count so much that it’s gonna hurt it, but just know that it can. So you gotta be cautious about that. Don’t ever go into it thinking, I’m gonna go completely crazy with my write offs. When you don’t have a house to purchase that right now, do you wanna purchase one down the path?
What percentage of loans are you doing that are DSCR? Just outta curiosity.
70% of my pipeline is DSCR. Okay. ’cause It just makes sense. We have it. Even guys, it just makes sense, especially when you buy it with the, one of the things I was asked a lot other than ’cause last time we got together, you say, Hey, what, what’s the thing you’ve been asked the most? Which is, you know, why do you need that? The other I was asked a ton over the years was, why can’t I finance the property with my LLC? It’s just a pass through entity, it’s still me. Well now you can, and it’s amazing to me how many people do say, well, let me use up my Fannie Freddie first. I’m like, no, no, no, no, no, let’s not do that. Let’s do what everybody’s begged for, which is to finance for 30 years in your LLC and then go back to that. This is, it’s to me, if it isn’t the holy grail, it’s first cousin, it’s really an amazing opportunity to utilize your LLC.
Okay. So with that is, so you guys can go to the show notes, obviously we’re gonna have a link to connect with Aaron. Thank you again, Aaron.
Thank you Aaron and Melissa for an episode packed with valuable takeaways. Be sure to contact one of our investment counselors for a free strategy session. If you don’t have an investment counselor, not a problem. Just fill out the form on our website. We will connect you within 24 hours and you will be in touch with one of our great team members here. Help us spread the word, leave us a rating and review on iTunes, help share this show with other great like-minded people like you. And once again, thanks for listening. We’ll see you on our next episode.
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