Episode 104: Refinance your Rentals

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Show Notes

Refinance your Rentals! This is one of the coolest things about rental real estate. You can leverage the money you have invested.  Boom! One investment can be refinanced more than once, you can pull that money out and guess what it isn’t income because you have to pay it back.  Listen to Dave and Mike discuss Refinance your Rentals in this episode of their series on BRRRR

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Mike: Alright guys, welcome back to the Discount Property Investor podcast. Your host Mike Slane and–.

David: David Dodge, hey guys, good morning to ya, good afternoon I guess. Whenever you are listening, good day to you.

Mike: That’s what’s great about podcasts; we record it when we feel like it, you listen to it when you feel like it.

David: That’s right.

Mike: So the Discount Property Investor podcast, we are all about real estate investing, primarily wholesaling. Wholesaling is what we recommend everyone gets started with when you are investing, or beginning your investing in real estate. We put together a completely free course for everyone; freewholesalecourse.com. We encourage everyone to check that out, we have a ton of reviews on it, most of them have been positive so we are real proud of that, something we enjoy putting together and hope you enjoy and learn from. So again, that is where we really recommend most people start wholesaling. The reason for that; you are going to learn comps, you are going to learn them yourself, you are going to learn them from other people walking through your properties telling you no they think the rehab is too high. They are going to tell you no I think your price is a little high, this price would make sense for me. So wholesaling is a great way to leverage other investor’s knowledge to build your own knowledge, and start your real estate investing career.

But, today on the podcast, Dave, we are going to talk about refinancing rental properties. So Dave and I have been working on the BRRRR strategy in our business to–.

David: Hell yeah we have!

Mike: — yeah buddy, to grow our rental portfolio to 150. 150, why? We don’t know, that’s the number we picked, that’s the number we’re going after. So we are about a third of the way there. What do we do, Dave? What’s the BRRRR method?

David: Ah the BRRRR method, I love the BRRRR method. The BRRRR method is a way to buy properties, rental properties with little to none of your own money, and BRRRR is an acronym. It is B with four Rs behind it, BRRRR. B stands for buy, then what you do is you are going to rehab or rennovate, that’s the first R. The second R would be rent that property out. The third R would be to refinance that property. So we are buying these properties with private lenders, or lines of credit or even bank loans. But essentially we are buying it with someone else’s money, right? We are going to rehab that property, then we are going to rent that property, then we are going to re-finance all of the money back. So basically we are going to pay off whoever we borrowed from originally with the bank in the end. The last R of the BRRRR strategy is to repeat. So you use this strategy to acquire a lot of rentals in a short period of time. As Mike mentioned, we are close to 50 properties already, and our goal is to get to 150 in the next one to two years. Hopefully sooner, you know?

Mike: The faster we can go the better.

David: The faster we can go the better.

Mike: I would love to have it done by December, but that is probably not realistic for us.

David: We are not going to rule that out.

Mike: Hey, if we can find a good package, maybe we will.

David: So that’s the BRRRR strategy, guys. As Mike mentioned before, if you are new to real estate investing, start with wholesaling, it’s a great way to learn to talk to sellers, negotiate deals, run your numbers, and really the best deals that any real estate investor is going to get is when you go direct to the seller. You can bypass a real estate agent and in some cases not always. When you are dealing with a seller directly, it is going to save them a lot of time and expense, and it is going to save you a lot of cost. So you are really looking to do a win win when you are dealing directly with the sellers. So again, check out the free wholesale course if you are new, or haven’t already it’s awesome. Today we are going to be talking about refinance, this is the third R in the BRRRR strategy. We have actually done a couple of mini series’s, this is actually episode five of our mini series, is that right, Mike? Episode five essentially. So if you are wanting to know more about the BRRRR strategy, or all about the BRRRR strategy, go back a couple of episodes, and start where– I guess episode one where we talked about buying.

Mike: Check out the BRRRR strategy on our previous podcast, you can find those on DiscountPropertyInvestorPodcast.com, we are on iTunes, we are pretty much everywhere. Thank you guys for checking out today and checking out the podcast.

David: Hell yeah! Let’s roll.

Mike: Let’s talk about refinancing. We have done enough intro to what– beat the dead horse, we just keep beating that dead horse.

David: We are going to keep beating it, that’s alright though. Refinance today, guys.

Mike: We are playing chess, guys. We are not playing checkers in this game. You have to think ahead about building wealth and creating a rental portfolio. It’s not a simple one two three thing. You don’t want to over complicate it. But, when you are talking about refinancing with banks, they like to see history. They want to see what you have done in the past, and they want to make sure they are essentially betting on a winning horse. They don’t want to gamble their money, they want to know you’re going to pay them back. So what am I getting at here? Well long story short, if you are a employee currently. You are working for someone else, you have to keep working for someone else for a while. You need to have at least two years tax returns doing what you have been doing–.

David: That’s a great point, Mike.

Mike: — so you can get refinance with lenders.

David: That’s a great point.

Mike: So again guys, I know I want you to quit your day job if you hate it, I want you to quit and be self employed and–.

David: But having those W2 returns is really going to help you.

Mike: Those W2 returns are worth more than just that paycheck.

David: Yeah they are worth more than that.

Mike: They are worth a lot more than just that paycheck. If you don’t have experience in rental real estate, if you have been an employee, don’t quit that day job yet. I want to just emphasize that point, that W2 that you get from your employer is very important.

David: That’s a great point.

Mike: The banks see you as a lendable person essentially. So like I said, the refinancing is a game of chess not checkers. You want to keep that W2, and you want to go an apply with as many banks as possible.

David: Man that’s a gold nugget! Apply with as many banks as you can and start that process today. Don’t wait until you buy a house, then you have rehabbed that house, and you are leasing that house to then go talk to a banker about refinancing it, guys. You need to be doing all these things at the same time, or even before. So go set up your relationship with a banker or bankers. We personally like to work with a local bank that has between maybe three or five on the low side branches, some even less. But maybe 10-15, these are local banks. The reason we like them is because they are going to lend to us in a style of portfolio lending. Meaning that they are not going to be selling these mortgages off to the secondary market. So, Mike, what are some benefits of working with these local banks as well? We were talking about it a minute ago with the whole [00:07:46.20 – inaudible] thing.

Mike: Absolutely. So local banks– so why do we work with local banks? Well they are more likely to invest in their community.

David: I love that.

Mike: They see–.

David: Going to be difficult to get US bank or Bank of America to do a loan for us on a rental we don’t live in. It’s a higher risk and all of the above.

Mike: Uh huh.

David: Let’s circle back real quick though. When you are working with the local banks and they give you– let’s say they give you a loan on a property and it is a 20 year term on that loan, or a 20 year amortization I should say. However the term maybe be three or five. That is basically going to be pretty standard. Most banks are going to be leaning towards offering three year loans, if you pay an extra quarter point or half a point you may be able to get the five year term. But what makes it different dealing with these local banks who are doing these portfolio loans versus a bigger bank, or a bank that is not local? When that term comes due, right? The end of that three year, that five year period; even though your amortization table is let’s say on a 20 year [00:08:59.21 – inaudible], if you don’t have a bank, it is going to very difficult to renew, okay? That’s a really big thing I want to harp on just for a second is– whenever they loans becomes due, essentially they are just becoming due for somebody to re-underwrite them, right? You are not having to go out and get another loan from a different bank necessarily to get a new loan on it. Instead what happens is the bank does an appraisal and they adjust the interest rate, then they give you another three to five year term. But what is most important about that whole thing I just rambled on to you guys about, is that the amortization does not start back at day one. So if I have a five year term let’s say on a 20 year [00:09:50.14 – inaudible], and I get through the first five years, I am on year six of 20. If I go re-finance that to another bank at another 20 year [00:09:58.08 – inaudible], I am starting at day one again. This is where the snowballing power really comes into play.

Mike: Yeah so what Dave is mentioning here is the fact that you are saying on your six as opposed to your one. So if you know much about lending–.

David: Or four.

Mike: — the– interest is paid very heavily upfront. So being in year one you are probably paying 90% interest, maybe even 95% interest and 5% goes actually towards the principle balance of that loan. So you make very little progress in the first few years towards paying down the principle balance of that house. That’s why renewing versus refinancing these loans is such a powerful thing. I am going to circle back though because we are really talking about two different types of loans too. We are talking about commercial loans. Commercial loans is really what we are approved for, and super powerful, we are able to get more than those first traditional ten mortgages. A lot of people say, oh you can only get proof for up to ten mortgages–.

David: I get two or three people a week sending me messages under different social media saying, how do you guys get around the ten year rule? The ten property threshold essentially, right? I think what they mean by that is– a lot of banks will allow you to get up to ten loans in your personal name. But once you get above ten they are not very willing to lend to you, because it is in your personal name, and it is just high risk. They want you to have a business.

Mike: Right, let’s talk– exactly– that changes too. I don’t know all the laws–.

David: I don’t even have– this is funny, but I don’t even have ten loans in my personal name.

Mike: It’s hard to get.

David: It’s hard to get. I think I might have four– three or four. So it’s like– you don’t even necessarily have to put them in your personal name, you could put it in an entity.

Mike: I have three and that is why I am– I emphasize so heavily to keep your W2 job, because I quit mine, and I wasn’t able to get financed for a while and it really set me back. So I had to prove myself as an entrepreneur–.

David: It takes two to three years–.

Mike: — a couple of years to say, listen I am making money in this trade or this profession, can you lend me money again? They are still not very comfortable with it. So again, you really want to leverage that W2, get as many as you can. Go the traditional route, typically you can get away with a little bit cheaper interest rates when you go with conventional mortgages in your personal name. So again, you want to do that, get as many as you can. When you hit that that threshold where they are like, we can’t give you anymore loans. Okay, well I would– then start looking at other banks for commercial loans. So again, step one you are going to get as many personal as you can for the lowest interest rate you can, amortization over. Again, this is all personal over the longer period, the longest period you can so you increase your cash flow. So let’s talk about just the loan terms really quick.

David: Sure.

Mike: One of the terms is term. What we mean by that is–.

David: Duration.

Mike: Duration or the loan.

David: That’s correct.

Mike: When we are in our commercial loans, we are saying we have a three or five year term. What that means–.

David: It locks in the rate, that’s all that means. That’s all it is, it locks in the rate. At the end of that term the bank is going to  want to do some due diligence to make sure you are A, paying your taxes, B, you are paying the bank, and C you are lendable, you are somebody they want to do business with.

Mike: Exactly, our commercial lenders are typically one three or five years. We like to stretch it out as far as we can because we would rather be locked in.

David: Rates are really low right now, they are historically low. So if we can pay an extra quarter point of a historically low rate to get two more years guaranteed at that rate we do, and it staggers. So we don’t have all ones or threes or fives. I don’t know if we have any ones, do we? I think they are just mostly– private money short term loans. All of our banking loans are basically staggered between three and five, just to limit risk and also lock in those rates for a little bit longer periods of time. Love that, Mike, good work. So term is one of them. The next thing is interest, that’s something you need to be aware of, what is the interest rate? Interest rate, assuming you have a fixed rate loan versus an adjustable. Adjustable is very simple, guys, it adjusts, okay? If it’s a term– a loan with a term, then that interest rate is going to be provided by the bank, okay? So shop around, interest rates can vary quite a bit from bank to bank, as well as the other items that are addressed. We have term, we have interest rate, what else you got, Mike?

Mike: Amortization

David: Amortization, very important.

Mike: So the term– again it is probably not quite right, so the term of the loan could be thirty years, but we call it a thirty year amortization, or a twenty year amortization.

David: They are two totally different things, that’s a good point to make.

Mike: We need to look up what they actually– again, amortization I know for a fact is the period of over which it is financed.

David: The pay scale in which the percentages of your payment go to interest versus principle, that is what an amortization table is. So yes absolutely, amortization you want to become familiar with that, interest rates you want to become familiar with those. So if you are new to this process or you want to get involved in the BRRRR process, go talk to a local banker, or several. Get to know those people, get that relationship going with them. If they will lend you, great. Jump right in, if they won’t lend you, that’s okay too. Ask them what it’s going to take to create a business relationship with them. They are going to look at your taxes, they are going to look at your W2, they are going to look at your debt income, they are going to look at your financials, and they are going to be able to tell you, we would love to do business with you. Most people don’t realize this, but banks make money by lending it, right? When you deposit money into a bank, they are loosing money essentially because they owe you an interest rate on it. So they have to then arbitrate your money and lend it out to make money. So banks love lending money, but they protect who they lend to, because they don’t want to lose money, nobody wants to lose money. So banks get paid when they do loans. So go talk to these banks. If they won’t lend to you, just ask them what do I need to do to become lendable? What is that going to take? Then they are going to tell you, they are going to say, your credit score is a little low, and your debt to income is a little high. So reduce some debt, try and make more money if you can, pay off some bills or try and get that credit up. They will essentially become a coach to you, they will coach you on what you need to do to get a loan.

Mike: I love that. That is again part of the reason–.

David: Sorry I went off on a tangent.

Mike: No that’s great. That’s part of the reason it’s very important to go and apply to a couple of banks. They will, they will help you, they will figure out, hey listen you’re credit is not great; you need to improve it. Again, it may be hard news to hear, or may not be something you want to hear that they can’t lend you money, but you have to bite that bullet and figure out how you can get them to lend you money. It’s very important to go and try to apply to as many as you can as quick as you can just to get this ball rolling, and find what it is that is adversely affecting your lendability, or your ability to borrow money.

David: Love it, cool.

Mike: So we talked about commercial loans, we talked about term interest and amortization. The difference between the traditional– the conventional mortgages in your personal name, typically you are going to get fixed rates for 15-20-30 years, whatever your amortization is.

David: For the personal ones?

Mike: For the personal ones you are probably going to get the rate locked for the length of the mortgage.

David: So the term– what Mike is referring to is that the term and the amortization table line up; they are both for 15, 20, 25 even 30 years. I have a couple of 30 year loans where the term is 30 years with a fixed rate the entire time, and the amortization table is also on a 30 year. However, when you get to commercial it changes a little bit.

Mike: Gets a little bit more confusing, because you could get a variable rate, but we always suggest– especially low interest rates, get the fixed rate mortgage. So then on–.

David: Good for keeping track of everything too.

Mike: Plus, who wants their interest rate to go up?

David: Right.

Mike: Again, with historic lows it just makes sense to lock in, versus–.

David: With a commercial loan though, that’s where things get a little different.

Mike: That’s where the term and the amortization don’t line up. This is what we got excited about and were telling you about before. So hopefully we will reiterate that, hopefully you will understand why it’s a powerful thing. The commercial one– your amortization can be scheduled over a 20 year period. Technically that’s about as far–25 is some of what our lenders will do on the amortization table. But the term is going to be much shorter, meaning it is only going to be for three years before they say, hey listen this loan is up and you have to do something with it. Well the reason a lender does this on a commercial one is they want to re-underwrite you essentially. They want to make sure you are still credit worth, they want to make sure that you are paying them etc. If the interest rate goes up, they want to increase the interest.

David: Yep, excuse me, everyone wants to get paid.

Mike: So again, the commercial loans yes, there is a little bit more variability, a little bit more risk on your part, little bit more risk on the bank’s part, because they are loaning to an LLC, not necessarily to you personally. A lot of them will make you sign a personal guarantee anyway. But yeah that’s just part of it. That is pretty much all I’ve got on the–.

David: On the refinance process. Let’s circle around real quick and talk about the big picture. So when you are using the BRRRR strategy, the refinance part of this is as important as every piece of the BRRRR strategy, right? If you are using private funds or hard money to buy the property, and then you rehab that property and you rent that property out, you need to refinance to be able to pay off those hard money lenders or those private lenders, for several reasons. One, your initial term with those individuals or those companies probably wasn’t for three to five years, it was probably four, six, eight months, right? Also the interest rate that you are paying to those private lenders is going to be two to three, maybe even four times as much in terms of your annual interest, as you are going to be paying if you have a bank you are working with. Bank money is most of the time the cheapest money there is in terms of the cost or the interest rate. So refinancing is very important in the BRRRR strategy, you have to be able to pay those private lenders back, so then you can re-borrow that money to keep the train rolling, right? Buy the next one and keep your crews rehabbing and so on and so forth. Refinance is obviously super important. Go introduce yourself to the local bankers. Make sure they know who you are. Again, if you are not approved today, don’t walk out of that bank ashamed and disappointed; I’ve been denied loans– I get denied loan once a month. But it is only because I get loans on lot’s of things. It happens, I don’t even care. Real talk.

Mike: We literally have just applied to two new lenders, and they both said, hey your credit looks great, everything you sent us looks great. One of them came back and said, let’s do business. The other one said, we don’t like you. It’s going to happen. Again we say–. It doesn’t hurt our feelings, what are you looking for? We will figure it out, we will fix that. Also there are other lenders out there, and they all view things a little bit differently.

David: They do.

Mike: Again, you are going to learn from your experience. Like Dave said, don’t be ashamed of being denied by a bank. Learn from that, that’s the whole point, we don’t get this education from our educational system, from going to school. Nobody tells you, here is what you need to get a loan from a bank. It is very important. Go out there and ask the loan officer, hey what can I do.

David: Love it guys. That is probably going to wrap up this episode. Again this is going to be episode five of our mini series on the BRRRR strategy– what’s up?

Mike: We didn’t finish.

David: What have we got?

Mike: We have to emphasize the fact you have to know your numbers up front. We talked all about the how to of the refinance. But you also need to figure out what your monthly payment is ahead of time. If you know your numbers–.

David: You need to work them backwards, go ahead.

Mike: And we have a cool little spreadsheet, we will probably put something online for you guys, maybe a link to it. Where you can find it– just look it up– amortization schedule. Go out there and plug in– hey if I borrow $80,000 on this property, amortized over 20 years, what is my monthly payment?

David: What is my monthly payment going to be?

Mike: Then you have to add in your insurance and your taxes, and figure out what that monthly cost is. That is going to effect your cash flow when you need to know your numbers ahead of time.

David: That’s a really good point.

Mike: Let’s wrap up on that, Dave. Again, I just wanted to hit that–.

David: Whenever you are using your BRRRR strategy, the whole purpose of the strategy is– again, to be able to acquire a lot of assets quickly with little to money. However, if you buy a bad deal, it is not going to work very well. The BRRRR strategy doesn’t work very well, because what happens is that you are refinance numbers are going to be less. Meaning the loan the bank is going to give you is going to be less than what you might have borrowed to purchase and fix that property. So you want to work these numbers backwards and know before you buy it what you think it may appraise for, as well as what you think you might get a loan for. Some lenders are going to lend different amounts and use different formulas in different areas. Again, go meet those people. Absolutely, don’t forget to work the numbers and or now your numbers before you start. Again, there is something to be said about somebody who jumps in. Sometimes some of the best lessons are learned from mistakes. Don’t be afraid to make mistakes either.

Mike: Thank you for listening to the Discount Property Investor podcast, we appreciate it. If you haven’t checked out the free wholesale course go do that. We always want to emphasize that, and we look forward to chatting with you guys again soon.

David: Talk to you next time, guys, signing off.

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