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Let us join The Discount Property Investors David and Mike discuss about wholesaling real estate. They talk about Rental Portfolio and BRRRR METHOD but focus on funding the rental purchase. If you are a new investor and interested in rental properties but don’t have much ideas on how to finance the business, then this is for you. If you checkout the freelandlordcourse.com they put a rental property analyzer, it will help you analyze a rental property deal. Go check it out guys!
Things that will cover in this episode:
- Private lenders and how it works
- Hard money lender
- Bank Funding
- Commercial loans
Mike: Good afternoon, everybody. Thanks for joining us. Your host Mike Slane with co-host.
David: David Dodge, hey guys.
Mike: What’s going on? We are the discount property investors and we like buying real estate so that’s what we’re going to talk about.
David: That’s right.
Mike: Changing it up today.
David: Buying real estate.
Mike: Talking about real estate. No, we are gonna change it up a little bit so our primary discussion is usually something to do with wholesaling real estate, but that also, we recognize wholesaling is more of a job, a high paying job, but it’s more of a job than a path to freedom, and what we really like is freedom.
Mike: Freedom of time, freedom of money, the ability to do what we want when we want, so that is what we are gonna talk about today. We’re going to talk about building a rental portfolio. We have built a rental portfolio, we’ve done this over a hundred times buying rental properties and we’ve employed what’s called the BRRRR method. So, we’ve talked about this in the past, The BRRRR Method is an acronym for buy, rehab, rent, refinance and repeat. So again that’s the BRRRR method in a nutshell and today we wanted to focus in on funding the purchase, right Dave?
David: That’s right.
Mike: Yeah, so funding the purchase. A lot of people and our target audience has always been newer investors. We kind of- we kind of dive in to some more advanced topics but a lot of new investors say well, I don’t have money, I can’t do this and that is a fallacy. That is a-
David: I like that you didn’t say a lie, cuz it’s not necessarily a lie, but it’s also a not a fact.
Mike: Well, it’s a mindset.
David: It’s a mindset, that’s exactly right.
Mike: It’s like that, what’s that Henry Ford saying? If you believe you can or you believe you can’t-
David: If you believe you can, you can. If you believe you can’t, you can’t.
Mike: Right, you’re correct. So again, if you think you can’t, you’re right, you absolutely can’t. If you think hey, you know what? Maybe I can, you absolutely can. So funding the purchase, let’s talk about what we- what we do or have done or can do, cuz we’ve done all these. Well, almost all these I haven’t done a lease option before but we’ll get to that when we get to it. So first and foremost, the easiest way to buy is cash. So again, we recognize that newer investors don’t necessarily have 30, 40, 100 thousand dollars sitting around to purchase a property with cash so that is totally understandable, but there are ways around that. We’ve got a funding partner, we’ll leave some links to some of our funding partners to- and we’ve got two of them that I really like right now.
Mike: Go put in there and one of them uses a combination of like your business name and your business credit to generate 0% interest via credit cards to purchase real estate, so again, it’s a way to do that again, you can come up with the cash. So cash is number one, cash is always king. What we use and I think our preferred method is using private lenders. So, we’re talking about purchasing properties and using private lenders. How does that work? It works very similar to when you purchase with a bank except there’s a lot less paperwork and a lot less red tape. When you purchase with a bank, they put a deed on the property so they record basically some paperwork against the property when you purchase it that states that they are owed money on this property so when title is run, someone else has to clear that deed. They need a deed of release on that property so they can then purchase it. So similar situation when you use a private lender, you are going to want to record that deed of trust against the property so that it is again, so that is recorded. So when you go to refinance this later with the bank, they see there is a loan or a lien on this property and that it needs to be paid off or released prior to the refinance or at the time of the refinance. So that is private funding. Where do you find private lenders? Well, I think we’ve got these a little bit backwards here in our previous attempts, the BRRRR method book that we went on these on or we spoke about these on, because I think hard money is kind of the next step up. It’s cash then you can get a hard money lender.
David: I agree.
Mike: In terms of ease of access. Why do I say that? So a hard money lender-
David: Well, as long as you can find like a line of credit as cash. You know it’s cash or cash alternatives that you immediately have access to, will be the first tier. Second would definitely be hard money and it’s not hard to get, it’s just based on a hard asset and then so on so forth. So yeah, I agree Mike.
Mike: Yeah so a hard money lender. Who’s a hard money lender? What’s a hard money lender? They are more of an institutional lender. Typically they’re somebody who is lending money as their profession or as their business and they’re going to charge pretty high interest rates, typically on short-term loans for real estate cuz again, it’s a hard money lender because it’s a hard asset such as real estate. So, that is hard money lending. How do you get private lenders? So the reason I kind of went down that path was after you’ve done a few deals with a hard money lender, you’re going to start to feel a lot more confident about hey, I am a real estate investor, I’ve done deals. You’re going to have a track record to show people that you know. So again, private lenders are typically people you know, the people that you either met through business dealings or people that are in your life who have money that again would be willing to lend it to make a good return on the money, on the loan that they lend you or the money that they lend you. So again, once you’ve established that comfort level, it’s a lot easier to approach family and friends and say hey, can I borrow $80,000 for this property? They’d be like what, you’re crazy, especially for your first deal. Whereas if you’ve done three or four, you say hey this is what I’m doing and you can walk them through the whole process and say listen, I buy the property then I fix it up and then I go to a bank to refinance it, here’s three properties I just bought that I did this with. If you want to make 10% on your money, let me know, I’d love to borrow money from you. Otherwise, I mean they’re paying you or I’m paying the hard money lender, it’s fine by me. So again, if you’ve got less to- when you are not begging for the money, when you aren’t desperate for it, again, it’s just a lot easier to ask for it I think. So again having the experience with a hard money lender just makes that conversation much easier if it’s somebody that you know personally, so that’s private lending. Some of our private lenders again are people that we’ve done business with in the past and you know, they’re in real estate themselves and they just have extra cash and they want to loan it out so we say okay great, can we borrow it? They say great, it’s a win-win. They want to make a chunk of change on the cash instead of having it sit in their savings account and we want to buy properties with it so it just makes it very very easy. Both of those are easier than getting a bank loan. So bank loans typically are going to take significantly longer to get so it’s gonna almost eliminate your ability to buy off-market deals. So again, that’s kinda why we like cash, hard money or private lenders because we can still move really quick on our closings which is important to us.
David: That’s right.
Mike: So bank funding, mentioned that. That’s kind of-
David: Did you talk about the rates in terms on each of those?
Mike: I haven’t.
Mike: Let’s talk about bank funding and then get into the rates.
Mike: If that works for you.
Mike: Yeah, so bank funding, you’re all familiar with this or you most likely are familiar with is in that you have purchased a property or you know of people who purchase properties and they get bank loans. It’s very very standard.
David: It’s probably 97 to 99% of how most real estate transactions occur.
Mike: Yeah, I would say- again, I would say of primary residences, almost 99%.
David: Yeah, exactly.
Mike: Of all real estate transactions, I don’t know.
David: Of all real estate, yeah maybe a little less but I mean the majority guys. If you are- if it’s a single-family home, yeah 95 plus percent are getting a bank loan.
Mike: But banks again, they require the most from you. They require the most documentation, they want to see two years income, W2’s, taxes, they want to see all sorts-
David: Debt to income ratio, credit scores.
Mike: Exactly. Thank you. They look at everything.
David: The big stuff.
Mike: So again, the hard money lenders, the private lenders, they’re not gonna look at all this stuff. They’re going to look more at the deal and more at again, private lenders maybe you a little bit as a person, that’s about it. So again, the bank is the one who’s going to give you the cheapest money. So, Dave you want to talk about rates, I’ll let you-
David: Yeah yeah, so the bank’s gonna be the cheapest like Mike said. Typically, you know, you can get a loan anywhere from 2 to 6% from a bank and it’s going to vary depending on a lot of things that I’m not going to get into, but just know that, you know, 2 or 3% loan if it’s a primary residence and it’s not an investment property isn’t crazy by any means. If it’s an investment property, you know, you’re typically looking at somewhere around the 4 to 6% range, but that’s still incredibly cheap guys. So 2 to 6% typically on your bank loans. If it’s your own cash, there’s no rate, it’s just an opportunity cost. If you’re using a line of credit, you’re again going to probably be closer to the 5 or 6% give or take to borrow from the bank, but when you’re using a line of credit, you’re actually pledging your own assets or something, right? Next would be your private lending and I’ve seen people get private loans as low as 8. Personally I’ve always paid 10 or 12 percent, so I’d say the range on your private’s going to be anywhere from 8 to 15%. Hard money is going to be a little bit more. I’d say your hard money is typically going to be closer to 14 or 16%. However, if you have a good relationship with your hard money lender, you might be able to get them down, so if I was to give you a spread on the hard money, you’re probably gonna be looking somewhere around 12 to 16% whereas private money is going to be somewhere between 8 and 12 % and bank financing is going to be between 2 and 6%. That’s it.
Mike: Okay, so you heard those percentages and bank rates sound amazing. We all want to borrow that money as much as we can, at least I know Dave and I do.
David: I do, trying to get my hands all over that money.
Mike: Yeah, 10 million, 20 million in debt baby, I want that. I want that as long it’s that good debt.
David: That’s right.
Mike: But you’re also hearing those interest rates at 8 to 16%, even- maybe even higher in some cases on-
David: The hard money.
Mike: Your hard money lenders and you think, well hell I’m not gonna pay somebody 16%. Well why not?
Mike: If you’re going to make $40,000 on a deal or if you’re going to create a cash flowing asset for yourself, add $30,000 in equity and $300 a month cash flow, why you care if you pay 15%?
David: Exactly, so here’s the thing the thing I wanted to mention just real quick Mike, and it goes with what you’re saying. It’s all about the term, right? So the loans that we had mentioned, you know, they’re 2 to 3%, those are typically 30-year terms, right? They’re typically fixed rate loans, they’re amortized over the same amount of time frame as the loan, so that’s something that everybody needs to be aware of. Whenever you’re dealing with lending, there is a term on the loan, which is basically when the money has to be paid back or is due, but then there’s also an amortization time frame and I referred to it as a term as well, but it’s different, their two different things. So when you’re talking about this cheap money, it’s typically a longer term loan and the amortization is going to match. It’s going to be you know, a 30 year amortization and a 30 year term. Well when you get into the hard money and private money sphere, you know, you’re going to be paying double if not triple if not quadruple the interest rate, but these people are lending on a much shorter term and I think that that has a lot to do with the rate, okay? Also, when using a private or hard money lender, you may not be required to have any skin in the game. Now you may, it’s all going to depend on the lender, but if you can get a homerun deal and as Mike kind of mentioned earlier, if you have a little bit of experience and you’ve had success doing this already, it’s going to be a lot less risky for the lender, right? For the person that’s lending to you, so you might be able to acquire a deal and even get enough money lent to you to rehab it and have none of your money in the game.
Mike: That is what we like.
David: That’s what we like but you’re going to have- it’s going to more risky for the lender so they’re of course going to want to charge that 12 or 14 or even 16 percent if that’s the case, all right? Now with the bank loan, you are almost always going to have to have skin in the game, all right? Typically it’s going to be 20% unless you’re using the BRRRR method and you- and you- and you know that there’s, you know, ways around it, but typically a bank’s going to want to seize 20% equity in the deal.
Mike: Yeah, we’re talking about like our initial purchase really.
David: Right, right.
Mike: So on your initial purchase, a hundred percent all the time.
David: Yeah, refi’s are a whole different ballpark.
Mike: You’re 90- yeah, you’re almost guaranteed to have to have 20% with a bank loan.
David: Unless you buy like with a VA loan or an FHA type of a product, these loans are going to allow you to bring less money in so you know, could be 5%, could be two and a half, 3% with FHA. I don’t know the exact figures however-
Mike: VA’s zero.
David: VA’s zero, right. However, they’re gonna have a lot of restrictions, you can’t buy, you can’t use these loans for investment properties unless you buy them as primary residence, live there for a short period of time and then you know, move out. I think that’d kind of be the only way to legally go about doing it. The other approach would be- or I’m sorry, the other downside to these cheaper loans is you know, if you’re not putting down at least 20% equity or have 20% skin in the game somehow, you’re gonna be required to have PMI which stands for private mortgage insurance and that insurance I believe is a government insurance agency, is it not Mike?
Mike: I don’t know [inaudible].
David: Kind of a little over my pay grade honestly, but you have to have it though is my point. If you don’t have 20% equity, you have to have private mortgage insurance which essentially ensures the bank or the lending party of you- against your default and the thing that I really hate about PMI is once you get to 20%, you can get it removed, but it’s up to the length- the borrower.
Mike: To request.
David: To request, so if you don’t know that your- that you’re all of a sudden at 20% and you don’t- nobody tells you which it’s not really in their best interest to tell you, you’re going to keep making this insurance payment which is so annoying.
Mike: I don’t remember what the rule is now but I think it’s they don’t have to tell you or to release it until 25%.
David: Oh wow.
Mike: Once you get to 25%, they have to drop it, something along those lines.
David: Then they force you? Okay, that’s news to me. That’s news to me.
Mike: There’s a very very specific- yeah again, but I just- I don’t like PMI, I think it’s- yeah, it benefits you zero [inaudible].
David: It benefits you zero, right and you have to pay for it too which is annoying.
David: But anyway, not to get too deep into the weeds here guys.
Mike: That is also more on your private or personal residences like we were talking about 90% of the time.
David: Yeah, with commercial loans so let’s talk about commercial loans cuz you know, we haven’t really touched on that yet, but when buying investment properties, banks are typically want to lend you commercially alright, which basically means that they’re going to have a little bit higher rate, not a ton, but a little bit higher rate, a little bit shorter term, okay? and the amortization may or may not line up with those terms, right? So typically on, you know, a personal residence, this is a primary residence for you and your family to live in, it’s going to be very easy to get a 30-year term with the 30-year amortization schedule and again, you may have 20% you may use you know FHA or VA or whatever you can and have little to no money in that deal, right? But again, they’re assuming you are going to be living in that house and there daily or weekly and maintaining it and keeping it up. Well, with commercial, they know you’re not living in that property. In fact, I don’t even think you can get a commercial loan on a residential piece of property, maybe you can but I’ve never heard of it.
Mike: On a personal residence, no.
David: Yeah, I’ve never heard of it. So the commercial loans are basically more designed for investors, therefore they have a little bit more risk. So they’re not going to want to lend you 30 years, it’s typically going to be a 20-year term. Now again, you may find a bank that does 25, you may find a bank that does 15 but typically it’s about 20 years. Amortization also 20 to 25 years. I mentioned the rate would be a little higher, now it’s not typically a ton higher but you’re looking at you know, a half of a point to a point basically in terms of your rate being a little bit higher. What am I missing Mike? That’s about it, isn’t it?
Mike: So there’s the period as well, so although it is amortized over a 20 to 25 year term-
David: Ooh yeah.
Mike: The period of the loan will probably be 3 to 5 years.
David: That- yeah, I missed that.
Mike: Meaning that after 3 years or 5 years or whatever the term of the loan is-
David: It’s a rate lock period is what they call it.
Mike: Kind of, its not-
David: But it comes- but the loan either has to renew or it becomes due.
Mike: Right. So I mean technically the way they’re all written though is the loan is due. Our lenders again, they don’t- and most lenders, they’re not trying to-
David: Well it’s not in their best interest.
Mike: Right, they don’t want to take the properties back, they would rather renew the loan at a new interest rate cuz again, especially at historically low interest rates, they’re expecting rates to go up at some point. I mean we all are, right? There’s no way they can keep going down. So again, but yeah so you’ve got a three to five-year, I guess that’s called the period, right? That’s what we’re gonna call it.
David: It’s just like the long-term, I believe.
Mike: The term, there we go. Yeah.
David: Yeah, but it can- and that’s where it’s a little confusing because you can have a loan that’s a 3-year loan, but it could be amortized over 20 years and that’s a little confusing for a lot of people I think.
Mike: And what it does is again, the longer the amortization period is going to decrease your monthly payment so that’s going to increase your cash flow and all these things can be slightly confusing, so let me- let’s try to summarize and wrap it up there.
Mike: Because I’ve got a great place to send people. If you go check out the freelandlordcourse.com, on every page, we put a rental property analyzer and what that does is it helps you analyze a rental property deal to determine whether or not it’s going to work as a BRRRR property for you to get all of your money back, you to hit your rental metrics and for you to leave $0 in the property or whatever your target metric is.
David: Great tool.
Mike: And you can adjust all those things, but it’s set up. You can adjust the loan term, you can adjust the interest rate, you can adjust everything you want, but we’ve got a video on how we use it and again, you can download that, it’s a Google file- Google, what is it called? sheet and again, when you click the link, it actually just downloads it to your own little Google Drive and you’ve got your own sheet that you get to manipulate, nobody sees that except for you. So that’s where I think I’d like to leave it guys, we’re talking about the BRRRR method, how to purchase properties or how to fund them and those were the different ways that we fund our purchases.
David: And you mentioned free landlord course?
Mike: Free landlord course.
David: All right, check it out guys, signing off.
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