Posted Thursday, July 6th, 2023 by Enterprise Property Management
We discuss the importance of financing in real estate investment and provide advice to investors about why proper financing is essential to ensure profitability and the success of an investment property. A knowledgeable mortgage officer will be the key to finding the right financing options based on the investment goals. It is essential to prepare a detailed plan that considers cash flow, rate of return, and desired outcome, to establish a focused goal for selecting properties as an investment. Working with a property manager who can identify properties that are likely to generate a profit and can help by weeding out problematic properties; a property manager helps save time and effort for buyers.
Aaron Ivey
0:00:00 – Hello, and welcome back to the Behind the Curtain podcast. My name is Aaron Ivey. Today, Joe Garner joins me to discuss short-term and long-term investment financing options and shows us how a good loan officer can pair a future property purchase with the best financing. We will talk paperwork, interest rates, flexibility of various loan types, and why it is important to have an investment plan in place prior to purchasing investment real estate. So listen in as Joe and I walk through how selecting the right financing option can set you up for success. Joe, how are you?
Jo Garner
0:00:43 – I am doing fantastic, Aaron.
Aaron Ivey
0:00:45 – I love it.
Jo Garner
0:00:46 – Talking about our favorite topic.
Aaron Ivey
0:00:48 – I know, yeah, real estate, you know, it’s funny, I avoided plane conversations, you know, on an airplane this weekend. I was traveling with my daughter and thankfully what I’ve learned is that if I want to talk to somebody about real estate and when they say, what do you do for a living, I’ll say, oh, I’m a realtor or I’m a broker and they’ll say, oh, that’s incredible. And then if I don’t want to talk about sales.
Jo Garner
0:01:18 – The exciting part of it.
Aaron Ivey
0:01:21 – Yeah, yeah. And it is exciting. You had actually said something right before we started recording about how people need to do everything they can to make sure that their initial purchase is a success. That’s right. There’s so much gain, there’s so much ground that real estate investors can cover and so much profit that they can make off of purchasing the property the process initially before purchasing the property. Right, right. And I think you’re such a crucial part of that.
Jo Garner
0:01:44 – I’m excited about real estate Aaron as you know I am an investor as well as in the mortgage business so I’m a big proponent of buying real estate right and buying it often.
Aaron Ivey
0:02:01 – Amen! I totally agree and we have investors that they have either that philosophy or they have sort of a one or two per year philosophy. And so just depending where they are at in their investment lifespan, that’s kind of what they choose to do or how quickly they choose to buy. Specifically last week was very interesting. We had several homeowners that have chosen to transfer property management over to our management company, which is great. I wanted to just briefly talk about how the lending atmosphere is right now. Like, there has been so much change in the market over the last 18 months. I know that’s a very long period of time, but it seems that in the last quarter, at least three, four months, that things have sort of calmed down a little bit. At least that’s the way that I see it as a realtor. So I was just curious if you’re seeing things pretty much the same way and kind of what you thought is around the bend, what can we expect?
Jo Garner
0:02:51 – From the mortgage desk, I can say that it is cyclical. You’ll have periods of home prices popping up, like we saw in March and April, over 1% per month home prices went up month over month in March and April. It appears that in May, home prices appear to have dropped. So is that a correction? I don’t know if that’s just a correction we’re seeing and hopefully we’ll see it go up more in the summer before you know during our hot season. As a general rule, Erin, the home prices tend to go up over time. So I’ve always taken a view that real estate is a long-term investment. It’s a good investment, it’s a solid investment if you hold it over time.
Aaron Ivey
0:03:41 – Yeah, I totally agree and there are so many articles that are out there showing the value growth in real estate over the course of decades. So definitely if we’re talking about, you know, even in terms of one decade, right, so many of my investors, they want to purchase properties and they want to hold them for ten years. That’s their goal. Right. And if they can accelerate the payoff of that property, they can have a paid off property within 10 years. And then they have, you know, an asset that they could sell for its value, depending on how the market is, or they could borrow against it. And so there’s so many things that you can do with a property where you owe little to nothing. I agree with you on the long term aspect of it. And so it’s funny that you brought that up. I’m actually seeing a little bit of a drop in the flip game, right? So people that are fixing, purchasing, fixing, and then just immediately flipping, say within a one year timeframe. Right. Are you seeing that as well?
Jo Garner
0:04:34 – I don’t do a lot of mortgages on fix and flip. My clientele, Aaron, are normally investors who are gonna buy and hold because I’m doing a long-term mortgage on it. So you’re seeing that more so than what I would see. I’m seeing investors come in. A big trend is buy it, fix it up, refinance it on a permanent loan, and then make the profit, you know, over time on the positive cash flow coming in on that property. I’m seeing that and just people deciding, hey, I want to get in the rental game, and just buying a home with traditional 20% down or 15% down investment for a 30-year fixed rate. Those are the two camps. You know people doing low document type loans for investment where they don’t have to show a lot of income they just use the income on the lease. I see that. Those are the three camps that I mainly see come across my desk.
Aaron Ivey
0:05:31 – Yeah, well I think we see the same thing in general in the real estate market. The flip game usually from my perspective comes from the webuyhouses.com type, you know, signs that are on every street corner in Memphis. You know, those people are really looking to take advantage of people that absolutely have to sell that want cash offers and usually people will take less, you know, for their property if it’s in cash and usually the people that are selling to these organizations have not kept up with their home maintenance. So there’s a lot more for these investors to do when they actually acquire these properties. So they’re able to go in, they’re able to create an amount of profit or build profit into the flip. And of course since they do this for a living, their flips are very clearly designed when it comes to the type of materials that they use or the vendors, the painters, the plumbers that they use instead of the property. So they’ve already pre-negotiated, you know, fees for different things, whether it’s materials or service. So that is a money-making thing.
Jo Garner
0:06:36 – Absolutely.
Aaron Ivey
0:06:37 – Yeah, so, you know, that part of the flip industry is still going on. I get calls every week, definitely, sometimes two or three times a week from investors who want to get into flipping houses. So again, just with the very basic metrics of how Memphis works, the cost of living, the cost of construction, you can flip properties in Memphis still. And a lot of people are using hard money for flips.
Jo Garner
0:07:02 – They are, yes. I was just talking with a hard money lender last week and he came and spoke to one of our networking groups and there is money to be made in Memphis. It’s, you know, of course I’m biased. I live in Memphis, but I also work mortgages all over the country. And Memphis is, in my opinion, the best place to buy real estate if you want to make money.
Aaron Ivey
0:07:22 – You know, and we were talking about that too right before we hit record. You know, Memphis has got such a phenomenally low cost of living. Now, granted, people work hard here.
Jo Garner
0:07:33 – Right.
Aaron Ivey
0:07:33 – Nobody lives here for free, and nobody lives here without showing some effort and some intention to make money. When investors ask me, what are the type of people that live in Memphis, what I tell them is, these are people that wanna go to work every day, they wanna come home every night, spend time with their family or their friends, and then get up and do the same thing again tomorrow. People in Memphis do not like a whole lot of interruption with their day-to-day, week-to-week, year-to-year life. And a cool thing about rental property which I know you own as well yes is that when you look back at some of your tenants who have been in your house is the longest these are tenants who just want to live their lives and they want a good landlord that’s going to take care of them, and that’s it they almost want to act as if that is the home that they own and as a landlord you actually want them to feel like it’s their home. So I guess it’s really difficult to give long-term insight as to where you, I say long-term, short-term over the next quarter as to where you see interest rates going. But right now, would you see us at being in a strong lending environment, a sort of a weaker lending environment, or somewhere in between?
Jo Garner
0:08:44 – Well it depends on what type of loan you’re talking about. In the traditional world, you know, like your Fannie Mae, Freddie Mac, conventional loans, FHAs, lenders are becoming more restrictive. They are pulling in the belt, if you will. But on the non-traditional side, where a lot of investors live, and that’s the products that a lot of investors will use, I’m actually seeing it loosen up. Yes, they’re opening up the door and expanding their criteria to bring in more investors into the mortgage market.
Aaron Ivey
0:09:21 – Okay, that’s really cool, and I would imagine that people, I mean if you, if anybody looks at the stock market in 2023, right? Let’s just say 2023, okay? They’re gonna see very little return in, say, the Dow Jones. I mean it has just been so anemic, right? And so a lot of investors are just waiting for there to be a turn or a change in the Dow and they’re not seeing it. There’s this change in the Dow. And so, you know, for the smart day trader, they’re going to be able to make some money. But for like the long-term mutual fund holder, might be a little bit less of a return. And so these investors that have cash, they’re definitely looking to put that cash to work.
Jo Garner
0:10:02 – Well, of course, you’re talking to me, and I’m all about rental property. I think you’re going to buy it. You’re going to buy it right. You’re going to hold it. You’re going to make money on it month over month. It is one of the best investments I have ever made in real estate. You got to buy it right. You’ve got to get the right mortgage on it. That’s where I come in, is making sure that that mortgage is going to really work for you for the time that you plan on having that house.
Aaron Ivey
0:10:30 – Yeah, that is so important. A lot of our investors, you know, once they get a good rate, they just they don’t even think about mortgages ever again. I think that’s like kind of the best case scenario for investors to say, you know, I got that my three and a half percent and I’m just going to ride this thing until I sell it. But there are a lot of investors right now, obviously, that don’t have that opportunity. So I’m actually going to skip ahead just a little bit. And I want to talk a little bit more about the DSCR. Yes. And you were telling me that you had a case study right before we started and I was wondering if you could just let us know a little bit more about your investor who used the DSCR.
Jo Garner
0:11:05 – And I’m going to change his name. Okay.
Aaron Ivey
0:11:07 – Okay, go ahead.
Jo Garner
0:11:08 – I’m going to call him Daryl Dason and he owned his home, his own business and was doing well as a landlord on a couple houses down the street and At a real estate investor meeting a friend told him about an opportunity and I know you have multiple opportunities Aaron for people like Daryl, but to buy a home at a at a good price and You know make some money every month the house was already bringing in money So Daryl did the numbers and realized the deal was too good to pass up. But here was his challenge, and this is a common challenge with investors. Darrell had his own business. He had a really good accountant. A really good accountant makes it hard on a mortgage officer. He made a lot of money, controlled a lot of money, did not show a lot of net profit, which is what your traditional mortgage underwriters are looking for. That is the net profit and that’s what traditional loan underwriters are going to calculate for your income to find out whether you’re going to qualify or not. Well Darrell’s not going to qualify on a traditional mortgage. But not to be daunted, what we did, he had good credit, he had his 20% down and some reserve money. The house was in good shape, had a good title, so we switched him over to what we call a DSCR debt coverage type loan. How did this loan work for Darrell? Well, it did not require any of Darrell’s tax returns. It did not require Darrell to show up with a wheelbarrow full of documents on all of his other properties and all that stuff. He got to skip that step. All we asked for was a lease on the property that Darrell was buying. And we had to make sure that our PITI, our principal interest taxes and insurance payment, would not exceed the amount that Darrell was getting for rent, which was Darrell’s goal too, because Darrell was buying this to make money. But this way, Darrell could buy the house he wanted and start getting the rent income right away without having to wait another year to file another tax return which is what a traditional loan underwriter would tell him to do. Well let’s wait till next year when you got, you’re showing more net income. No, he bought it today with this program and this was the answer. This was the answer for Darrell to get the house and start making money on it today.
Aaron Ivey
0:13:39 – It sounds incredible. I think that there are a lot of investors out there, you and I have spoken to some investors recently that don’t have access to as much cash as they would like to on the down payment or have recently inherited property. And so they’re saying, well, I’ve inherited this property and I want to make those properties work for me. They’ve got some equity in those properties that they can pull out, you know, for cash for repairs, but they don’t want to spend all the cash that they have in those properties that they’ve inherited on the purchase of the property. So you have previously talked about some of the parameters about the DSCR and I’ll lead you into that. I think one of them is that for the DSCR loan, the property itself has to have a purchase price of $100,000.
Jo Garner
0:14:24 – Well, no, the loan amount actually has to be a hundred thousand.
Aaron Ivey
0:14:30 – I’m sorry, thank you for correcting me on that. So, a loan amount has to be $100,000.
Jo Garner
0:14:34 – Right, and if you’re at twenty percent down, you know, you’re looking at a price around 125, 130. Put twenty percent down, you’re going to have a loan amount of around a hundred. Now, I’m doing a package right now for an investor that’s got like eight properties. I’m doing five of those and because we’ve got such a large package now there are individual loans that are going to be closed there’s going to be individual closings on each one but the investor said you know we’ll let this investor do a couple that are maybe a little bit below a hundred maybe in the 90s because we’re doing so many of them for this client so they made an exception.
Aaron Ivey
0:15:12 – Okay, but you know as a good rule of thumb, the concept of 125 to 130 for the DSCR, that’s kind of a comfortable floor or foot. And so you said 20% down, the investors are going to be required to put 20% down. Correct. So there does need to be cash and reserves. One of the big questions that I have is, do they need to have reserves at all for the DSCR? Is that going to be something that people are going to check?
Jo Garner
0:15:39 – Not necessarily if they have really good credit it’s obvious they manage their finances well you don’t necessarily have to have cash reserves it really window dresses the file and if there’s anything that an underwriter might question in the file if you have reserves it’s grease on the cog it will help you get the deal done. The reserves are good cash is king still today. Can anything affect the interest rate that a borrower is going to be getting on this loan? Yes, your credit score is big. The higher your credit score, the lower your rate. If you have no experience as a landlord, a DSCR lender will usually maybe raise the rate a little bit, maybe a half a point or something or a quarter of a point, something like that. If you don’t have any experience, this is your first rodeo being a landlord. The price goes up a little bit if you’re buying as an LLC versus as an individual, it’s not the rate that goes up. Most of the time what they’ll do is they’ll add a half a point or a point or so onto the closing cost.
Aaron Ivey
0:16:45 – So is there kind of a prime rate for DSCRs? Does that ever change or is that different lenders or different?
Jo Garner
0:16:50 – Different lenders are different, Aaron. On that one, there are multiple lenders out there. I mean, I have a plethora of lenders that I can shop, if you will, and they’re all going to have different guidelines.
Aaron Ivey
0:17:04 – Got it. Okay, and then another question that I had was refinance. Like I have read through a couple of your case studies and I know that the end goal of the DSCR, that is not a long-term loan that you want to be holding on to it. It seems to have a purpose for acquiring the property and I would assume that there is a seasoning period for the DSCR or is there not?
Jo Garner
0:17:26 – It depends on the lender. I’ve got a lender right now that if you were going to buy the house, maybe, let me give you an example. A lot of my investors, in fact, the one I just referred to that’s refinancing five right now. They actually bought the house and they got private money to buy the house and fix it up. Now the house appraises for a whole lot more than it did obviously when they bought it and fixed it up. So the DSCR loan that we’re doing is actually using the after repaired value and you can do that even within three to six months. There’s not the 12-month seasoning that recently Fannie and Freddie put in place with traditional loans. Your DSCR companies, each one may have a different seasoning period, but one particular one that I like has about a couple of months, three months. They have to show where they did the repairs though, they did the renovation.
Aaron Ivey
0:18:21 – Yeah, and I mean, I can tell you, you know, as Boots on the Ground Property Management, property management that a rehab and renovation is going to take at least, oh my goodness, at least four months, sometimes six, just depending on what part of town you’re in and what kind of work you’re looking to get done and then how much you want to pay, right? Because the more you want to pay for a rehab, the faster it’s going to get done.
Jo Garner
0:18:40 – Right, well in this case, so they bought the house, they rehabbed it, and then they came back to me and said, can we do a cash out? Well, it really depends on how much the value is because on cash outs, a lot of these DSCR companies, they’re not gonna go over 70%. But on a rate term, they’ll go up to 80%. So on this case for this customer, they’re like, we don’t care about a bunch of cash out, we just want our money back so we can go do a whole nother group of investment properties. The rinse and repeat kind of thing, they’re going to buy it, renovate it, refinance it, rinse and repeat. Yeah. So that’s where I come in. And the DSCR loan is a 30-year fixed rate loan. You can keep it forever. The rate is a little higher on a DSCR loan than a traditional loan. So if rates should come back down again enough to where it makes sense, sure you could refinance out of that, get a lower interest rate, traditional loan if you can qualify. Traditional loans have a lot of guidelines though, Aaron. One of them is you can’t own more than 10 financed properties. Well, a lot of our investors own more than 10 financed properties. So that comes into play, whether you’re going to be able to refinance out of a non-traditional loan back into a traditional.
Aaron Ivey
0:19:56 – Got it. So in order for that to make sense to refinance the DSCR loan that you got initially, interest rates would need to come down. And that would be going towards a traditional loan, but can you refinance your DSCR for another DSCR?
Jo Garner
0:20:14 – Yes, yes you can.
Aaron Ivey
0:20:15 – Hey, I wanted to ask that question right there.
Jo Garner
0:20:16 – You win. You win.
Aaron Ivey
0:20:18 – I was looking for that question. So that’s really neat. So what would the circumstances be for somebody who wanted to refinance with another DSCR loan?
Jo Garner
0:20:26 – It would just be the same guidelines. If rates came down significantly and it made sense for them and it would increase their cash flow, then they would provide the lease. We would make sure that the PITI payment did not exceed the amount of the monthly lease. The house would have to still be in good shape, good title. We would still have to verify that they had equity in the home of at least, you know, the 20% equity position, 80% loan to value, and their credit score would have to still be good.
Aaron Ivey
0:20:58 – Well, thank you for taking the time to talk about Darryl’s story. I love the fact that Darryl, I think you said his name, last name was Dyson.
Jo Garner
0:21:04 – Well, I changed his name.
Aaron Ivey
0:21:05 – I know, but I love it. It’s the D-S-E-R, and we’re talking about Darryl.
Jo Garner
0:21:10 – Darryl Dyson, yeah.
Aaron Ivey
0:21:11 – So I will connect those for the rest of my life.
Jo Garner
0:21:13 – But you know, I do want to say before we go off the air here, the big plus for working with you, Aaron, is that you’ve been in property management for…
Aaron Ivey
0:21:22 – 22.
Jo Garner
0:21:23 – 22 years.
Aaron Ivey
0:21:24 – Yeah.
Jo Garner
0:21:25 – In this Memphis market, you have a front row seat on what properties will make money. So that, in my opinion, is what you offer your clients that is gold. And that is you know which properties are going to make money. You know which properties are going to be good because you’ve been in this business on the front row for 20 something years.
Aaron Ivey
0:21:48 – Well thank you for saying that. I think you’re exactly right. We’ve been able to watch what I call accessible investment properties, right? Because there are a lot of investment property opportunities that just aren’t there, right? There are houses that people would love to own, but they’re not accessible because they’re too expensive or maybe there are restrictions in those particular communities as to, you know, long-term rentals. So accessible real estate over the course of the last seven years or so, the accessible real estate has been in neighborhoods where I was a little less comfortable for a while. And now that we are moving into this more, I would call it a balanced economy. You’ve referred briefly to a correction that could be happening right now. Of course, we have to wait and see the data to know whether or not we have had a correction. That is allowing that accessible range of properties to move back into this middle income area, the middle income demographic. And as an investor, I know that you love that.
Jo Garner
0:22:44 – That part is very good.
Aaron Ivey
0:22:45 – I mean, if you can have a middle income home in a middle income neighborhood and have a middle-income tenant who’s responsible and everything, that could be your three to five-year tenant. And when I explain this to investors, they want that, like that’s the gold ring. And then what usually happens to a five-year tenant is sometimes they stay for seven, sometimes they stay for nine. And so now you’ve developed this relationship with somebody who’s embodying this investment that you’ve made and like what Enterprise Property Management has done for so many investors is we’ve helped them get peace of mind by having a relationship through my company to the tenant. And you have the resources to take care of it. Absolutely. My team right now is the best that I’ve ever had. Thank you so much for being on with us again. We’ve been with Jo Garner and you can find her at jogarner.com. She’s a licensed mortgage originator and the host of the iHeartRadio show, The Real Estate Mortgage Shop. I think you said you’re in the process of writing another book.
Jo Garner
0:23:44 – Yes.
Aaron Ivey
0:23:45 – I think that’s fantastic.
Jo Garner
0:23:46 – The current book is Choosing the Best Mortgage, the Quickest Way to the Life You Want.
Aaron Ivey
0:23:51 – Which is so purposeful and wonderful. And my name is Aaron Ivey. I’m the principal broker and owner of Enterprise Property Management and EPM Real Estate. You can find us by going to PropertyManagementMemphis.com or epmrealestate.com. You can always reach out to me by cell at 901-461-0905. We’ll look forward to hearing you soon.
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