Navigating the Mortgage Lending Landscape: Insights for Real Estate Investors
Real estate investing is an ever-evolving field, and understanding the mortgage lending landscape is crucial for any investor looking to expand their portfolio. In a recent podcast episode, Chris Knight, Mike Taylor, and their guest, Tevis Durbin, delved into the intricacies of mortgage lending, offering valuable insights for both novice and seasoned investors. Here, we'll explore the highlights of their conversation and how these insights can aid in making informed investment decisions.
Introduction: Setting the Stage
Chris Knight and Mike Taylor of Red Door Property Management welcomed Tevis Durbin, a specialist in mortgage lending for real estate investors, to their podcast. They set the stage for an insightful discussion on current market trends, lending options, and strategies to maximize real estate investments.
Meet the Expert: Tevis Durbin
Tevis Durbin brings a wealth of experience with over 25 years in the mortgage industry, focusing primarily on real estate investors. His insights into the evolving nature of mortgage products and the current lending landscape provide investors with the knowledge to navigate their options effectively.
Understanding the Mortgage Lending Landscape
Tevis discussed the significant shifts in the mortgage lending landscape post-COVID. The Midwest's lower cost of living attracts both primary homeowners and investors, leading to increased demand for rental properties. Tevis highlighted the importance of understanding market trends and the types of lending products available for investors, noting the diversity beyond the traditional Fannie Mae and Freddie Mac options.
Exploring DSCR Loans
A focal point of the discussion was the Debt Service Coverage Ratio (DSCR) loan. Tevis outlined how this product allows investors to bypass traditional income documentation, focusing instead on the income potential of the property itself. This product can be particularly useful for self-employed individuals or those looking to expand their portfolio quickly.
Lending Guidelines and Risk Assessment
Tevis emphasized the ongoing evolution of lending guidelines post-2008 financial crisis. While the market offers more flexibility and options today, understanding the balance of risk and reward remains crucial. Specifically, he discussed the differences in underwriting processes for owner-occupied versus investment properties, underscoring the importance of credit scores and cash reserves.
Financing Options for Diverse Investor Profiles
With a diverse range of investors in mind, Tevis explained the various financing options available. From small W2 employees to serious investors with larger portfolios, understanding options like traditional loans, DSCR loans, and the unique flex product is key to building a robust investment strategy.
Appraisal Processes and Loan-to-Value Considerations
Tevis shared insights into the appraisal process for investment properties, noting its similarities and differences compared to owner-occupied valuations. He explained the importance of understanding loan-to-value ratios and how they impact down payment requirements and borrowing ability.
Economic Considerations: Is Now the Right Time to Invest?
Addressing concerns about today's economic conditions, Tevis offered a balanced perspective. He stressed the importance of defining realistic expectations and reminded investors of the potential benefits of long-term property appreciation alongside cash flow considerations.
Creating a Roadmap for Investment Success
Finally, Tevis offered practical advice for those looking to embark on their real estate investment journey. He highlighted the importance of developing a team, understanding financial qualifications, and engaging with reliable mortgage lenders to set a strong foundation for success.
Conclusion: A Path Forward
This podcast episode with Tevis Durbin provided a comprehensive overview of mortgage lending options and market dynamics for real estate investors. By understanding these key concepts and strategies, investors can make informed decisions to effectively grow their portfolios in today's competitive environment. Whether you're just starting or looking to expand, staying informed and prepared is the key to successful real estate investment.
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Transcript Here
Podcast with Tevis Durbin
Summary
This podcast features Chris Knight and Mike Taylor from Red Door Property Management interviewing Tevis Durbin, a mortgage lending specialist from Supreme Lending. The discussion centers around mortgage lending for real estate investors, covering the current market landscape, financing options, and risk assessment. Durbin highlights the shift towards rental properties due to affordability issues and evolving lending products. They explore traditional loans, DSCR loans, and renovation loans, emphasizing the importance of cash flow, credit score, and LLC considerations for investors. The podcast aims to provide a comprehensive overview for both new and experienced real estate investors, offering advice on navigating the lending process and building a successful investment portfolio.
Introduction and Host Greetings[00:00:00] Chris Knight: Welcome back real estate investors. My name is Chris Knight. I'm the business development manager here with red door property management. And as you all know, I'm joined with Mike Taylor broker owner of red door property management. Mike, how are you? Excellent. Chris, how are you doing? I'm doing really good.
[00:00:15] Chris Knight: And today we have an amazing episode planned for everybody today.
Meet the Mortgage Specialist: Tevis Durbin
[00:00:18] Chris Knight: We are joined with special guest Tevis Durbin, who is a specialist with mortgage lending, specifically as it pertains to real estate investors. So I think you're going to get a tremendous amount out of today's episode. Let's let's find out a little bit more about Tevis.
[00:00:32] Chris Knight: Tevis, give us a little bit of background and what it is that you actually do.
[00:00:35] Tevis Durbin: Yeah. Thanks for having me. I appreciate it. Absolutely. Been in the business for about 25 years. Been with this company for 11 years and my wife and I worked together. I've been doing it for 18 years and still going strong on both sides of the business and personal.
[00:00:47] Tevis Durbin: But we really have honed in on the real estate investor side of the business over the last couple of years. We feel like that's a good niche for us. And the company's out of Texas been in business for 25 years. It's a private company and it's a good family run company. Good small, but yet still big to get it done.
[00:01:03] Tevis Durbin: We're in every state.
[00:01:04] Chris Knight: Yeah, that's great. That's great. And I'm sorry, did you mention the name of the company that you work for? Supreme Lending. That's Supreme Lending. Okay. But you're actually you're based out of.
[00:01:10] Tevis Durbin: Fishers. I've got two locations here. I've got one in Fishers and then one in Elkhart.
[00:01:14] Chris Knight: Okay. Okay.
Understanding the Mortgage Lending Landscape
[00:01:15] Chris Knight: And what it is that we're trying to achieve today. We're going to try to give really the full overview of the life cycle of trying to secure the loan, what documents you might need beforehand, before you even get into the consideration of meeting with someone like Tevin. And then of course the ins and outs of all the intricacies, all the different lending vehicles you might be able to secure.
[00:01:35] Chris Knight: Throughout the process, just to give you a little bit of insight before you even get the ball rolling. And then of course, if maybe you already have multiple investment properties and you're looking for other lending opportunities to expand your portfolio, we hope to get into a lot of that. In.
[00:01:49] Chris Knight: Why don't we just go ahead and jump right in. I've got a list of questions here, and I'm certain that we're going to go off topic every now and again. And I know Mike has a lot of insight being a very active real estate investor himself. He's going to want to dig into a lot of the intricacies as we get into each one of these questions.
[00:02:05] Chris Knight: So let's jump in. Can you give me an overview of the core, the current mortgage lending landscape for real estate investors, how much, or how little can a real estate investor put down what type of early lending options should a new investor be looking at let's start there.
[00:02:21] Chris Knight: And then I'd also like to get a brief overview of what you are seeing currently in the lending market. Are you seeing more investors coming in more than your individual single family home, but buyer just touch on each one of those topics if you can.
[00:02:34] Tevis Durbin: Yeah.
Current Market Trends and Investor Insights
[00:02:34] Tevis Durbin: So the market's really changed. I think COVID started everything with allowing people to work remotely.
[00:02:40] Tevis Durbin: And so with the Midwest, having a lower cost of living, we see, we were able to see a lot of people kind of migrate towards Indiana. And so not only from a primary standpoint, but I think investors tried to get ahead of that and try to buy some properties out here with our lower property taxes. And so I think it started then.
[00:02:59] Tevis Durbin: But then now you jump forward three or four years and you've got affordability issues that are really starting to take hold. So a lot of people are choosing to rent instead of buy. I think I saw a statistic the other day where they said the average age of the first time home buyers gone up from 30 to 38.
[00:03:16] Tevis Durbin: And so I think there is a huge demand for rental properties or rental needs. And I think that's really helped. The landscape from that side for real estate investors, so I think that's the first thing we're seeing more of that we had a meeting with the owner of the company at the end of last year to talk about what we wanted to do this year And he said he felt like our business would be anywhere from 10 to 20 Just on the real estate investor side.
[00:03:39] Tevis Durbin: Wow, he thinks that's a huge push. So we've started to position our products around that. And I would tell you, if you jump back to 2020, we really, most lenders only had one option for investors. It was just a Fannie or Freddie product and where you're putting 20 percent down back at that time.
[00:03:57] Tevis Durbin: And things have evolved since then with the additional products and people are getting creative with the less money down or other options for them.
[00:04:04] Mike Taylor: And maybe we could talk about that a little bit because I've been in real estate for 20 plus years and you've been doing this for a long time too.
Lending Guidelines and Risk Assessment
[00:04:10] Mike Taylor: So You know, I was in it back before the financial crisis, and there was, anybody could get a loan that could fog a mirror, they had the what, the no income, no asset loans, they call it the liar's loans and then we had and then we had the financial meltdown and then you couldn't get a loan for anything, and where are we with that?
[00:04:26] Mike Taylor: Are lending guidelines, have they loosened quite a bit? Are we in the middle there? Like where are we in terms of how loose is the lending environment right now?
[00:04:35] Tevis Durbin: Yeah, so we're definitely Starting to take some of the guardrails off for sure, but the big focus after 2008 was ability to repay That's all we heard was Can they afford it?
[00:04:49] Tevis Durbin: Can they repay it? Cause like you said, the liar's loan caused a lot of default and people came back and said you should have known. So the focus was on ability to repay more than anything. Now you're starting to see, because everybody's got so much equity in their properties right now, nobody's going into default, nobody's doing a short sale.
[00:05:07] Tevis Durbin: And so these loans are performing. And so you're starting to see an appetite to take on more risk. And We're not back to the liars loans, so to speak but you are starting to see a lot of non QM, non agency loans start to play back into a factor. And so they're just getting, they're starting to open up options, but what they're doing is they're still hedging their risk.
[00:05:28] Tevis Durbin: So they are charging maybe a little bit higher interest rate than they will. Once they, they get some data to see how these are performing.
[00:05:35] Chris Knight: Have you seen any key differences between the underwriting process for an owner occupied property versus a, an investor type loan?
[00:05:43] Tevis Durbin: Yeah, so they still, with owner occupied, they believe that even if we were to go into a recession or whether we're there now or not, they feel like people would always maintain where they live.
[00:05:53] Tevis Durbin: So therefore, you start to have that implied risk if you go into a second home or a rental. Of course. And yeah, we underwriting is tougher on that. I would tell you for a first time home buyer, that's going to live in a house. You've got programs where you can go as low as five 80. But when you're talking an investment property, If you're under 700, they really penalize you on rate and also they want more money down So they still have a much higher standard for that investor Market right now just because of the perceived risk if things were to go south.
[00:06:23] Tevis Durbin: Oh,
[00:06:23] Mike Taylor: that's gold Yeah, just to clarify you're talking about credit score, correct? Yes. I'm sorry credit score. Yeah. Yeah, so so credit score is of course Paramount importance. If you're an investor.
[00:06:32] Tevis Durbin: Yeah, it really is. Not that you can't get something done, but it's just there's a huge hit to rate closing costs money down if you're south of 700.
[00:06:40] Tevis Durbin: Yeah.
[00:06:40] Chris Knight: So are there specific factors that you would consider critical when assessing the risk aside from credit score? Of financing and investment?
[00:06:48] Tevis Durbin: Obviously, if they do have a current housing expense that they can document, that's huge. So it could be rent like if they're renting an apartment, that's okay.
[00:06:54] Tevis Durbin: But if they have a primary house, a mortgage, or something like that's huge. The other thing is cash, assets. That's just a huge not only do they have money down, but they also have what's called a reserve account. Those are very critical pieces of the puzzle.
Financing Options for Real Estate Investors
[00:07:08] Mike Taylor: What types of different financing options there are for and, we work with different types of investors.
[00:07:14] Mike Taylor: We work with, small investors who may You know, be high wage earners, get a w two job and want to, add one or two or three or four rental homes to their portfolio. And then we do also have kind of more serious investors who have a small portfolio or a small maybe apartment complex.
[00:07:31] Mike Taylor: Yeah. So maybe just go through. Kind of what options for different people and what you might recommend for different.
[00:07:38] Chris Knight: And before you get started there, just to give you a little bit more of an expanded idea of our typical investor is yeah. An overwhelming majority of them are W2 employees. And a lot of them in fact, are one of our most recent podcasts that we did was with one of our portfolio builders.
[00:07:54] Chris Knight: And he started by pulling out of his 401k. So any, even if you could speak to that, is that a good idea? Yeah. Is that necessary in some cases to generate the cash down in order to get into some of these loan options? I guess I would start, like I said,
[00:08:07] Tevis Durbin: if you jump back five, six, seven years, the standard option really was through Fannie and Freddie, whether you were W 2'd or self employed, you're putting 20 percent down, good credit score, you've got to have assets.
[00:08:19] Tevis Durbin: And what we've tried to do is evolve from that and open that more. It also used to be that you had You couldn't be someone that's never owned a house. So if I were living in an apartment and wanted to buy a rental property, that was tough six, seven years ago. And so they've started to relax that a little bit and companies are trying to create other products.
[00:08:40] Tevis Durbin: So we can go as little as 15 percent down. A lot of people think you have to do 20 because of a mortgage insurance. There's eight different mortgage insurance companies, but only one or two will offer mortgage insurance on a rental property. And if you put less than 20 percent down, you have that. So we can do as little as 15 percent down, which helps.
[00:08:57] Tevis Durbin: Chris, in regards to the question of pulling out of a 401k That's going to vary for every investor obviously in the timing of the market if we're at a high in the market and they want to pull out they can some clauses will allow you to pull out to buy a house and not penalize you there's a clause that maybe that needs to be a primary residence versus a rental So there's a lot of variables on that But you can't borrow that money so that the money down on an investment property can't be borrowed The other big distinction is understood When I'm buying my house that I want to live in, and say I'm a first time homebuyer, and my grandpa wants to give me the down payment, gift it to me.
[00:09:30] Tevis Durbin: You can do that on a primary, not on a rental. So they really want that to be your own money. They want to know that you've been able to save that money and are willing to invest that. And so that's a key distinction. But as far as some other products, as you start to build your real estate portfolio, sometimes you want to build that quicker than the guidelines will catch up with you.
[00:09:50] Tevis Durbin: So reporting that income on your tax returns.
Deep Dive into DSCR Loans
[00:09:53] Tevis Durbin: And so that's where you're starting to get into some hybrid products like a DSCR loan or a debt service coverage ratio. And so that allows people to continue to build that portfolio maybe quicker than guidelines would prefer it. The other thing is your traditional agency products.
[00:10:09] Tevis Durbin: They would limit you on the number of properties that you had so you could have up to 10 financed properties. As this segment of the business grows, there's people that are going to have more than that. And so you've got the opportunity to loosen those restrictions. And then I guess finally, as we hit this from a 30, 000 foot view.
[00:10:25] Tevis Durbin: People are getting creative and they want to know what about if I can close this in an LLC. And traditionally that was something you couldn't do. And now you're starting to see people open up to where you've got options of closing these, investing these within a limited liability corporation versus straight individual.
[00:10:41] Chris Knight: Okay. Yeah. You're buzzing right through a lot of these questions. So you're stealing a lot of my thunder, but it's really, this is awesome information. Go ahead, Mike,
[00:10:47] Mike Taylor: let me just back up. Cause I think, like I said, our audience is a pretty wide range. We've got some pretty experienced investors, but I think some people really just starting to get their feet wet too.
[00:10:55] Mike Taylor: So let me just back up. Cause I know that we've all been doing this for a long time and throwing around some jargon. So let me just back up and maybe just explain a couple of things. When we're talking about Freddie and Fannie, So then correct me if I'm wrong, but that is going to be your traditional loan that we've always thought of, right?
[00:11:11] Mike Taylor: More of an owner occupied home, but they do offer that for investors. And so that why when we say Freddie Fannie, that means you're going to get a traditional loan from like you guys, but eventually that's going to be sold off and Freddie and Fannie are going to back that loan. And so that's what just the more of the traditional loans.
[00:11:25] Tevis Durbin: Correct. Like when people hear conventional or standard, that's your bread and butter versus like FHA government loan. So yeah, that'd be Fannie and Freddie are the
[00:11:33] Chris Knight: agencies. And your down payments, I assume they're different between both products, right? So FHA, do you still require the 20 percent down?
[00:11:40] Tevis Durbin: No FHA is not for an investment property.
[00:11:42] Tevis Durbin: It's strictly primary and that's three and a half percent down.
[00:11:44] Mike Taylor: Okay. Yes. And then you start to get the most, the more kind of. Advanced like the, like you said, the DSCR, the debt service coverage rate, debt service coverage ratio. And that is basically where you don't necessarily look at you as an individual.
[00:12:01] Mike Taylor: You're more looking at the asset and how the asset can pay off the loan and service the debt on the loan, hence the name, right? The debt service coverage ratio. And there's a little bit of an equation on that to determine can this asset Substantiate the debt service on this loan,
[00:12:15] Tevis Durbin: right? Do you want we can expand on that?
Comparing Traditional and DSCR Loans
[00:12:17] Tevis Durbin: Do you want me to now or yeah? Go ahead. Let's just jump into it. Yeah, so what's nice about that is let's just say see if I'm w 2d or self employed because there's different variables But if I'm self employed And maybe I'm writing off with expenses, my income. So I'm showing a lower adjustable gross and maybe that's okay for my current environment.
[00:12:37] Tevis Durbin: But as I buy some of these additional properties, it puts some pressure on that. When I say on that, your debt to income ratio. So there's some higher standards as you buy investment properties. So what we offer with this debt service coverage ratio loan is We don't require any income documentation.
[00:12:53] Tevis Durbin: So we don't need to see tax returns. We don't need to see pay stubs. What we're looking at is strictly when you get an appraisal, we ask the appraiser to tell us what the market rent would be for that house, comparable homes. And then based off of that, what we're looking at is, will the market rent be greater than your payment on that?
[00:13:13] Tevis Durbin: That's that ratio that we're looking at. And if so you can buy it. So that's that. So I've got people that Employed and they would prefer not to show their taxes. Maybe they are writing things off. Maybe they've got maybe they just formed an LLC. Maybe they're switching the way they structure it.
[00:13:30] Tevis Durbin: Or I've got W 2 individuals where it's just, maybe I only qualify for a 150, 000 investment property, but I'd like to buy a 250, 000 property. So it allows that flexibility.
[00:13:42] Chris Knight: And is there any delay on when those payments are started on a DSCR? Do you only start making payments on that loan once you place the tenants?
[00:13:50] Chris Knight: No,
[00:13:51] Tevis Durbin: unfortunately it would. So you would still start making payments usually within 30, 45 days after closing, regardless of there's a tenant or not.
[00:13:59] Chris Knight: Okay.
[00:13:59] Mike Taylor: Okay. On these DSCR loans, is there a loan limit on them? Let's say I find a million dollar apartment complex.
[00:14:07] Tevis Durbin: So you do, so that could vary from lender to lender.
[00:14:10] Tevis Durbin: Most of them are going to follow They could follow agency guidelines, so you're going to be somewhere in that 760 range. There are some exceptions where you can go up to a million dollars. I'm not sure, off the top of my head if anybody is offering greater than a million dollars at that, at this time.
[00:14:26] Tevis Durbin: So that's the gap? That'd be my, yeah, I think so.
[00:14:27] Mike Taylor: Okay. And then what about the actual the math behind the coverage ratio? What are you guys looking at? Are you guys just looking at? Hey, here's the rent minus the taxes. Like what is the actual math behind you determining that ratio?
[00:14:39] Mike Taylor: And what is the ratio? Does it depend on the lender? Is it like, I've always heard like 1.
[00:14:45] Tevis Durbin: Yeah what you're, so it's even on an investment property, you do have the option of escrowing your taxes or insurance. Because if you put 20 percent down, you could decide to pay your own taxes and insurance or escrow.
[00:14:56] Tevis Durbin: Whether you do that or not, we're looking at the full housing expense. The principal, the interest, the taxes, the insurance. That's That's what we're looking at as far as the payment. And then on the market rent, the appraiser will usually give you a range. So based on comparable homes at this price, market rent could be 1500 to 2000.
[00:15:14] Tevis Durbin: And then they'll say, but we feel like it's 1, 900. So that's going to be the amount we use one to one ratios, the sweet spot. So if you are greater than 1. 25, so if you've got a higher market rent than your payment, you get a better rate. You get better financing terms. If you're South of that one to one ratio, you can still do it, but there might be, it's definitely going to be a higher rate, higher costs, things like that.
[00:15:40] Tevis Durbin: But then also they might require a. minimum loan amount greater. So a lot of DSCR loans will start off with a minimum loan amount of a hundred thousand, but if that ratio is less than one, they want it to be 250, 000. Usually the floor though is 70. 75. So anything less than that, very few lenders will offer.
[00:16:03] Mike Taylor: Is it just strictly that, that straight math? Like you said, the 1900s, we'll use that for example. Do they calculate anything for say vacancy or maintenance, or is it just, Hey, here's the market rent. Here's the payment. And that's your ratio.
[00:16:14] Tevis Durbin: That's it.
[00:16:14] Mike Taylor: Oh, it's pretty simple math.
[00:16:15] Tevis Durbin: Very simple.
[00:16:16] Mike Taylor: What kind of down payment options on these DSCR?
[00:16:18] Mike Taylor: Let's just stay with these DSCRs for a minute. Yeah, we'll just do a little bit of deep dive. What kind of down payments are you looking at on these DSCR type loans?
[00:16:25] Tevis Durbin: Usually 20%. Once again, and what I try to share with everybody is, There are different sweet spots So you could get much better terms if you did 25 percent down or 30 percent down But the minimum is usually going to be 20 percent down Okay, when
[00:16:39] Chris Knight: you say better terms
[00:16:40] Tevis Durbin: better rate better closing costs things like that Now the other thing that's very unique to these dscr loans are prepayment penalties So that's the other thing because in indiana very few loans Will allow you to charge a prepayment penalty but on these dscr loans You can and it's anywhere from one year to five And it's if I have a five year prepayment penalty and I refinance or sell in that fifth that first year It's five percent and then it drops down four three two one You get so much better favorable financing if you do a prepayment penalty and i'll share that but typically three three years if you do less than that It's a pretty hefty hit to the fee and the rates.
[00:17:22] Tevis Durbin: If you do five, it's not as much of an advantage, but we also, that's where you just really have to educate your investor. Are you thinking about refinancing this within that three year period? What's going to be the cost? What's your cashflow on it at that time? Are you looking to flip it and things like that?
[00:17:37] Tevis Durbin: But it's typically there's different options on that and we just walk them through the numbers.
[00:17:42] Chris Knight: Okay, so that's interesting. A lot of our investors are working the BRRRR method. So they are expecting to refinance the property shortly after placing a tenant. So are you saying that using one of these DSCR loans is probably not something that they're going to be looking for with that prepayment penalty?
[00:17:57] Chris Knight: You can still choose not to do one. Okay. It's
[00:17:59] Tevis Durbin: not a requirement. It just gives you better financing.
[00:18:01] Chris Knight: Gotcha.
[00:18:02] Tevis Durbin: And so typically what I might do is, if that's the case, then we wouldn't do one, but then when we refinance, we might. To try to lock in a better rate and better terms since they might be set now that they've got a tenant.
[00:18:14] Mike Taylor: Okay. All right. Understood. Is there a premium that an investor would pay for getting a DSCR loan versus a conventional? So are you going to pay a higher rate for the convenience of, because it sounds really convenient. It's a lot easier. I've done a DSCR loan and I've done a conventional.
[00:18:31] Mike Taylor: I'm self employed, so it makes the conventional a lot more difficult. I did a refi on a, Rental house. I did maybe I was maybe five years ago and it was, oh my God, it was brutal. I said, I'm never doing that again. And I haven't. So I've trended more towards the DSCR personally, out of convenience, being a self employed person.
[00:18:47] Mike Taylor: It's more convenient for me. It was like a part time job providing all the information. So anyway, back to my original question was, is there a premium that they that an investor will pay for a DSCR versus a conventional loan?
[00:18:57] Tevis Durbin: Yeah, absolutely. And it's really, it's not. It's not so much that it's a DSCR loan by title.
[00:19:03] Tevis Durbin: It's, you're paying a premium because you're showing the underwriter less cards. I'm not showing you my taxes. I'm not showing you any income. So therefore that's a perceived risk. And so there is a premium What I typically tell people is It just depends on where you're at in the process if you can put 20 down and in your income you can verify and document it you can typically get a better Option going the traditional route, right?
[00:19:30] Tevis Durbin: It's what if you can't And then that's so I never present just a DSCR unless I've got an investor that's all they've done and they know that's what they're looking for. If I've got a first time investor, I've got a tool will show these things side by side, four different options, and it's at a 30, 000 foot view so they can see payment rate out of pocket, and then they can always drill that down, but then they can see the differences.
[00:19:55] Tevis Durbin: The other thing I think we, we skipped over is on a traditional loan for an investment property, the agencies, Fannie and Freddie, they've imposed what's called loan level price adjusters, which I know we're getting a little bit deep, but I, but what that basically means is they're telling us as lenders, they're charging us.
[00:20:15] Tevis Durbin: Say roughly three points that we have to pass on to the consumer, so the closing costs are automatically higher on that Versus DSCR because it's a specialty product. You don't have to do that. So that's why there's less fees So there might be a premium on rate. So once again, it's just showing them side by side the different options And they can decide from their standpoint.
[00:20:38] Tevis Durbin: But as far as ease, it's definitely easier to get a DSCR loan closed because we're just not asking for all that additional documentation.
[00:20:45] Chris Knight: This side by side thing that you were referring to, is that something that changes as the loan products themselves change? And the reason I ask is I'd love to get my hands on something like that and maybe even have it display during the podcast or something like that.
[00:20:57] Tevis Durbin: Yeah. So what's nice, I do this for a first time in home buyers, but I also do it for investors because. It's a link and so I can update it and it can be live
[00:21:05] Chris Knight: Okay,
[00:21:05] Tevis Durbin: but what it'll show is those different options But then if they call me and they say hey tevis i'm looking at this property on delaware I'll pull it up I can pull up the property taxes what that costs and I can update all those options live So they can see how the impact how it changes
[00:21:19] Chris Knight: Okay So so i'll talk with devon here a little bit and i'll see if we can't get a link and maybe we can pop that down in the description when we post this video, but You so I want to get into a little bit of the nasty.
Interest Rates and Loan Products
[00:21:30] Chris Knight: We've talked about the interest rates and that's what a lot of people are talking about right now, especially investors as they're struggling at their ability to cash flow with current interest rates. I don't want to, I don't want to harp on it too much, but I do want to get into how are interest rates determined for investment properties versus mortgages that are for owner occupied.
[00:21:49] Tevis Durbin: So if, and once again, it can vary, but if we want to just generalize it, you basically, and obviously the more, Special the more special of the product, the higher that premium will be, but let's just say typically you're going to be about three quarters of a rate higher from a owner occupied to an investment property ballpark.
[00:22:14] Tevis Durbin: And then it could be higher on the DSCR loans. The other thing is, and I don't think we mentioned it, but on a DSCR loan. And I think we've got another product. You can do an interest only option. So that's where, as an investor, I try to share with them interest rate is important and I don't try to act like it's not, however, I'm really looking at cashflow.
[00:22:33] Tevis Durbin: So what if we, you're already putting 20 percent down. What if we looked at an interest only option to lower your payment? So you've got a bigger cashflow spread. And then we can go from there as an option.
Advanced Loan Options and Strategies
[00:22:45] Mike Taylor: Are you seeing two one, are you seeing, and then two, maybe you could talk about options that are available for both conventional and DSCR, but you mentioned interest only, but our arms available, so an adjustable rate mortgage, are you seeing those, are you recommending those and are they available on both products?
[00:23:03] Tevis Durbin: On at least with us on a traditional investment property loan, we don't offer an arm on our DSCR loan. We do. And we've got another, it's called our investment flex product. We do. Right now, because the yield curve is still a little bit inverted.
Understanding Short-Term and Long-Term Rates
[00:23:18] Tevis Durbin: So you've got short term rates are almost identical as long term rates as that flattens and gets back to more normalized market.
[00:23:26] Tevis Durbin: You'll see arms be very popular. And typically you won't, it's usually a seven year arm. So it's fixed for seven years and then it turns variable. There's also a 10 year arm option, but right now we're not doing any of those, even though we offer them, it's just not the, there's no advantage to it right now.
[00:23:44] Mike Taylor: Got it. Like the one month T bill is the same month as a 10 year T bill. So why would you buy a 10 year T bill, right? Exactly. Okay. That makes that makes sense.
Exploring Mortgage Options for Investors
[00:23:51] Mike Taylor: You mentioned that you, when present this to an investor or a home buyer, you give them four options.
[00:23:55] Mike Taylor: I think we've been talking about two. Are there two options that we want to, or you want to discuss?
[00:24:00] Tevis Durbin: Sure. We, so when we first started developing our products for investors, what we looked at is The traditional product, the closing costs were just outrageous, and that's because they were being pushed through from Fannie and Freddie to lenders.
[00:24:15] Tevis Durbin: So we created a product where we could almost do away with those, but we require 25 percent down instead of 20, but we almost are saving them that 3 percent hit. So they're putting more money down, but the out of pockets almost the same because they're not paying that additional closing costs.
[00:24:32] Mike Taylor: That 3 percent we're just, I know you just talked about it, but that is just on all investment properties coming from Fannie and Freddie. That's just getting pushed to the home buyer.
[00:24:39] Tevis Durbin: I would say I can speak on behalf of us and a lot of mortgage banks. You might have some retail channels that can absorb that, maybe a credit union or bank, but they are definitely pushing that down.
[00:24:49] Tevis Durbin: It's whether or not they can absorb it. Got it. So to be fair. So our first product we created was. How can we? Because when I talked to a lot of investors, they tell me, Tevis, man, you're beating me up. I got to put 20 percent down and your closing costs are just outrageous. I can't do it. I don't have any money for rehab or I don't have any money for the next property.
[00:25:09] Tevis Durbin: I buy. And so we went to the owner of the company said, Okay, what if they put 20 percent down? Five percent down more I granted that's still out of pocket, but we can cut the cost And so that's the first thing we created The next thing we created was the flex product and that's where it can get a little technical but like for instance What if you had a dscr loan where?
[00:25:28] Tevis Durbin: It was just in an area where the market rent couldn't support the payment a lot of times that meant you couldn't buy it then our flex product still gives them that option So we can do a coverage ratio You Less than one, less than 75 on that flex product. So we're just trying to there's, it's you see the damn cracking, you put your finger in one hole and another one pops up.
[00:25:47] Tevis Durbin: So we try to create another product, but so that's the four products are the standard. We've got one that if you put 25 percent down, you show your, all your documentation, it's a better rate, lower fees. We've got the flex product. That's a hybrid between that. And then the DSCR.
[00:26:02] Mike Taylor: Okay. So I was going to ask you, so if I'm a W2 employee, what product would you recommend to me?
[00:26:07] Mike Taylor: But I'm going to guess you're going to say it depends on the property and the cashflow situation.
[00:26:11] Tevis Durbin: And also what's your outlook? Are you going to buy one and you're done? Are you, what's your appetite? Are you looking to buy several? And what's your cashflow?
[00:26:17] Tevis Durbin: Are, and are we buying one that needs to be rehabbed or not? So once again all of that will go into it.
[00:26:23] Mike Taylor: Yeah. And we did touch on it, but I wanted to circle back on it because I don't think we explained it, you mentioned, so if I'm thinking if I'm a W 2 employee and I'm a highway journey or have my own house and I want to add like maybe two, three, four rental homes relatively in a quick fashion, we get those calls all the time, right?
[00:26:37] Mike Taylor: Hey, I need my portfolio. I want to have, five in the next two years. You mentioned it, but on a traditional conventional loan for an investor, there are debt to income ratio requirements where even if you are, Cash flow, even if it's positive cash flow, if it's not, if you haven't done it for a year and that cash flow isn't reported on your tax return the lenders, the conventional lenders won't count that as income to offset your debt payments.
[00:27:04] Mike Taylor: Is that correct? Yes. Okay. So that's when you may look at one of these other products. Yeah. Even though you could qualify but the payments are gonna start to add up on you quickly. Exactly. Okay. Okay.
Loan to Value and Appraisal Process
[00:27:15] Chris Knight: Alright, if we're ready, I want to get into the loan to value and the appraisal process.
[00:27:18] Chris Knight: Okay. How does the appraisal process differ for an investment property for your average owner occupied property? Is it different?
[00:27:24] Tevis Durbin: Yeah, so it can be, and especially if we're talking multi units, duplexes or even three or four units, but it, we're always going to want to see that rent component what can the, what's the market rent support, especially if we're trying to do a DSCR or something like that the cost can be about a hundred dollars more than your standard appraisal which will vary from lender, so you might be somewhere between that and then other than that, the appraiser is still going to value that property the same way they would any other.
[00:27:50] Tevis Durbin: They're just going to look at that rent schedule as well.
[00:27:53] Chris Knight: Okay. All right. And I know Mike, I know you had a big question here that we added regarding the down payment required following the loan amounts or the appraisal amount. So for example, securing a great deal on a home under the appraised value, can I put less than 20 percent down?
[00:28:07] Chris Knight: Do you want to expand into that? Yeah, no I know the answer to
[00:28:10] Mike Taylor: this, but I think we get this question a lot. Just cause we know it doesn't mean that they do. Yeah. And I think it's worth talking about. So let's just say, let's just use easy math for example, but let's just say I just get a killer deal on a house, right?
[00:28:20] Mike Taylor: Let's say it's valued at say one 50. Let's say I pick it up for whatever reason at 100, 000. Is that going, what would my down payment be? Is there any way that I could lessen that out of pocket because I was able to secure such a great deal?
[00:28:32] Tevis Durbin: Unfortunately, we have to go the lower of the two. Yeah, so it would be on that 100, 000.
[00:28:37] Tevis Durbin: So if you're putting 20 percent down, it would be based off of that.
[00:28:39] Mike Taylor: Okay, so it would be 20 percent of the 100, 000. Yeah, I knew that. And unfortunately,
[00:28:45] Tevis Durbin: yeah it's, but now what you're looking at is, and that's the other thing where on some of these products, if you want to refinance and either you've got two choices, when you refinance, do you want to pull cash out, get some of your money back, or are you just looking to drop the rate in term?
[00:29:01] Tevis Durbin: Most products, if you want to pull cash out, you've got to wait 12 months to go off that appraised value. There are a couple, like I said, DSCR and some others where you can at six months, Pull some of that cash out to try to get some of your investment back off that appraised value.
Rehabs, Refinancing, and the Brrrr Method
[00:29:15] Mike Taylor: I think maybe that's a great transition into talking about rehabs and the Burr Method and refinancing.
[00:29:21] Mike Taylor: Chris, do you got a, I don't know if you have a couple of questions, but
[00:29:24] Chris Knight: no, really just, I was going to let Tevis lead the way there. So let's say I'm a new investor. I have one rental property. Now I'm looking to refinance it to get into expanding my portfolio as quickly as possible. What does that look like?
[00:29:39] Chris Knight: So
[00:29:39] Tevis Durbin: as far as they're wanting to refinance and pull some money out of that first one to put down on the other?
[00:29:43] Mike Taylor: Maybe let's talk about two different scenarios. So one is I have a house and I want to pull some equity out. And then let's talk about maybe like a rehab. I'm going to go buy a house that I know is going to be a rehab, because I think that would be maybe two different products, I'm guessing.
[00:29:56] Tevis Durbin: For sure. So the first one, like I said, on your traditional loans, if you want to pull money out of a property that you've acquired, you have to wait 12 months to use the appraised value. Okay. On a DSCR loan, you could do that at six months. Now that can vary from lender to lender. So that's a way. So like in your previous example, if I had appraised for 150, I bought it at a hundred.
[00:30:17] Tevis Durbin: So maybe at that six month mark, I can go off an appraisal and try to get some of that cash back out. But you're still limited to about 80 to 75 percent of the loan to value. So there's really not a lot you can pull out in a short period of time, unless you rehab it, fix it up and the value is going to go.
[00:30:32] Tevis Durbin: The other question was on a rehab. So A lot of people have probably heard the term a 203k and it's a renovation loan and that specifically pertains to FHA and it's, if I'm a first time home, but not a first time home buyer, but if I want to buy a house I want to live in and I want to fix it up, that's what a 203k is.
[00:30:51] Tevis Durbin: Well, a lot of people ask what if. I don't want to live in it. Is there a product available for investors? And that's called a home style renovation loan. And what that will allow an investor to do is let's say I want to pick up a property for 150 And I want to put 50 in it. So what we'll do is we'll get an appraisal subject to Those renovations, and then we'll loan 85 percent off of that after improved value.
[00:31:16] Tevis Durbin: So we'll finance in the cost of buy and the repairs, and they can even finance in six months of the payments, because we know if you're rehabbing a house, you can't put a tenant in it. So we're going to let them, if they choose, they could roll anywhere from one to six months in that. So then they, so they're really just coming cashflow for the money down, but The rehab can be put in it and also the payment.
[00:31:36] Tevis Durbin: So that's really cool. It is now. And I tell a lot of investors and that's a product where there's no prepayment penalty on it because we know you're borrowing more day one than the house is worth and it's an investment property. So the rate and fees can be higher. So what we'll typically do is that's a lonely only hold for about six months.
[00:31:54] Tevis Durbin: And then we refinance it to get that lower rate and then maybe at that time we do an interest only we do whatever But it's a good alternative the one thing i'll throw out there because I get this question a lot Can I do the work myself? And that's where just too many things going on at one time So
[00:32:10] Mike Taylor: you don't have to tell me
[00:32:11] Tevis Durbin: I know.
[00:32:11] Tevis Durbin: Yeah, so we're like no we can't do that We were gonna have to get a contractor to do that and then go through it. So
[00:32:16] Mike Taylor: what is that? That sounds like an amazing product. Is that something that you guys keep in house or is that You
[00:32:21] Tevis Durbin: we'll keep it in house while the work's being done because, there's draws that are going out and stuff like that so they can get a little hairy, but then after that, it's a loan that we could retain it or we could have somebody else service it.
[00:32:31] Tevis Durbin: Okay.
[00:32:31] Mike Taylor: What does that do? Look like underwriting wise, like paperwork wise, is that a bear or is it just pretty simple working with a contractor, getting the estimates, supplying that to you? Is that a is that a pretty cumbersome process in terms of underwriting a loan like that?
[00:32:45] Tevis Durbin: There's two components to it. One, as far as from an investor's standpoint, we're going to underwrite that the same way we would other loans. So we're going to look at tax returns and things like that. From the appraisal standpoint, we're just going to underwrite it based off of those repairs being done.
[00:33:00] Tevis Durbin: So we are going to need a bid, and we're going to have to break down labor and materials so we can figure that out. But the part that can be cumbersome is we have to vet out that contractor. Because what we don't want to do is have one of your investors buy a house. And they've got 50, 000 for repairs and the contractor skates town after he gets that first advance.
[00:33:19] Tevis Durbin: So what we'll typically do is we'll vet out contractors in the area ahead of time. So then that way we don't have to do it. Once the process starts, you just re your investor would reach out to a contractor, they give them a bid and boom, we just move right through the process. But if you have to vet the contractor out, that can add an additional three weeks on to the processing time.
[00:33:39] Chris Knight: Good, good.
LLCs and Investment Properties
[00:33:40] Chris Knight: I'd like to get into a little bit of the LLCs. I think we're wrapping up to the tail end of this. We've got a lot of amazing information already out there, but one of the most common questions that I get all the time is should I open an LLC? If I do open an LLC today before acquiring an investment property, can I open that LLC today and come to you and then go ahead And take out a loan in that LLC and let's say I purchased the property under my name today and the lender options under my name, and then I want to transfer it into an LLC right after closing.
[00:34:11] Chris Knight: Would you suggest that? Is that a possibility? Is that a no? I've heard that there's immediate payoff if you want to, and Mike, help me with the terms here, but if you want to transfer to an LLC or you want to sell it, then you have I think it triggers the,
[00:34:22] Mike Taylor: technically, it triggers the due on sale clause, due on sale clause, I think.
[00:34:26] Mike Taylor: I know a lot of people do it, it's technically, you shouldn't so I don't know, maybe just thoughts on that. What are the no's there?
[00:34:30] Tevis Durbin: Yeah and it is a common question An LLC should they get one or not it from a lending standpoint? It's not so much a question for us to answer it's more of a liability You know if i've if me personally if i've got an investment property and somebody falls or gets hurt If they bring a lawsuit towards me, I don't want that to hit me personally So i'd have a limited liability corporation set up as an umbrella so it would hit that there's Your traditional products won't allow you to close a loan in an LLC name.
[00:34:58] Tevis Durbin: I guess we'll back up one step There's can I borrow in an LLC or can I vest it in an LLC? So most Residential lenders will tell you when we loan money it has to be to an individual So we're going to look at a social security number not a tax id so you're borrowing the money The question comes in next is can I vest it in an LLC?
[00:35:23] Tevis Durbin: Traditionally, what people would do is exactly what you were talking about, Chris. I would just close it in my name, mine and my wife's name, and then at the day after closing, I would quick claim deed it from myself into an LLC. It's one of those things, I think the best way for me to describe it is if you're driving on the interstate and you're doing 58 and a 55, could you get pulled over for that?
[00:35:45] Tevis Durbin: Thank you. You could do you get pulled over for that? No, so could a lender Call that note do? They could i've never seen it because a lot of times What people will do is they'll do that with a trust like i'll close a loan and then afterwards i'll deed it into my trust You know for estate purposes But you don't have to worry about that with a dscr and then also with our flex product You can actually the day you close we will vest it In an LLC and people get real confused because you're still signing All the documents at closing in your personal name But the stuff that gets recorded and that's public record is in an LLC, right?
[00:36:29] Tevis Durbin: And so that's what people will see when they pull up the deed or anything like that, but you're still signing as a person but it's vested as an LLC so you don't have to quit claim deed that after closing you can do that day one Gotcha, is that
[00:36:42] Mike Taylor: on all forms? Three so we have conventional which you technically can't do that And then on the other three products that we talked about is that the way that happens or is that just on the dscr ones?
[00:36:51] Tevis Durbin: On our investment flex product, you can do an llc and the dscr So your traditional ones you can't and that might not be the case for all lenders. But that's More times than not that is the case that on your traditional loans you have to vest it in an individual But on our flex and on our dscr The day you close, you can vest that in an LLC.
[00:37:11] Mike Taylor: Okay. So let me just summarize it just to make sure I understand. So on the flex and the DSCR, you can take title in an LLC. But then personally guarantee it with the bank for the loan product itself.
[00:37:23] Tevis Durbin: Yeah. Cause the flip side of that is, is if I truly do want to get a loan under my LLC, that's a commercial loan, not a residential loan.
[00:37:31] Tevis Durbin: And then they're, what they're really going to look at is they're going to look at the assets and the longevity of that LLC.
[00:37:38] Mike Taylor: Yeah.
[00:37:38] Tevis Durbin: So that's what they're but we're a residential lender, so we don't do commercial loans. But so that's why everything's in the personals. Okay. Social security number but investing is where most people get confused.
Economic Conditions and Investment Advice
[00:37:47] Chris Knight: Gotcha So there's also a lot of concerns about today's economic conditions probably no different than any other time I'm sure there's always something to panic about with it with the current market conditions, but with the current market conditions what's your personal advice? Do you think now's a good time to get into investment, with the current Loan vehicles that you currently have available or should they wait?
[00:38:07] Tevis Durbin: I think the first thing is defining reality I mean We'll have some investors call us And they want to buy an investment property and they want to cash flow to where they could quit their day job I want to cash flow seventy thousand dollars a year on this first problem. That's right. I get that all the time yeah, and I would love to do that too.
[00:38:24] Tevis Durbin: So I think it's defining reality and I think what you're seeing, we'll have investors come in and buy 10 properties within a quarter because they're what they look at it as I'm investing. I've got money in the market, and I'm pulling it from the market to real estate. And so there's two components there.
[00:38:42] Tevis Durbin: It's not just a cash flow. It's. That asset appreciate and I'm looking at that. Is it? Is it stable? Can it? Can it complement my portfolio that I've already got going? So that's one way to look at it. So you might not cash flow as much day one, but I also think you're seeing rents. Renewal rents are being able to go up at a higher rate than new rents in some regards It's different in each market But I think it's if you've got a long term investment on it If you are outlook on it If you also are looking at to complement something then it can be a great idea and I think because there's so many Buyers that are on the sidelines right now.
[00:39:21] Tevis Durbin: And you just got people that, that don't want to buy into, and I tell people, if you're not going to live in a house for three years, you shouldn't buy. You've got to have that time period. So we have so many people are wanting to rent right now. And so I think there's a huge opportunity for.
[00:39:34] Tevis Durbin: Investors. Yeah.
[00:39:35] Chris Knight: Okay. So it follows the rule. The best time to buy was 20 years ago. The second best time to buy is today. Yeah. I completely agree. So I'm glad that follows our advice. Otherwise we'd have to cut that right out of the podcast because if you said no, you should wait.
[00:39:48] Chris Knight: That's just not going to work. No, that's, that's great. I think we've covered a lot of the options that are available to new investors to expanding portfolio investors. Is there any other additional piece of advice that you might give someone looking to buy or invest in real estate?
[00:40:03] Tevis Durbin: What I try to do is, we've got a tool that will actually It's almost if you were to go to your investment advisor and say, I'm thinking about an ETF or I'm thinking about Bitcoin or I'm thinking about whatever your investment advisor is going to put together. Okay here's what you're looking at.
[00:40:19] Tevis Durbin: If you invest X and maybe you do it over the next five years, you stop. This is what your return will be. We have the exact same thing for. Investors for rental properties. We'll share with them. We almost treat it like it's the same thing. What will be our ROI? If you buy this property and this is your cash out of pocket, we're looking at what can we cashfl
