How to Choose the Right Financing for Your First (or Next) Real Estate Deal

0:00I like breaking it down basically into three main loans that I see investors use. And obviously in each of these buckets, I'll call them, there's a 100 loan products, but the first bucket is just your full doc stuff. This is good for usually, you know, the guy who's got a W2 or the combined household income, husband, wife, something like that. U, but most importantly, they have the income to qualify for a loan, right? And if they have that, that's just a standard conventional. You know, pretty pretty straightforward.

0:30You qualify with your debt to income ratio. So, we can use a certain percentage of what you make to take on new debt. If you qualify there, I'd recommend continuing to use that loan until you run out of qualification because you typically get the best rates, right? U the problem that a lot of investors find themselves is that you buy yourself out of qualifying really quick, right? I think with my I think I used I think two or three conventional loans and then I had to go non-conventional when I was buying. I think about yeah I think it was about two or three.

1:04And the reason being for that is that whether you're, you know, I'm a business owner as well, obviously I own the one brokerage, right? I, you know, when you're not W2, you you you play the tax game, right? Your goal is to ride up as much as possible. And real estate allows you to do that in a very unique way, right? Now the downside is when you when you pull that lever, you're sure getting a lower taxable income, but you're offsetting your ability to qualify for a mortgage when you do that.

1:37Obviously, if you're decreasing your income, you report on tax returns, you have less income to qualify, right? So, to answer your question truly, the second bucket, you know, the first the full dock conventional realm being the first one, the second bucket is where most investors lie. If not immediately eventually right and that's the non-conventional realm that includes the most common product by far is the DSCR loan that stands for debt service coverage ratio and that's a lot of words to mean a very simple thing all you guys can just consider it the cash flow loan instead of having the prop I'm sorry instead of having the individual qualify with your debt to income it pivots all of that qualification just onto the property property.

2:22That's why investors love it because they don't have to qualify, right? And to give an example, if you have a property that rents for whatever $3,000 a month, you can get a mortgage payment up to $3,000 a month, pretty simple, right? As long as that property proves that it can generate enough money to pay for its debts. That would most almost assuredly be our most commonly offered product to investors just because of how easy it is. You don't have to do tax returns. You don't have to provide pay stubs.

2:53You don't have to provide any documentation of income. And a lot of people will say, "Oh my gosh, that sounds like a 2008 loan, right?" those of you who remember the the the ninja loans, no income, no job, right? And yes, a little bit. The difference being between this and 2008 is you could get that loan in 2008 with a 0% down payment. Can't do that now. DSCR loans will typically start with a minimum of 20% down required.

3:24That's the huge difference. The underwriting was the same, but they combined it with zero dollars down. And that's understandably where you get dangerous. Well, and a lot of those didn't cash flow too, right? I mean, also they didn't do the cash flow. That's correct. That's exactly right. 2008 was even worse where people in the full dock realm were just you you were photoshopping tax returns at that point adding a couple zeros to them to your income. And believe it or not fraud. Yeah.

3:55Yeah. Yeah. Just light little little pinch of fraud, right? Yeah, dude. 2008 was a crazy time. And then the I was going through the three brackets, conventional, the non-conventional realm, which basically just includes all the loans that have a different way you qualify, but there's still a qualification aspect. The last aspect is just hard money lending. We call it bridge debt in the industry. And that's where it's just it's called assetbased lending, which is just an equity play.

4:26You're basically your lender is basically acting as a partner with you. So that's the loans that fund burr projects, renovations, fix and flips. Those are loan products that all those guys use, but they're not long-term products. You know, that you want to put on like a 30-year fixed, right? They're short term, usually 12 to 18 months. You get in, you get out, try to avoid paying the higher interest. And as I went through those three buckets from conventional to hard money, the underwriting got easier, but the rates obviously in terms get worse, right?

4:57M that's that's like the whole mortgage industry wrapped up in little three minutes there. That's no that's super helpful to kind of visually compare products and start to think about where you know for the listener you know where they want to focus. Do you since you offer both the second bucket and the third bucket, if somebody wants to start with the burr model, obviously they're going to one of the Rs and the Burr model. It's buy, rehab, rent, buy, renovate, re I forget what all the Rs are.

5:32Buy, rehab, rent, and then refinance basically, and then repeat. So if you're going to refinance at some point, do you offer like a seamless transition into a DSCR loan? Do you have any products that kind of flow in from one loan to another or do you need to do two separate loans? Yeah, it is two separate loans. It's funny, I'm I'm actually creating a a burr loan right now. I'm having one of our investors who who will kind of preund the refinance, which will be very ideal because it'll prevent it'll kind of combine the B and the R into one, right?

6:05Right now we do do the full process and I'll give you an example. Very classic scenario, right? Somebody's, let's just say, buying a $300,000 house, going to do 50,000 of rena, right? We can finance the purchase and the rena up to a certain percentage based on your experience, right? The more you flip, the better leverage you get. U, let's say it's your first time, we'll do it with, you know, 20% down of the purchase and we'll finance 100% of rena. So, for this example, 300 purchase, you would have to put 60 60 grand down and we'll finance the 50,000 renovation as well.

6:42Okay. So what's your loan amount? 300 60 down is 240 purchase and 50k rena. So, 290k loan. That's what we're starting with. Okay. Let's say you go through your renovation. You have, you know, $50,000 in in in upgrades done. And let's say that $300,000 house is worth $425. Now, I don't know. I'm just shooting an example, right? And what we want to make sure we're protective of, and this is where a lot of what I started earlier, a lot of banks that only do hard money, they won't really care about the refinance because they don't do DSCR loans or they may not be good at that.

7:21So a hard money lender will get you into that hard money loan even if you can't get out, right? And this is a very important thing to remember because hard money loans are high rates. And let me explain what I mean by can't get out. Let's say now you're sitting, you know, at the end of your refinance and you were anticipating that house being worth 425 and let's say the market dropped a little bit during your flip, so now it's worth 400. -oh, we didn't plan for that, right? Typically, most lenders on a refinance, so we've done the buy, we've done the refi, the rehab, we've rented it, and now we're going to refinance, right?

8:00And we're sitting at $400,000 or $400,000 value of the project that you flipped. Most banks will go to around 75% loan to value on a refinance. Okay. Now these numbers still work out well, but 75% of 400,000 is 300,000, which is right close to the the number that we brought in. However, let's I don't know, just for sake of the argument, let's say it appraised at 350, right?

8:34350,000 times 75, just plugging that into my calculator, is 262. Numbers aside, that's less than what we owe. Remember, we took out a 290 loan, right? Why this is important to know is if you go to refinance that, you can't cover your debt. So, you now have a hard money loan that is usually has some, you know, maturity due. It's due right now. You have to pay it. That's usually within 12 to 18 months of when you get it.

9:05And there's not enough equity in the property to pay it off. So, really one of two options. You default or you bring in more money. And if you had a lender who knew how the DSCR loans worked after your renovation, you could have potentially avoided being in this scenario. And every single day I have people come to me and say, "Hey, Christian, I got a hard money loan six months ago and I'm trying to get out of it and I can't and I say, "Okay, let's read through your numbers. What did it appraise for?" 350.

9:36Oh, yeah. It doesn't work. What happened? I don't know. I I I targeted a bad property or it rents low or whatever. You know, and if if you were having the conversation with somebody that did the exit financing after the hard money loan, you would potentially have someone who would have protected you from getting that environment. And I all the time I'll kill deals. And that sounds wild because the lender's job is to like close deals, not kill them. But if I see a property that the borrower won't be able to refinance out of, I'll tell them, "Don't get the hard money loan." Right?

10:12All the time. I do it every single day. You know, hey, you need to find a different property. You know, there's nothing wrong with you. There's nothing wrong with your down payment, but this property won't debt service when you get out of it. I can't get the DSCR loan. You're not going to have enough equity there, right? And it can prevent you from getting in in a very hairy scenario, right? Yeah. Yeah, that's a great great point. A lot of people I think when they're starting out don't realize that the only reason you do a rehab is to build equity. So like a lot of people will like do a a burr just to try to get a good rental property that's at market value.

10:50And I'm like, well, just buy a property at market value if that's what you want. Don't don't go through the headache because it's going to be a pain in the ass to do this rehab. So just buy something at market rate, put the down payment down, and start cash flowing right away as opposed to doing the rehab. That that makes a lot of sense and that's great that you know I I I say to people all the time a lender can be your your best ally when you're investing because they've seen so many deals if they're telling you don't do this deal that's that's usually a sign that you should probably listen to.

11:21So that's awesome. What are so what what are I guess the the I want to focus on the DSCR loan because like you said that's the most popular product and one that my community uses all the time. What are your basic terms right now? I know that the rates have gone all over the place over the last just week here, but what what are you looking at? What can people expect as they're starting to look at properties? Yeah, rates are I mean right now we're we're recording this right in the middle of all the tariff madness, right?

11:56The big beautiful bill, right? However that's going to end up right now more than ever really, at least as long as I've been in the industry, it's important to stay on top of things. If you're running your numbers, I kid you not, guys, th this could be a huge difference from the day you get preapproved to even like 60 days later when you put a property in escrow. Most people will from the day they get preapproved to the day they actually close the loan.

12:28Most people take around 90 days. Usually 60 days to put a property in escrow and obviously 30 to close. Right now in those 60 days, a title wave could go right in the in the the economic environment we're in right now. And the reason I say that is that communication with your lender is more important now than ever. I always recommend it as you're searching, keep your rates up to date, keep your your projections and your proforma up to date. But with how volatile vol volatile volatility whatever how volatile the market is right now I your terms that you end up getting could be so different than what you expect and that could be the other way.

13:14It could be better than you expect. You have to keep your expectations in line with reality. So I just wanted to take an opportunity to say stay in touch with your loan officer if you're buying right now. But to answer the the the main part of your question, what can you expect with the DSCR loan? The the DSCR has two main challenges. The the first one obviously being the down payment. So, make sure that you have the down payment in line with with what you need to buy. And number two, it's it's how we calculate the rental income.

13:48A lot of I assume your viewers, you know, short-term rentals, mid-term rentals, rent by the room, a lot of people do a lot of different strategies, right? And here's where DSCR is very hard, and this even ties into the first question you asked me. How do I how do I stay up to date with all these with the conventional realm? There's, most of you have probably heard of it. There's Fanny May and Freddy Mack, which basically are these huge, you know, government sponsored entities that have determined the rules of lending in the conventional space.

14:22They have determined what debt to income you can go up to, what your FICO score needs to be, how much of a down payment you need, the the whole shebang. They have all the math and there's like 1,800 pages of Fanny May guidelines. I've read each one, unfortunately. But in the DSCR world, there's no Fanny May. And this is what people forget. They think there's like one DSCR loan. There's not. There's hundreds of them. There's some that take short-term rentals.

14:53There's others that don't. There's some that allow for 15% down. There's others that don't. There's some that allow rural properties, some that don't. There's some that allow log cabins, others that don't. There's some that allow tiny homes, others, I can go on forever, right? The the challenge that you that you land in though is that you will hear that certain things are acceptable on DSCR loans, and it's not wrong, but they're not all allowable on the same loan.

15:25For instance, you can't put 15% down on a short-term rental on a rural property that's a log home that has an ADU, right? That's on a I don't know, fill in the blanks. Even though I could find a lender that each of those things are acceptable, there's nobody who takes all of them, right? So the DSCR loan is uniquely challenging in that you hear advice that is cherrypicked and you can't use all of it at the same time.

15:57Which is why a broker is incredibly important. Being able to navigate these based on the loan product that you you know that you're you're needing to close your loan. Now, if you have a good one that can kind of navigate the waters with you, then the expectation is is clean, right? A 30-year fixed. So, getting back to the initial part of your question, what can you expect? 30-year fixed, they typically come with some format of a prepayment penalty. That's anywhere from zero to five years. Closer out you get to five, the better your rate.

16:30The closer you get to zero, the the worse your rate. Sweet spots two to three years. Rates right now, I don't even know how valuable this is because they could change next week. But rates are in like the low to mid7s right now, maybe creeping up a little bit into the upper sevens on the average 30-year fixed. And they require on average 20% down. And I'll end with my last point on the DSCR loan is how we calculate rental income. I explained that the only real requirement underwriting wise of the loan is that you need enough rent to cover the mortgage.

17:07And that is true. However, the question becomes, how do I calculate rent? Let's say you're buying a property that's vacant. Is the rent zero? Right? And the answer is no. We have three main ways of calculating a rent across all of our lenders. The first one is if a tenants in the property and you're inheriting them, that's what we use. Easy, right? They have a signed lease, it gets transferred to you. Cool.

17:38The second is if it's vacant, we can give you credit with the market rent for a long-term rental. So, that's what does the market provide here for a 12-month lease, right? 3,3500 a month, whatever. How do we determine that? It's done by the appraiser, right? When we send an appraiser out to evaluate the the the value of the property to ensure you're buying it for market value, we also ask him to evaluate the rent. And that's what we use. The third one is short-term rentals. And this is where we get creative.

18:10We can use kind of an algorithm of AirDNA and you know, market calculations of daily rate and occupancy. And for sake of time, I won't go into the algorithm because there's there's a lot of different levers that you can pull in it, but just know that we have a unique ability to credit you with the projected short-term rental income. Whereas probably 80% of DSCR lenders can't. So, be careful to make sure that, you know, if you're buying a short-term rental, work with a lender that can give you credit for short-term rental income.

18:43And everything else that I mentioned, the rural aspects, the a manufactured home, a log home, you know, whatever. We can lend on each of those scenarios. Just know the more of them that you stack together, the less likely it is you are to find funding. Feel like that was a monologue, but that's what you can expect in DSL. It's a monologue.