The Wisconsin Investor
Each week, we bring you interviews with some of Wisconsin's top real estate investors who share their tips, tricks, and strategies that you can implement right away. This show is dedicated to helping Wisconsin real estate investors elevate their game. Along with interviews, I'll also dive into hot topics in solo episodes and feature experts from various real estate sectors across Wisconsin.
The Wisconsin Investor
Decoding The Fed and Interest Rates: Why Higher Mortgage Rates Are Good For Investors
What happens when the Federal Reserve makes a move, but the expected interest rate drop doesn't follow? Eric Workman from Renovo Financial joins us to untangle this complex financial web. We promise you'll gain a fresh perspective on why Fed actions don't always trickle down to consumer borrowing rates and how savvy real estate investors can benefit from a wider array of lending products. Eric reveals the behind-the-scenes mechanics of loan packaging for fixed-income investors, and how a diversified approach in financial options can be a game-changer in today's competitive market.
Economic challenges are aplenty, but those with a keen eye for strategy can still thrive. Together, Eric and I explore how seasoned investors adapt their acquisition tactics amidst fluctuating capital costs. We highlight the post-COVID market landscape, discussing the paradox of soaring asset values during a time of low borrowing costs. The dialogue underscores the critical importance of market timing and staying informed about economic trends to navigate the ever-changing real estate terrain effectively.
We also pivot to long-term investment strategies that consider both economic trends and personal growth. Eric and I dive into the Debt Service Coverage Ratio (DSCR) loans, how they work and who would be good candidates to utilize them. By sharing our own market experiences and the lessons learned from past misjudgments, we underline the value of mentorship and strategic purchasing. To connect with Eric and discuss working with them, you can go to https://renovofinancial.com/lending/workman/ or the best way to start the conversation is to email him at eric@renovofinancial.com.
Everybody, welcome back to another episode of the Wisconsin Investor Podcast. Today I have a very special guest, mr Eric Workman from Innovo Financial, and today we're going to dive into the economy here, post-election, which is a super hot topic. Everybody wants to know what's happening with real estate, what's going to happen with interest rates, all these other kind of things, and Eric has, and his team over at Renovo are all over this stuff. I get a weekly or bi-weekly report from them that talks about all the kind of macro economics as it relates to real estate, and so, eric, I'm excited to have you man. Welcome to the show.
Speaker 2:Thanks for having me, buddy. We've been looking forward to this one for a while.
Speaker 1:Yes, sir, yes sir. We've been kind of waiting to get Eric on here until the election because we knew there was going to be some changes. Probably, no matter what direction the results came in, there was going to be some changes in the environment. So what we're going to do today, eric, I want to dive in first and talk, you know, just economy. Let's talk about rates, let's talk about all that fun stuff that our listeners are looking to hear about, and then I want to get into what you guys do as well at Renewable Financial, because I know through the mastermind we belong to, you guys finance a lot of investors around the country. I know you guys have started working with some of the buyers that we have around here in Wisconsin and some of the Wisconsin folks as well, and so you guys have some great products.
Speaker 1:I want to make sure that the listeners here have you guys also on their radar as a possible lending option as well, because I'm a big supporter and a big believer for investors out there. You need to have a lot of buckets of money that you can dip into and everybody's products. You can pick and choose then for the deal what one makes the most sense for that particular deal or for your specific situation. But the more options, generally speaking, the more deals you can do. So we'll dive into that towards the end.
Speaker 1:But let's get into the juicy stuff right away for everybody. Tell us a little bit just in general. You know, post-election here this is going to drop about two weeks after the election has happened. So we're a little. You know we're about a week out from when this is going to drop. But tell me what you're seeing in the in the overall market since, since the election has happened and some of the hot topic being really interest rates, I think a lot of us thought they were going to potentially drop and we're we're seeing the opposite. Talk about what's happening with that.
Speaker 2:Yeah, it's good timing. I just got off of a pretty lengthy phone call with a very active client of ours and he was definitely in the camp that post-election and now post a second cut from the Fed that he was going to you know that would be calling with these great news of hey, rates have come down. You know let's go ahead and hit the bid on this refinance that you're looking at, et cetera, and it's the opposite.
Speaker 2:And what I told him is you know, look, this is great news as it relates to your portfolio. So if you are someone who owns assets, whether it's you know equities and you know you have a big 401k or a big stock portfolio or, like him, you've got a big real estate portfolio. Congratulations, the last couple of weeks have been really good for you. The flip side to that is the cost of acquisition of new assets and the cost of the capital that you need to require.
Speaker 2:Those new assets are also going up Because you just it's very rare that there's a moment in time where you get to have your cake and you get to eat it too right, where your asset values and everything that you own stays consistent or rises and the cost of the capital to buy more goes down. We saw that in the early I would say the middle stages of COVID, but let's all hope that that was a moment in time that we don't revisit anytime soon. Yeah for sure.
Speaker 1:I ain't going back to COVID, I'm not doing that. Yeah, let's not do that. Talk about, can you tell, can you explain to listeners? Because I think, even for me, being in this for a while, I don't sit and study rates or understand why the rate is doing one thing or the other. I'm probably like your investor. I'm like, oh cool, fed's cutting rates Awesome. At least I did early in the year and then I saw rates were ticking back up. After the half point cut we got an initial drop, I think, in interest rates and then they started to tick back up and I was like, wait a minute, this isn't making sense. They're predicting like five more Fed cuts. Maybe just enlighten the audience on why that is not necessarily the best barometer to look at is what the Fed's doing.
Speaker 2:Yeah Well, I think the simplest reason, or the simplest way to explain it, is that the audience doesn't borrow from the Fed.
Speaker 2:The audience is borrowing from financial institutions like ourselves, like banks, like other secondary market mortgage companies, that they get their money from somewhere.
Speaker 2:But then they turn around and they tend to package these loans up as investment vehicles and then sell them off to pension funds, life insurance companies, et cetera, who need, like fixed income type products for their own investment portfolio or for their annuity products or for their life insurance pants. And in order then for the end buyers of these pools and packages of loans to be achieving their goals on yield, they have to fix that to something right. A lot of these loans then get fixed to well, the safest thing that you can buy in the world is supposed to be a US treasury bond, right? And so if I'm one of these massive Wall Street investment companies, or if I'm a life insurance company or a pension fund and I am needing to achieve yield and the treasuries are below what I need, well, ok, I'm going to go out, I'm going to find some other product that I can buy, but I have to get some sort of premium over the top of the treasury for that.
Speaker 2:So if I'm going to buy a pool of single family rental loans spread out across the Midwest. The return on those loans needs to be some factor higher than the safest thing that I could buy, which would be a government treasury bond. And what you find is that most of then, the secondary market for loans like ours loans from banks, loans from other lending institutions are tied to the treasury plus some sort of spread above that. Sometimes you'll hear it's like the treasury plus 200, treasury plus 300, treasury plus 350, what have you? And that plus is that margin above what the treasury yield is that gives you what the rate is that you're paying for that particular loan.
Speaker 2:Okay, so I go through all that to say that the listeners of this podcast and the rest of the consumers in the world who are borrowing money, most of the time they're borrowing at a treasury amount plus some sort of yield, and what we've seen happen since the first Fed rate cut is that the treasuries have gone up almost an entire percent. So they were around 3.4, 3.5%, both the five and the 10-year treasury, about 60 days ago and as of right now they're at 4.3. So they're up 80 or 90 basis points almost an entire percentage point.
Speaker 2:Okay, and the the question for that, I guess, or what a lot of people are asking, is why? Why is that the case? So then you get into kind of some broader market economics, which is there's only so much capital in the world and everybody who has a dollar to invest is looking to get as as good of a return as they possibly can on that dollar. And right now the equity side of the of the ledger, you know, investing in stocks, investing in the overall s&p, investing in the nasdaq, etc. Is continuing to just absolutely rip. I mean, you're just seeing massive yields and returns investing in equities, and so in order for the sellers, the government of these treasury bonds, to compete from a yield standpoint, the prices on those bonds have to continue to go up.
Speaker 1:Got it. Yield standpoint the prices on those bonds have to continue to go up, got it? So interest rates are what I'm hearing here, what I took away from that, eric. It's less tied to the Fed rate and it's more tied to the stock market. So if stock market goes down, would it be safe to say that we could expect the interest rates to also go down?
Speaker 2:Generally speaking, yes.
Speaker 1:Okay, okay. So we, as real estate investors, want a bad stock market. It's what I'm taking away you know it um.
Speaker 2:So I am a. I'm a regular guest on a, on a chicago podcast that a couple of my clients, um are hosts yeah and I said on the last time I was on that show. I said I actually think what we all should hope for is for rates to stay high for a very long time okay um, and my, my rationale behind all of that is that the fed.
Speaker 2:The fed has a very you might've heard this before like they have a very blunt instrument. They have a very blunt tool. Like they don't have precision saws and screwdrivers and whatnot, they basically have a rock, and that rock is either beating the Fed rate down or propping it back up.
Speaker 1:Okay.
Speaker 2:And it's you know. Again, it's not a precision tool, it's a very blunt tool. So if rates stay where they are for quite some time, it means that the Fed doesn't have to lower the cost of capital in order for the economy to continue to do well, Right.
Speaker 2:So, the Fed's. The Fed's desire to lower its costs to lending institutions around the country who can borrow from the Fed is designed to help cheapen capital, to get more capital into the economy, to pick the economy back up when it's fallen. Right, if the economy continues to do and there's a lot of different parts of the economy other than the stock market but if inflation is low, if real wages are on the rise, if jobless reports continue to stay low and if the overall economy continues to grow, then the Fed shouldn't have to lower its rates.
Speaker 1:If the.
Speaker 2:Fed would lower its rates with that kind of economic tailwind. That's where you see the creation of more inflation in a lot of cases Okay. So I have been saying this now for most of the year, which is I hope that they don't cut rates. I hope that they don't, and not for any sort of political purpose or reason, but just I hope it's not necessary. I hope the economy's continuing to stand on its own two feet and not need the government's intervention with cheaper capital.
Speaker 1:Right. So what do you see in investors do, then, along those lines that are trying to get either acquire more assets and that sort of stuff. I mean, how are they viewing it with some of these people you're talking about that are doing high levels, high volume acquisitions at this point with a higher interest rate environment? How are they underwriting it? Are they just buying it cheaper? Are they looking at the deals differently or looking at a longer term picture? What are you hearing when you're having conversations with some of your investors out there that are still in acquisition mode?
Speaker 2:Yeah, it's becoming an input. The cost of the capital is an input in the expense assumptions and not to dissimilar whenever lumber was going crazy or drywall was way high, you had you, you just you had to factor it in into the overall economics of the deal.
Speaker 1:um and in a lot of cases.
Speaker 2:Yeah, it means you have to buy it better. Um, you know, I have some of my, some of my best as in most experienced, highest credit, most liquid customers. They're out like they're doing direct mailers now you know because there is no all the low hanging fruit is gone.
Speaker 2:The good news, with all the low hanging fruit is gone, is that also a lot of the inexperienced competition is gone. Right, so you're not out there competing with a lot of newbie investors who are trying their hand at flipping for the first time. Right, so you know the, the, the competition pool is smaller, but the competition is at your level or better, and so what I'm finding is that the most experienced, highest quality borrowers that I have are working the hardest right now on acquisition on sources of acquisition, on negotiation and the acquisition, and they are factoring in that the cost of the capital is going to be what it is.
Speaker 2:If things stay good, then their after repair values or their projected sales numbers should hold or grow, but also if they're planning on keeping it. You know they're underwriting to today's rates. They're not underwriting to. They're not underwriting to, you know, these hopeful lower future rates.
Speaker 1:Yeah for sure. You know what was interesting, eric, when you were talking earlier about the cost of drywall and the cost of the materials and that sort of stuff. I just think what's? And correct me if I'm wrong. I mean you know way more about economics than I do, but what I'm hearing when you say that is there's always levers you can pull right and so like, if the economy's good and inflation is down in theory.
Speaker 1:So your cost of capital may go up, but your cost of rehab may come down, and so it's just. It's just playing with these different numbers. It's not good or bad, it just is what it is and you just kind of factor it in on at the time you're projecting, acquire it, and you just being on top. It sounds like just being on top of what costs are for all the different levers is really an important thing when when you're underwriting these deals and just making adjustments. But, like you said, if the economy is good, then those ARVs should be generally higher, and so, again, it's not good or bad, it just is what it is and you just got to underwrite it for what the economy is telling you.
Speaker 2:Yeah, if the economy is good, then asset value should be stable or rising. Then asset value should be stable or rising.
Speaker 1:Americans should be working.
Speaker 2:So rent should be good. Their wages should be growing. So when you own assets, like the idea of them holding their value and the idea of the residency you're going to have in your assets, having better jobs, more disposable income, those types of things that's good for everyone. It's. It's great. I mean it's great. Yes, it's great for the country as a whole. It's great for the economy, it's great for people who own assets.
Speaker 1:Yeah.
Speaker 2:And so would it be nice if you owned a bunch of assets and they ripped and the value of them went up and then all of a sudden you were able to refinance at much lower rates. Yeah, that would be amazing, but you would have to. You know that's timing the market in a way that very few people in history have ever been able to do Right history I've ever been able to do. Also, what I caution folks against is if rates right now for commercial property and whether that's a portfolio of single family homes or a 20 unit apartment building if rates are around 7% right now, okay, that's what they're at. If they drop to four and a half or 5%, the value of your buildings have gone down. It's just, it's a very rare economic circumstance that would have the value of your assets staying where they're at and the cost of the capital really dropping.
Speaker 1:And that's like what you were talking about. We had kind of the anomaly during COVID right when that seemed to happen. Cost of capital was like at all time lows, but values skyrocketed.
Speaker 2:It was like a really weird time period when you pump whatever it was four, six, $8 trillion of cash into the economy and lower the costs of borrowing from the government. Have this you have this moment in time where, um, a lot of cash running around the system, but I mean, we saw what happened with that, right like it eventually funnels its way into uh, it funnels its way into the folks in the country who own assets, and whether those are stocks or whether those are, whether that's real estate, the values of all those went way up and then inflation came along behind it and then the cost of borrowing came along behind that. So you know, we're like, we're at the end of that wave and the hope is that it's relatively smooth sailing here for quite some time. That's the hope, yep.
Speaker 1:Yep, well, I think this is already. Hopefully, our audience is getting some awesome nuggets out of this already, because I talked to so many investors and everybody talks interest rates right, like that's the thing. Oh, interest rates are so high I can't make any of these deals work. What you're describing here is it's not good or bad or anything. It's just it's good If the economy is good. If you're, if you're a buy and hold investor or a flipper, because if people have money and their jobs, their jobs are safe, their wages are going up, they can afford to buy houses. Right, same thing, yeah, tenant on the tenant. Base Theoretically, base theoretically. What I would assume is, if the economy is going really well, rents should increase. Then you should be able to push rents and be able to get higher rents, so-.
Speaker 2:Yeah, affordability should rise.
Speaker 1:Right. So once you're locked into your payment, okay cool, as long as, depending on what balloon payment you have on that loan, if those rents go up, your payment's still the same, but your rents are going up. So, year after year, your appreciation should increase, your net worth should increase by debt pay down and appreciation, and you should be getting an increase in cashflow as the economy continues to stay chugging along. So we don't want bad stock. We don't want bad stock. I don't.
Speaker 2:I don't, I don't, and you know, I, one of the one of the things that I think has helped me be um at least relatable in this role is that I, I have bought, renovated and sold uh, you know hundreds of properties myself.
Speaker 1:Nice.
Speaker 2:And I own a bunch of real estate myself, and so I know exactly what uh what my borrowers are going through. I've lived the same issues and problems. I'm living some of them currently, but I don't want the economy to crash. I don't want the properties that I own that are valued probably as high as they've ever been, to lose 30%. I mean, what good is that Right?
Speaker 1:Just so you can buy cheaper ones.
Speaker 2:I guess, I guess. But, um, you know I better. I better stack up a bunch of cash now and buy nothing. Yeah, um, waiting for that day to come where everything that I own is worth 30% less, just so that I can then take this cash and go buy something else, but like I don't less, just so that I can then take this cash and go buy something else. But like I don't, I don't want to hope for that.
Speaker 2:Um to be to be candid, like my business partner and I own, for the real estate that I own, we were pretty certain Number one Hillary was going to win in 2016. And then there was going to be a recession and we pulled back on buying from, you know, 16 to 19. And boy were we wrong in both accounts. And now we look back at the opportunities that we passed on at that time and it's just like gosh, what, what could we? I mean what, what would our portfolio look like today? Or what you know, where would it be now? Yeah, so I think for a lot of the listeners out there, there's two things. We have a sign being made for our office that it's kind of our motto. It's making money is hard right, making money is hard.
Speaker 2:And very few places is it as hard as in real estate. Right, I say it all the time. The equation is incredibly simple buy for x, put in y. Now it's worth z.
Speaker 2:Congratulations, you've made a profit the equation is simple, the execution is very difficult. Yeah, um, and that you just understand. Sometimes the cost of capital is going to be up. Sometimes the cost of labor is going to be up. Sometimes the cost of material is going to be up. Sometimes the cost of labor is going to be up. Sometimes the cost of material is going to be up, but over time and over an extended period of time.
Speaker 2:Real estate is the safest and best way to generate wealth that's existed in this country for hundreds of years, and having some mentorship with folks who have been in real estate for a decade or two longer than you, who have seen whether it be 17, 18, 19% interest rates, or who you know went through the crash in 08, 2010 or what have you, and just comparing the longevity of their portfolio to where your goals are and realizing that this is not a get-rich-quick business at all, I think would help a lot of folks who are thinking I can't make this work. It's like no, you can make it work. You got to buy it better, you got to buy your materials better, you got to lock in your trades better or something. It's just going to be harder, but, yes, you can make it work.
Speaker 1:Yeah, there's the old saying and this is kind of cliche but the best time to plant the tree was 20 years ago. The second best time is today. Right, I was literally thinking about that. Yesterday, our internet in cell phone went out, which, by the way, that's a whole nother episode. It's like when your electricity goes out and you don't realize how much you rely on electricity. The same thing you don't have cell phone or internet. I'm like, oh, I'll go look up the weather. Nope, can't do that, I'll go do that. So I did yard work yesterday and I was out and I was looking at a tree we planted three years ago.
Speaker 1:And that motto came into my mind of, like, thinking about having conversations with some of the investors I've been having who are sitting on the sidelines waiting for the economy to crash, waiting for that perfect time to go buy real estate, and they've been doing that since 2016,. Man, like, since I got into this, I keep hearing the same people wow, it's too hot right now. I got to wait for the prices to come down, like. You know what, like you just said, between 16 and 19,. You thought that let's sit on the sidelines and wait, and you know, you're shooting yourself in the foot. Do you know, are you familiar with Barry Habib? Have you heard of him or are you familiar with his, his work?
Speaker 2:The name sounds familiar, but I'm not super familiar with it.
Speaker 1:He spoke at the mastermind that we're in it's Collective Genius in last December and I took some of his slides and I put a little thing together and one of the slides that stuck out to me was what you described, eric, was just the average appreciation on real estate over the last since, like the 1940s, real estate's lost, I think, six years out of the 76 year period that he showed, and four of those years were from 08 to 2012. And four of those years were from 08 to 2012. So you think about the track record of real estate, as you mentioned, how safe it is. You're doing pretty good Now, even appreciation.
Speaker 1:You talked about the treasury and how some people say that's the safest investment out there. When you mentioned it's at 4.3 or something like that, I think you said if you look at average appreciation over time and real estate, you're probably at least at 4% to 5% across the country, and that's not factoring in debt pay down from your tenants either along that same period. So you're getting the appreciation at a treasury safety level, plus you're getting the debt pay down, creating that wealth cone and that spread of debt worth. So that's awesome, yeah.
Speaker 2:The difference, though, is that you know, anybody out there who owns rental real estate knows that it's it's work.
Speaker 1:Yeah, it's not. Yeah, it's not treasury passive. Yeah, exactly, Touche, Touche. Well, let's let's transition. Man, that was great. I I think there's there was a ton of nuggets in there and hopefully you guys got a lot out of this listening to Eric. Let's talk a little bit about Renovo and what you guys do on the financing side of things, because this is another challenge for a lot of people is just finding quality lenders that they can work with on acquiring real estate or refinancing or whatever the case is that they're in. So talk a little bit about Renovo. Tell us a little bit about who's an ideal client for you guys, any type of loan programs that you think would be beneficial for those that are tuning in today.
Speaker 2:Yeah for sure. So Renovo, we started here in Chicago in 2013. So this is our no, that's not right 2011. So this is our 13th year. August was 13 years in business.
Speaker 2:Okay, started off as a local hard money fix and flip lender right 3 and 13, 4 and 14, you know exit points, what have you? But we have some extraordinary leadership. You know Daniel well, kevin, the other co-founder they have really stewarded this business through a very interesting decade plus of real estate and just overall economy and capital markets etc. So we kicked around the first four or five years just kind of steadily growing here locally, um, just growing in the client base that we had and, and you know, bringing in different investment partners into the business. That would lower our cost of capital so that we could be a little bit more competitive in the overall landscape.
Speaker 2:Um, and then it was, uh, around I think, 2019, 2019 that some larger scale Wall Street investment companies started to take, started to look into our slice of the overall lending world. The size of the market for what we provide is hundreds of billions of dollars a year. Wow, and I think for a long time Wall Street kind of you know, just looked away from it. You know we were non-traditional. You know hard money, you know just these almost like pejoratives, like when you hear of the way that we were described, and it was at that time that a couple of larger scale investment companies took a look at us.
Speaker 2:We did some partnerships with them that then opened up our product suite from just being able to finance, you know, short term fix and flip loans to also then being able to get into some spec new construction and really what I think opened the gates for us was getting into being able to do long-term loans as well. So we had a lot of clients who were buying property, fixing it up, intending to keep it. They've got it leased out. It's time to pay us off. What do they do know? And so we're spending a lot of time in 2017, 2018, early 2019. You know setting up relationships with local banks and guaranteed rate and you know quicken loans and those kind of places to try to feed them.
Speaker 2:You know loans to for, you know, long-term rental loans yeah and it was around that time that the DSCR product started to kind of make some waves and a big company called Neuberger Berman we formed a partnership with. They kind of became the balance sheet that we were able to originate a lot of these loans onto and then they were able to get them sold off into the secondary market.
Speaker 2:So that was a big pillar, I would say, in our growth. But then, candidly, 2020 came around and the manner in which we had ourselves financed as a company you know we had the capital that we had set up was fixed and it was long-term okay. And the other private lenders across the country that were roughly our size at the time, a lot of them were financed on the equivalent of a, of a credit card, of, like your dad's credit card, and he could just take it back okay, so covet hits um and a lot of those companies saw their lines of credit just shut off.
Speaker 2:So, in business today, out of business tomorrow, and that did not happen to us. Um, we certainly hit pause on some originations in early 2020 just to make sure that zombies weren't going to be crawling up the side of the Sears Tower.
Speaker 2:But we were still financed, we still had capital, we still had money to lend. We still had capital, we still had money to lend. Yeah, uh, and so we became um, we became known as, uh, as the port in the storm in some cases, but what we also did is we went out across the country and we found the best lenders at these shops that had had closed their doors and we gave them uh, we, you know, we brought them in under the reno umbrella and that was Boston, san Diego, tampa, raleigh, dallas, denver. We went from doing loans in Chicago in one year to doing loans in like 10 markets.
Speaker 2:The next Wow, and it was just an explosive opportunity for us that, you know it's difficult to say. Covid was good to us. Wow, nice. That's still a lot of states that are difficult to do business in, so we don't lend in some of those, but we're mostly coast to coast at this point. It's allowed us to continue to bring on just exceptional talent and also has opened the doors to more and more capital for us to expand what we can do for real estate investors and also be, as I think, aggressively priced as a company like ours can be. So our clients are professional real estate investors, and then you put a period.
Speaker 2:After that we lend money to real estate investors and that's it. We're not a bank. We don't want deposits, we don't want to finance your car, there's no credit cards that you need to sign up for, it's just. We have a myriad of short-term loans for you know, fix and flip, fix and rent, new construction, bridge loans, et cetera and then we've got a very robust long-term product 30-year loans at varying. We can do five, seven and 10-year arms. You can do 30-year fix for rental property that are fixed assets that you're wanting to cash flow for an extended period of time.
Speaker 1:Awesome. Can you just explain for those that are newer what's a bridge loan, eric Eric?
Speaker 2:it kind of depends. It's really like it's a short-term loan that you need for a property, for could be a variety of reasons, right, maybe you have a lot of equity in it but you're planning to sell it, but you need that money now. And so you know you do a bridge loan on that particular property to get some of that equity out to go use it to acquire a different asset. In some cases it's hey, I am going to buy this building, but for whatever reason, the bank or Fannie or Freddie or whoever I was going to use for this building, they need a different level of occupancy or they need a longer, they need at least a T3 or T6 in order to give me the type of financing I want on it. So we do a short-term acquisition loan on a big property those kinds of things.
Speaker 1:Cool yeah, I just wanted you to explain what that is for people who hear that term but have never had anybody explain it. Typically those are going to be a little higher interest points, that kind of thing, because it's a short-term period, correct.
Speaker 2:Yeah, short-term interest only.
Speaker 1:Yeah, now your 30-year products. Are those DSCR loans, or are those? They are all DSCR.
Speaker 2:All DSCR.
Speaker 1:Okay, can you explain for again same thing for those that have never heard what the heck is DSCR? Can you explain what that stands for and how somebody who was looking at a rental property what they need to look for if they want to engage with you guys potentially on seeing if you could be a financial financier I don't even know if that's a real word Financier.
Speaker 2:Financier, financier, I don't know. I always get confused. I'm like who's the mortgage or who's the mortgagee? I hate that Trying to fill those out.
Speaker 1:Yeah, I hate that. Could they just come up with two different terms, just tenant, landlord? Let's just go with that. There you go, yeah. Mortgage holder, mortgage giver there we go, right, reasonable.
Speaker 2:Yeah, so DSCR is an acronym for debt service coverage ratio. So DSCR is an acronym for debt service coverage ratio and, simply put it's we look at the property itself and say can the property support the debt that's being placed on it? In the conventional world, what you hear a lot about is DTI, or debt to income ratio, and you know that's for if I'm going to buy a home, can I afford the debt that I'm trying to take on on this particular asset?
Speaker 2:But since this isn't, since these aren't personal residences, since these are rental properties, the assets themselves generate income and can the income that the asset generates and can the expenses that it costs to maintain that asset can. Once those are paid, is there enough left over to pay the debt? And so we look primarily at the debt coverage of the asset and and then we look at, like the guarantor's credit and those credit and their experience and those types of things. But it's not the guarantor's, I don't really care what your tax returns say.
Speaker 1:Beautiful their income, their reporting and I'm glad you brought this up, eric, because there's a couple other DSCR products that have been then brought in and one of the big advantages I think is for those folks who maybe are self-employed, maybe that's a good person who doesn't show a lot of income potentially on their tax return, would that?
Speaker 2:be Sure who hasn't been self-employed for less than two years?
Speaker 1:Yeah.
Speaker 2:Or in a number of cases, like I mentioned, our borrowers are pros. They might already be filled up with. You know you can have 10, you know Fannie Freddie type loans to yourself personally.
Speaker 1:If you've been at this for a while.
Speaker 2:you might already have that, and so now you have to go commercial with the lending that you're using to continue to build the portfolio.
Speaker 1:Yeah, what's like a minimum requirement for you guys if you're looking at somebody lending to somebody on one of these DSCR loans, as far as what's the debt service coverage ratio minimum that you're looking at? And then any other factors, credit score or whatever else somebody should be aware of. And I'm sure it varies based on experience and some of those things.
Speaker 2:but yeah, I had a client who, well, she was referred to me by another client the other day and she's like well, what are your rates? And I said, well, you know, it's the five-year treasury plus the margin, and there are eight factors that go into that margin, right? And there are eight factors that go into that margin, right. It's property type and loan type and loan size and the borrower credit score and the property's debt coverage ratio and the prepayment penalty or not on the loan and whether it's cash out or not, et cetera. So there's all these factors that kind of go into it, cash out or not, et cetera.
Speaker 1:So there's all these factors that kind of go into it.
Speaker 2:but to be to simplify it, like on a single family home, it's got to cover at least a 1.0. So when you, when you take a look at the rent, the principal interest, taxes, insurance and association dues have to be less than or equal to the rent that you bring in on the property. Okay, so I got $1,000 of rent.
Speaker 1:My principal interest tax is insurance and if there is some kind of association fees it has to be $1,000 or less. That's right.
Speaker 2:Yeah, Once you get into multifamily, it goes up to $1.2. Um, once you get into multifamily, it goes up to 1.2. So, um, in that case that you were just saying there, like you know, $1,200 of rent, um, all of your expenses have to be a thousand or less.
Speaker 1:Yep, and what I think when you say expenses, what's interesting for the audience to understand you're not factoring in CapEx management um vacancy, any of that stuff. It's interesting for the audience to understand. You're not factoring in CapEx management vacancy, any of that stuff, it's just principal interest taxes we are when you get to five plus.
Speaker 2:So five plus units all that comes into play. A couple more acronyms, like on one to four unit properties, we go based on PIDIA, which is principal interest taxes, insurance and association dues. When you go over five plus, we get to what's called NOI, or net operating income, which is rent, minus vacancy taxes, insurance, capital expenditures, payroll, admin, admin turnover costs, repairs and maintenance, et cetera. So you layer all of that in and then you get to your NOI, and then your NOI has to be more than your principal of interest, or just your interest.
Speaker 1:If it's an interest only loan, okay, good to know. Good to know, very cool. Well, I love that you guys have these options for folks. Eric, if somebody wanted to work with you guys, what's the best way for them to get ahold of you? Is there a link that we can put in the show notes for folks? Is there your contact info we can throw in there? If somebody wanted to inquire about working with you guys and their specific situation, what's the best way for them to go about starting that conversation?
Speaker 2:Yeah, so my team um. It's renovofinancialcom backslash workman. Um, but what we can, we can put that link there in your notes. Um, and then emails. Honestly, the easiest the amount of phone calls and text messages that I get in a day can. It's very easy for them to get buried. Um, but my email address is Eric, it's.
Speaker 1:E R.
Speaker 2:I C at Renovo financialcom.
Speaker 1:Cool, Cool. We'll throw that in there as well. We always want to wrap this up with a little fun questionnaire as we get to here. I know you're a Chicago guy First of all. Are you a bears fan? God? No, oh, thank you.
Speaker 2:All right, good I was going to have to. Actually a big Packers fan. Love it Beautiful. What is? And I think I know the answer to this, but what is your favorite Wisconsin tradition or favorite place to visit in Wisconsin?
Speaker 1:Um, well, uh, I have two. Um, so I'm I'm going to be at Lambeau on Thanksgiving. Nice, I'll be there too. Oh, very cool. Let's connect that man.
Speaker 2:Let's do it. Um, yeah, the entire family is going up. Uh, parents, sister, her family, my family, et cetera, so it's going to be a great time. Um, I love getting up there and, but also I think that Wisconsin has the best public golf in the entire country, I would agree. Um, and so you know, I'm going to sand Valley in May. Um, I go to Kohler frequently. Um, I think Aaron Hills is just absolutely spectacular, so I love going up to Wisconsin to golf and, um, you know, I believe green and gold.
Speaker 1:So love it, buddy, love it. That's why I had you on, man. I knew, I knew there was something good in your soul and that's right there. You talk about the golf thing, though I I have a place in Florida as well and I go golfing down there and the courses are just terrible compared to up here. I mean, it's unbelievable. Like I'm dodging balls left and right, like they can. I almost have to wear a helmet out there sometimes Cause they run them so close together or they're just in terrible shape, or I'm like man, we got it made up here in Wisconsin with all the beauty that we have, naturally, and how well the courses are kept and just some of the options that we have for courses. So I'm going to.
Speaker 2:yeah, I mean, and that's not even like you know, like Lasagna is amazing and um, trying to think of some other other spots up there that I've been to, but just it's, it's fantastic In comparison to Chicago and it doesn't like Chicago and has got some amazing private golf, some of the best private golf in the world, but the public golf here is it's terrible in comparison to Wisconsin.
Speaker 1:Yeah, terrible, I love it, man. Another thing that Wisconsin wins on baby I love it, that's right.
Speaker 1:Yes, indeed, all right man. Well, eric, I appreciate you being on the show. Thank you guys all for checking this out. If you guys got some value out of this, please share it. If you guys are new to real estate investing or you just want to get started investing in Wisconsin and you haven't engaged with us yet, go to wisconsindiscountpropertiescom. No obligation. We would love to just help you get started in your journey. You can fill out the contact us form and somebody from our team will reach out and have a conversation with you and see if we can be of any assistance. Eric, again, it's been a blast man. All of you, we'll see you on the next show.
