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
DSCR Loans & House Hacking: The Loopholes Banks Don’t Want You to Know!
Securing financing remains the biggest hurdle for most aspiring real estate investors. When traditional banks say "no," where do you turn? In this eye-opening conversation, mortgage expert Aaron Kramer reveals the financing secrets that have helped hundreds of investors build substantial portfolios, even without perfect credit or W2 income.
Aaron breaks down how house hacking creates a perfect entry point for beginners, allowing you to live in one unit of a duplex while tenants in the other help pay your mortgage. The financial magic happens when you learn about loan programs specifically designed for this strategy – VA loans offering 0% down for veterans, FHA loans requiring just 3.5% down, and conventional options starting at 5% down. Each option provides a legitimate path to property ownership with minimal cash investment.
The conversation takes a fascinating turn when Aaron explains DSCR (Debt Service Coverage Ratio) loans – a game-changing option for investors. These loans require no income verification, allow properties to be held in LLCs for liability protection, and offer 30-year fixed rates typically unavailable through traditional bank financing. For self-employed individuals or those with complex tax situations who've been shut out of conventional financing, this could be the breakthrough you've been searching for.
A compelling mathematical breakdown reveals why waiting for interest rates to drop might cost you more in the long run. The five-year equity difference between buying at today's rates versus potentially lower future rates amounts to just a few thousand dollars – negligible compared to the appreciation and wealth-building you'd miss by sitting on the sidelines. As Corey puts it, "Time in the market beats timing the market."
Ready to explore these financing options for yourself? Connect with Aaron through Executive Mortgage or reach out through Wisconsin Discount Properties to discuss your specific situation and get pointed toward the right financing solution for your real estate goals.
To get in touch with Aaron, head to www.executivemortgage.com. To get exclusive off market deals sent to you on a weekly basis, go to www.wisconsindiscountproperties.com and put your info in today!
Hey everybody, we are back with another episode of the Wisconsin Investor Podcast and I'm your host, corey Raymond. I've got another amazing guest, as I say every episode, because everybody I bring on here I'm bringing to you guys for a reason because they're bringing value, and we hope that you're getting the value by tuning into these episodes. But recently I've been doing some ads for our sponsor, wisconsin Discount Properties, and so I just wanted to talk about a deal that we recently had. I always bring these up, try to let you know what you're missing out on, so if you're sitting on the sidelines, hopefully this is motivation to get you in the game.
Speaker 1:Okay, so we had one on Roosevelt Street in Green Bay recently. Purchase price we put it out for was, I believe, 200,000. I don't remember what we advertised it for, but that's what it ended up going for ARV on this thing was 290. And the investor who bought it. We followed up with that investor and what they ended up doing was they did some light paint, some cleanup, that sort of thing. They're going to shoot for selling it for around that 240 to 250 range.
Speaker 1:So not a huge spread here by the time you factor out holding costs, closing costs, realtor commissions, et cetera, et cetera. Plus the work that they're going to do there, they may make $20,000 or $30,000. Still not bad. But when you factor it in what's going to be their profit per hour, they figure they're going to get about 10 hours into this thing. So about $2,000 to $3,000 per hour they're going to make on this deal. That's from underwriting it to purchasing it, to getting their cleaner and their painter in there, to listing it and going through that process A total of 10 hours. So if you're looking for deals like that and you're not on our buyers list, go to wisconsindiscountpropertiescom, plug your information in there and you'll start getting these deals sent to your inbox every Monday morning and hopefully we can help you accelerate your real estate investing goals With that. Let me introduce the man of the hour, mr Aaron Kramer. Aaron, how are you doing, sir?
Speaker 2:I'm good, Corey. Thanks for having me, man.
Speaker 1:Yeah, excited to have you, man. I've known you for quite a while now and tell everybody a little bit about your background. You're a mortgage broker. How'd you get into this mortgage game and how long you've been at this thing?
Speaker 2:Yeah, I've been in the mortgage business since 2018. Prior to that, I spent most of my professional career in the corporate world in transportation, and I was looking for to get out and do something different. The corporate world had kind of run its course and, as most of hopefully, the listeners know, tony Breuer with Good Faith Funding and I were mutual friends. We'd gone to college together and Tony's the one who actually got me into mortgage lending. So I've been chasing that dream ever since 2018. And it's just super satisfying. There's just nothing like helping someone get the keys to their first home or their vacation home or their first investment property. There's just no better feeling than that. So I've loved every step of it so far.
Speaker 1:Wow, You're a better man than me, Aaron. I don't know if you remember this, but I was probably Tony's protege right before you and I went through and got got licensed and did the whole thing and I remember us talking about that yeah and did the whole thing.
Speaker 1:And uh, I remember us talking about that, yeah, yeah. And I made it about three hours in the office with Tony and I was like this is not for me, I'm out of here, dude. I went through the whole thing, spent months, get licensed, did all the training, I started processing the loans and I was like I can't do this man. He's like are you serious? I'm like yeah, dude, I'm sorry I'm out of here. See you later. Yeah.
Speaker 2:I'm a numbers guy so it just kind of came natural to me. When you mix numbers and sales, it's just it's. It's what I like to do.
Speaker 1:Well, I'm glad that you're doing it and it's not me, because you're much better at it than I probably ever would have been for sure. Well, I wanted to bring you on here because, if you listen to the show, guys, I'm always talking about your two highest income producing activities in real estate are finding deals and finding money. Okay, aaron, here happens to have some products and some ideas around how to get you guys some money, and I think this is a really important topic because I literally I have this conversation, aaron, every day of the week with people who are wanting to get started in real estate. How do I do it? How do I get the money? Where do I get the money? And there's lots of options, but you've got a few different tools that I think would be really helpful. Let's start with the house hack. Let's talk about A what is a house hack? And B. Let's talk about how does someone go about getting into a property and doing this strategy.
Speaker 2:Yeah house hack really is for initial investors. If they're looking to get involved in real estate investing, one of the things that they can do is house hack, which is basically buying a duplex, living in one side as your primary residence and then renting out the other side to basically pay some to maybe your mortgage as a result of that. So house hacking has become really popular because, one, it allows people to get a primary residence, but, two, really gets them some experience in what real estate investing is all about. How do you work with tenants, how do you do repairs, how do you do lease agreements, how do you do repairs, how do you do lease agreements, things of that sort. So what oftentimes what people don't realize and understand the benefit of as well is that being a primary homeowner also helps you for future financing for investment properties, because there's a lot of lenders out there that require you to be a homeowner in order to get long-term financing. So there's a lot of benefits of house hacking that can be utilized.
Speaker 1:Yeah, when you and I were talking before we started the episode, we were talking about that and I don't know if I've just not been in that position before where I haven't owned a home Like. I've owned a home since I was in my early to mid twenties, so I've always been a homeowner for the most part. I just never. I didn't know that was a thing where you had to be a homeowner in order to get some of these loan products, but it makes total sense.
Speaker 2:Yeah, Most of the lenders want they want mortgage history. They want to know that who they're lending to. They have the ability to pay a mortgage so they're lending to. They have the ability to pay a mortgage, so they're going to require it. It doesn't necessarily have to be a primary home. It could be an investment property, it could be anything. But they just want you to have owned a home and shown some proof of mortgage payment history, at least within the last three years.
Speaker 1:Okay. Is there any reason that if they have a proven rental history, that that doesn't seem to carry the same weight for these lenders?
Speaker 2:I don't know if I'm following Corey.
Speaker 1:So let's say somebody is renting for a few years and they've got proven record, they paid on time to their landlord, all that sort of stuff. What's the difference between that versus them owning the home? Why do the lenders see a renter versus differently than a property owner?
Speaker 2:Yeah, I think just more so than the mortgage history of it. I mean rent. Rent obviously is almost like. I mean you can get rental history and oftentimes if I'm lending to clients that don't own a primary home, I do need to prove 12 months worth of rental history. But it's just. But it's more so the mortgage history that shows up on their credit because it does help and or hurt their credit score depending on their mortgage history. So those lenders want a 12-month history to know that people can make their mortgage payments on time. It just it's more of a investor requirement for the lenders to prove that people can, that people that they're going to lend to can make their payments.
Speaker 1:Well, and a lot of these are sold on the secondary market, right. So they packaged all these loans up into big bundles and they sell them off to Wall Street, and so the Wall Street guys, I imagine, want to have a certain set of standards that they know the underwriters are following, and that's just one of the key requirements they must have identified as being an important factor for them.
Speaker 2:Yep, I mean there are a few lenders out there that don't require home ownership but as a result, it's more risk to the lender investor. So you're talking higher rates, higher costs as a result, and oftentimes most people are going to be homeowners at some point. So having that in your back pocket, I guess I would say is beneficial.
Speaker 1:Yeah, for sure. And I was just at a conference a few months ago where they had a mortgage guy come in and he studies the rates and what's going to happen and predicts all the stuff right and looks at all the data. And what he was saying was really interesting to me that first-time homebuyers now the average age is like 35 years old for a first-time homebuyer. I think one of the points that I'm taking away from this start of our conversation, aaron, is if you're one of these younger brackets and you're thinking of you, eventually you're going to want to get into real estate. You know, maybe it's time to you know, get off the couch and get in the game sooner than later to just kind of start that clock of credibility.
Speaker 2:Yeah, for sure I, I. It's amazing how many clients I see nowadays that um, young, younger clients I will see in their twenties, um, that don't have credit, that don't have credit history either, um, which nothing, nothing, um. So, in order to kind of, it doesn't surprise me that that first time home buyer, you know market is in their thirties, because oftentimes you gotta, you gotta get that credit built, that credit history, get your scores high enough so that you qualify for some of these programs. Um. So, starting at a, at a younger age, credit wise, if you can get some um, you know, get some ownership under your belt, it's definitely going to help you, um, in the long run.
Speaker 1:Wow, that's crazy. I didn't realize that. Again, maybe I just was lucky that my, my parents were like you need to build credit. When I was younger and 16 or 17 or whatever it was.
Speaker 2:Ditto with you on that one, my mom, working at a bank definitely helped me from that perspective.
Speaker 1:That gives you a little help usually. Yeah for sure. Let's go back to the house hack strategy now. So what would be the minimum requirements if somebody was like man, I really want to do one of these house hacks. Like, let's talk about what kind of capital they need to have. Where can they get the capital from? Credit scores, work history, like. What does that look like?
Speaker 2:I know some of it may be general, but it's going to follow some of your traditional financing requirements, and when I say that, I mean it's based off of your debt to income ratios and your credit score, and things of that sort are going to determine what loan program that you qualify for. We'll talk about some programs for investors and investment properties later on that don't have the traditional financing requirements, but from a house hack perspective, I mean, there's a lot of programs out there. There's, you know, if you're a veteran, you can do. You could do a VA loan for a duplex. I've helped a lot of investors actually use the VA loan for duplexes. There's the FHA loan. Well, let me step back. Va loan, zero down payment. If you're a veteran, you can do zero down, which is, which is super cool.
Speaker 1:Unbelievable, and you're living in it, so now you've created an income for yourself. I mean this, is that's correct, wow.
Speaker 2:Yep, fha. Fha is probably the other lowest down payment program out there. That's three and a half percent down payment, and then you have some conventional programs. There are some out there that allow you to go as low as five percent on a two unit. Wow.
Speaker 1:Let's go to the FHA one. What are the pros and cons of that one? Who can qualify for that?
Speaker 2:Yeah, fha allows you to have a little bit lower credit score to qualify and a higher debt to income ratio. So for those that might not have the greatest credit score you know, you could theoretically go as low as 580. 580 to 600 is. There's some lenders out there that'll do it. You got to have some. You got to have some money available. I mean you can still do three and a half percent down, but they're going to look at your reserves and your debt to income if your credit score is that low. But it certainly can be done. But again, it allows you to have a higher debt to income ratio. So if you do have a lot of debt, it's another opportunity for you. So those are some of the pros lower credit score, higher debt to income ratio, higher debt to income ratio.
Speaker 2:One of the cons is that an FHA loan is a government loan and the condition of the property can come into play for an FHA loan.
Speaker 2:So when an appraisal is done for that property, the appraiser is not only determining the value of that property but they're also doing you can kind of think of it as a mini safety inspection to make sure that the property meets certain FHA required criteria.
Speaker 2:So, is the roof in good order? Are the mechanicals in order? Is there any chipping or peeling paint? Are there handrails? If there's any steps, carbon monoxide detectors, smoke alarm detectors those things the appraiser is looking for and basically needs to sign off on those in order for an FHA loan to be completed, where in a conventional loan you don't have that and actually FHA VA kind of follow the same guidelines. So the safety aspect of the property does come into play quite a bit with those and in this market, where it's right, the competition is fierce and a lot of the two units are going, you want to put your best foot forward from a financing perspective. So if a seller has multiple offers all at the same purchase price and one is an FHA and one is conventional, they're likely going to select that conventional because they don't have to worry about the condition of the property coming into play. So it's a little bit of a con from that perspective.
Speaker 1:Yeah, I know. Obviously, if we're flipping a property or something, that's always something we look at. What's their financing situation look like? If it's FHA versus conventional, we're going to go with the conventional one. 900 times out of you know 900 times. We're going to go conventional over the fha, just easier for everybody, you know. But you only got one offer on the table. Let's roll the dice with the fha and see what happens.
Speaker 2:Yeah, for sure yeah, oftentimes with the fha appraisal too, when, if it comes back needing repairs, they're gonna they're gonna call the appraisal, subject to those repairs being completed. So they will list out specifically on that appraisal report what needs to be done so that you can get those fixed. And then we have to send the. Once they're fixed, we send the appraiser back out there to re-inspect those items and then to ultimately sign off on them. Okay.
Speaker 1:Got it. So is it a longer closing process typically, or can you still get it done in about a 45 day window?
Speaker 2:It can be, depending on if repairs need to be done and the extent of the repairs and how quickly how quickly those need to take place. So in FHA loans I always try to encourage that we do an, we order that appraisal as as soon as we possibly can in case there are repairs that need to be done. So we can still try to stay within our timelines. Nice.
Speaker 1:The cash down right, the 3.5% and let's say the 5%. I remember when I was getting a home loan a while ago I mean the latest house we didn't have this, but the previous one they wanted to know where all the money came from. Where were you getting the down payment from? Are there certain restrictions? Are there and are they different for FHA versus a conventional of where you can get the down payment money from, like gifts and things like that?
Speaker 2:um, down payment can go. Yeah, I mean down payment can come from. I mean it can come from your own funds, so you get. You just got to verify where those funds came from savings accounts, checking accounts, 401ks, um, iras, any any personal accounts you could have you can utilize. Okay, um, most loan programs nowadays also allow you to get gifts, so as long as you can source those gifts from a family member, you can certainly use them as well. You just got to source where they, where they come from. Cool, just got to stay away from cash, so large deposits into your asset accounts that are documented are no-nos.
Speaker 1:All my drug money, even all my drug money, I can't shoot.
Speaker 2:I know Right these lenders. They protect against money laundering and fraud, so any those are great businesses.
Speaker 1:Come on.
Speaker 2:Right, any, any large deposits they're going to ask you to source that aren't from an employer or that that again that we don't have a paper trail of.
Speaker 1:I didn't know you could use 401ks or IRAs.
Speaker 2:I guess I don't know why I never thought of that, but yeah, I have a lot of people that will pull from their 401k to use that for down payment. Wow.
Speaker 1:And now, are they typically doing a loan out of their 401k or are they actually taking a withdrawal?
Speaker 2:It depends on how their 401k is structured. They're all kind of structured differently. I've seen some that are just doing a withdrawal from it and some of them that are doing a loan. So it all really depends on how it's structured and what your 401k company will let you do.
Speaker 1:You can tell I invest in real estate mostly only right. I don't know all the ins and outs of those other foreign things. Those, those are the. But what about work history, aaron? Is there a certain amount of time somebody needs to be at a particular job or like? What does that look like? Say, somebody just switched jobs three months ago, what does that look like?
Speaker 2:Yeah, that's not. As long as they just switch jobs, it's typically not a big deal unless there would be a big gap of employment. Lenders are typically looking for a two-year work history where you could get a where it could get a little tricky is if there would be a big gap in employment or if you're switching professions for whatever reason.
Speaker 2:going from W-2 to self-employed that's probably the biggest one where self-employed people people that are commissioned sales-based we typically need a two-year history of that before we can use that income. So from a self-employed perspective, it's typically a two-year tax return history.
Speaker 1:Oh, so even a little bit longer. Now. Are there any loan programs that you and the mortgage broker world have that would still work for somebody who went that route? They left their job. Now they're self-employed. Are there ways that? Do you have any kind of products out there that you know that somebody could be able to utilize still in that situation, or what's their? What are you typically seeing as their best avenue to get some financing rolling?
Speaker 2:Are you referring to primary home financing, Corey?
Speaker 1:Probably more like house hack, maybe investor too. We can talk both, you know primary.
Speaker 2:I know that's a whole different animal. But yeah, I mean from a primary home perspective. Yeah, there's there's bank statement programs. There's 1099 programs. There's a variety of programs out there that that don't necessarily follow the traditional financing path Okay, but you have to make sure that you qualify for them. So oftentimes I think the best example maybe it would be for those that are self-employed that just don't show a lot of income on paper as part of their self-employed business. That's traditionally how we need to show their income from a tax return perspective, term perspective. But what we could do instead if they don't show income on paper, we could potentially do a bank statement program where we show the revenue that they have coming in. The lenders will typically do a calculation to determine how much of that income we can use and then we run debt to income ratios based off of that. But it's based off either a 12-month bank statement history or potentially a a 24 month bank statement history as well.
Speaker 2:Okay so there's some non-traditional avenues out there for for clients that don't meet the traditional requirements. That's awesome.
Speaker 1:And you, you have some of those products at your disposal there.
Speaker 2:Yeah, absolutely we have. We have all of those products available that we utilize.
Speaker 1:I think that's one of the best benefits. When I was searching for loans for a home loan anyway I was working with a broker versus going to my local Wells Fargo or whatever. You guys have access to a ton of different options where I felt like my local bank or whoever I bank with had one or two and it felt like you kind of weren't getting the best deal there. And sometimes I would go to the broker Like I think I worked with your company on a few of my home loans and you guys would have better rates from the Wells Fargo than Wells Fargo had. Yeah, some of those are. Yeah.
Speaker 2:Some of those are really weird because I'm being on the broker side of things. We work with multiple lenders, so we shop those lenders on the behalf of our clients and oftentimes the the some certain lenders um will will have lower whole you can think of it as wholesale rates versus retail rates that they that they use internally, um. So so yeah, it's, it's weird. I did have a couple of clients that that had their loans sold to, let's just say, wells Fargo, where I use the lender. They shopped Wells Fargo and ultimately the loan got serviced by Wells Fargo down the road at a lower rate than what they were hearing from Wells Fargo directly.
Speaker 1:Yeah, so fascinating to me. I don't understand the world. But hey, whatever, I'm just looking for the lowest rate. That's why I go to guys like you Give me the brokers, baby, give me the brokers, give me the best deals, right, let's talk about. So that's house hacking, I think, and one of the questions I guess I had for you. Aaron, I get this sometimes. I guess I'm going to stay with house hacking for a second. Somebody house hacks. How long? How long do they technically have to live in that house before they can get out of there and go to the next one, if they say they did a five percent down or a three and a half percent down or a va?
Speaker 2:yeah, the lender's typically going to want them there to be. The lender's typically going to want them to be there for at least a year before before they go do something different. And when I say do something different, meaning if they're going to potentially maybe buy another duplex to house hack that one. Now there's some extenuating circumstances that can maybe change that one year requirement. One of the biggest ones would be if you're moving for your job and it's a decent distance away.
Speaker 2:I have some clients I'm working with right now that you're probably familiar with Corey, that lived in Milwaukee and they moved to Green Bay for a job. So they had a duplex that they were house hacking in Milwaukee. They got a job here in Green Bay. They're looking to house hack a property here in Green Bay. Ironically enough, we're probably going to meet that year requirement anyway, but we started the process at probably about nine months. So that was going to be an extenuating circumstance where a lender was going to be like, yeah, they're moving for a job, we're not really going to have that one-year requirement where if they own that property in Green Bay and they were looking to buy another property in Green Bay, that lender is probably going to want that one-year requirement to be in play, okay.
Speaker 1:Now, if they moved out, are they coming back and saying, hey, do you still live there? Or how are they? What if you just went to a different lender for your next one? I'm not trying to say you should do that, I'm just literally trying to understand this. If this is illegal, or if you can do this and say like hey, I moved here, I don't like to commute, I want to move. Or hey, I moved here. It's been 30 days, I don't feel safe here, I'm going to move.
Speaker 2:Yeah, I mean, if you have an extenuating circumstance and you can express it via what's called a letter of explanation, um, the underwriter is going to use some discretion, um, in those examples, the new, for the new loan program, wherever you're going to for the new loan.
Speaker 1:So if you're trying to do something within a year, um.
Speaker 2:If it's within a year, um, and it's within the same geography, there isn't a super compelling story. They might stick to that year. But if, but, if you're worried about your safety, if your family is growing, um, if you want to get into a particular school district, um, there there are some compelling reasons that can be. That can be used to get by that one year rule Cool, but it's still a lender discretion.
Speaker 1:And is there a limit to how many of these house acts somebody could do in their life?
Speaker 2:No, but. But oftentimes the lender. The lender will think that maybe you're playing this game right. You're trying to get investment properties with primary home financing because primary home financing is better meaning lower rates, lower down payment requirements than investment property financing. So there again, there needs to be compelling arguments. So often I've worked with a few clients now where they're on their third or fourth duplex that they're house hacking. But in each instance there's been a compelling reason, compelling reason being each time the duplex went up in value, value, purchase price, okay, had more bedrooms, more square footage, was in a better school district, maybe it was because they were moving for a job. There's always been a compelling reason. So as long as you have a compelling reason, you can continue doing it as often as as you want. I think the max I've seen has been like three or four, three or four duplexes.
Speaker 1:I thought there was a rule like you could only have like 10 loan, like conventional loans, in your name or something like that in your personal name.
Speaker 2:Yeah, fannie Mae and Freddie Mac are pretty stringent around you having no more than than 10 conventional loans or 10 loans in your personal name. Once you get to 10, they kind of shut you down. So clients need to be a little bit careful about that If they're doing a lot of financing in their personal name.
Speaker 1:Okay, and you probably want to be flipping those LLCs anyway and getting some asset protection going on after one or two of those bad boys. Correct, yeah, absolutely yeah, very good. Yeah, absolutely yeah, very good. Well, that's great. This is. This is good stuff. I'm learning a lot here. Aaron, talk about DSCR loans. This is like all the rage. Now Tell us what is a DSCR loan and how does somebody utilize this thing in the investment space.
Speaker 2:Yeah, dscr is the acronym for Debt Service Coverage Ratio, so it's an investment property loan that basically has three main talking points, at least when I talk with investors. I don't need W would like. You don't have to, you could do it in a personal name. But it gives you the option to take title in an LLC, which in today's world most investors want for tax and liability benefit reasons. And thirdly, 30-year fixed rate financing. So most investment property loans don't have 30-year fixed rate financing. So if you're trying to do a commercial loan in your LLC and you go to a bank or credit union, they're typically doing some sort of 5, 7, 10-year arm that's amortized over 20 or 25 years, where this product has 30 year fixed rate financing. So from a cash flow perspective, it should benefit the investor to have better cash flow as a result.
Speaker 1:Wow, that's awesome. Those are great points. Yeah, and I like a mix of both in my portfolio, like I like 20 year just because I'm paying down more debt. Now I could pay more debt down with the 30 year if I was disciplined and just made extra payments. But the 30 years are nice too, because you get a better mix of, like you said, you can make something cashflow a little bit easier and not a lot of community banks very rare.
Speaker 1:I have a couple community banks that'll offer 30 year, but there's five-year balloons on all that too. So you got to think about, like, hey, I'm not paying that much debt down in this five years, and in five years when that thing balloons, you know if this bank just says, sorry, we don't want any more real estate, I got to hope I got enough spread there to go to another lender and be able to have them take on that financing. So it's a riskier proposition versus just locking that baby in and letting it ride. Yeah, absolutely, that's awesome. So no income verification. So what are the requirements then? Like, what do they need for this DSCR loan?
Speaker 2:Yeah. So the DSCR, the debt service coverage ratio itself, is calculated by what the lenders determine as qualified rent and then, in qualified rent divided by whatever the all-in monthly mortgage payment is, creates that ratio. So if it's one, let's just say it's one perfectly. It's cash flow neutral, meaning your rent is the same as your mortgage payment. So it's a ratio of one. The lenders typically want it to be above one because it's cash flow positive, so it's less risk to them. But there are some lenders out there that will allow you to go under one and and do a cap. A cash flow negative property comes at a bit higher. Yeah, it comes at higher rates and and costs and things of that sort. But um, but yeah so and how does that work?
Speaker 1:I feel like that's just. You're just setting somebody up for failure here.
Speaker 2:I feel like that's like a 2008 product well, yeah, let me elaborate a little bit because I think explaining how the qualified rent works may get us to where I think you're going, corey, with your question. So qualified rent is defined typically from the lender as the lower of these two items, the lower of current lease agreement rent or comparable market rent as defined by an appraiser. So, for example, if you've got a brand new lease in place and your lease is for 1500 bucks and when the appraisal is done, not only is the appraiser going to determine the value of the property, they're also going to do what's called a comparable market rent schedule to determine what market rent is for a property that has those type of characteristics. Let's just say the comparable market rent comes back at $1,200, but you have actual leases in place for $1,500. The lender uses the lower of the two for the ratio calculation. So they're going to use $1,200 instead of $1,500 in the numbers.
Speaker 2:Now there's some exceptions to that. If leases have been in place for a while and you have three months worth of history and we can prove that you're getting $1,500 a month for the last three months, the lender is typically willing to use the higher amount in that example. So $1,500 might be used. But a lot of investors nowadays, if they're using hard or private money to purchase the property and they need to refinance out of that, they don't have three months worth of of new rents yet, um, so so they're going to use the lower, um again, they're going to use the lower of the two numbers.
Speaker 2:Okay, where to go back to your question about being under the cashflow number? Let's just say you have current leases in place or have been in place for a while. Let's say an investor's buying an already existing rental and it's got a 12-month lease out there and it's at a thousand bucks and market rent comes back at 1500. Well, you have to use that $1,000. And if your mortgage payment is, let's just say, $1,100, your cashflow negative. Where the investors are allowing it or the lenders are allowing it to happen is they know that likely down the road that owner of that property, once that year lease comes up, they're going to bump that up to market rent numbers to $1,500.
Speaker 1:That makes a lot more sense. That makes a lot more sense.
Speaker 2:Okay, I was very concerned there for a minute.
Speaker 1:I was very concerned. I'm like what are we doing here? We're going back to the old days.
Speaker 2:Okay, yeah, I mean, it's still risky, don't get me wrong, because you're paying more monthly on your mortgage than what you're getting in, and obviously that doesn't include if you've got property management fees or vacancies or anything like that. So it's just purely qualified rent divided by whatever the all-in monthly mortgage payment is when you say all-in monthly mortgage payment, aaron?
Speaker 1:are you talking about principal interest, taxes and insurance, or just principal interest payment, aaron? Are you?
Speaker 2:talking about principal interest taxes and insurance, or just principal interests, principal interest taxes and insurance. And if, for whatever reason, there would be HOA fees, if it's a condo or something like that, those fees get included as well.
Speaker 1:Okay, got it. Okay, yeah, cool, because I was like man. You could scoop up a ton of properties with this type of a loan product and now typically are people using these more on refis out of hard money or private money, or people using these for purchases, or what are you seeing on your?
Speaker 2:end. I see a little. I see a little of everything. Um, um. I would say if you're getting a screaming um, if it's a screaming deal, um, if, if it's a turnkey property and it's a screaming deal deal, most people are using hard money and then refinancing out. If it's not a screaming deal and it's a turnkey property, a lot of people are just doing a purchase with their own funds assets that they have HELOC funds, something and using their own funds for the down payment.
Speaker 2:Okay, if it's a, if it's a property getting a screaming deal and it needs a lot of work, oftentimes people are using their own funds, hard money, to purchase it and then we're refinancing out, whether we're paying off the hard money lender or if they're trying to get you know, using their own money, they're trying to get their own funds back out. We can do what's called either delayed financing or a cash out refinance Once. We can do what's called either delayed financing or a cash out refinance Um, once. Once it's, you know it's a, it's that. It's that BRRRR process. Um, people are familiar with the BRRRR process right, buy, buy, uh, rehab, rent, refinance, repeat, um. So oftentimes a lot of clients are following that process, um, so it's typically more of a refinance. Um got it. It just depends on what funds they're using if they're using her money or if they're using their own.
Speaker 1:Okay. Is a DSCR product a little more expensive than, say, if they just did a conventional cash out refi or what's the benefit of? Is the benefit of doing the DSCR just so you don't have that income verification for more of those folks that are self-employed or switch jobs, or who's the main avatar for that product?
Speaker 2:Yeah, I think it's more so those that want to take title in an LLC.
Speaker 1:Oh yeah, that's right Sure.
Speaker 2:Those that are unemployed, those that want to take title in an LLC. Yeah, the spread between traditional financing and DSCR rates is becoming less. Oh yeah, I just talked with some clients where the actual DSCR financing the rates were better than the traditional financing. Wow yeah, so there was a bigger spread, but it's shrinking.
Speaker 1:Okay, it's shrinking. Good to know, good to know the other thing with a.
Speaker 2:DSCR loan where, a little bit different than your traditional financing, dscr loans typically will have a prepayment penalty.
Speaker 2:Okay, you don't have to select a prepayment penalty, but if you don't, it comes at a higher rate than, say, if you selected a one, two, three, four to up as much as five year prepayment penalty. So the lenders, the lenders are putting those prepayment penalties on there because they're looking to make at least a certain amount of money on them and if, if someone is going to pay off that loan early, refinance early, they want to make sure that they're securing a certain spread.
Speaker 1:I guess I'll call it so they got their margin baked in, then Correct, correct, so they can. They margin baked in then Correct, correct, so they can. They can be more competitive on the front end on the rate Right. It makes sense.
Speaker 2:So it's, it's. It's. One of the cons of a DSCR loan, I would say, is the fact that they have a prepayment penalty and that rates are a little bit higher. But but the pro is, in my mind the pros definitely outweigh outweigh the cons of being able to get it into an LLC name and the fact that, depending on what your income is, if you can't qualify traditional financing, it gives you an opportunity to do it without having to prove income on paper.
Speaker 1:For sure, for sure. Well, and a lot of the hard money lenders or at least I know good faith funding is going to require somebody to be able to get at least a DSCR loan. So they know that if things go long or projected to go long, they know they can get their money back in that six month timeframe, Correct?
Speaker 2:Yeah, you know, working with Tony and Jairus and the good faith funding team, I'm fortunate enough to be on one of their their long-term financing list of lenders out on their website. So they want an additional exit strategy. They want to know that even if you flip the property, that if the flip doesn't happen and you can't sell that property, that you can secure long-term financing and keep it as a rental. So they're looking for that exit strategy. So oftentimes good faith fundings clients are coming to me saying hey, can I get long-term, can I get pre-approved for long-term financing utilizing a DSCR loan, should I absolutely need it?
Speaker 1:Yeah, yeah. And then going back to the, the qualified rent thing, it sounds like very similar to why we burr properties, right, Like if you're just trying to go out there, if you're an investor. I remember when I got started I'm like why does somebody need to do private money or hard money or whatever? And then refi later after it's fixed up? And it's similar Like when you go out and you're going to purchase a property, that lender is going to take either the purchase price or the appraised value, whichever is lower. So even if you got a screaming deal and you're like, oh, I've got 20% equity in this sucker right, the bank's like well, I want to be even more secure, so I'm going to take the lower value and lend off of that, and now you pay your down payment off of that and so now you've got all this dead money sitting there, which is why we love the bird Sounds very similar on the qualified rent thing. They're gonna protect their butts and take the lower number to make sure that they're being conservative on their underwriting.
Speaker 2:So we don't have another 2008.
Speaker 1:which is a good. Yes, which is a good, yeah, yes correct, for sure. What else is? What else have you seen out there in the lending world right now, aaron? What are some other things for investors that you're seeing, or then conversations you're having, maybe some some stories of some folks that you've worked with that you know, maybe combine some of these products and had some success. You know what are some. Give us some ideas on any of that stuff, if any of that comes to mind.
Speaker 2:Yeah, I think I mean the cool things out. There are cash out refinances. I'm seeing a lot of investors take advantage of that, even if it means going to a little bit higher rate. If it allows them to get cash, is king right. So if they can get their, if they can get funds to use them to purchase more properties, a lot of investors are doing that. So I've been seeing that trend quite a bit, especially if someone's at an investment property rate of 2%, 3%, 4% years back you know, years back. I'm not seeing it so much in those instances, but if it's within the last couple of years and they got a screaming deal initially on the purchase and they can refinance now to pull some of that equity out, I'm seeing a lot of investors do that and again, maybe taking a little bit higher rates as a result, but then utilizing those funds to buy more properties to improve cashflow for them.
Speaker 1:That's awesome, man, I love that I did a bunch of HELOCs on my investment properties. There was a commercial bank for a while and I don't think they're doing this anymore but they were taking second position on HELOCs on investment properties, so they didn't. Most of these community banks are gonna wanna have first position. If they're gonna do a HELOC, they'll want the original loan. But again, if you got loans, like I got loans in the threes, I'm not refinancing that sucker right, I'm going to keep that thing. So instead, a way to tap that same equity is like well, I'll get a HELOC on it and then I can still utilize that equity without messing up my underlying rate. So-.
Speaker 2:Yeah, that's just been a challenge there's. There's that many lenders out there nowadays that will do a HELOC um a HELOC on an investment property and especially, like you said if they're not in first position. Um it's. It's something they they won't really look at.
Speaker 1:Yeah, it's tough. It's tough. There's they got to. I found with the community banks their appetites come and go right. So you, uh, you got to strike while the errand's hot. If they got a hot product, you know we built our almost our entire portfolio, over a hundred units, when banks were handing out money in the in the late 20, you know, 2018, 2017, up to 2021, ish, and it was like they were.
Speaker 1:They were giving it away Like it was candy at a parade and you could. They were doing ARV loans where you could go in and they were coming in with the appraisal opposite side of this. Now they were appraising them as completed on the purchase. So you would go there and say, hey, this is my vision, this is my rehab budget, here's what I'm going to do to it. They say, oh, okay, well, if that's what you're going to do to it, then the value of it's going to be here. We'll lend you 80% of that. And I was like this is great. I'd walk out of closings with checks for like tens of thousands of dollars. I'm like this is amazing. I just bought a property and got paid to do it. This is great. There's still a few out there.
Speaker 1:If you've got a longstanding relationship, that'll still go that route. But it's a lot tougher these days to find that. Especially if you're starting out, it's a little bit more of a grind. Yeah, you were talking about the cash out refi, something else. Going back to that, aaron, when you talk about stepping up a little bit in rate, I find this really fascinating. I'm really into rentals for equity and wealth. The cashflow is awesome, love. Cashflow is king as well. But if you're doing the BRRRR method, I've just found it's tougher to. Cashflow is king as well, right, um. But if you're doing the burr method, I've just found it's tougher to cashflow Anything that's really going to change your life. If you're, if you're trying to get into it no money, you know it's like too good to be true. If you're like, oh, I'm going to make all this cashflow and I got into it no money, those deals are pretty, pretty hard to come by, right, you'll get one or the other, right.
Speaker 1:But I ran a little scenario through my good friends at ChatGPT and I did a podcast on this, I don't know, maybe eight episodes or so ago. And what was interesting to me is I looked at that same guy I was talking about that was predicting the market. He was predicting by the end of this year, rates are going to be down around that five and seven, eighths or whatever you guys call it 5.85 is what I call it and where we're sitting in this day and age, commercial loans were probably in that 7%, maybe seven and a quarter range. So I just ran this little scenario for a house hacker. I think this is really interesting. If you're going for a house hack and let's say you're in a VA loan and you've got no equity, you bought it for $300,000.
Speaker 1:Today the market, let's just say average appreciation is 4% a year. It's pretty conservative. It's been higher than that in the last two decades, but let's just say four. And you're on a 20-year AM schedule. So now you're saying VAs are going to be 30 years, so it's going to be a little bit less. Right, you're going to have less of this. But in five years, at a 7% rate, you have about $106,000 of equity in that property because you're getting the appreciation and you're getting your debt pay down right Now. If your tenants are paying it down, it's even better. Right? They just created $106,000 for you.
Speaker 1:If I change that to a 5.85% rate, you're only at about $110,000 of equity, so your equity difference is not that big of a difference. In the grand scheme of things, you'll cashflow about 200 bucks more a month on that, on the 5.85. So your cashflow changes, but the equity building does not change hardly at all. It's nominal. So it's better to get that clock started earlier. With that higher rate you're going to have less competition if rates are high than when they drop. You're getting a better deal on the property, your purchase price could be lower and with some of the products you're talking about, you can lock these things in for 30 years and not have to worry about what the rate's doing. You just let the clock work in your favor. So I found that really interesting. When I ran those numbers, I thought that was fascinating.
Speaker 2:It's super interesting around some of those numbers and how rates can impact it, how the market can impact it, how values. Once you loop it all together, it certainly has some impacts.
Speaker 1:Yeah, for sure. All right, Aaron, we always, we always wrap with a fun question here. So I know I kind of I prompted you before we started and you weren't really sure. So let's see if over the last 35 minutes or so or whatever, we've been talking, let's see if this has helped. So, favorite Wisconsin tradition or favorite place to visit in Wisconsin.
Speaker 2:Favorite Wisconsin tradition or favorite place to visit in Wisconsin. That's a good one. I mean Wisconsin traditions. It's kind of hard not to talk about eating brats, 4th of July fires, you know, picnics, things of that sort. Fourth of July fires, picnics, things of that sort. So I think there's probably too many of them to maybe outline one as a favorite Places to go. I'm a big sports guy, so Lambeau Field, brewer Game, bucks Game, any of the Wisconsin sports teams, I don't know.
Speaker 2:I've been fortunate enough to go to some of the other professional stadiums around the around the country okay and to me there is nothing like um, there's nothing like lambeau field or a brewer game in comparison to some of the other places I've been.
Speaker 1:So it's that's awesome, man I've only been to one other nfl stadium for on game day. I went to the to the bears packers nfc championship game okay dude, it was horrible.
Speaker 1:It's like this is like a. I feel like everybody here was at a funeral, like everybody was like kind of walking around about to take a drink out of the parking ramp. They're like you can't, oh don't you dare, take a drink out of that. I was like what do you mean? It's the nfc championship game. You can't you just walk around with drinks. They're like no, you'll get ticketed. I was like what isn't this game day? I was so. I was so culture shocked totally different.
Speaker 2:I was out in denver back in the the far years okay and denver has one of the craziest. If you, if you see a denver bronco game and it's in denver listen very closely. Whenever the quarterback throws an incomplete pass, they have this chant of incomplete. They chant it every time the opposing quarterback throws an incomplete pass. So if you're watching a broncos game anytime this coming year, and it's in denver. Listen for it, it's. It's in Denver. Listen for it, it's. It's super weird Wow.
Speaker 1:So it's kind of lame.
Speaker 2:Yeah.
Speaker 1:I know. So yeah, we got it. There's just nothing like.
Speaker 2:Lambo, nothing like Lambo, nothing like a American family field tailgating for for a brewer game.
Speaker 1:To me, it's just it just doesn't compare. That's very true. I love it while you're tailgating for both events. So combine a couple of those things together. That's fantastic, aaron. Any final words of advice or any other things you want to leave the audience here with as it relates to the mortgage lending loan world, I think it's just the fact that there's a lot of options out there.
Speaker 2:I'm biased to brokers. I feel like we have the best programs out there, best products, because we're able to shop, able to shop multiple lenders on a client's behalf. So even before I got into mortgage lending, when I was buying my you know, my first home and financing, I used a broker as well, just because I, because I did shop it around, I shopped it with my local bank and the broker was able to get me a better deal. So again, I'm biased because it's my profession and what I do. But more often than not we're able to meet and beat rates of our competitors and the broker side of things. So that's awesome, definitely give us an opportunity for, you know, fits your primary residence, second home, investment property, dscr loans for an investment property. Certainly, look me up at executivemortgagecom.
Speaker 2:All our you know all the loan officers have links out there. Um, all of our you know all the loan officers have have links out there. Um, obviously I do primary home loans as well, but my, my specialty in the office and I'm I'm I think one other loan officer has done a DSCR loan, but I'm the only other loan officer here at the office that that that focuses and has knowledge and expertise in the in the DSCR loan field. So happy to. Uh, you know, if anyone wants to reach out, just look me up out on executive mortgagecom and and reach out and happy to talk through any opportunities you may have.
Speaker 1:Love that. Hey, last little nugget here before we go. One question I was going to ask you earlier and I want to go back to before we wrap. Sure, If somebody is going to come and do a loan application with you, my advice to them all the time is get pre-approved from a bunch of people right away. If you're going to do it, they're all going to ask you for the same crap anyway, so you might as well just take all your stuff and go get with community banks, go get with hard money lenders, go get with guys like you in the broker world. Get as many lines in the water. One of the concerns people have, though, is their credit pulls. Can you just clarify for people Cause I know this has been a conversation I've had with a lot of people just put it out there how does getting a bunch of different lenders all in the same period of time affect their credit?
Speaker 2:Well, if, if a credit poll needs to be done, some lenders will do it, some some don't For example, when, when it's a DSCR loan, I oftentimes won't pull credit, I'm going to take them for their word on what their credit score is, just prefacing it with the fact that the rates and numbers could change depending on what their credit score actually is, because I will have to pull it at some point. But for traditional loan financing to get pre-approved, I need that credit report because I need to do some debt to income ratio calculations where I don't with a DSCR loan. So, other than the score for a DSCR loan, that's all I really care about. But for traditional financing needs, I need that credit report, not only for the score but also for what shows up as debts on there so I can do some calculations. So if that's the case, I always encourage people to try to get your credit pulled within.
Speaker 2:It varies a little bit. I would say a seven day period. If you get it pulled within a, it could be a little bit longer, maybe seven to 10 days, but a seven to 10 day period. If you have multiple credit pulls, to the bureaus it only looks as like it's one credit pull so it doesn't impact your score as much. Now, if you're going to wait and have it pulled monthly by seven different lenders over seven months, then, yeah, it's going to impact your score and it's going to look to the bureaus that you've had multiple pulls done versus versus one.
Speaker 1:Yeah, Now, I'm glad you clarified that. I actually always thought it was 30 days, so I'm glad you said seven to 10.
Speaker 2:Yeah, I, I would, I would do it, I would do it more in that seven day period, just to be safe.
Speaker 1:Okay, seven to 10 day period Good good rap there. And period Good good wrap there. And yeah, like I said, I think guys that are listening to this, my advice, if you ask me, is get, get as many buckets of money available to you as possible. Helox private money brokers, because they're all little chess pieces you heard Aaron talk today about. He works with really closely, with good faith funding. Those are two chess pieces that you're using together and you're just using the two products that they have to create a really awesome wealth building vehicle for yourself.
Speaker 1:And that's an example of two products. You've got a house hacking tool that Aaron talked about. You've got conventional cash out refis. You've got community banks. There's so many options out there. There's national lenders who are kind of a mix between a hard money lender and a traditional lender. So, get as many buckets of money.
Speaker 1:Definitely reach out to Aaron at Executive Mortgage, and we can put a link or something like that in the show notes too, Aaron. So if people just want to go there and check it out and get ahold of you, don't talk to anybody else at Executive Mortgage, just talk to Aaron. He knows the investment world. No, I'm just kidding. You guys have a lot of great, great folks over there, but talk to Aaron. The investment world no, I'm just kidding. You guys have a lot of great, great folks over there, but talk to Aaron. So, with that guys, if you got some value out of this, creating wealth in real estate creates a ripple effect in your. You guys can be a spark for just one other person.
Speaker 1:Share this episode with somebody else out there. Share on your social media. You could be the cause of somebody creating generational wealth for their family by tuning into one of these episodes, and we really appreciate it as well. And, like we said earlier, if you're not ready to get on the buyer's list yet at Wisconsin Discount Properties and you just want to have a conversation about your current situation, no obligation. Just go on our website, hit the contact us form. You don't have to fill out your information and join the list. Just hit the contact us form and we'd love to have myself or Reese or Connor or somebody from our team hop on a call with you and help understand your situation and point you in the right direction and get you connected to great folks like Aaron or a bunch of these other lenders that we talked about as well, if you're in that point and ready to get going. So, aaron, appreciate you again, man, being on here, and for all of you guys, thanks for tuning in. We'll see you on the next episode.
