How to Finance Your Rental Properties

Mike: Welcome to the flipnerd.com podcast. This is your host, Mike Hambright, and on this show I introduce you to expert real estate investors, awesome entrepreneurs, and super cool vendors that serve our industry. We publish new shows each week and have hundreds of previous shows and tip videos available to you, all of which you can access by visiting us at flipnerd.com or visiting us in the iTunes store.
By the way, flipnerd.com is the most robust social platform in existence for real estate investors where you can find off-market wholesale deals in your market, find great local vendors to help you and your business in your market, and socialize, learn and grow with others in our industry. There’s truly nothing like it. If you’re not already a member, please visit us at flipnerd.com today where you can set up a free account in about 30 seconds. Everybody’s doing it, the cool kids and even the nerdy ones. So get on over to flipnerd.com.
And now let’s get started with today’s show.
Hey, it’s Mike Hambright at flipnerd.com. Welcome back for another exciting VIP interview, where I interview successful real estate investing experts and entrepreneurs in our industry to help you learn and grow. Today I’m joined by Steve Bighaus, who’s recognized nationally as an expert in the mortgage industry, specifically around financing to investors. Now as you probably know, there’s a lot of misinformation about how to finance your rental properties, and how to get started, and even how to grow, especially as you’re trying to grow your portfolio or get started.
So building a rental portfolio is a very powerful way to build long-term wealth and cash flow. Financing obviously is key to that. So today Steve is going to share a ton of his great knowledge of how to finance investors, how they work with investors, and how you can either get started or you can build your portfolio from here. Before we get started, though, let’s take a moment to recognize our featured sponsors.
Advertisement: RealtyMogul.com is an online market place for real estate investing, connecting borrowers and capital from accredited and institutional investors. Get a rehab loan fast and close in as little as 10 days. Rates start as low as 9%.
We’d also like to thank National Real Estate Insurance Group, the nation’s leading provider of insurance to the residential real estate investor market. From individual properties to large scale investors, National Real Estate Insurance Group is ready to serve you.
Please note, the views and opinions expressed by the individuals in this program do not necessarily reflect those of FlipNerd.com or any of its partners, advertisers or affiliates. Please consult professionals before making any investment or tax decisions as real estate investing can be risky.
Hey, Steve, welcome to the show.
Steve: Thank you, Mike.
Mike: Glad you’re here. So it was interesting, we were talking beforehand. People that listen to the show that have listened to quite a few episodes probably pick up on this, but I usually talk with the guest beforehand and we talk about what we’re going to talk about. And after doing over 170 shows, one of my challenges is always how do we keep it fresh, how do we find something we haven’t talked about?
And it’s not that we’ve never talked about financing before, but I think this is a little different today in terms of how to finance your rental properties. Especially, it’s one thing if you have 100 rental properties and you’re looking to refinance or you’re looking to do things with some of the big guys. But there’s a lot of people that just never get started or there’s so much misinformation that they have a deal or they have access to a deal but they just get hung up on the money part of it. So I’m glad you’re going to share some of your insights and experiences with us today.
Steve: Well, I’ll do my best.
Mike: Yeah, yeah, great. Before we get started, Steve, why don’t you tell us about yourself and how you got in your position now and a little bit about Team Bighaus?
Steve: Let’s see. My adventure started in ’85 when I got out of the service. Spent eight years in the Air Force, knew that I didn’t want to be a cop on the outside. And so I kind of wanted to get into finance, and I’ve always been pretty good with numbers. And talked with a gentlemen local to Longview, where I grew up, and he suggested I go sell real estate for a couple years. I did that up until ’88, and then he offered me a position in that with financing. And I just started from there.
So I was there for a couple years, moved into the banking world, eventually worked my way up to be a vice president in the bank running the mortgage department here in Seattle. Started working with a group of investors who were buying from foreclosure auctions and over the years they bought like two or three hundred properties. Made a decision to start a company here in the area to help people pass that information on to buy from the auctions. Did that with them for probably about five, six, seven years.
Was contacted in 2008 by a gentleman in Memphis. Actually, it would have been the latter part of 2007, about financing in Memphis. The only thing I knew about Memphis at that point in time was blues, barbecues, and that was about it. And so I did some research through the month of December, and that looked intriguing as far as who the players were and the model, talked to a couple of folks. Hopped on an airplane in January, went out there, flew out to Memphis for about a week, kind of getting the lay of the land. I did that for about five months, because the model was totally different from anything else that I was accustomed to.
Wrote my first loan in, I think it was, June of 2008, and been ever since. And so the model worked well. Once we developed our reputation in Memphis, we’ve expanded. Currently, right now we’re in 18 states and financing investors. I have myself as the only loan officer on the team, and then I’ve got six people as far as support staff that help me finance the real estate investors.
Mike: Why don’t you share kind of at a high level how lenders or underwriters, especially if you’re with a larger bank, how they look at owner-occupants versus tenants? Because a lot of us that have been in the business for a long time, like for example, I have private money, I have some smaller local banks that finance my stuff, but we do our operations checking accounts at Chase. And that’s because I drive past four of them on the way to work and it’s just easy. In fact, they’re very good for that type of stuff. Have lots of great apps and stuff like that.
But there’s a lot of turnover inside a Chase, pretty much like a retail store. Every time I go in, there’s a new banker that wants to talk to me about how they can help finance some of my business. And I say, “Let’s not waste our time here because you don’t get me and we’re just going to have a conversation and in 15 minutes you’re going to say no, we can’t do that.” Because that’s what happens every time.
And it was interesting, the last time it happened, maybe a year ago, it was a senior loan guy. I caved and I said let’s just sit down and I’ll tell you what we do. And he said, “No, we can’t do that. It’s just too risky.” And I said, “Look, I have a bunch of rental properties that I have at about 50% loan to value, and you guys will finance people at 97% all day long that effectively have no equity in their house, and you’re telling me that I’m risky?” It’s just counterintuitive, right?
Steve: It’s amazing when you hear that when you talk about the investors as far as risk. And that’s the way a lot of institutions look at investment properties. They feel that they’re a riskier kind of loan. It’s unfortunate because I don’t feel it that way. I mean, at least I don’t see it in our experience. I mean, we’re a direct investor to Fannie Mae and I’ve worked with several institutions that loan directly to Fannie. And they’ll always get input as far as how service is performing. And the feedback that we have after the audits are that the investment portfolio is probably the best-performing part of our portfolio.
Now I think a lot of people, what they do is they go back and look at risks. They look at what happened during the mid-2000s. Because there was a combination of owner-occupied, and there were a lot of investors out there. I mean, you could buy a property at the auction, you paid $200,000 for, and it was worth $400,000. They were telling people to get these option ARMs, pull the money back out. That was adding to the risk and a lot of people still haven’t gotten over that yet.
But when I see the investors today, I see a different type of investor. I see somebody who’s really looking at not necessarily appreciation, making that money on the flip, even though there is some validity to flipping properties. But what I’ve seen the market really change for is cash flow. And so you get these people, they come in and they recognize that it’s long-term cash flow. This is how they’re going to create their wealth or their retirement. However they want to look at it and how they can control it.
So I look at the investors that are coming in today and they’ve got income, they’ve got pretty decent jobs, they’ve got some cash in the bank, they’ve got pretty decent credit. These are the people that are coming in, both entry level and seasoned investors that are trying to get farther. Then with Fannie Mae we can do up to 10 finance properties. I’ve got some cases where the individual can do 10 properties. Now, a husband and wife, they both have jobs, they’ve both got credit, they’ve both got assets. They can literally double those figures to where they can go to 20. Or if they’re a domestic partner.
So we help them get that way there. And then I’ve developed, over the years, contacts for people that want to move past that 10. Because at that point in time they’re really a commercial borrower. Some people, if you want to continue past that 10, here’s some people that you need to connect with, that can possibly help you with that.
Mike: Well, maybe you can start by telling us a lot of folks that use financing for . . . let’s say they’re getting started and they want to buy some rental properties. They typically may potentially have the opportunity to use the GSEs, to use Fannie type money. So break down some myths in terms of whether you can buy four properties or 10. Depending on whom you talk to, they might be able to get 10 done and some can’t.
Steve: You’ve got the two major GSEs. You’ve got Fannie and Freddie. Freddie is limited to four. They’ve never changed, years back, they used to be at 10. Never made that decision to change back to the 10. They’ve always kept it at four. Fannie Mae is actually pretty investor-friendly. They really are. They’ve got 10 finance properties. When you go to some of the larger institutions or just institutions as a whole, they’ll tell you they’re capped at four.
Those are lender overlays. In other words, the lender makes the decision to restrict the growth of the investor. So they’ll do that. Some of the other things that you’ll see is maybe they’ll slow down as to how many investment properties you can buy in a given year. Maybe they’ll cap you at two. They like to use the term “rapid acquisition,” because they feel that that’s risky. So they’ll limit that. That’s not a Fannie Mae policy.
Mike: So why would a lender do that? Is it because they fear that they can’t then in turn sell that?
Steve: Not necessarily that they can’t sell it. They don’t want to take the risk. In their opinion, the investor is a riskier type of person to lend to. So they don’t want to, in their terms, maybe overexpose themselves.
Mike: So for that lender, if Fannie is backing it, what is their risk? What’s their exposure to something going wrong?
Steve: Well, there’s always a risk any time you do a loan, where two, a couple years down the line the individual may default on the loan. They’ll go back and they’ll take a look at it. Bottom line is, they’re just not comfortable with investment properties. So instead of trying to help investors, they actually set it up to discourage people or make it more difficult to obtain financing.
Mike: And maybe you could dispel some of the myths around . . . this is something early on that I discovered. When I got into real estate investing, to be frank, my wife and I went in with both feet. We left our jobs and so at that point we were self-employed people with less than two years’ tax returns, so we couldn’t get Fannie or Freddie loans.
By the time that we had two years’ tax returns, we had more than 10 properties. And in fact, they were through private lenders and stuff, to where they were financed in a different way. Some of them were actually owned outright. But what surprised me was that even if we had owned 10 of them and paid cash for them, that counts toward our limit of 10 properties, right?
Steve: If the properties are owned free and clear, they don’t count. The magic term is “financed.” So with Fannie Mae, they’re looking at financed properties. Now one of the myths that I do hear is people will come to me and say, “Well, they don’t show on my credit report.” I say, “Okay. That’s fine. But I can pick them up on your tax returns. I’ll see that you paid financing.”
There isn’t a distinction that Fannie Mae makes that says that the financing is only credit that shows on your credit report. It’s financed properties as a whole. So whether it’s an institutional lender, whether it’s private financing, it’s considered a financed property. When you own a property free and clear, it’s not financed. Granted, you can take credit for the income and the expenses that you have on the property, but as long as there’s no financing, it doesn’t count.
Mike: So one of the challenges that we talked about briefly before we started today was that for investors in my world, where we buy and sell a lot of houses through wholesalers or we’re wholesaling them to other investors, for example, when I wholesale houses I only sell to cash buyers, or cash-like, people that can move very quickly. It could be hard money. The challenge is with using GSE-type money is that it’s not that fast. So maybe talk a little bit about how that limits some investors from buying properties because they don’t understand that bridge to . . . here, I’m going to refinance it through you, for example, but I need to do something differently up front. Maybe talk about how that process works or the cleanest way that it should work.
Steve: Well, I tell people, perfect world, the process that they’re going to do the financing where they’re putting 20-25% down, figure 30 to 45 days on the process. And that’s provided that there’s no issues on title, we can get the appraiser into the property, if there’s rehab on the property, everything moves along good. So the process itself really isn’t that bad.
I would say probably about 25% of my business right now are investors that paid cash for a property. So in other words, it like’s anything. They always feel that if they offer a cash deal they can close in a week, week and a half, they’ve got a little bit more leverage, and maybe get a little bit better deal when they purchase a property.
So Fannie a few years back came out with what they called the delayed financing exception. Now prior to that, to cash out refinance, you couldn’t own more than four financed properties and you had to be on title for six months. That was the rules. When they added the delayed financing exception, what that did was that targeted borrowers that had five, six, seven, eight or nine properties that were probably strong borrowers. These are the guys that have the cash, they have the credit, they have the income and they could do this. So what they’d do is they’d buy a house for 50, that house was worth 75.
What they’d do is they’d come to me, “I just purchased this house, paid $50,000 cash.” We on our side, we’re obviously going to verify where those funds came from. They can immediately turn around, refinance the property. They’ve got a six-month window from the date of purchase to get the transaction completed in. I can do up to 70 or 75% depending upon how many financed properties they have. They can receive up to their original purchase price back and I can utilize the appraised value to drive along the value.
Mike: So it’s based on appraised value, not necessarily purchase price.
Steve: No, it works off appraised value. Now some lenders, where we talk about those overlays, some lenders will say, “Yes, Mike, we do offer that, but we base our loan-to-value off the purchase price and not the appraisal.” So again, that’s an additional overlay that the lender puts on the property.
Mike: I see. That’s interesting, because what I think I’d heard in the past, and we’re talking about misinformation here, is that typically you would need to own the property for six months before you can refinance it. Or maybe that was if you wanted to do a cash out. I don’t know if that was an overlay type issue or if that was a specific Fannie rule at the time.
Steve: That rule’s still in effect. So if I get a borrower that comes to me that’s owned a property for a year, and let’s say they owe 50 on it, the house is worth 100. They own four financed properties or less. They want to pull 75 out of it. They can do that. They’ve been on the property for six months, they own less than four financed properties, and that’s still in place.
The delayed financing fills a void for those people that paid cash that maybe had more than four financed properties that paid cash and wanted to get their money back. Because basically what these people do, they get their 50 grand back and they recycle their money. Now they can go out and buy another house. But typically these are the people that are stronger. Because once you move past that fourth financed property, credit scores increase. You have to have a minimum 720 credit score. The reserve requirements increase, so now you’ve got to have six months PITI in reserves on each investment property. Again, you’re looking financially at a much stronger and in time probably a more sophisticated borrower.
Mike: One of the challenges, I’m giving you challenges here that I know investors face, which is that typically real estate investors are usually told to not put houses in your personal name. You should close in legal entities. I know that if you’re using Fannie or Freddie, they pretty much have to be in your personal name, and I know that people can deed them over to their business after they finance and things like that. Maybe share your experience and what the right way to do it is here.
Steve: Well, both Fannie and Freddie, the GSEs, only loan to natural individuals. If the property’s in an LLC, you need to quitclaim it out. I need to close it in the name of the individual. What they do after, if they transfer it over to an LLC, that’s between them, their accountant, the IRS, however they set it up. We all know why they transfer to the LLCs. It’s for asset protection. There’s still a lot of debate about whether there’s a due on sale clause. That’s probably something they want to take up with their attorney as far as giving them advice, but I’ve seen a lot of investors do it.
To give you an idea, when a person comes to me and they want to purchase a new property, they might have an LLC already set up that’s got four loans in it that are set up in the LLC. I still count those loans against them. The way the underwriting guidelines are, they are still considered an obligated debt, even though they’re in the LLC. Because let’s face it, you and I both know an LLC, all you do is take and put a blanket over your head. When I remove the blanket, it’s still you. The vehicle to put them in those LLCs is the matter of a quitclaim deed or a warranty deed, however they do that.
Where they run into problems is if they try to transfer to a corporation. Because at that point in time, whether they’ve set up an S Corp or a C Corp, the only vehicle they utilize to be able to transfer from yourself to a corporation, you have to actually sell the property to the corporation. I tell any of my clients that try and do that, if that file ever gets audited at any point in time for whatever reason, maybe it’s a random audit, maybe you missed a payment, they see that you sold a property to the corporation, guarantee it, they’re going call your note due.
Mike: Yeah. So maybe you could just kind of tell us at a high level what people should look for in finding the right lender. Because I know a lot of folks, some of the challenges they have is they work with somebody that doesn’t necessarily specialize in real estate investors and/or the lender has all these overlays.
I think a lot of people that buy properties, it’s almost like for a lot of folks if a doctor tells you something it must be true, but if you had 10 doctors they may tell you 10 different things. So people just assume, well, that’s my lender and their financing, it was a Fannie-type product so therefore this is how Fannie Mae works. I know that’s a big misconception. But how do you find those lenders that can help serve you the best?
Steve: Well, the way a lot of people come to me is through reputation. They’ll talk to other investors. Maybe the wholesalers will recommend them over to us. So that’s typically where that starts, and I think it’s really important that when the customer comes to a lender that they ask them pointed questions. Unfortunately what happens is a lot of people that are out in the industry right now that are working as loan officers don’t know. It’s unfortunate to say, but it’s the absolute truth. And God forbid if you go to one of those Internet companies where they take your application over the phone, you’re talking to one of 30 customer service people, they’re definitely not going to know.
You need to make the decision. I tell people it’s the difference between driving a Volkswagen and a Rolls Royce. The Volkswagen is a cheap car, and you’re right, some of those other lenders can probably beat me a little bit more on rates and fees. That’s fine. That’s just part of the business and the way we operate. You’ve got to love capitalism because that’s what capitalism is.
But secondly, what I tell people is do you want to look at a lender as one that’s going to give you the cheapest rates, or do you want somebody that’s going to help you really map out what you want to do financially as far as do you want to go to seven properties? Do you want to do ten properties? Do you want to stop at five? Where do you want to be, because I’m the guy that’s going to be able to help you get there.
So talking to a lender that can provide you with the right information is absolutely imperative. And if I don’t know the answer, what’s nice with my company, because they’ve really helped support my business, is that one, I can go to corporate. And if corporate doesn’t know they can go direct to Fannie Mae. And who better to hear it from directly than Fannie Mae? Having those resources out there and information, I think, is really important.
Mike: Even on the owner-occupied. You know, we buy and rehab and resell houses. Every time we sell a house, we don’t control who the lender is because the seller or their agent has picked that lender. But my fear every time we’re working with somebody is the lender says everything is fine, but it always comes down to the last couple days when the underwriter starts going through the file.
There’s always a challenge with not just lenders, but a lot of spaces. At the end of the day you have a sales guy saying we can do this, there’s no problem, but ultimately the underwriter is going to decide what can or can’t be done. And there’s nothing worse than thinking you’re good to go and coming down to the wire and then hearing that it can’t be done or there’s a problem with something that nobody anticipated up until that point, unfortunately.
Steve: And that goes back to my statement I made a couple minutes ago about the loan officer not knowing. It’s their job to know. Seriously, that’s their job. They work for a company. They should know what they can do and what they can’t do. I do the same thing. I’m as smart as any underwriter out there. I can argue any underwriter any day of the week. But I’ve taken the time to do the research. I’m going to do that before I put my client into a house, because the last call I want to make 30 days later is, “Oh, it’s not going to work.” I’ve failed as a loan officer at that point in time to my client.
Mike: Yeah. So I often tell a lot of new real estate investors, Steve, that if you’re just getting started and you have a good job, take advantage of getting loans through the GSEs because they’re better rates, they’re long-term, they’re fixed. There’s a window that’s open right now. If you don’t take advantage of it and you get beyond that tenth property, it’s a whole different world. It’s a whole different product. You’re not going to get a 20 or 30-year fixed rate loan from anybody. What kind of advice would you give to people that are maybe just getting started, that have that window still open to make sure they take advantage of it?
Steve: Well, I think with anybody, one, they have to get in the right mindset to be able to do this. So they need to talk to people that can help them, give them advice as to far as actually looking at inventory. So they’re comfortable in the market, whether they finance within their home state or they go outside of the state, they start doing their homework there.
As far as a lender goes, they just need to search out somebody that can help them on the finance end. Because let’s face it, they might have the cash, they might have the job, they might have the credit, but if they don’t have somebody that’s going to walk them through that financing, it might not become a reality for them. A lot of people have to get over that initial fear that they can’t do it, because a lot of times they can.
Mike: What are some other things you see, Steve, that are misinformation that’s out there or just bad information that’s out there that people should avoid or look out for?
Steve: One of the common overlays that I hear is about a two-year landlord history experience requirement. So in other words, they’ve got to have documented two full years of owning rentals before they can utilize the income off their new rental property to qualify for it. That’s not true. That’s on a purchase transaction. And I can go as far as like, with Fannie Mae, they don’t even require a lease. So if the property is vacant at the time, the appraiser provides me with his estimation as far as fair market rent. I can utilize 75% of that figure to offset the payment. So the two-year landlord history experience requirement is an additional overlay that lenders place on it.
We’ve had some where they have geographic restrictions, where if the customer doesn’t live within 100 miles of the subject property, they won’t finance it because they don’t feel that they can manage the property. Unfortunately, the majority of people right now, all of my clients, I would say probably 99.9% of my clients — they don’t manage their properties. They use a property manager.
I wouldn’t even attempt to manage my own properties because you’ve got to stay up on laws, all the accounting that goes along with it. I don’t have time for that. That’s what I hire a property manager for. So again it’s back to that not necessarily on the lender’s part not understanding, not wanting to understand. It’s just easier to say, “It’s risky. We don’t want to do it.”
Mike: Right. I know rates are all over the board, but what are typical rates right now that you’re seeing, and then what are the typical terms? These are typically people that are able to get 30-year fixed loans, is that right?
Steve: Yeah. And the rates, I mean, you might get into the low fives, maybe the high fours. They’re just all across the board right now. I always hate to state specific rates. They’re there. The rates are good right now. Even at 6% with some of these properties with the price points they’re getting into, it still makes sense. It’s still cash flow.
Mike: Yeah. So maybe you can take a few minutes and talk about when folks get up above 10 and they can’t use the GSEs anymore, what the typical products that you have available or that they should be looking for to grow from there.
Steve: Well, there’s another company, they just opened up a product this year that actually allows people to go past that 10. They don’t have a limit as far as number of financed properties. Anything new, I’m always a little apprehensive at first, so I’m just letting some of the other lenders that I know try the product out, see how it works. Because a product, when it’s new, there’s going to be a lot of learning curves until they get that up.
I tell clients once you get past 10, the GSEs look at you, like Fannie and Freddie, and they look at you as more like a commercial individual. So maybe that’s exploring commercial possibilities with banks, which some of my clients have done.
Mike: Great. Well, Steve, if folks want to learn more about your business, and I know you have a lot of information on your website dispelling a lot of the myths we talked about today and much more, why don’t you tell us where they should go?
Steve: Well, they can start at my website at teambighaus.com, spell the last name B-I-G-H-A-U-S, so they can start there. All of my contact information is on our website. They can look at some of the videos that we’ve done. We’re in the process of redoing some of them, and I want to continue to add more, especially on subjects that affect investors.
We’ve also started doing a radio show in October up in the Northwest where we’ll bring in wholesalers from different states and we highlight them on the radio show, which allows people to see some of the properties that are in the various states and the possibilities. Because let’s face it, here in Seattle, there’s nothing cheap about living in Seattle as far as real estate. But when they see that they can go to Memphis, and buy a property in a B, A neighborhood for $75 to $100,000, it’s going to make them money, and then when they see what the payment’s going to be, they’re going, “This is great. I can’t quit this opportunity.”
So we’re trying to bring that to our client base and I think that really helps out with our clients that are wholesalers is that people can see what’s available out there and say, “Okay. So maybe I can’t buy one here in Seattle, but maybe I can buy one in Memphis or Indy or Atlanta, wherever I want to buy.”
Mike: It’s interesting. I think more than ever right now there’s a lot of turnkey rental providers, there’s a lot of franchise property management companies that allow you to potentially own properties in a bunch of different markets, but from a reporting standpoint they kind of roll that up and you can see it. The time really is right to feel comfortable investing in other markets.
Steve: It’s a great time to be investing. Of course, people ask me when’s it going to run out of properties. I say, I don’t know. If I had that crystal ball I’d be one rich guy. What I do know is where we saw some reduction in the inventory where the hedge funds came in and bought real heavily for a couple of years. But we’re even seeing that, where that’s starting to slow down a little bit and they’re not buying as much.
I’ve even got a couple of my wholesalers buying properties from the hedge funds. They’re coming back into the market. I don’t necessarily see that shrinking and I still say it’s a great time for people to buy, but they need to look at . . . maybe they don’t think they can buy. Look at the information, because a lot of times people would be surprised that they do have the cash to be able to do it.
Mike: Yeah, absolutely. Awesome. Well, Steve, thanks so much for your time today. We’re going to add a link for your website down below so folks that weren’t able to write that down can get back and learn more about you. Appreciate your time today.
Steve: Thank you very much, Mike.
Mike: All right. Have a great day.
Steve: Take care.
Mike: Thanks for joining us for today’s flipnerd.com podcast. To watch or listen to more great shows, please visit flipnerd.com or visit us in the iTunes store. To access the most robust social platform in existence for real estate investors, where you can find off-market wholesale deals, great vendors literally in your market, and to socialize with other like-minded individuals, please visit the one, the only flipnerd.com. If you’re not yet a member, you can set up a free account in about thirty seconds. It’s pretty much the coolest site that’s ever existed in the real estate investing industry, so get on over to flipnerd.com.