Show Summary
Rental properties are an incredible way to build cash flow and wealth. Access to funds to purchase properties is critical, and working with someone that understands your specific goals, and understands the rules in detail is paramount. Steve Bighaus, national lender to rental investors, joins the show to share what financing is available, when to use each type, and how to get started now. We take a deep dive into actions you can take now to start the process, and cover benefits of refinancing properties you currently own. We also discuss how you can find turnkey rental properties to build your portfolio.
Highlights of this show
- Meet Steve Bighaus, nationally recognized mortgage industry expert specializing in financing for real estate investors.
- Learn what financing options you have for rental properties, and which ones make the most sense for you.
- Join the discussion on how to get access to the funding you need to buy rental properties, and the importance of finding the right lending partner.
Resources and Links from this show:
Listen to the Audio Version of this Episode
FlipNerd Show Transcript:
Mike: Hey, everyone. It’s Mike Hambright with FlipNerd.com. Thanks for joining us for this episode of the Expert Interview Show where I interview leaders and entrepreneurs from across the real estate investing industry.
So if you’re new to the show, if you haven’t listened before, if you’re a first-timer, hey, welcome here. We have hundreds of shows that you can access to learn from some of the most knowledgeable in the real estate investing space. If you are a member of FlipNerd.com, welcome back. We’re glad to have you here. If you’re not a member, please check out FlipNerd.com. You can get a free account in about 15 seconds now. We made it very easy.
This is episode number 295 with Steve Bighaus. Steve has almost 25 years of experience in the mortgage industry, specifically, he focuses on helping investors with financing or refinancing rental properties. As a huge believer myself in building wealth and cash flow through rental properties, I’m really excited to have Steve with us today because financing is key for rental properties. We really hope to provide some clear steps to benefit everyone listening today, how you can either get started or ramp up your rental business.
If you have been watching the show before, you’ll know that recently we broke the show into two parts. Part one we’re going to get to know a little bit more about Steve. We’re going to talk about different types of financing that are available and then, in part two, we’re going to go into the taking action segment and we’re going to talk a lot more about how you can literally start taking steps to either getting financing or potentially even refinancing your properties and Steve can help us with that. So, Steve, how are you today, my friend?
Steve: I’m doing great, doing really good, Mike. I appreciate you having me on the show.
Mike: Yeah, glad to see you. So what’s interesting is it wasn’t all that long ago that it seemingly became nearly impossible to get financing for real estate. During the downturn, it got tough and it’s almost starting to get too easy in some instances. You’re starting to see some crazy stuff happening from a finance perspective. First, why don’t you take a minute to tell us about you and your background and then we can talk about the history of financing and maybe where things are going?
Steve: Okay. Well, I’m currently partnered with Security National Mortgage. My team here at Security National is Team Bighaus. I have six people that work for me. Like you stated earlier, our primary focus in that is financing investment properties. So we did 396 loans for investors last year. We’re up to about 22% from last year. So I’m real happy with that.
My side of the business as far as what I do and the niche I’ve created is not real glamorous. My average loan size is probably $80,000. I’ll do some of the smaller loans some of the other lenders won’t do. I do that as a service to my client base because let’s face it, you can buy something in Memphis or Ohio that maybe doesn’t fit what a big national lender wants to do.
But it’s an opportunity for you to buy a cash flow property and create that passive income. So I’ve kind of done that. It’s been a great niche. When I go speak at events, occasionally I get lenders that say, “You really do those?” And I say, “Absolutely.” It’s business for me. It’s great referral. It’s a great referral network that we’ve developed.
Mike: Yeah. You’re saying that the feedback you get or the questions you get from other lenders is they’re questioning the fact that you work with investors, you’re saying?
Steve: Well, that and I work with some of the smaller loan amounts.
Mike: I see.
Steve: They would say it’s not worth their time.
Mike: Yeah.
Steve: Which is unfortunate.
Mike: Yeah. From your perspective and for those listening in, you’re looking to build partnerships, right? You probably wouldn’t do it if you knew every loan was going to be a one-off, but if you knew I could help this person get five, 10 or more properties, then I assume that’s a big part of why you do it is because of the opportunity to be an ongoing provider for somebody, right?
Steve: Well, I do that and it’s great. It’s great to watch people succeed, to get to those properties now where they’re able to create that passive income. They need to understand that it’s not just short-term. They’re looking at long-term investment. To get them to that point is very rewarding. I’m happy from that standpoint.
Mike: Steve, let’s talk about at a high level, I know we’re going to get into the details in the back half of the show, but just talk about different types of financing that are available. Because we have veterans and new folks alike on the show, we may be a little academic for some of you that have experience, but I think a lot of people are often surprised that you can get government financing through Fannie-type loans that they just wouldn’t think would actually fund investment vehicles. But maybe can you just kind of lay out the most common financing types for rental loaners?
Steve: Yeah. So basically as a company, we sell to both Fannie and Freddie. So the conventional financing is probably 99% of our business, where we’re selling stuff. A lot of people think that it’s really tough to get a loan. Well, when you’re dealing with the investors, where maybe with the first-time homebuyers you might struggle a little bit.
Typically they’ve got the job. They’ve got some cash in the bank. They’ve got decent credit. Those people are not tough to do. They’re just not. What because the issue with getting that financing is how knowledgeable the person on my end is to be able to get that type of financing. That’s where it really becomes an issue.
Mike: Yeah.
Steve: Typically investors can be a little more complex than, say, people that are buying primary residences. But both Fannie and Freddie, Fannie has always been pretty aggressive with the investors. Freddie Mac, they just came around in October of this year, made some changes, increased their number of finance properties to six, did away with a landlord history experience requirement. Those are positive moves for the investor.
So when I hear people out there that say, “It’s really tough for investors to get loans,” it really isn’t. Again, what really determines in that is how tough it is is going to be is going to be how good the person is on my side and the company. The company themselves want to be able to support the originators.
Mike: Yeah. And then outside of Fannie and Freddie, typically, if you’re getting started and you don’t have any rental properties right now or kind of under 10, if you will, that’s probably the best place for most people to start, right?
Steve: Correct. And then a lot of people are recognizing right now, we’re doing it with my wife, we’re taking a retirement account and we’re going to buy some properties in our self-directed IRAs. So any time that I look at my clients, that’s one of the areas that I go to and we always have that discussion. Even though I don’t do that type of financing, I want to be able to be that point where I can’t get some . . . what do I want to say? Plant the seed. That’s what I want to be able to do.
So you’ve got the conventional financing people going to look at their IRAs and then you’ve got some portfolio lenders that are starting to come out. I look at the portfolio side with some of those companies out there still a little cautiously because it’s still relatively new and they’re still getting their feet wet. I tell my clients this because they talk to me about these things. I say, “Just think if you’re hamster on a spinning wheel. Think of how long you want to be on that wheel to get this done.”
My recommendation is we wait a little bit, see how some of these products go and then we can jump on that or they can always move into the commercial realm. So the commercial realm is where they bundle. They’ll take the properties that they have, they’ll form an S-corp. They’ll bundle everything up. That’s a little bit more complex, a little bit more costly. I tell people, “Let’s right now, let’s look at the singles.” I think that’s a better way to go. I’ve done some stuff where we’ve bundled, where we’ve done the commercial loans, but it takes a while. It really does take a while to get them done.
Mike: Yeah. For folks that are listening out there, I’d say in my experience lending, especially on the rental property side is somewhere where you really want to think of your lender, find somebody that is a partner, a member of your team. You can talk about what you do, Steve. I know that when somebody can tell you if it’s not just transactional like, “Hey, I need a house. Come help me.” And it’s more like, “Here’s what I’m trying to do over time,” then you can provide some guidance there that you’re just not otherwise going to get. Is that safe to say?
Steve: Absolutely correct. Where I want to be, and as I tell my clients, I want to be a resource. I’m not a 9:00 to 5:00 guy. That’s why I said if you need to contact me with after hours, you can pop me an email, send me a text, give me a phone call, the same thing on the weekends. I need to be part of their team because that’s the only way they’re going to get successful with investing and lending. I tell them they’ve got to have someone that helps them provide inventory. They’ve got to have a good lender, maybe an attorney, an accountant. You’ve got to have a team. You can’t be experts in all those areas.
The other thing I tell the people is you can always find pricing a little bit cheaper than what I am. The question I ask them, I say, “That’s fine.” I say, “In other words, you can be a transactional customer or you can be a relationship.” Unfortunately, the people that are transactional are only going to be able to get you up to this point as far as property, they’re not going to be able to help you after that. They’re not going to be able to give you advice because they’re just order-takers.
Mike: Right. And if you jump around that way, if you’re transaction to transaction, you never get efficiency in terms of doing the next loan because you’re starting from scratch every single time. That underwriter may have different processes and stuff. They can’t say, “Remember last time we needed all this,” or, “I remember all this from you about last time. So you don’t need to provide it again.” So there’s a lot of value there to build in a longer-term relationship.
Steve: And I think not only the value on my side . . . all the information that we collect from our borrower we keep electronically. So if they come back to me three, six months down the line, I’ve got the application on file, we’ll go over their information with them, make sure their employment hasn’t changed. We’ll address making sure they haven’t moved, taken on any additional debt.
So it’s real easy to do. Because I also have got two underwriters, all they do is my stuff. When they come in, I’ll look and see who the underwriter was under last file and I’ll direct that file over to them because they’re probably familiar with what they’ve done. So the process is a lot smoother for the clientele, definitely not as painful, absolutely by far. Again, you’re not starting all over again.
Mike: Right. In my experience, Steve, maybe you can give some guidance on this. I’ll tell you my situation. When my wife and I started as real estate investors, we literally left our jobs kind of cold turkey, dove in with two feet. I am not saying that I recommend anybody do that. But one of the challenges we had is we got into this knowing we wanted to accumulate rental properties and we’ve built a nice portfolio now. The problem is we basically couldn’t qualify for Fannie and Freddie-type loans because we were self-employed without two years’ tax returns. We were basically new entrepreneurs with no safety net on a salary coming in or anything like that.
And then the problem is by the time we had that, two years later, we had well over ten rental properties and the interesting thing about the GSEs, the Fannie and Freddies of the world, it’s one of those government things that you just kind of scratch your head and say, “How does this make sense?” is originally in my thinking is hey, I can get 10 properties financed through them, but you basically can’t own more than 10 rental properties.
Even if I own them all free and clear, at the time, at least, they wouldn’t say, “We don’t care if you own 100. We’ll finance the next 10.” It was basically you own more than ten and, therefore, we can’t provide financing. Am I saying that right?
Steve: So properties that are owned free and clear don’t count in that mix. We’re only looking at financed properties. So one to four financed properties. I don’t count commercial properties. So if you own an eight-plex, that’s not going to be counted in the mix. The other misconception, I’ve got to laugh at this, people have first and second mortgages on their properties, right? Some lenders will count those as two financed properties because they think of number alone. Well, I don’t care if you’ve got 20 loans on a property. It’s one financed property.
So it has nothing to do with the number of loans. So the other thing to do too in that is one of the things I look at, and this comes into that whole scenario has far as being able to talk with the lender that knows what they’re doing, is we’ll get people that are husband and wife, domestic partners, they’ll want to buy properties. So the first thing I look at is, “Can I separate them? Can they qualify individually?” I can literally double their buying power if they can do that.
Mike: Sure. So say that again. A husband and wife could buy typically up to how many properties, then if they’re able to split . . . why don’t we say if you’re able to split them up and then talk about what that means?
Steve: When you qualify for an investment property, you only have to make enough money to cover your existing housing expense, whether it’s rent or first mortgage payment and any installment revolving debt that you have. I can use rental income from day one to offset the payment. So you’re not incurring any addition debt. So if they both have jobs and they’re able to support that, I can split them up. So some lenders will come back and say you’ve got to file separate tax returns and bank statements, a bunch of bunk. That’s a lender overlay that they’ve placed.
So the beauty about it is here’s what’s really cool. You get asset statements, for example. A lot of husband and wives or domestic partners, they’re going to have joint accounts. So maybe they’ve got $100,000 in this joint account. Let’s say the husband is buying the first set of houses. So we need to make sure that he has access to all those funds. We just have the wife write a letter saying that he has 100% access to all those funds. Guess what? Then he can do that. And then it’s vice versa when the wife starts buying her properties.
So there are things that you can do that definitely help the borrower. Unfortunately, a lot of the people out there that are doing some of the investor property financing, they’re just not attuned to these tricks. I shouldn’t say tricks. They’re tools that we can . . .
Mike: Nuances.
Steve: Yeah, that we can utilize and make people to where they can really maximize their buying power. I can’t tell you how many clients I have, husband and wives that own double-digits, 18, 19, 20 properties and they’re set. Once they get to that, they go, “We’ve got 20 properties. We don’t need to buy any more.”
Mike: Yeah. That’s great. Okay, Steve, let’s jump into part two, taking action. Let’s talk a little bit more about how folks can actually get their financing and some things that they maybe need to think through.
One of the things I want to say real fast, though, if you don’t mind, the stuff that you just talked about, about some of the little nuances of the typical loan officer or maybe every loan officer at kind of big bank USA, the banks that we drive past 10 of them to get to every day to wherever we’re going, is they just don’t get this stuff. You really need to have a partner that really understands that. I can tell you from experience we’ve banked with one of the largest national banks. We do kind of our operating funds there, but we’ve never used them for financing.
But all the time, they want to know, “How can we get into your investing business?” And I know they can’t do it. Usually, over and over again I say, “I don’t want to go this route. I know you can’t do what we need and let’s not even waste our time.” It was about a year ago, somebody finally convinced me, “Let’s just sit down and see if we can help. I don’t know if we can, but let’s see it out.” I said, “Okay. I have all these rental properties and I have about 50% loan to value. I’ve got a lot of equity in there. We’ve got them well paid down. They cash flow really well,” and kind of gave them everything.
Ultimately, they came back and said, “We can’t do that. It’s too risky,” is what they said. I said, “Wait a minute, you’ll lend somebody that puts down 3.5% on a property and they can lose their job tomorrow and, therefore, have no cash flow to cover it and I’m telling you right now that these things cash flow and they can pay for themselves for sure tomorrow and for years to come and has 50% loan to value and it’s too risky?” And the guy just looked at me like he didn’t really even understand what I just said.
So that kind of proves my point here of you really need to find somebody to partner with like you, Steve, that really understands you as an investor and understands what it is that you’re trying to accomplish.
Steve: You know the irony about that? Just what you were talking about, you were talking about lenders that don’t want to do investment properties because they consider them too risky. That is such an erroneous statement. The numbers don’t support what they’re doing. We service our own loans here at Security National. All you’ve got to do is go back and look at servicing trends as far as nationwide as far as what they do. Typically, you’ll see the investor stuff run . . . I was just looking at ours.
We’re less than 0.5% delinquencies and foreclosures with the investor side, okay? But when you get up to the FHAs, VA and USDAs, they typically run double digits. They’ll run 13 to 15%. Much higher. A term you don’t hear on the investors side is first payment default, whereas you’ll see that on some of the government loans. People get into a house. They buy a house. They don’t even make their first payment and it goes into foreclosure. It’s interesting to see.
What I typically find . . . the example that goes in our industry is if a person has got an investment property, a second home and a primary, they’ll keep their primary. They’ll let go of the second home and the investment properties or it will just go down that path as far as far as progression goes. But in reality, let’s face it.
If you talk to the majority of the investors out there today and you say, “You’ve got these 10 investment properties and you’re making your money in your primary. If you get in trouble, which one are you going to let go of? They’ll go, “My primary. I can rent. I’m not going to give up my income.” That’s the difference. When you have your hard end cash into it, when you’ve got 20, 25, 30% into a property and that property is making you money, why would you walk away from that?
Mike: Right. Steve, one thing I want to ask about with Fannie and Freddie, you’re typically putting down 20%, is that right?
Steve: Yeah, that’s true too. Single-families, that’s what you’re doing. With Fannie Mae, they have that dividing line of one to four financed properties. You can do 20% on single-family. With Freddie Mac coming into the picture right now, with them increasing that to six, you can actually do your first six single families with 20% down and then we can do the remaining with Fannie Mae at 7 through 10, the remaining 4 at 20%.
Mike: Okay. And one of the things that we should mention is if folks are looking to . . . maybe you can get into some of the specifics of refinancing here in just a second as well. But if you’re looking to finance or even refinance and you’re able to use Fannie and Fredie Loans, people are literally getting 30-year fixed rate loans even on their rental properties. Is that right?
Steve: That’s correct, absolutely correct. That’s 98%, everything is 30-year fixed. Occasionally, I get people that step out. They’ll want to do a 20-year or a 15-year and that’s fine.
Mike: Yeah.
Steve: But the majority of it is 30 years because there is no prepayment panel. They always want to accelerate the payments that they can. And let’s face it. If you’re doing a $40,000 and $50,000 loan on a 30-year, that’s a car payment nowadays. They could take the extra money they’re doing and they can pay it off. But they’ve got that option.
Mike: Sure. When you start to get into portfolio loans or private loans or other things, I know my banking relationships, they’re 15-year amortizations and they’re adjusting every three to five years and the rate is adjusting. I don’t think there’s a real estate investor on the planet that doesn’t think that interest rates are going to go up at some point. Now, whether that’s a year or three years from now, I don’t know. But I know they’re going up in the next 30 years. So you can lock in. I don’t know what your thoughts are on that, Steve, but you can lock in rates that are just historically low right now.
Steve: The rates are really good. There’s even talk about the Feds going back and undoing what they did in December and bringing it back down where the Fed rate is zero. That’s basically free money is what they’re doing.
It’s really hard to say. Early on in my career, it was pretty easy to judge the cycle as far as interest rates. You could almost set your watch to them. But now it’s such a world economy and it’s really complex. Things happen in China, they affect us as far as our rates. The gas prices are affecting them right now. It’s really tough to gauge as far as rates are going to go. A lot of people say, “Where are rates going to be in a year from now?” I say, “I don’t know. My crystal ball broke a long time ago.”
Mike: Yeah. Well, maybe Steven I’d like to see if we can give you different examples here. For somebody that is maybe new or newer and maybe has a couple rentals or zero even and then somebody that wants to refinance. I know that everybody has an individual plan and there are specifics that you’d have to talk to an individual person about, but maybe just give some high-level guidance. Let’s start with somebody that has zero or maybe even a few rental properties already, but they want to kind of accelerate that. What should they do from a lending perspective to kind of start moving forward?
Steve: I think what’s really important is to start a dialogue with the lender, somebody like myself that’s got a great background with lending and has done a lot in this. I think that’s the first place to start. Let’s talk about where you’re at today, where do you see yourself three to five years down the line, what are your goals? What are you looking at doing? I think that’s the first place to start. And then, once we get past that and kind of get a plan, then let’s start the pre-approval process. Let’s go back in and let’s look at your financials.
So typically, what I’ll do is I’ll refer the client to my website so they can start the application process there. So they complete the application. We download it at our end. The system generates a list of documentation they need to provide us along with a secure link. And then, once that comes in, we can pull a credit report. I can get back on the phone with a client and I kind of go over where they’re at.
The dollar figure, a lot of times people say, “How much am I approved for dollar-wise?” Well, it’s kind of an irrelevant point because what I’m really looking at is units. I can utilize cash flow from day one to offset the payment. Really, what’s going to drive how much they can buy is how much cash they have available.
So in other words, we have to look at cash as far down payment. We need to look at cash for closing costs and then they have to have reserves on top of that. So that’s really going to drive how many properties or the amount that they can buy. You have got somebody with a couple hundred thousand dollars in the bank, they can write their own ticket. Even though we’ll issue a pre-approval in the conforming limit of 417, I really tell the clients units is what I’m really looking at.
We’ve got those dividing lines and we want to make sure that we stay in communication through the process to make sure that we maximize like your 20% down payment on single-families up to six, then we move to the 25 and then do it that way there.
Mike: Okay. And one thing I want to kind of shamelessly plug in here is I’ve been investing in real estate for eight years now so I had no experience before that and a lot of people know my story. We’ve bought hundreds of houses since then and I mentor and coach a team that buys 1,000+ houses a year now. We have a lot of volume.
But one of the things that I’ve realized over time, I’ve been very geographically isolated historically and it really is a part of starting the show and building relationships with people all over the country. It made me really understand the power of saying if your market gets tough to buy in or if you live on the coast somewhere, California or even on the East Coast, where you just can’t find cash-flowing rentals, instead of saying, “I can’t do that here,” just say, “I’m going to go somewhere else.”
There are tons of markets throughout the Midwest and the Southeast that offer opportunities. We’ve built, and I know you work with a number of them too, some great relationships with turnkey operators. So I think one of the things that people want to grow rapidly instead of putting all the hard work in yourself to try to find them in your own back yard if you even can . . . if you live in California, it’s pretty hard to find cash flowing rentals in most parts of the state . . . is to go to other markets and kind of accomplish your goal of growing there. It really comes from working with a great turnkey operator.
It just so happens that we at FlipNerd recently launched another site called PassiveRental.com where we can kind of show you who some of the best operators in the country are and help understand your goals a little bit better and help you maybe get financing. Just to be clear here, we actually recommend and work with Steve in some instances there. So if you’re looking to grow your portfolio and you can’t do it in your backyard, I’d encourage you to go check out PassiveRental.com.
Steve: You mentioned that; I’ll pick on the Seattle market. I’ve got a client up here that will buy quads, four-plexes. So he’ll buy them distressed $300,000 and then he’s got to put another $200,000 to $250,000 into rehab. So now he’s into these $500,000-$550,000. Now, they’ll appraise for $750,000-$800,000. He’ll probably get $1,200, $1,300, maybe $1,400 a door. You can go to the other markets in the United States, buy a quad totally rehabbed for $150,000 that will generate $700 a door.
So you do the math on those, it doesn’t take you long to figure out where your money is better spent. You do it here in your backyard. A lot of people say, “I like them local.” That’s funny. Are you going to manage them? I’m sure not. You’re going to pay a property manager anyway. It doesn’t make any difference if the property manager is 15 miles away or if it’s 2,000 miles away. They’re still going to serve the same purpose.
Mike: Yeah. Absolutely. I can tell you from my specific experience, all my rentals are in the Dallas area here. I’ll go out of my way to not drive past a rental. In fact, I have not seen one of my rental properties. There’s one that I saw that’s not too far from my office.
Unfortunately, my wife said, “Let’s go drive past there.” I was like, “No, no, no, I don’t even want to know.” We don’t manage them ourselves. What am I going to do if their grass is long or the paint is peeling or something? I don’t even want that introduced into my head because I know my property manager will escalate it if there’s a serious issue to worry about.
Sure enough, we’re like, “They need to fix that garage door that’s kind of hanging crooked.” We didn’t need to go there. I go out of my way to not drive past them because I just don’t want to know when I pay somebody to figure that stuff out. So it just kind of hit me after a while of like, “If I don’t want to drive past them here, what does it matter where my rentals are?”
Steve: Right. Absolutely correct. When I’m talking to my investors, when we’re doing that initial consultation, I say, “I can help you. You can find the property. You can find a great turnkey property. You can find somebody like me that’s going to do the financing. You’re building your team. But I say, “You really need to have a great property manager.” That’s going to make or break you.
So again, it’s back to forming that whole team and being able to give those people advice. Let’s face it, I’ve been doing this for 28 years. I own rental properties of my own. We’re going to buy a few more. But I can tell you right now that I’m forming a team. I’m not an accountant. I’m not an attorney and I don’t try and do that type of thing.
Mike: Sure. One other thing I would add is there’s really a lot of benefit to being diversified and having stuff in more than one market as well. I’m in Dallas where it seems like Dallas can do no wrong right now. But I’m looking to hold these rentals forever. So 20 years from now, that could be a different story and there’s a lot to be said for being kind of diverse in different markets as well.
Steve: Of course, people come back and say if I buy a couple in Memphis and buy a couple in Georgia, is the financing going to still be the same? I said, “It’s all on a national level.” Nothing changes if you move from state to state.
Mike: Yeah. Steve, let’s kind of go back and talk about the refinancing part now. I’m trying to kind of profile people that might be listening in their scenario. Probably a common scenario is somebody that has a few rental properties and they’ve been hanging onto them for a while. So some people want to pay them off.
They don’t want to essentially refinance them and extend their amortization way out because they’re getting close to being paid off potentially. Some want to leverage them forever as far as they can. You could have a pretty good argument for that with Fannie and Freddie-type money where you can lock in a rate that’s basically almost free money by the time you account for leverage and appreciation, any appreciation at all. Let’s just say somebody that has a few rental properties that is considering reinvesting them, maybe talk about what some of the benefits are and how they might go about that.
Steve: So the first thing that comes to mind, I get a lot of people that call me up and say, “My rates are like 5.5%. I see the rates are lower than that. They’re in the 4s. Does it make sense to refinance?” So when you take into account loan amounts and different things, it’s really not that big.
So a lot of times on a rate term refinance, unless they’ve got a 6 or 7, 8% rate, it really doesn’t make a lot of sense. I want to do what’s best for the client, not what’s best for my pocketbook. So a lot of times, people will say you’re saving 0.75% or maybe a full percent on a $50,000 loan. It ain’t that much. By the time you go in and pay all the closing costs and you see you’re saving $30 a month but you spent $3,500 to get it and you figure out where your rate of return is going to be on that, you’re four or five years out, maybe even six. It doesn’t make any sense to me.
So the rate and terms I watch constantly. The cashout, though, where people want to leverage their money, where they want to pull some equity out, that I agree with because that’s a great way to take that money. If it’s sitting there, you can take and turn that, you can utilize that for down payment on the other rental property by all means.
Mike: Buy more properties. Yeah.
Steve: With Fannie Mae, up to four financed properties. You’ve got to be four financed properties or below to be able to pull cash out. So if you’re above that, cash out is no longer an option for you. Now with Freddie Mac entering the picture up to six, that’s two more additional properties. It makes it a little more viable.
Mike: Sure. Now, back to your thing about Fannie up to four loans, is that four financed through Fannie? If you have them with a traditional bank or community bank where their rate is adjusting every three to five years . . .
Steve: It doesn’t make any distinction. They look at financed properties. I don’t care if your mom and dad financed your property. I don’t care if you’ve got private money or if you got it with the bank. If it’s one to four family and you have it financed and you report it on your tax returns, it’s going to be counted.
Mike: I see. To me, it seems like one of the bigger benefits of potentially refinancing if you can get into a Fannie or Freddie type loan is to lock in that rate. Any other loan that you have probably has an adjustment or rate adjustment over time.
Steve: Correct. One thing that came out a few years back that’s been really beneficial, you’ll get some of those clients that have a home equity lender. They’ve got cash, they pay cash for a property. Now what they want to do is they want to get their money back. That is a spinoff of the cashout. So they call it delayed financing.
Basically, it says that a client, if you pay cash for the property, you can receive up to your original purchase price back, roll in your closing costs and I can utilize the appraise value to drive the loan to value. You’ve got a six-month window from the date of purchase to get it done. So you’ve got that.
So basically, what people can do is they can recycle their money. So it’s perfect when you get a person that’s got like a home equity line. Let’s say they’ve got $100,000. When they buy a property for $50,000, that property is worth $70,000. When it’s all said and done, they bought it at a pretty good price. Well, they can get their money back and they can recycle that and use it again to buy another property. So it’s a great tool out there.
Mike: Sure. Awesome, Steve. Well, we’re kind of getting towards the end here. Any final words of wisdom? Is there anything we haven’t covered yet that I want to make sure we mention? Then, I want you to share how folks can learn more about you and maybe get ahold of you if they’re interested in talking some more about this as well.
Steve: I’m always happy to talk to people. If they want to give me a call at the office, I’m assuming I can give my phone number, right?
Mike: Yeah, go ahead.
Steve: My office number is (425) 903-5647. You can send me an email at [email protected]. You spell the last name B-I-G-H-A-U-S. Always happy to talk to clients, always happy. Sometimes clients will come to me and the information I give them or help them walk through, that’s kind of like the pivot point for them.
At that point in time, they were kind of on the fence. The Internet is great, a ton of information out there on the Internet. Now, whether or not it’s all good, that’s something else. Everybody’s got an opinion out there. What I won’t do is I won’t steer you wrong. I just want to make sure that I give you the right information so that you can make those financial decisions that are going to affect you not only today but in the future also.
Mike: That’s great. Steve, did you say your website or where people should go for that?
Steve: It’s Team Bighaus. Thank you. Again, the last name is B-I-G-H-A-U-S. So it’s TeamBighaus.com.
Mike: Awesome. Just to throw one more site out there, for those that might interested in learning more about turnkey opportunities and buying rentals from some of the top operators in the country, you can check that out at PassiveRental.com. We’ll add links for all this stuff in the show notes here. Steve, I definitely appreciate your time with us today and thanks for sharing all this information.
Steve: Always a pleasure to be on your show.
Mike: Thanks, Steve. If you’re listening, rentals is a really a great way to build up income. It’s not all milk and honey, but it is a great way to build wealth for the long-term. For me, that’s quite frankly why we’ve done it. It’s our retirement plan, once you become self-employed, you have to do things like this to build up some wealth that you can rely on. It will eventually be a great thing for you. So thanks everybody for joining us today and, Steve, great to see you.
Steve: Good seeing you too, Mike.
Mike: Everybody have a wonderful day.
Are you a member of FlipNerd.com, the most robust real estate platform in existence, where you can find off-market wholesale deals and great vendors literally in your market? You can get access to advice from experts and learn about local clubs and events right in your backyard. If not, please visit FlipNerd.com and register for a free account. You can register in less than a minute. It’s pretty much the coolest site that’s ever existed in the real estate investing industry so get on over to FlipNerd.com.
So if you’re new to the show, if you haven’t listened before, if you’re a first-timer, hey, welcome here. We have hundreds of shows that you can access to learn from some of the most knowledgeable in the real estate investing space. If you are a member of FlipNerd.com, welcome back. We’re glad to have you here. If you’re not a member, please check out FlipNerd.com. You can get a free account in about 15 seconds now. We made it very easy.
This is episode number 295 with Steve Bighaus. Steve has almost 25 years of experience in the mortgage industry, specifically, he focuses on helping investors with financing or refinancing rental properties. As a huge believer myself in building wealth and cash flow through rental properties, I’m really excited to have Steve with us today because financing is key for rental properties. We really hope to provide some clear steps to benefit everyone listening today, how you can either get started or ramp up your rental business.
If you have been watching the show before, you’ll know that recently we broke the show into two parts. Part one we’re going to get to know a little bit more about Steve. We’re going to talk about different types of financing that are available and then, in part two, we’re going to go into the taking action segment and we’re going to talk a lot more about how you can literally start taking steps to either getting financing or potentially even refinancing your properties and Steve can help us with that. So, Steve, how are you today, my friend?
Steve: I’m doing great, doing really good, Mike. I appreciate you having me on the show.
Mike: Yeah, glad to see you. So what’s interesting is it wasn’t all that long ago that it seemingly became nearly impossible to get financing for real estate. During the downturn, it got tough and it’s almost starting to get too easy in some instances. You’re starting to see some crazy stuff happening from a finance perspective. First, why don’t you take a minute to tell us about you and your background and then we can talk about the history of financing and maybe where things are going?
Steve: Okay. Well, I’m currently partnered with Security National Mortgage. My team here at Security National is Team Bighaus. I have six people that work for me. Like you stated earlier, our primary focus in that is financing investment properties. So we did 396 loans for investors last year. We’re up to about 22% from last year. So I’m real happy with that.
My side of the business as far as what I do and the niche I’ve created is not real glamorous. My average loan size is probably $80,000. I’ll do some of the smaller loans some of the other lenders won’t do. I do that as a service to my client base because let’s face it, you can buy something in Memphis or Ohio that maybe doesn’t fit what a big national lender wants to do.
But it’s an opportunity for you to buy a cash flow property and create that passive income. So I’ve kind of done that. It’s been a great niche. When I go speak at events, occasionally I get lenders that say, “You really do those?” And I say, “Absolutely.” It’s business for me. It’s great referral. It’s a great referral network that we’ve developed.
Mike: Yeah. You’re saying that the feedback you get or the questions you get from other lenders is they’re questioning the fact that you work with investors, you’re saying?
Steve: Well, that and I work with some of the smaller loan amounts.
Mike: I see.
Steve: They would say it’s not worth their time.
Mike: Yeah.
Steve: Which is unfortunate.
Mike: Yeah. From your perspective and for those listening in, you’re looking to build partnerships, right? You probably wouldn’t do it if you knew every loan was going to be a one-off, but if you knew I could help this person get five, 10 or more properties, then I assume that’s a big part of why you do it is because of the opportunity to be an ongoing provider for somebody, right?
Steve: Well, I do that and it’s great. It’s great to watch people succeed, to get to those properties now where they’re able to create that passive income. They need to understand that it’s not just short-term. They’re looking at long-term investment. To get them to that point is very rewarding. I’m happy from that standpoint.
Mike: Steve, let’s talk about at a high level, I know we’re going to get into the details in the back half of the show, but just talk about different types of financing that are available. Because we have veterans and new folks alike on the show, we may be a little academic for some of you that have experience, but I think a lot of people are often surprised that you can get government financing through Fannie-type loans that they just wouldn’t think would actually fund investment vehicles. But maybe can you just kind of lay out the most common financing types for rental loaners?
Steve: Yeah. So basically as a company, we sell to both Fannie and Freddie. So the conventional financing is probably 99% of our business, where we’re selling stuff. A lot of people think that it’s really tough to get a loan. Well, when you’re dealing with the investors, where maybe with the first-time homebuyers you might struggle a little bit.
Typically they’ve got the job. They’ve got some cash in the bank. They’ve got decent credit. Those people are not tough to do. They’re just not. What because the issue with getting that financing is how knowledgeable the person on my end is to be able to get that type of financing. That’s where it really becomes an issue.
Mike: Yeah.
Steve: Typically investors can be a little more complex than, say, people that are buying primary residences. But both Fannie and Freddie, Fannie has always been pretty aggressive with the investors. Freddie Mac, they just came around in October of this year, made some changes, increased their number of finance properties to six, did away with a landlord history experience requirement. Those are positive moves for the investor.
So when I hear people out there that say, “It’s really tough for investors to get loans,” it really isn’t. Again, what really determines in that is how tough it is is going to be is going to be how good the person is on my side and the company. The company themselves want to be able to support the originators.
Mike: Yeah. And then outside of Fannie and Freddie, typically, if you’re getting started and you don’t have any rental properties right now or kind of under 10, if you will, that’s probably the best place for most people to start, right?
Steve: Correct. And then a lot of people are recognizing right now, we’re doing it with my wife, we’re taking a retirement account and we’re going to buy some properties in our self-directed IRAs. So any time that I look at my clients, that’s one of the areas that I go to and we always have that discussion. Even though I don’t do that type of financing, I want to be able to be that point where I can’t get some . . . what do I want to say? Plant the seed. That’s what I want to be able to do.
So you’ve got the conventional financing people going to look at their IRAs and then you’ve got some portfolio lenders that are starting to come out. I look at the portfolio side with some of those companies out there still a little cautiously because it’s still relatively new and they’re still getting their feet wet. I tell my clients this because they talk to me about these things. I say, “Just think if you’re hamster on a spinning wheel. Think of how long you want to be on that wheel to get this done.”
My recommendation is we wait a little bit, see how some of these products go and then we can jump on that or they can always move into the commercial realm. So the commercial realm is where they bundle. They’ll take the properties that they have, they’ll form an S-corp. They’ll bundle everything up. That’s a little bit more complex, a little bit more costly. I tell people, “Let’s right now, let’s look at the singles.” I think that’s a better way to go. I’ve done some stuff where we’ve bundled, where we’ve done the commercial loans, but it takes a while. It really does take a while to get them done.
Mike: Yeah. For folks that are listening out there, I’d say in my experience lending, especially on the rental property side is somewhere where you really want to think of your lender, find somebody that is a partner, a member of your team. You can talk about what you do, Steve. I know that when somebody can tell you if it’s not just transactional like, “Hey, I need a house. Come help me.” And it’s more like, “Here’s what I’m trying to do over time,” then you can provide some guidance there that you’re just not otherwise going to get. Is that safe to say?
Steve: Absolutely correct. Where I want to be, and as I tell my clients, I want to be a resource. I’m not a 9:00 to 5:00 guy. That’s why I said if you need to contact me with after hours, you can pop me an email, send me a text, give me a phone call, the same thing on the weekends. I need to be part of their team because that’s the only way they’re going to get successful with investing and lending. I tell them they’ve got to have someone that helps them provide inventory. They’ve got to have a good lender, maybe an attorney, an accountant. You’ve got to have a team. You can’t be experts in all those areas.
The other thing I tell the people is you can always find pricing a little bit cheaper than what I am. The question I ask them, I say, “That’s fine.” I say, “In other words, you can be a transactional customer or you can be a relationship.” Unfortunately, the people that are transactional are only going to be able to get you up to this point as far as property, they’re not going to be able to help you after that. They’re not going to be able to give you advice because they’re just order-takers.
Mike: Right. And if you jump around that way, if you’re transaction to transaction, you never get efficiency in terms of doing the next loan because you’re starting from scratch every single time. That underwriter may have different processes and stuff. They can’t say, “Remember last time we needed all this,” or, “I remember all this from you about last time. So you don’t need to provide it again.” So there’s a lot of value there to build in a longer-term relationship.
Steve: And I think not only the value on my side . . . all the information that we collect from our borrower we keep electronically. So if they come back to me three, six months down the line, I’ve got the application on file, we’ll go over their information with them, make sure their employment hasn’t changed. We’ll address making sure they haven’t moved, taken on any additional debt.
So it’s real easy to do. Because I also have got two underwriters, all they do is my stuff. When they come in, I’ll look and see who the underwriter was under last file and I’ll direct that file over to them because they’re probably familiar with what they’ve done. So the process is a lot smoother for the clientele, definitely not as painful, absolutely by far. Again, you’re not starting all over again.
Mike: Right. In my experience, Steve, maybe you can give some guidance on this. I’ll tell you my situation. When my wife and I started as real estate investors, we literally left our jobs kind of cold turkey, dove in with two feet. I am not saying that I recommend anybody do that. But one of the challenges we had is we got into this knowing we wanted to accumulate rental properties and we’ve built a nice portfolio now. The problem is we basically couldn’t qualify for Fannie and Freddie-type loans because we were self-employed without two years’ tax returns. We were basically new entrepreneurs with no safety net on a salary coming in or anything like that.
And then the problem is by the time we had that, two years later, we had well over ten rental properties and the interesting thing about the GSEs, the Fannie and Freddies of the world, it’s one of those government things that you just kind of scratch your head and say, “How does this make sense?” is originally in my thinking is hey, I can get 10 properties financed through them, but you basically can’t own more than 10 rental properties.
Even if I own them all free and clear, at the time, at least, they wouldn’t say, “We don’t care if you own 100. We’ll finance the next 10.” It was basically you own more than ten and, therefore, we can’t provide financing. Am I saying that right?
Steve: So properties that are owned free and clear don’t count in that mix. We’re only looking at financed properties. So one to four financed properties. I don’t count commercial properties. So if you own an eight-plex, that’s not going to be counted in the mix. The other misconception, I’ve got to laugh at this, people have first and second mortgages on their properties, right? Some lenders will count those as two financed properties because they think of number alone. Well, I don’t care if you’ve got 20 loans on a property. It’s one financed property.
So it has nothing to do with the number of loans. So the other thing to do too in that is one of the things I look at, and this comes into that whole scenario has far as being able to talk with the lender that knows what they’re doing, is we’ll get people that are husband and wife, domestic partners, they’ll want to buy properties. So the first thing I look at is, “Can I separate them? Can they qualify individually?” I can literally double their buying power if they can do that.
Mike: Sure. So say that again. A husband and wife could buy typically up to how many properties, then if they’re able to split . . . why don’t we say if you’re able to split them up and then talk about what that means?
Steve: When you qualify for an investment property, you only have to make enough money to cover your existing housing expense, whether it’s rent or first mortgage payment and any installment revolving debt that you have. I can use rental income from day one to offset the payment. So you’re not incurring any addition debt. So if they both have jobs and they’re able to support that, I can split them up. So some lenders will come back and say you’ve got to file separate tax returns and bank statements, a bunch of bunk. That’s a lender overlay that they’ve placed.
So the beauty about it is here’s what’s really cool. You get asset statements, for example. A lot of husband and wives or domestic partners, they’re going to have joint accounts. So maybe they’ve got $100,000 in this joint account. Let’s say the husband is buying the first set of houses. So we need to make sure that he has access to all those funds. We just have the wife write a letter saying that he has 100% access to all those funds. Guess what? Then he can do that. And then it’s vice versa when the wife starts buying her properties.
So there are things that you can do that definitely help the borrower. Unfortunately, a lot of the people out there that are doing some of the investor property financing, they’re just not attuned to these tricks. I shouldn’t say tricks. They’re tools that we can . . .
Mike: Nuances.
Steve: Yeah, that we can utilize and make people to where they can really maximize their buying power. I can’t tell you how many clients I have, husband and wives that own double-digits, 18, 19, 20 properties and they’re set. Once they get to that, they go, “We’ve got 20 properties. We don’t need to buy any more.”
Mike: Yeah. That’s great. Okay, Steve, let’s jump into part two, taking action. Let’s talk a little bit more about how folks can actually get their financing and some things that they maybe need to think through.
One of the things I want to say real fast, though, if you don’t mind, the stuff that you just talked about, about some of the little nuances of the typical loan officer or maybe every loan officer at kind of big bank USA, the banks that we drive past 10 of them to get to every day to wherever we’re going, is they just don’t get this stuff. You really need to have a partner that really understands that. I can tell you from experience we’ve banked with one of the largest national banks. We do kind of our operating funds there, but we’ve never used them for financing.
But all the time, they want to know, “How can we get into your investing business?” And I know they can’t do it. Usually, over and over again I say, “I don’t want to go this route. I know you can’t do what we need and let’s not even waste our time.” It was about a year ago, somebody finally convinced me, “Let’s just sit down and see if we can help. I don’t know if we can, but let’s see it out.” I said, “Okay. I have all these rental properties and I have about 50% loan to value. I’ve got a lot of equity in there. We’ve got them well paid down. They cash flow really well,” and kind of gave them everything.
Ultimately, they came back and said, “We can’t do that. It’s too risky,” is what they said. I said, “Wait a minute, you’ll lend somebody that puts down 3.5% on a property and they can lose their job tomorrow and, therefore, have no cash flow to cover it and I’m telling you right now that these things cash flow and they can pay for themselves for sure tomorrow and for years to come and has 50% loan to value and it’s too risky?” And the guy just looked at me like he didn’t really even understand what I just said.
So that kind of proves my point here of you really need to find somebody to partner with like you, Steve, that really understands you as an investor and understands what it is that you’re trying to accomplish.
Steve: You know the irony about that? Just what you were talking about, you were talking about lenders that don’t want to do investment properties because they consider them too risky. That is such an erroneous statement. The numbers don’t support what they’re doing. We service our own loans here at Security National. All you’ve got to do is go back and look at servicing trends as far as nationwide as far as what they do. Typically, you’ll see the investor stuff run . . . I was just looking at ours.
We’re less than 0.5% delinquencies and foreclosures with the investor side, okay? But when you get up to the FHAs, VA and USDAs, they typically run double digits. They’ll run 13 to 15%. Much higher. A term you don’t hear on the investors side is first payment default, whereas you’ll see that on some of the government loans. People get into a house. They buy a house. They don’t even make their first payment and it goes into foreclosure. It’s interesting to see.
What I typically find . . . the example that goes in our industry is if a person has got an investment property, a second home and a primary, they’ll keep their primary. They’ll let go of the second home and the investment properties or it will just go down that path as far as far as progression goes. But in reality, let’s face it.
If you talk to the majority of the investors out there today and you say, “You’ve got these 10 investment properties and you’re making your money in your primary. If you get in trouble, which one are you going to let go of? They’ll go, “My primary. I can rent. I’m not going to give up my income.” That’s the difference. When you have your hard end cash into it, when you’ve got 20, 25, 30% into a property and that property is making you money, why would you walk away from that?
Mike: Right. Steve, one thing I want to ask about with Fannie and Freddie, you’re typically putting down 20%, is that right?
Steve: Yeah, that’s true too. Single-families, that’s what you’re doing. With Fannie Mae, they have that dividing line of one to four financed properties. You can do 20% on single-family. With Freddie Mac coming into the picture right now, with them increasing that to six, you can actually do your first six single families with 20% down and then we can do the remaining with Fannie Mae at 7 through 10, the remaining 4 at 20%.
Mike: Okay. And one of the things that we should mention is if folks are looking to . . . maybe you can get into some of the specifics of refinancing here in just a second as well. But if you’re looking to finance or even refinance and you’re able to use Fannie and Fredie Loans, people are literally getting 30-year fixed rate loans even on their rental properties. Is that right?
Steve: That’s correct, absolutely correct. That’s 98%, everything is 30-year fixed. Occasionally, I get people that step out. They’ll want to do a 20-year or a 15-year and that’s fine.
Mike: Yeah.
Steve: But the majority of it is 30 years because there is no prepayment panel. They always want to accelerate the payments that they can. And let’s face it. If you’re doing a $40,000 and $50,000 loan on a 30-year, that’s a car payment nowadays. They could take the extra money they’re doing and they can pay it off. But they’ve got that option.
Mike: Sure. When you start to get into portfolio loans or private loans or other things, I know my banking relationships, they’re 15-year amortizations and they’re adjusting every three to five years and the rate is adjusting. I don’t think there’s a real estate investor on the planet that doesn’t think that interest rates are going to go up at some point. Now, whether that’s a year or three years from now, I don’t know. But I know they’re going up in the next 30 years. So you can lock in. I don’t know what your thoughts are on that, Steve, but you can lock in rates that are just historically low right now.
Steve: The rates are really good. There’s even talk about the Feds going back and undoing what they did in December and bringing it back down where the Fed rate is zero. That’s basically free money is what they’re doing.
It’s really hard to say. Early on in my career, it was pretty easy to judge the cycle as far as interest rates. You could almost set your watch to them. But now it’s such a world economy and it’s really complex. Things happen in China, they affect us as far as our rates. The gas prices are affecting them right now. It’s really tough to gauge as far as rates are going to go. A lot of people say, “Where are rates going to be in a year from now?” I say, “I don’t know. My crystal ball broke a long time ago.”
Mike: Yeah. Well, maybe Steven I’d like to see if we can give you different examples here. For somebody that is maybe new or newer and maybe has a couple rentals or zero even and then somebody that wants to refinance. I know that everybody has an individual plan and there are specifics that you’d have to talk to an individual person about, but maybe just give some high-level guidance. Let’s start with somebody that has zero or maybe even a few rental properties already, but they want to kind of accelerate that. What should they do from a lending perspective to kind of start moving forward?
Steve: I think what’s really important is to start a dialogue with the lender, somebody like myself that’s got a great background with lending and has done a lot in this. I think that’s the first place to start. Let’s talk about where you’re at today, where do you see yourself three to five years down the line, what are your goals? What are you looking at doing? I think that’s the first place to start. And then, once we get past that and kind of get a plan, then let’s start the pre-approval process. Let’s go back in and let’s look at your financials.
So typically, what I’ll do is I’ll refer the client to my website so they can start the application process there. So they complete the application. We download it at our end. The system generates a list of documentation they need to provide us along with a secure link. And then, once that comes in, we can pull a credit report. I can get back on the phone with a client and I kind of go over where they’re at.
The dollar figure, a lot of times people say, “How much am I approved for dollar-wise?” Well, it’s kind of an irrelevant point because what I’m really looking at is units. I can utilize cash flow from day one to offset the payment. Really, what’s going to drive how much they can buy is how much cash they have available.
So in other words, we have to look at cash as far down payment. We need to look at cash for closing costs and then they have to have reserves on top of that. So that’s really going to drive how many properties or the amount that they can buy. You have got somebody with a couple hundred thousand dollars in the bank, they can write their own ticket. Even though we’ll issue a pre-approval in the conforming limit of 417, I really tell the clients units is what I’m really looking at.
We’ve got those dividing lines and we want to make sure that we stay in communication through the process to make sure that we maximize like your 20% down payment on single-families up to six, then we move to the 25 and then do it that way there.
Mike: Okay. And one thing I want to kind of shamelessly plug in here is I’ve been investing in real estate for eight years now so I had no experience before that and a lot of people know my story. We’ve bought hundreds of houses since then and I mentor and coach a team that buys 1,000+ houses a year now. We have a lot of volume.
But one of the things that I’ve realized over time, I’ve been very geographically isolated historically and it really is a part of starting the show and building relationships with people all over the country. It made me really understand the power of saying if your market gets tough to buy in or if you live on the coast somewhere, California or even on the East Coast, where you just can’t find cash-flowing rentals, instead of saying, “I can’t do that here,” just say, “I’m going to go somewhere else.”
There are tons of markets throughout the Midwest and the Southeast that offer opportunities. We’ve built, and I know you work with a number of them too, some great relationships with turnkey operators. So I think one of the things that people want to grow rapidly instead of putting all the hard work in yourself to try to find them in your own back yard if you even can . . . if you live in California, it’s pretty hard to find cash flowing rentals in most parts of the state . . . is to go to other markets and kind of accomplish your goal of growing there. It really comes from working with a great turnkey operator.
It just so happens that we at FlipNerd recently launched another site called PassiveRental.com where we can kind of show you who some of the best operators in the country are and help understand your goals a little bit better and help you maybe get financing. Just to be clear here, we actually recommend and work with Steve in some instances there. So if you’re looking to grow your portfolio and you can’t do it in your backyard, I’d encourage you to go check out PassiveRental.com.
Steve: You mentioned that; I’ll pick on the Seattle market. I’ve got a client up here that will buy quads, four-plexes. So he’ll buy them distressed $300,000 and then he’s got to put another $200,000 to $250,000 into rehab. So now he’s into these $500,000-$550,000. Now, they’ll appraise for $750,000-$800,000. He’ll probably get $1,200, $1,300, maybe $1,400 a door. You can go to the other markets in the United States, buy a quad totally rehabbed for $150,000 that will generate $700 a door.
So you do the math on those, it doesn’t take you long to figure out where your money is better spent. You do it here in your backyard. A lot of people say, “I like them local.” That’s funny. Are you going to manage them? I’m sure not. You’re going to pay a property manager anyway. It doesn’t make any difference if the property manager is 15 miles away or if it’s 2,000 miles away. They’re still going to serve the same purpose.
Mike: Yeah. Absolutely. I can tell you from my specific experience, all my rentals are in the Dallas area here. I’ll go out of my way to not drive past a rental. In fact, I have not seen one of my rental properties. There’s one that I saw that’s not too far from my office.
Unfortunately, my wife said, “Let’s go drive past there.” I was like, “No, no, no, I don’t even want to know.” We don’t manage them ourselves. What am I going to do if their grass is long or the paint is peeling or something? I don’t even want that introduced into my head because I know my property manager will escalate it if there’s a serious issue to worry about.
Sure enough, we’re like, “They need to fix that garage door that’s kind of hanging crooked.” We didn’t need to go there. I go out of my way to not drive past them because I just don’t want to know when I pay somebody to figure that stuff out. So it just kind of hit me after a while of like, “If I don’t want to drive past them here, what does it matter where my rentals are?”
Steve: Right. Absolutely correct. When I’m talking to my investors, when we’re doing that initial consultation, I say, “I can help you. You can find the property. You can find a great turnkey property. You can find somebody like me that’s going to do the financing. You’re building your team. But I say, “You really need to have a great property manager.” That’s going to make or break you.
So again, it’s back to forming that whole team and being able to give those people advice. Let’s face it, I’ve been doing this for 28 years. I own rental properties of my own. We’re going to buy a few more. But I can tell you right now that I’m forming a team. I’m not an accountant. I’m not an attorney and I don’t try and do that type of thing.
Mike: Sure. One other thing I would add is there’s really a lot of benefit to being diversified and having stuff in more than one market as well. I’m in Dallas where it seems like Dallas can do no wrong right now. But I’m looking to hold these rentals forever. So 20 years from now, that could be a different story and there’s a lot to be said for being kind of diverse in different markets as well.
Steve: Of course, people come back and say if I buy a couple in Memphis and buy a couple in Georgia, is the financing going to still be the same? I said, “It’s all on a national level.” Nothing changes if you move from state to state.
Mike: Yeah. Steve, let’s kind of go back and talk about the refinancing part now. I’m trying to kind of profile people that might be listening in their scenario. Probably a common scenario is somebody that has a few rental properties and they’ve been hanging onto them for a while. So some people want to pay them off.
They don’t want to essentially refinance them and extend their amortization way out because they’re getting close to being paid off potentially. Some want to leverage them forever as far as they can. You could have a pretty good argument for that with Fannie and Freddie-type money where you can lock in a rate that’s basically almost free money by the time you account for leverage and appreciation, any appreciation at all. Let’s just say somebody that has a few rental properties that is considering reinvesting them, maybe talk about what some of the benefits are and how they might go about that.
Steve: So the first thing that comes to mind, I get a lot of people that call me up and say, “My rates are like 5.5%. I see the rates are lower than that. They’re in the 4s. Does it make sense to refinance?” So when you take into account loan amounts and different things, it’s really not that big.
So a lot of times on a rate term refinance, unless they’ve got a 6 or 7, 8% rate, it really doesn’t make a lot of sense. I want to do what’s best for the client, not what’s best for my pocketbook. So a lot of times, people will say you’re saving 0.75% or maybe a full percent on a $50,000 loan. It ain’t that much. By the time you go in and pay all the closing costs and you see you’re saving $30 a month but you spent $3,500 to get it and you figure out where your rate of return is going to be on that, you’re four or five years out, maybe even six. It doesn’t make any sense to me.
So the rate and terms I watch constantly. The cashout, though, where people want to leverage their money, where they want to pull some equity out, that I agree with because that’s a great way to take that money. If it’s sitting there, you can take and turn that, you can utilize that for down payment on the other rental property by all means.
Mike: Buy more properties. Yeah.
Steve: With Fannie Mae, up to four financed properties. You’ve got to be four financed properties or below to be able to pull cash out. So if you’re above that, cash out is no longer an option for you. Now with Freddie Mac entering the picture up to six, that’s two more additional properties. It makes it a little more viable.
Mike: Sure. Now, back to your thing about Fannie up to four loans, is that four financed through Fannie? If you have them with a traditional bank or community bank where their rate is adjusting every three to five years . . .
Steve: It doesn’t make any distinction. They look at financed properties. I don’t care if your mom and dad financed your property. I don’t care if you’ve got private money or if you got it with the bank. If it’s one to four family and you have it financed and you report it on your tax returns, it’s going to be counted.
Mike: I see. To me, it seems like one of the bigger benefits of potentially refinancing if you can get into a Fannie or Freddie type loan is to lock in that rate. Any other loan that you have probably has an adjustment or rate adjustment over time.
Steve: Correct. One thing that came out a few years back that’s been really beneficial, you’ll get some of those clients that have a home equity lender. They’ve got cash, they pay cash for a property. Now what they want to do is they want to get their money back. That is a spinoff of the cashout. So they call it delayed financing.
Basically, it says that a client, if you pay cash for the property, you can receive up to your original purchase price back, roll in your closing costs and I can utilize the appraise value to drive the loan to value. You’ve got a six-month window from the date of purchase to get it done. So you’ve got that.
So basically, what people can do is they can recycle their money. So it’s perfect when you get a person that’s got like a home equity line. Let’s say they’ve got $100,000. When they buy a property for $50,000, that property is worth $70,000. When it’s all said and done, they bought it at a pretty good price. Well, they can get their money back and they can recycle that and use it again to buy another property. So it’s a great tool out there.
Mike: Sure. Awesome, Steve. Well, we’re kind of getting towards the end here. Any final words of wisdom? Is there anything we haven’t covered yet that I want to make sure we mention? Then, I want you to share how folks can learn more about you and maybe get ahold of you if they’re interested in talking some more about this as well.
Steve: I’m always happy to talk to people. If they want to give me a call at the office, I’m assuming I can give my phone number, right?
Mike: Yeah, go ahead.
Steve: My office number is (425) 903-5647. You can send me an email at [email protected]. You spell the last name B-I-G-H-A-U-S. Always happy to talk to clients, always happy. Sometimes clients will come to me and the information I give them or help them walk through, that’s kind of like the pivot point for them.
At that point in time, they were kind of on the fence. The Internet is great, a ton of information out there on the Internet. Now, whether or not it’s all good, that’s something else. Everybody’s got an opinion out there. What I won’t do is I won’t steer you wrong. I just want to make sure that I give you the right information so that you can make those financial decisions that are going to affect you not only today but in the future also.
Mike: That’s great. Steve, did you say your website or where people should go for that?
Steve: It’s Team Bighaus. Thank you. Again, the last name is B-I-G-H-A-U-S. So it’s TeamBighaus.com.
Mike: Awesome. Just to throw one more site out there, for those that might interested in learning more about turnkey opportunities and buying rentals from some of the top operators in the country, you can check that out at PassiveRental.com. We’ll add links for all this stuff in the show notes here. Steve, I definitely appreciate your time with us today and thanks for sharing all this information.
Steve: Always a pleasure to be on your show.
Mike: Thanks, Steve. If you’re listening, rentals is a really a great way to build up income. It’s not all milk and honey, but it is a great way to build wealth for the long-term. For me, that’s quite frankly why we’ve done it. It’s our retirement plan, once you become self-employed, you have to do things like this to build up some wealth that you can rely on. It will eventually be a great thing for you. So thanks everybody for joining us today and, Steve, great to see you.
Steve: Good seeing you too, Mike.
Mike: Everybody have a wonderful day.
Are you a member of FlipNerd.com, the most robust real estate platform in existence, where you can find off-market wholesale deals and great vendors literally in your market? You can get access to advice from experts and learn about local clubs and events right in your backyard. If not, please visit FlipNerd.com and register for a free account. You can register in less than a minute. It’s pretty much the coolest site that’s ever existed in the real estate investing industry so get on over to FlipNerd.com.
