How to Fund Your First Rental (Rental Property Loans 101) (Rookie Reply)

Ashley Kehr:
Are you ready to buy your first or next investment property?You are in the right place.I am Ashley Care.And I’m Tony j Robinson. And this is the Real Estate’s Rookie podcast.Not long ago, we were just like you we’re trying to make a little extra cash to hopefully leave our nine to fives.Now we’ve built rental portfolios, quit our jobs and hit financial freedom, and it all started with that first deal. One property can change everythingLike the couple who bought six rentals and just 15 months while working three jobs,Or the couple who purchased six rental properties in just 15 months.Or the single dad who went from $17 an hour to $200,000 a year and passive income in just a decade.Every week on the Real Estate Rookie podcast, we bring on rookies who are doing it right now and they’ll show you exactly how they got started, their strategies and the steps to repeat their success.We’ll answer your real estate questions, talk about real rental properties and how much they’re making, and give you the step-by-step strategies we wish we knew when we were rookies.No jargon, no gatekeeping, just real rookies, real stories and real financial freedom.New episodes come out every week, that’s three times a week.Tap subscribe so you don’t miss any episode drops on YouTube. Just search real estate rookie today.Before we jump in, I want to tell you about when I bought my first rental. I thought collecting rent would be the hardest part, but I was wrong. The admin never stops expenses, receipts, tax forms, tenant issues. I didn’t expect the behind the scenes work to take up so much of my time and Headspace every night was another round of paperwork and I started thinking, if it’s like this with one, how do people handle five or 10 Base? Lane helped me get out of the weeds. It’s the official banking platform of BiggerPockets that handles the whole backend for me. Expense tracking, financial reporting, rent collection, even tenant screening. It’s the first time I felt in control and now that I’m not drowning in admin, I finally see how my real estate business can scale. If you’re starting out, do yourself a favor. Sign [email protected] slash bp today and you’ll get a hundred dollars bonus.I went to a conference last week and had the opportunity to speak with other investors who found so much relief from using Base Lane. So guys, make sure to check them out. Now let’s get into today’s first question. Today we’re doing it a little differently. We took the top three questions we see most commonly asked instead of pulling specific questions. So let’s jump into the first question.Okay, today’s first question is how do I finance my first real estate deal? And this could also be tailored to how I fund your first real estate deal. So the first thing you need to do is look at your own finances. Do you have any money to put into the deal? Do you have money for reserves? What does your situation look like? So the first thing I’m going to recommend is what cash do you have? What do you already have that’s liquid that you can deploy into your first real estate investment? So now that you have that amount, we’re going to find out where else you can find money. So Tony, should we start with maybe just conventional financing loans?Yeah, and I think when people think about traditional financing, this is what comes to mind for most people when they think about buying real estate, this is the model that comes to mind, but it’s basically you go out to a bank, you plop down 20 to 25% and then they give you the other 75 to 80% of that mortgage. And I think this one is probably maybe the most widely known, probably the easiest to kind of find. And it’s one that we’ve met lots of folks both just at conferences through our interviews in the rookie podcast that they’ve used this to get their first deal. So there’s absolutely nothing wrong with going this route. If you want something that’s quick, simple, and maybe just widely available from lots of different banks and lots of different lenders. Now is it the best route? That probably depends on you, depends on your deal, it depends on what it is you’re trying to put together, but I think it is one of the easier ways to get started.
Now, what I will say is we talk through the different types of funding options that are out there. And maybe this is even a good thing to say before Ash, there’s a few different places you can go to get money to buy your first deal. You can go to a traditional bank, bank of America, chase, you can go to, and those are like the large national global banks. You can go to small local, regional banks or credit unions. It’s another option. You can go to hard money lenders, and these are our businesses who kind of specialize in funding deals for real estate investors, typically a little bit more expensive than some of the other options. And then your final option is using something like a private money lender. So this is someone who’s not in the business of lending money, but they lend money as a way to just generate better returns on the capital that they have, right? They’re individual investors. So you’ve got the big National Bank of America, chase Banks, the local regional banks and credit unions, hard money and then private money.Tony, one more to add to that, and I honestly don’t even know the proper classification, but they’re not a bank and they’re not really a hard money lender, but a mortgage broker where they don’t work for a specific lender and they go out and they shop the loan for you. So they are their own little company and they go out and you give them your information, the property information, and they actually go and shop it for you almost like an insurance broker would for an insurance policy. And they go and find what loan product would fit you, which one is going to give you the best rate, which one has the cheapest closing cost. And so that is just another one to kind of throw into the options there As a mortgage broker.And the mortgage brokers are great because they can, like you said, give you access to all types of those loans. They might have connections with hard money, private money, credit unions, et cetera. But I think the biggest thing for Ricky’s that are listening is talk to as many potential funding options as you can. I think where Ricky sometimes get into troubles when they just go with the first lending option that they come into contact with and they just assume that whatever that person is offering is all that there is that’s out there. But as you spend more time in the world of real estate investing, you start to figure out that every single lender has a slightly different suite of products that they can offer you. And what your local Bank of America branch is offering you is probably very different than what the hard money lenders offering you and what the hard money lenders offering you is very different than what your local credit union could be able to offer you or the local regional bank. So talk to as many people from as many different of those buckets as possible before you make your decision about what loan product to use.And all you have to do is write up an email, tell them your situation, what your finance is like. If you have an idea of what your credit score is, how much cash you have available now, tell them what you want to do, copy and paste that. Just change Dear Soandso and go on to each bank’s website and find one of the lenders on there or just fill out their contact form with that information and they’ll send it to the right person within those banks. And what you’re doing is even if you don’t feel like you’re ready yet and you know that you don’t have enough saved or your credit score isn’t great, the bank can help you figure out here’s what you need to do to get that property. And it’s so much better to prepare and plan ahead than waiting to like, oh my God, this is a perfect deal, the perfect property. I need to figure out right now with the bank what I need to do and how to get approved and what’s going to make this happen. But if you, right now, even if you think you’re not ready to buy a property, start this process with a lender as to what you need to have in place in order to actually get a loan from them.And I just want to give one hack to help expedite this process. Chad, GPTI actually did this a couple months ago. I put in this prompt, I said, I need a list of 100 unique banks and credit unions within a 50 mile radius of my hometown. I said, exclude any large national banks like Chase or Bank of America, et cetera. Chad, GBT came back and asked me a few questions to clarify, and after that it worked for 62 minutes. So it took its 62 minutes to put this together, but it came back with a list of 100 different banks and credit unions within a 50 mile radius, many of which I’d never heard of before. So this is how easy it is to go out there and get that list. Now you just have to go in there and do the work and actually pick up the phone or start sending some emails to get in contact with those folks. And I think Ash, we say this all the time as you’re reaching out to folks, don’t tell them that you’re looking for a 15% down investor loan, right? Tell them, Hey, I’m a real estate investor. Here’s the end objective that I’m trying to reach. What is the best loan product you have to fit those needs?So besides just financing or getting a loan from a lender, a bank, there’s also some creative finance and one of the best ones that I like is seller finance, where the seller is actually going to hold the mortgage. So at closing, typically the bank would give the money that you’re borrowing to the seller and they walk away and they get their lump sum of cash, and now you owe the bank money for that loan. Well, in seller financing, the person is not getting that lump sum of money. They say, instead of you going out and getting a loan or you giving me cash of a lump sum for whatever the purchase price is, you are going to make monthly payments to me or whatever the payment structure is going to be. So they’re holding the note, they’re holding the mortgage, so they’re not getting that lump sum unless you are putting down a down payment.
So for example, I did a seller finance deal where I did $20,000 down. So at closing they got $20,000. Then we also filed a mortgage with the county saying that I owed the seller a hundred thousand dollars and it was amortized over 15 years and it had a balloon payment in 12 months. So in 12 months I would pay them the full balance. And in the meantime, over those 12 months, I was paying interest only, and I don’t remember exactly, I think the interest was 7% for this example. So I was making interest only payments of 7%. So they earned the interest on that money instead of a bank. My payment was pretty low because I wasn’t paying principal and interest, it was just interest. And that gave me time to fix up the property over those 12 months. And then I went and refinanced with the bank.
You could set the nice thing about seller financing. You can set it up any way possible. You could set it up that you’re only paying 1% interest. You could set it up that it’s amortized over 40 years. So you’re taking that purchase price and you’re splitting it up over 40 years. That really is going to decrease what your payment is and hopefully increase your cashflow. So there’s lots of different options. And my one advice with that is if you are talking with a seller or a real estate agent and you say, would you be able to seller financing? And if they say no, my response is always, oh, okay, I didn’t know if you had talked to your CPA or your accountant about the tax advantages of it. And usually that gets them a little more curious as to wait, what would the benefit be to me? So kind of just throwing that into the conversation.And I think seller financing is one of the best, and I think it will depend maybe on your market and kind of where you’re at. Pace morbid will probably say otherwise that you can do seller financing at any market at any time. But he’s probably perfected that in a way that many of us haven’t. But even for us, the first hotel that we bought, we did that via seller financing as well. And it was a great deal for us. It was a great deal for them and it worked. And that’s also part of the reason why I’m so bullish right now on the kind of small boutique hotels and motels because there is a lot of opportunity for seller financing there as well. So depending on your asset class, depending on where you’re at, it may be more available. And Ash, I don’t know. I mean, lemme get your experience. Do you feel like it’s maybe easier to get seller financing on multifamily than it is on single family?I think it’s easier to get seller financing from an investor. So say you have somebody that owns the property, that it’s not their primary residence, they’ve held it as an investment property, I think you have. And they’re also savvy in a sense that they realize the tax advantages of doing this. A lot of it does depend too on what their reason is for selling. So do they need the money? And I think that’s such an important piece to create a financing, is to figure out why are they selling? What do they need the money for? What are their motivations? So you can kind of work around that to make a deal that is a win for them and a win for you.So there you have it. Those are all the options or at least some of the options you have to help fund that first real estate deal. So go back to this episode when you find that diamond in the rough deal that you’re looking to take down. Now we got a few more questions to answer. We’re going to talk about licensing, we’re going to talk about some important metrics that you need to know as a rookie investor. But first we’re going to take a quick break to hear a word from today’s show sponsors. Alright guys, welcome back. So we just finished talking about financing your deal. Now we’re going to talk about a question that comes up a lot. And that question is, do I need a license to be a real estate investor?I’ve probably spent about $500 signing up to take the course three or four times. I’ve probably gotten 25% way through the course, but being a real estate agent is definitely not for me. So I would say that Tony and I have been real estate investors and we do not have our license. So let’s kind of go through the pros and cons because there’s definitely advantages to having your real estate license. But I would say that no, you definitely do not need your license to invest in real estate.And I think, I dunno, what are some other examples we can give in life? I know how to drive a vehicle and I can drive my car from point A to point B, but can I give you a detailed breakdown of the inner workings of that vehicle and how the fuel goes from my gas tank to the engine and all the things that happen in between there? Absolutely not. Can I turn on my television and enjoy my favorite show on Netflix? Absolutely. I know exactly how to work my tv, but can I tell you how the signal gets from Netflix servers and lands on my TV thousands of miles away? Absolutely not. So I think it is the same thing, right? As a real estate investor, knowing how to use the tool is sometimes enough and you don’t necessarily need to know the inner workings of the tool itself. So as long as I know how to work with real estate agents, as long as I know how to work with wholesalers, as long as I have a means of acquiring those deals, I don’t necessarily need to know the inner workings of the tool and how it’s working.Yeah, I think the thing that came to me, an example was a car salesman. If you buy cars and maybe you fix ’em up a little bit and you’d sell them or you’re buying cars to put on to Turo or whatever. As a car salesman working at a dealership, you’re going to most of the time be the, when people come to trade their car in, you’re going to know first this person is looking to sell their old car, just like an agent may know first that someone’s looking to sell their house. But most of the time if you’re in the business of buying a car, put it on Turo to rent it out or you’re fixing them up because you’re a mechanic, you’re most likely not also going to be a car salesman, but maybe say you are a mechanic and you want to find cars to flip or whatever, that would be a parallel business that you would be doing the horizontal integration.
We do see a lot of business owners do that where it’s like, oh, it makes sense to also do this and also do this and things like that. But for this circumstance, yes, you can bring in additional income as a real estate agent. You won’t have to pay a commission to somebody else for buying and selling any of the properties that you own. But there is a cost to being a real estate agent. And there is time put into being that one of the big reasons I do not want to get my real estate license and I would not want to buy or sell properties for myself is I don’t want to do the paperwork. I don’t want to fill out the contract. I don’t want to have to go back and forth with the other agent trying to figure out details and things like that. I don’t want to have to schedule showings when there are tenants in place. I love having a real estate agent that communicates directly with the tenants and when they’re showings, and I am just completely out of that, but I don’t even know what the cost is. But to maintain your real estate license, there’s a cost. You have to have your license with a broker who takes a percentage of that commission. And then you also have to do continuing education too throughout the year. So that’s more schooling than I definitely do not want to do.And we’re talking more about the cons. I guess maybe some of the benefits of getting your license. You’ve got access to the best data for your specific market, my understanding that not everything always makes it onto the, and sometimes there could be a delay, a lag there, so you get access to the best information. And you can also, like I’ve seen the backend of the MLS or gotten data from there, and definitely the ability to manipulate the information inside is a lot stronger on the MLS than it is on a Zillow or Redfin. So even that piece I think has beneficialJust the seller’s notes or the agent’s notes. I’ve gotten the listing from my agent directly instead of from the MLS. And there’ll be a private little note section where sometimes I’ve seen that they’ll put what the rents are for the tenant and you can get a copy of the rent rider and there’s a lot more that you can have access to as a licensed agent than just looking on Zillow to your point. But that’s a big one is knowing what the rents are and stuff that can expedite, yes, this is a good deal for you or not.So the quality of data is potentially better if you have direct MLS access. I think the other piece is say that you are someone who flips homes and you want to maybe save on commissions. That’s another great reason maybe to get your license if you can list these properties yourself and actually be good at it because you could list yourself, be your own agent and do a terrible job, and you end up losing more than whatever 5% you would’ve paid, or two and a half percent really you would’ve paid in commissions. But say you can be good at it, then maybe you can save a little bit on your commissions as well. So I think those are probably the big benefits and you have a deeper working knowledge of the transactional side, all the forms, the disclosures and all those things that go into it.
But I think Ash back to a conversation we have with David Green, our friend of BiggerPockets who wrote the book sold, he’s an agent, he’s a real estate investor. And I remember asking him this question, he said, unless you want to be a top producing agent and a real estate investor, don’t get your license. If you just want to have it just to have it, it’s probably not worth it. But if you actually want to build a business around being an agent, then it’s most likely worthwhile. So I always keep that in the back of my mind when I hear folks ask, should I get my license? It’s like, well, do you want to make this a business? And if the answer is no, then okay, is it really worth the time, effort, and energy that goes into acquiring and maintaining that license?Yeah, and that’s another thing too, is you can create a business out of this. This could be another source of income for you. So I mean, if that’s something you want to do, that can be a huge benefit to you. So yeah, I think it’s more just personal preference as to, because you could also say, Tony, you should actually get your GC license. You’ll save a lot of money not paying eight 10% to a GC to oversee your project. And that’s actually more than when an agent would make on commission after she splits it and after the broker is. So there’s other things that you could do to save money too. So just something to think about is if you want to have another additional source of income that is real estate related, then there’s other options for you out there too. Okay, we’re going to take our last break, but when we come back, we’re going to talk about a cap rates and why does it actually matter or does it? We’ll be right back.
Okay. Welcome back to the Real Estate Rookie podcast. Today we’re breaking down three of the most commonly asked questions by rookie investors. And this one is talking about metrics. What is a cap rate and why does it matter? So cap rates are often talked about a lot in small multifamily, large multifamily commercial properties, and you oftentimes don’t see it mentioned much for residential deals. Single family homes are not commonly, this isn’t a huge metric used for that. You see cash on cash return, 1% rule, there’s all these other metrics you can head over to biggerpockets.com/glossary. And if you ever hear words on the podcast or metrics that you’re not sure about, you can go ahead and there’s a tremendous list of these different terms and information that you can go ahead and pull this information from. So Tony, tell us what is the cap rate of your boutique hotel?Yeah, so we bought that property and gosh, I can’t remember what the cap rate was at the time of purchase, but at least in that area, the prevailing cap rates for hotels of that size, or I want to say somewhere in nine to 10%. And typically cap rates on hotels are higher than what you see for like multifamily. But the reason that the cap rates are so much more important on the commercial side is because that’s a big part of how those properties are valued. So we talk about properties trading or selling at certain cap rates, and ideally you want to buy at a higher cap rate and then sell at a lower cap rate in that spread is where you’re able to generate a lot of value. But yeah, cap rates are going to vary just like cash and cash return varies for single family homes. Cap rates are going to vary from market to market, and maybe 10% is a good cap rate for commercial hospitality property in Utah, but maybe 6% is a good cap rate in the beaches of California. So it’s going to vary from place to place. But yeah, ours was somewhere in that nine to 10% range.And the cap rate is calculated by what you’re not operating income is, so your income minus your expenses. So this is very different than cashflow because it doesn’t include any principle to say your mortgage that you’re paying on the property or any debt that you’re paying, and then that’s the operating income is divided by the purchase price of what you purchase the property for. Or if you’re just looking at an evaluation, you can also use the market value of what the property is currently valued at. A couple things to take into account, just like any other metric or statistic, is that this shouldn’t be what you base your decision on. Oh, this is a great deal, this is a bad deal. There’s other factors to take into consideration, such as appreciation, how you’re going to finance the property since net operating income doesn’t include your principal payment that you’re paying back, or even capital improvements that will need to take place on the property too over the course of the next five, 10 years.And I think this metric is, I wouldn’t say more advanced, but yeah, I think it’s a little bit more advanced of a metric. And I think for the Ricky’s who are just getting started, as Ashley said, it should only be one of the metrics that you look at, but you’ve got to go back to what is your true motivation for investing in the first place? Are you looking to strictly maximize cashflow? I just want the highest dollar amount per month that I can get. Then that’s one metric. Do you want the best return on your investment? Because sometimes I can get less cash flow, but get a better return on my investment. For example, if I put down 25% on a property, my cash flow is going to be higher, but my cash on cash return will be lower. If I put down 10%, cashflow might be lower, but my return on that investment is going to be higher. So what’s important to you? Do you want to maximize cashflow? Do you want to maximize your cash on cash return? Do you want to maximize your appreciation? Do you want to maximize your tax benefits? Take all of those kind of key metrics, cap rate included and use those together to make your investing decision. But yeah, to Ash’s point, I think just relying on cap rate can sometimes get you into hot water.Yeah, you can also go to biggerpockets.com/bigger deals and you can play around and look up different properties on the mls and it’ll compute the cap rate for you. And you can kind of see how maybe a single family home would compare to a smaller multifamily property that’s listed in the same market. And also just to get an idea of what cap rates look like in your area. So you could pull up your market and bigger deals and go through and just easily glance. And as you’re scrolling, it literally shows it to you right there. So you don’t have to take the time to figure it out for each property. It’s already telling you what the cap rate is for each one.So guys, look, trust me, if you’ve been stuck on questions like these, you are not alone. Every investor starts with the same curiosity and confusion, but the more you ask, the faster you grow.And also remember, real estate isn’t about having all the answers right away. It’s about taking the next right stop. Start by exploring your financing options and don’t stress about getting a license and make sure you’re learning how to run your numbersToday. We have a bonus guide just for rookies like you to give out. So make sure you check out the tenant screening guide that Ashley put together with Rent Ready. It’s a great next step. If you’re looking for your first tenant, it’s free to download and you can find it at biggerpockets.com/tenant screening. And also, don’t forget to subscribe, leave a review and share this episode with someone else who’s just getting started.I’m Ashley. And he’s Tony. Also a big thank you to Base Lane for sponsoring today’s episode. And don’t forget to go to base lane.com/bp to get your $100 bonus. Thanks for watching, and we’ll see you guys next time.