Posted Friday, November 11th, 2022 by Richard Roy
As prices for real estate take a dip we discuss new and young investors, interest rates and scenarios to find lending for buying investment property, and we talk about why it’s a great time to buy real estate. We talk about loans that allow you to buy as many properties as you can afford, the qualifications, and current loan rates.
Brett Bernard: Welcome back to another episode of Behind the Curtain Real Estate Podcast. I’m your host, Brett Bernard, and today we brought back Tina Talarico.
Tina Talarico: I’m Tina Talarico with Capital City Mortgage. I’m commercial loan officer. I’ve been in the financial industry for 27 years now. I was on the residential side and, and, and had been working with investors for about 15 years now.
Brett Bernard: So Tina, we brought her back. We had an episode couple of about a month ago, wasn’t it? We, we got a lot of inquiries about the discussion that we had Tina’s here today to discuss interest rates and different options and potential scenarios for you investors out there. And, you know, before we get into interest rates, I wanna discuss something that’s been irritating me this last couple weeks cuz I’ve gotten calls from of investors and they’re, you know, they’re kind of hem hawing around about buying. So I wanna talk about is now a good time to. I get that question from a lot of people that are like, Well, is should I be buying now? You know, but interest rates are seven, seven and a half percent to buy an investment property. Let me put it to you this way. In May, June, July of this past year, I sold more real estate in those three months than I did all the previous year. What baffled me was that people were paying retail and over retail. They were buying property as if Joe Biden said, We’re never cutting down another tree, We’re never building another house, so therefore you better buy what’s out there now cuz you’re never gonna get another one. That’s how people were buying. It was insane. And the hedge fund for buy blocks of house a site unseen and and paying 20,000 over market. I still today cannot put together their, their thought process on that. I don’t understand, other than the fact they had a lot of cash that they needed to do something with and they just figured they would buy a bunch of real estate and burn it up that way. So those folks have bought this past year. And look, I bought a lot of properties for people but I bought those properties after giving them a good education. Yeah. This is what the house is worth and this is what you’re paying. So you’re not putting yourself in a good position financially, but they were looking strictly at the cash flow. They weren’t looking at the asset value, which is fine. You know, cash flow is key. That’s the main thing you should look at. You gotta be reasonable when you’re looking at the value of the property. So those folks have paid 10 grand over market this past year in an investment property that’s cash flowing today. Now that $110,000 house that they bought in Raleigh that was rent for $1,200 a month is now worth 95,000. Maybe. You could buy that same house today for 95,000 so that that investor has lost a percentage of his value on his asset because of inflation, and a lot of these renders lip paycheck to paycheck. A lot of ’em now can’t afford $1,200. So their lease expires, they’re leaving those properties and going and finding a place for 900 a month because their check’s the same every two weeks, but their costs have gone up. So they’ve gotta reduce expenses and first place they’re gonna go is rent. Or least one of the few places they’ll go is rent. So now you’ve got a property that you paid 110 for, you’re renting for $950 a month to keep it rented. You’re not even getting the 1% anymore. You’ve lost $15,000 in your equity position of the property. So over the next three years, do you agree that things will turn around?
Tina Talarico: I do. I do.
Brett Bernard: The real estate market always goes back up. Guarantee I can say a hundred percent, I’ll put everything I own on the line. The real estate market will go back up.
Tina Talarico: It will.
Brett Bernard: Guaranteed unless a meteor hits earth tomorrow and it’s over, then yeah, it won’t go back up. We’ll all die and it’ll be done. But in if that doesn’t happen, the market’s going back up. Let’s take that scenario that I just told you, and I’ll say the market, let’s say November elections happen, things change and confidence goes up and people start buying and inflation kind of levels off and things get back to somewhat of a normal pace. Now that investor has to spend the next year or two or three years getting his asset back up to par where he was at. Now let’s take a person today that were to take and buy the exact same house for 95,000 and rent it for $950 a month because that’s what the market dictates it’s worth and what the ring comps say. Where do you think that investor’s gonna be in three years when confidence comes back? They’re now gonna have a house with 15,000 equity. They’re now gonna have a house that is increased in rent cash flow $150 a month, and they’re in a much better situation. So my point to this is to get people to understand smart investors buy when the market is scary. Those are the guys that make the money. Waiting for a market to cap out and then deciding to be an investor and jump in is ridiculous to me. I don’t understand that theory. You know, you go and you buy Amazon stock when it’s $140 a share or whatever it’s highest point it’s ever been. I know a lot of people that bought Amazon stock. Well guess what happened three months later it tanked and they lost half their value. So now they’re gonna spend the next couple years regaining what they lost just to get even. I wanna hear your take on that, and you’ve been in this business a long time. I haven’t been 27 years. I’ve been 21 years in the real estate business. So what is your take on that theory? You made a lot of money. I made a lot of money last year with people that wanted to buy top of market, but I did it with an education to them that you do know that if anything changes, you’re gonna be in a negative asset position.
Tina Talarico: Definitely. So, and that’s really what they need to focus on right now, is gaining that equity. The market’s gonna come back. There’s no question about, it has been in a decline, but I think it’s gonna turn the other way. And now’s the time to buy. There’s no question about that. You’re exactly right about everything you said, and I have investors that come to me and they have the same concern about the higher interest rates. However, we are seeing properties that were 150 or 120 just a few months ago and, and now they’re 15 10 to $20,000 less than what they were just 120 days ago.
Brett Bernard: Which is the best time to buy! Right? I haven’t done the math on this, but buying $110,000 house at 5.5% interest versus buying a $95,000 house at 7% interest, I’m gonna guess that you’re. Your ratios are gonna be in the same ballpark. So then at that point it comes down to cash flow. What do you pay for it? What is the cash flow? If you can buy a house that will have $15,000 in equity in two to three years, four years, and it’s gonna increase 150 to $200 a month in rental income in the next three or four years, and you can buy it today and break even. Would you go buy? Would you go buy Amazon stock if somebody said, listen buy it today at 80 bucks a share. I guarantee you it’ll say at 80 bucks a share. All it’ll do is go up. Now values may drop some more. You may buy a house at 95 and all of a sudden it’s worth 90, but it’s still gonna go back to its original point and exceed in the next three years, or four years, or five years, whatever that’s gonna be. Look at 2008 as an example. 2008 and ’09, everybody, that, that is it. The world’s coming to an end. The real estate market’s crashing. We’re doing, people were, you know, walking away from their houses as if that was it. People were jumping off of buildings down in Wall Street. But here in Memphis, by 2012, we were already back at normal levels. Four years later, we were at normal levels and exceeding our previous numbers before 2008. So think about all those folks that just weathered that storm, or those folks that came in in 2009 and just scooped up all the property that people were walking away from for pennies on a dollar. Think how they did. I know one particular guy who took $180,000 turned into $1.2 million in seven years, by doing that. I’m trying to tell people they need to be buying now. Buy now. If you can cash flow a property and break even, you need to be buying property now because now’s the best time to buy. December, January are probably the two best months to buy this year, cuz I think that’s gonna be our lowest point. Soon as we hit March of next year, I think people are gonna realize the world’s not coming to an end. Everything’s gonna kind of stabilize and they’re gonna go back into the market and start buying property again. Owner occupants especially.
Tina Talarico: I do too. Right now we’re seeing the investors aren’t battling with the owner occupant buyers. That has slowed, but investment properties, they’re still buying them right and left. A lot of them are looking at the same advantage that you’re talking about.
Get away from the notion that you’re gonna buy 10 rental properties and quit your job, cuz it’s not gonna happen.”
Brett Bernard: The smart investors are looking at those angles. The newer investors are a little more skittish, and I get that. They’re taking out a mortgage. They’ve been brainwashed into believing that investment real estate is income building. Get away from the notion that you’re gonna buy 10 rental properties and quit your job, cuz it’s not gonna happen. You wanna buy 10 rental properties, that in 10 years you can sell and triple your money, right? Or keep ’em for 25 years and cash out and retire with a couple million dollars. That’s what rental properties should be getting based on. Now I know that some of the loans are geared on cash. What’s the loan that you mentioned it to me and I can’t remember the the acronym for it.
Tina Talarico: It’s DSCR. Which is debt Service Ratio.
Brett Bernard: I wanna talk about that loan cause that intrigued me. You mentioned something to me about it, I did a little research on it, I’d never heard of this loan before, but this may be an opportunity for these young investors who are nervous about the market to do something like this or possibly do an interest only loan to create the cash flow they want even in a bad economy.
Tina Talarico: That’s correct, or we’re offering 40 year terms. We’ve always offered 40 year terms for a long time. However, they’re more popular now than they were before. You can always refinance. I mean, you can always refinance if you want to go to 15 or 30 years and you’re not comfortable with 40, refinance is an option down the road. Also, what I’m seeing is you. These investors are building some equity in the properties, they’re refinancing them, taking out some cash, using that money to go purchase more properties, growing their portfolio. With the DSCR loan, we don’t ask for tax returns, W-2s, pay stubs. We don’t use a debt to income ratio on any of our loans. We specifically look at the property investment potential, solely. We don’t look at the investor’s personal income. We ask for a bank statement to just to show that you have the funds to close. But other than that, we really don’t ask the investor for any personal documentation. It’s all about the property; all about the investment. I have investors that have recently bought 3 or 4 properties and they can’t get a loan because they have to debt ratio. You cannot use that rental income until you filed it on your tax returns.
Brett Bernard: So if you do a 40 year loan and your payment’s $495 a month, whatever it is, I believe to answer Richard’s question, yeah, you could pay 800 a month on the principal balance of loan and pay it down faster. But then all of a sudden you have a month where cash flow’s tight and you can’t make a double payment. Make a single payment. I like that idea cuz you were kind of in control of your cash flow. You decide how to use the cash flow. Me personally, I’d pay the loan down in 20 years, or I’d run it for three to four and then refinance it into something a little more suitable. But a 40 year amortization, I don’t know if you can get any better than that. That’ll negate the increase in interest rates currently, I think when it hits your cash flow.
Tina Talarico: That is true. That is true. And there’s really no disadvantage. Ethe most part they’re refinancing or selling in 5 to 7 years sometimes 10 years. We see some of ’em keep ’em 10 years, but, 5 to 7 years they’re out of that loan.
Brett Bernard: Now, is there a prepayment penalty on that 40 year?
Tina Talarico: Yes. I typically quote it 3 years or they go up to 5 years. You can reduce it to 1 year.
Brett Bernard: So you got a 40 year amortization, you keep the house 5 years, it increases 25% and then you flip it, make some cash, turn around and buy another property. Like you said, 5 to 7 years is the average term of a holding of an investor. I’ve got folks that have held property for 20 years, they’re paid for and they’ve got a significant asset sitting there. They paid 30 grand for a house. I just did one for, between our title attorney and one of my investors, he bought 7. I think he paid over the last 10 years, he acquired those properties and probably paid 30, 35,000 a piece. So he probably had all in 210, 250,000. We just sold ’em for 470,000. So he doubled his money in literally 7 to 8 years.
Tina Talarico: With these loans, you can buy as many properties as you want.
Brett Bernard: There was a time, yeah, where Fannie and Freddy. They cap out a cap at 10, 10 properties is the max you could buy. So then what they’d do is they’d open an LLC and buy 10 in the llc, then they’d buy 10 of their personal names. But what Tina was saying was that the particular loan product she’s talking about, there is no cap. You can buy a hundred properties, you can buy a million properties. There is no cap to how much money you can borrow. As long as you can show financially, you can support the loan and the debt service.
Tina Talarico: And a lot of investors cannot support that with their tax returns. Or even the rent that they’re, claiming on the taxes.
Brett Bernard: So basically if I wanna buy 30 properties tomorrow and they’re all renting for a thousand dollars a month and I use the debt service loan, I’m gonna be able to show $30,000 towards servicing that loan. Correct?
Tina Talarico: That’s correct.
Brett Bernard: That gives you the ability to buy what you want as long as you’ve got a decent credit score, but you don’t ask for income…
Tina Talarico: No income. No income whatsoever.
Brett Bernard: What is the credit score requirements on that?
Tina Talarico: The DSCR we can go down to 680 on those. Over 700 the terms are better.
Brett Bernard: More favorable? What’s the interest rate running on that?
Tina Talarico: The interest rates are running anywhere from 7.5 to 8.25.
Brett Bernard: So you gotta make sure you can cash flow. These at least break ’em even. In a nutshell, that loan to me sounded like something that as long as you have a decent credit score, you show the income to service the loan, they’re gonna consider the cash flow of that property as a deciding factor on whether you can get that loan or not. Is that correct? Or are you saying you have to file it on your taxes first before you can use that income?
Tina Talarico: No, you don’t have to file it on the taxes. What we do is we use the market rent. If the property’s currently leased, we can use the leased rent.
Brett Bernard: And you attribute that to. Ability to support the loan.
Tina Talarico: Right. To support the payment. That’s correct. 1% is the norm, which you want to at least cover the payment, taxes and insurance.
Brett Bernard: They need to show a $1,000 a month income when you say 1%.
Tina Talarico: 1%. Which means the rent versus the note taxes and insurance. So it needs to be a break even situation. However, we do go down to the 0.75. So if it’s not quite there, that’s okay. That’s okay.
Brett Bernard: As long as you’ve got the other income to. Show you can make up the difference or support the difference.
Tina Talarico: Yeah. And we still don’t ask for income documentation on income.
Brett Bernard: Did we not learn our lesson in 2008 from that ?
Tina Talarico: Well, you know, I’m, I’m thinking the same thing. But you know, they’re, they’re looking at the big picture and they’re looking at credit and that sort of thing.
Brett Bernard: But at the same time, I think 2008 also showed a lot of these lenders. Just rolled over on their backs and died that if they’d just hung in there for a couple years, or at least taken these assets back and sold them, they would’ve survived. They went doom and gloom in 2008 and a lot of these banks rolled upside down and died. But they could have survived, I think if they’d have taken these properties back when people walked away. Sign a sign, a quick claim deed release, and just take the property back and at least have it as an asset on your books, and then sell it when the timers right and recoup your loan, and plus some. I don’t understand why a lot of the banks did what they did, but I think, you know, if I was running one of these big banks, that’s what I’d have done. I’d have started buying back those assets or taking ’em back, letting people walk away free and clear and just stacking ’em up on the side until timer’s right, to liquidate ’em and make some money.
Tina Talarico: The investors right now they’re especially like you said, the newer ones, they just cannot grasp the advantage of buying right now.
How many properties do you need to quit your job?
Brett Bernard: Right. Well, let’s, let’s talk about that. Let’s say you get a new investor who can buy 10 properties tomorrow and a loan. Average investor, when they, when they’ve got a mortgage, wants to produce about $200 a month in free cash flow after your note taxes, insurance, and whatever else. But out of that $200 you’re gonna spend at least a hundred of that on maintenance and whatever. So it’s, the reality’s gonna be a hundred to $150 of property positive cash flow. So how many properties do you need? That’s what I would ask a young investor. How many properties do you need to quit your job? What do you make now? I make $80,000 a year. Okay, well let’s do the math. But you’re gonna need 72 properties in order to equal your current income at those numbers if you’re taking out mortgages. So, if you’re listening and you’re a new investor, get away from the cash flow theory. That’s the dumbest theory in the world. Investor real estate should be about asset building. You don’t buy stocks in the stock market for income. You buy stocks, you put money in a 401k to let it grow for retirement. You gotta view real estate as the same thing. That’s the only way you’re gonna do well in this business.
Tina Talarico: That’s true. I’m working with an investor now and he’s buying 36 properties and he’s been doing it a long time and so he knows the advantage of buying right now while prices are down a little bit. He’ll turn around and he’s gonna rent all of them. However a few of them have some pretty good equity in ’em right now and he’ll rent ’em for a year or two, turn around and sell out which ones he’d make the most money on, take that money and turn around and purchase more. However the majority of ’em he’ll keep long term. So, obviously, and he’s, he’s been doing this a long time, so he understands the advantage of buying right now.
Brett Bernard: Tina, how can people listen and get in touch with you?
Tina Talarico: I can be reached at 901-826-7218 and be reached anytime at that number.
Brett Bernard: And I would encourage you if you’re considering buying real estate: number one, call me Brett Bernard at EPM Real Estate 901-692-7401. I’ve been in an investment game a long time. I’ve been a real estate developer. I’ve owned my own rental properties. I’ve owned 41 at one time. I’ve bought, sold, developed, you name it, in real estate I’ve done it and I have investors from anywhere in the country and anywhere on the globe that, that come to me and I help them buy portfolios, and 9 times out of 10 I send them to Tina when they need a lender, because Tina has has got a a basket of loans and ideas to help people out. Tina in one particular deal, a package deal, worked tirelessly to get somebody approved. Honestly, there was a point I thought, Man, this thing’s gonna come unglued, there’s no way it’s gonna finish. But she got it finished. I appreciate that and we got it closed. Just give us a call if you’re interested, cuz we’d love to, to educate you further on the market. Don’t be too proud to ask, ask questions. I always tell people, you know, I get this a lot. Is this, this may be a dumb question, but… if you don’t know the answer, it’s not a dumb question. Period. That’s how I view it, and I’ve educated a lot of investors who are now seasoned investors and doing very well on how to buy, when to buy. When I tell you, now is the time to buy, now is the time to buy. You should be calling me or your. If you’ve already got one or calling Tina to talk about loans and you should be buying today, because unfortunately, if you bought it in July or August, the chances of you actually getting positive in the next two or three years is slim. But if you buy now, the chances of two, three years of you gaining is very high. I guess the main point I wanna make is there’s all kind of opportunities for young new investors to still be buying today. If you’re concerned about cash flow, if that’s your only reason to buy, then look at an interest selling loan that you can refinance when the market changes. Look at a 40 year amortization, which Tina discussed, which will help create that cash flow you want until things change and you can refinance and increase your cash flow. There’s no reason not to buy. There really isn’t. So you should be in the market buying if you’re not, If you’re gonna wait until the market turns around in the next couple years and buy the top of market, I feel for you, but you should call me and let me educate you and let’s discuss why you’re doing that because I truly believe now is the time to buy.Be Social:
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