In this episode, Cynthia Meyer and Veronica Woods dig into some alternative financing strategies with mortgage expert and podcast guest, Julie Simmons of Brandywine Lending. We talk about some ways to think about developing a partnership with your lender as you're growing and scaling your real estate portfolio.
In this episode of the Rental Property Café™ Video Podcast they cover:
What questions should you ask yourself before speaking with a lender? [00:04:44]
When to consider a Debt Service Coverage Ratio loan? [00:7:06]
How do lenders evaluate applicants who are self-employed or retired? [00:13:16]
What plan should you have ready before seeing a lender? [00:17:22]
What’s the one thing every lender wants you to know? [00:23:46]
Why is it important to stay in touch with your lender? [00:25:55]
“The lender really cares about that debt to income ratio.” - Julie Simmons
“Getting your ducks in a row and talking to your mortgage broker, for example, before you even start looking, helps you know what your budget is.” - Cynthia Meyer
“I've had people have the totally wrong product because they didn't talk to their lender enough about [mortgages].” - Veronica Woods
About the Rental Property Café™:
The Rental Property Café™ podcast offers a real estate tool kit for busy professionals who are building a real estate portfolio. In each episode, co-hosts Cynthia Meyer & Veronica Woods explore ways to grow a successful real estate business while growing your career.
☕ See more financial planning guidance for real estate investors from Cynthia Meyer on the Real Life Planning blog: https://reallifeplanning.com/blog
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Connect with Veronica Woods:
Transcript- Episode 18
[00:00:08] Cynthia Meyer: What are some of the alternative financing strategies for real estate investors? That's a question I get a lot and I know you do, too. Hi, I'm Cynthia Meyer with Real Life Planning.
[00:00:20] Veronica Woods: Hi, I'm Veronica Woods of Daniel Woods Real Estate.
[00:00:25] Cynthia Meyer: And this is the Rental Property Café™ and today on episode 18, we are talking with Julie Simmons from Brandywine Lending.
We're going to dig into some alternative financing strategies and some ways to think about or approaching developing a partnership with your lender as you're growing and scaling your real estate portfolio.
Welcome Julie. Thank you so much for talking to us this ,morning. Tell us what's important to know about you?
[00:00:50] Julie Simmons: Thank you so much for having me this morning. I really appreciate you giving me some time. Things that are important to know about me is just that I have an extensive background in both real estate and finance.
I was a investment analyst for many years and then worked in real estate for a number of years. So I bring a unique perspective to the transaction because I think I look a little bit bigger picture than just you're buying a primary residence and you are looking to finance that purchase. I have the ability- because I've worked in investments in the past to really help look at a bigger picture for when you're trying to build a portfolio; especially a diversified one that includes real estate holdings.
[00:01:33] Veronica Woods: Yeah, and that's why I naturally connected with Julie because I see so many of my clients sometimes make the wrong loan decision because they're not talking with someone that can really have the breadth of conversation and understand there is more than conventional loan and hard money; there is things in between.
And I know that's really what we want to hopefully get to on this podcast episode and really have a healthy conversation with kind of this triad between Realtor®, lender, financial advisor, all talking about how to really make the best decisions in terms of the financing for your investments.
[00:02:15] Julie Simmons: One of the things I really like about the company that I work for, and the specific way that we lend money is, we are not lenders. We do not lend our own money. I'm a broker. And so, the reason I really enjoy being a broker is because it gives me the ability to find the perfect product for each of my clients.
And when you come to me with money to put down and a good credit score, all I'm doing is shopping rates for you. I have 25 different lenders that we work with and so I go out into the marketplace for on behalf of my clients, and I find them a great rate. But then I have other people who have unique situations.
They may have lower credit. They may be self-employed. They may be looking for an investment property. I don't have 25 lenders for them but I still probably have five to seven. And so, I have different products that I can offer that if I just was working at a lender who lent their own money, I would only have the list of products that they had available.
So I love the ability to be able to offer products that are specific to the person that's coming to me to work with me.
[00:03:21] Cynthia Meyer: I think that's such an excellent point, Julie Often, have situations when I'm working with clients as a financial planner, where as that client is growing and scaling their real estate portfolio, they really need to up-level their team in terms of who's helping them and having a broker, either on the conforming or the commercial side, can be really helpful in figuring out what are all the options, especially in a high interest rate environment like we have right now.
[00:03:49] Veronica Woods: So usually, Julie, the way we like to structure these is we know the conversations we're having with our clients privately on the side, and then we bring them to the podcast and then Cynthia and I banter about it based on the advice we would give jointly back to our clients and just talking about the breadth of products, the five to seven options as opposed to one option, I think both Cynthia and I primarily work with investors, so with your investor hat on, they really think it's conventional loan, hard money loan, or cash. So what is your thought in how clients should approach you in terms of you getting enough information so that you can help them figure out what they really need?
[00:04:37] Julie Simmons: It's really just a phone call because obviously I'm, knowledgeable about all the products that I can offerIt's really important to get on a call and talk about not only what your goals are for this property, but what your long-term goals are.
So is this the first property that you're purchasing? Is it going to be a series of properties? Are you looking to buy and hold this property? I think that looking long term allows you to meet your goals. I think if you are shortsighted, it doesn't put you on the path that you want to be on. You need to be looking down the road a little ways so that you can find your destination and make sure that you're getting there.
I think that especially when you're buying your first couple of houses, it's very important for cash flow to be conducive to purchasing that next property. And so there is different aspects of the different products that I can offer that allow your cash flow to be a little bit better which is something that also people don't know about with the different programs.
And I do think it's really interesting that when people think about investing, it is very scary to think about going into this transaction. You have this other mortgage that you have to carry if you don't have a renter. If you don't have a tenant in there, there is different expenses and I think that's probably something that you both spend a lot of time on when people are looking at properties as reviewing with them what that cash flow is going to look like and what their return on investment is going to be because you're not looking to buy a purchase that is going to have you be in the red and that you're spending money. So it's really important to be cognizant of what the market rents are, what the interest rate's going to be, what the purchase price is going to be for the different areas that you're looking in because again, the only way to continue to build that portfolio is to make a good investment decision and so that's where I think your expertise is invaluable.
[00:06:27] Cynthia Meyer: Yeah, for sure Positive cash flow- it is the source of the down payment for the next property. So a lot of people have traditionally, in the past decade, they've re relied on a BRRR strategy- Buy, Rehab, Rent, Refinance, Repeat.
But sometimes, somebody who is refinancing now to try and pull equity out of the property ends up being in the red in terms of net cash flow. Isn't something that we generally want to encourage people to do. So, tapping into the equity may not be in this interest rate environment, the most solid reason to put a down payment on a new property.
[00:07:05] Julie Simmons: No, absolutely. one of the nice features of the DSCR program, which is a product that we offer for investment products, is that for the first 10 years, it can be interest only. And so, that is game changing as far as what your monthly payment looks like because you, while not making principle payments, do you have the ability to cash flow a little bit better?
[00:07:25] Cynthia Meyer: Can, we just be clear for everybody who doesn't know what that means? So DSCR is debt service coverage ratio. Can you explain that to us a little bit, Julie?
[00:07:33] Julie Simmons: Yeah, absolutely. So it's an amazing product for people who are looking to make a purchase for an investment property. When you think about it, it's going to fall in between a conventional loan and a hard money loan as far as the rate and the terms and things like that. It is a 30 year amatorized loan, so you will be locked into your rate for 30 years. You do have the option for the first 10 to be interest only. The way the product works is it does not look at your debt to income ratio. So when anytime that you purchase a home, the thing that the lender really cares about is your debt to income ratio. They don't care if you buy a hundred thousand dollars home or a million dollar home. The thing that they're looking at is how does this new monthly payment plus your existing debt compare to your income and based on the product that you're purchasing with, based on your credit score, you have different ranges of what your debt to income ratio can be.
So maybe you're buying an investment property and you already have a primary residence and you have some student loans that you had and you have a car payment. Your debt to income ratio might not support the purchase that you're trying to make even though you will have rental income with it.
There is different ways that you're allowed to report and use that rental income for qualification purposes. So what this product does is it does not look at your income. The only thing they're going to ask for from you is to see your credit score. So we'll run your credit. And then they'll want to show that you have assets to close.
But the way that they determine whether or not the loan can be approved is they are going to send out an appraiser. The house will need to appraise for not only the purchase price, but it will need to appraise for what the home is going to rent for. So as long as the rent is covered based on what the appraiser sees as a market rent in the area, the loan can be approved.
It's a very fast settlement because all we're doing is an appraisal and title. There's not a lot of underwriting that goes into the file because they're not underwriting you. They're really spending their time underwriting that appraisal. So as long as the appraisal comes back in a way that makes the lender happy, we can settle very quickly on those properties as well.
So that's a 25 day settlement. It's not as fast as cash, but it's all in all pretty quickly.
[00:09:53] Veronica Woods: Julie, now the ratio the lenders use in terms of covering the rent is not necessarily just the debt, there is some other expenses included in the.....
[00:10:05] Julie Simmons: So they're going to want to see the homeowner's insurance and the taxes included as well. Because again, the only money that they're looking at to cover this debt service and anything that's a lien-able thing against the property, which taxes obviously are. They want to make sure that their investment is insured- so that if you know it burned down that they still have recourse on the property. They are going to want to see that all of that covered as well.
[00:10:31] Veronica Woods: So I raised that just for our listeners, our watchers, that it's not the same budget that we were talking about. And there is some earlier episodes on the Rental Property Café™ podcast, which is really exhaustive list of all the operating expenses. So basically, Julie would green light your loan.
You could potentially still be negative cash flow because you do need to still account for all your expenses; for you personally making the decision. So, the lender could say," Oh yeah, I'll lend you the money." But then do you want to do it? You need to fully evaluate the full cash flow.
[00:11:11] Julie Simmons: And that's where Cynthia and Veronica can be invaluable to help determine if those numbers make sense.
[00:11:17] Cynthia Meyer: That's rightAll those expenses that we would include in a rental property budget that the lender isn't evaluating in this situation. So those could be things like landscaping, or utilities, or your cost of vacancy, for example.
[00:11:31] Veronica Woods: Or property management not even in that.
[00:11:33] Cynthia Meyer: Property management. That's right.
[00:11:34] Veronica Woods: Like Julie said, Insurance, taxes. There is a lot that's not included. So I just would caution for people who are using that product that you still have to do your own math or if you go to someone like Julie, she can help you make sure that's accounted for. But I do caution that this product, you want to go with somebody who has experience in it.
Because from my experience as a Realtor®, people will say, I could do it, but do they really do it often enough to advise you so that you don't make that mistake in saying, oh yeah, I loan you the money is still the same as it's a good deal for you.
[00:12:17] Cynthia Meyer: So Julie, I'm interested in your take on how things change for the investor once they're real estating full-time, if you will. And if you've gotten to the point where you can walk away from your W2 job, for example, and you're completely self-employed in your real estate business or maybe in your real estate business and in another business as well, but you're completely self-employed, where you're retired and living off multiple sources of income, how does that change from the point of view of financing a new property?
[00:12:52] Julie Simmons: Absolutely. So congratulations on becoming not tied to your desk job anymore. Having the ability to create your own destiny. That's an amazing place to find yourself.
And a lot of people think that once they get to that point, there are no products out there for them, but that's actually not true. There is just different products, there is different ways to look at things. When you have a W2 employee coming in we're going to look at pay stubs.
?) We're going to look at things that the lender can depend on as far as their income. The lender really cares about that debt to income ratio. That is so important to them. And in any product that you will go into for the most part, not all, because obviously we just talked about the DSCR where they're not looking at your debt income ratio.
That's one of the things that in most products they care about. So I have people that come to me who are retired or self-employed and they may bring in three to $500,000 in income, but then they have a lot of deductions. And when you have a lot of deductions, the number that we calculate your income off of is the number that you pay taxes on.
So whatever that net number is, we're not looking at your gross, we're looking at your net. And if you only at the end of the day have $20,000 that you pay taxes on, then that's the income that we're using despite how much other funds that you've brought in. And so consequently, even though, you may have a very successful business that you're running a traditional product would not work for you.
So what we would do in that scenario is we have a lot of different alternatives. The one that comes to mind that I probably use the most is the Bank Statement program. So that's for somebody who might have a lot of deposits. I just closed one last month and she was a property manager who managed properties all over New Jersey and Pennsylvania, and she had a lot of deposits, so she would show money coming in from all of her clients.
So what they did was they took 12 months of bank statements and they calculated her income based on the deposits that were made into her account that were considered business deposits. And she was able to buy a $500,000 home just based on those. And that was with carrying multiple rental properties that she owned.
She does something that she explained to me, and I still don't quite understand it where she loans out cars. It's almost like when you live in Philly and you rent a bike, you just rent a car?
[00:15:18] Cynthia Meyer: No, there are actually a couple of services now where you can rent out your car the way that people rent out their spare room on Airbnb.
[00:15:25] Julie Simmons: So she did that as well. So we were able to use all of that income and get her into a house very easily. So we have that program. The Bank Statement program is obviously the one that I probably use the most. If you are not looking in Pennsylvania and you are in any other state, for the most part there is a No Doc program.
It's just absolutely no documents. They don't look at anything. They want to see your credit score and assets to close and beyond that, it's almost like the DSCR program- but it's just absolutely no documents. We have another program that's available that is based on your assets. So I have a lot of retirees who no longer have income anymore, and previously they would not have been financeable because again the lender wants to see that you can service the debt that you have. And so even though you can say, I have $3 million in the bank, you are not taking disbursements from that. And they want to see consistent disbursements. So even though you're retired, you're not necessarily in a situation where you're taking RMDs and things like that.
And so it's important to have a product that can work for those people as well. And so the Asset Based program is another one that I do quite a bit.
[00:16:39] Veronica Woods: We have another scenario that some of our clients are in that is partnership. I know there is a difference between if you're partnering with a spouse versus a friend or a colleague, but could you talk about things you should consider if you're joint venturing?
[00:16:58] Julie SimmonsTermination would be the thing that I would talk the most about. You just don't know how the relationship is going to progress. If you're younger and unmarried, you may get married and need equity because you want to buy a house with your spouse. I think just like any business when you're coming into this, if you are buying with anyone, you should treat it like a business transaction.
Not oh, we're just going to buy this house together. You should treat it like a business. You should come into it with an operational agreement so that you have a plan for how things are going to be run. Talking about what happens when one of you wants to sell and one of you doesn't. When repairs need to be done, that one of you want to spend a certain amount on. An operational agreement, I think would be the most important thing.
I've been to settlement where those relationships fall apart and they can't be in the same room and refinancing and buying the other person out. It can get very contentious.
And so I would say you don't go into your marriage hoping it'll end, but there is a reason you sign a prenup and you don't go into a business relationship thinking it's going to end but you also are a business and you need to figure out how your business is going to run. So really spending the time to think through different scenarios that can happen and put together an operational agreement.
[00:18:15] Cynthia Meyer: Julie, I think that's very wise. What other guidance would you hope that people were taking before they even picked up the phone and called you as the loan broker?
[00:18:28] Julie Simmons: I think it's just more that this is the path that you would want to go down. That property management, when you're buying investment properties, how are you going to run your business? Again, it's all goes back to- you have started a new business. How do you want your business to run? Are you going to answer the phone at 11 o'clock at night when something goes wrong with the property?
Is it worth it to you to hire a property manager? Are you looking in areas that are familiar to you so that you understand how the market works and who lives in that area? And is there a good rental market in that area, or are you looking in a place that you know is unfamiliar to you?
I think. Really, you're starting a new business and you need to have a business plan as to how you're going to grow your business. How you're going to run your business. Some people are very happy to pay money to a property management company so they don't have to be bothered collecting rent and chasing people down for rent when something goes wrong and the tenants go late on their rent.
Just really thinking through what this purchase looks like. It's great to get the check in the mail, but it's a business now and so really planning in the same way that you would with a partner, just how you're going to run your business.
[00:19:47] Cynthia Meyer: Anything in particular that you would want someone to organize before they started talking to a lender?
[00:19:56] Julie Simmons: Yes, so I think that one of the most important things, and I do this with people who are making investment purchases as well as their primary residents is, you have X amount of dollars. Sometimes when it rains, it pours. And what is your contingency plan? If the roof starts to leak? A pipe burst, and you have unexpected expenses because your cash flow should not be so tight so that you are unable to deal with whatever could come up. You have a purchase that you're making for a large asset that lots of things can go wrong- systems can fail, roofs can fail, windows can fail, tenants can destroy your home.
So it's really important to just make sure that you fully understand the financial implication of making this purchase. If you are priced in such a way that you're very aggressive in trying to squeeze every last dollar out of the property, maybe that's a great plan for you, but it may cause you to have higher turnover.
And what does that look like to you? What does it look like to have to change that apartment over that house over every year, every two years, because your tenant doesn't want to stay? And now, you have to repaint. You may have to change carpet. You may have to spend money because you've squeezed that little bit out.
And not that you shouldn't do that, but just what is your philosophy on how you're going to do this? What is your long-term goals with this property? And so I just think thinking through that business plan is so important because again, things are going to come up. Part of your cash flow money that you've brought in that last year will be taken away from you when you have to turn the unit, because now you could have a vacancy. You could have time where there is no one in that property because you're turning it over and the other tenant moved out and left suddenly or did something in such a way. What are contingency plans if for some reason now you have to carry both places or have to make major repairs?
[00:21:56] Veronica Woods: Now, Julie, are you having those conversations with your clients or do you feel like you have those conversations enough with your clients?
[00:22:07] Julie Simmons: I work very closely with the Realtor®, so I feel like the Realtor® and I are both having those conversations. I have the conversation as much as the client specifically needs based on where they are in the process. If they're on their fifth property, they may not need to have that conversation. If they're buying their first property, I think it's really important to hear my perspective on it as well as their Realtor®s perspective.
[00:22:32] Veronica Woods: I agree. I do think sometimes clients don't know, especially the newer ones, that they can have that conversation with you. So you have to open it up, "Hey, I want to talk about your business." Not just, "Can you send me the preapproval because I need to submit an offer in."
So I usually ask people," What did you talk to your lender about? I know I have this piece of paper, but do you know what this means?"
"Oh no, I just wanted the paper because you said I needed it by the next morning."
You should really have a discussion of your concerns, like some of those things that you were bringing up.
I find that I'm pushing people back to talk to their lender to follow up about things that they weren't fully clear about. Especially just segueing into another question about the condition of the property. Because people use the term cosmetic loosely but, when I say that to you, you mean by Fannie Mae standards? So be clear, cosmetic for conventional is by a specific standards. From my experience, I've had people have the totally wrong product because they didn't talk to their lender enough about that.
[00:23:41] Julie Simmons: If I could, say one thing that I think is really important for everybody to know.
I would advise you not to wait until you found a property to do this process. I think it's so important to be gathering information at the beginning. So before you're out seeing properties, you should be speaking to a lender about all of these different concerns.
Then you are under the gun like, oh, I need to get this letter by tomorrow and now all of a sudden, we're having these rushed conversations and we're trying to fit everything in and we're trying to get your application submitted so we can at least do a preliminary pre-qualification depending on what product you're going to go into. We don't have time in that scenario to really flush out everything.
And you'll think of questions two days from that original conversation that you may need an answer to. But if we had that conversation three weeks ago when you started looking, then you could have had that two days to call me back or follow up with a question that you have and now all of a sudden you're under contract and it's very stressful.
It causes you to not enjoy the transaction and even when it's not a primary residence, if you're building a business and you found a property that you think is going to make you some money, you should be excited about it. This should be fun and it doesn't have to be stressful. When you surround yourself with really good strategic partners who are going to be there for you to answer your questions, provide you information, maybe guide you to ask questions you didn't even know to ask. It makes a difference in the transaction. Having a lender, having a real estate agent, having different team members in place that can really make this transaction fun and not stressful is the way that it should be.
It doesn't have to be stressful just because it's unknown or new. Part of our job is to make it so that it's comfortable for you and that you're happy with the decisions that you're making. You shouldn't go into it fearful.
[00:25:33] Cynthia Meyer: Just to add on to that a little bit. Getting your ducks in a row and talking to your mortgage broker, for example, before you even start looking, helps you know what your budget is.
What is a lender going to realistically afford just like when you're buying your your first or your next home. You don't want to start looking at $3 million properties if you can't afford a $800,000 property for example.
[00:25:55] Julie Simmons: The other thing that's really important is rates have been so volatile for the last year. We went through a period in 2022 where people were qualified for one thing and then as rates went up, they were no longer qualified for that amount.
Thankfully, 2023 has been better so far, but we're 11 days into the year. So I don't know that's a trend quite yet. Does it go the other way where before you were looking for a monthly payment of X and a purchase price of this, now all of a sudden you can afford more. And so maybe it makes sense to revisit that.
And so it's important to stay in touch. Your mortgage person should not just be speaking to you when they do their original pre-qualification, and then once you're under contract. You should be talking to them all the time because every house that you're going to look at is unique in its own way.
They're going to have different taxes especially if you're looking in a lot of different areas. The last thing you want to do is be blindsided by the fact that every other house that you looked at had taxes that were this, and now all of a sudden this house, for whatever reason, has taxes that are double and now you don't cash flow anymore.
It's never about what that purchase price is. It's always about the monthly payment. That's what you're really getting pre-qualified for and that's what you really care about in the end because that's what's going to have you cash flow. Not that you bought a $500,000 house.
Because that $500,000 house with $20,000 in taxes is a different monthly payment than a $500,000 house with $5,000 in taxes. Paying attention to that monthly payment is really what's going to help you accomplish your goals and make sure that you're cash flowing on these investment properties.
[00:27:25] Cynthia Meyer: Veronica, you have any more questions you want to ask Julie?
[00:27:29] Veronica Woods: No I don't think I have any more questions but I just to recap some of the themes that's come up in this discussion.
One, you have to look at your rental property business as a business, and Cynthia I think we pretty much say that on every podcast.
[00:27:46] Cynthia Meyer: We're down with that.
[00:27:47] Veronica Woods: Say the same thing. And you have to run the numbers. There is no shortcut of running the numbers. Obviously there is value to having experts that can look at the big picture for you as opposed to just the excitement about investing in real estate and not realizing it's the business, but really give you expert advice and that you're not on just Google and YouTube trying to figure it out.
You can actually have people- you can pick up the phone and ask those questions.
[00:28:18] Julie Simmons: I think it's important to note that we're here to help you. That's our job- to make this transaction smooth for you. Make sure that you have all the questions answered that you need and we're always available to help whenever you need it.
[00:28:31] Cynthia Meyer: Julie Simmons, thank you so much for joining us in the Rental Property Café™ today and giving us some really great wisdom and guidance about how people can work with their lenders and some alternative strategies for financing beyond kind of the typical 30 year fixed mortgage.
Tell us where can we find you online?
[00:28:51] Julie Simmons: So the best place to find me online is at brandywinelending.com.
[00:28:54] Cynthia Meyer: All right, so for everybody watching or listening please don't forget to subscribe to this podcast so you can get notifications of our next episodes.
And as always, thanks very much for joining us in the Rental Property Cafe™.
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