How to Invest with $100K & Managing Home Renovations

Ashley:
Is 40 too late to invest in real estate? We are going to debunk that myth. My name is Ashley Care and I’m here with Tony j Robinson

Tony :
And welcome to the Real Estate Rookie podcast, where every week, three times a week we’re bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And today’s rookie reply. We’re going to talk about things like DSCR, what is it and when should you use it? We’ll talk about a general contractor and what actually should you be expecting from a general contractor and maybe when does it make sense to not hire one? And we’ll also be talking about the questions you should be asking yourself when you’re getting started. But today our first question is about how to invest $100,000 in real estate today.

Ashley:
Our first question today is from CJ Bennett. If you would like to leave us a question, you can do that in the BiggerPockets forums or you can go to biggerpockets.com/reply or you can leave your question in the real estate rookie Facebook group. So CJ’s question is, hello everyone. I’m brand new to BiggerPockets, welcome cj, but not so brand new to the real estate game. I’ve flipped two properties and now I’m looking to venture into rentals. I’m very, very handy, a jack of all trades, if you will, so I can renovate properties without breaking the bank and labor costs. My question to everyone is this, with just under a hundred thousand dollars in the bank to invest, how would you make your next move? So should I flip a few more properties, dive into rentals to get more monthly income coming in, wait for the interest rates to drop a little move somewhere that isn’t so expensive?

Ashley:
I’m at the point where there are too many options for me and I can’t decide which is the best course of action. I appreciate any thoughts and comments? Well, first of all, great position to be in where you have many options to choose from. So that’s definitely a great spot. The first thing that I see, Tony, is to eliminate the weight for the interest rates to drop, because if interest rates drop, housing prices are just going to be more expensive. So no matter which way you’re looking at the deal, there’s going to be a challenge. So if interest rates drop, prices are going to go up on the price of properties, you’re going to be paying more and there’s going to be more competition to get into a property. Most likely with interest rates higher, you’re going to be paying less for a property and maybe people are feeling the same way that you are and there’s not going to be as much competition. But in my market right now, I am seeing properties still sell fairly quickly. So I still think either way you’ll have competition if you’re going on market, but there’s that fluctuation when interest rates are higher. Prices do come down a little bit when interest rates are lower, prices do go up and once interest rates do drop, everybody that’s been waiting is going to jump on all those properties. I

Tony :
Think the other piece too is cj, if the deal cash flows today at a seven, 8%, whatever it is you’re getting on this deal, why wouldn’t you buy it? Because say that rates go up three from now, you’re going to be pissed that you didn’t get in at a seven and if rates go down, then you just refinance and take the seven and turn it into a five. So you can always refinance the rate, but you can’t change your purchase price, right? So you can’t go back to the bank three years later and say, Hey, you know what? People actually buying these properties for a hundred thousand dollars less. I want to trade in my purchase price from a year ago and get the new purchase price today. It doesn’t work that way. So if the deal cash flows today at a seven, get the deal and then just refinance the rates go down

Ashley:
And I want to congratulate you to CJ on saving a hundred thousand dollars, this kind of can give you more options because you definitely don’t need a hundred thousand dollars saved in your bank account to actually invest in a deal. So you could probably do a couple of these options here because if you wanted to flip a property, you could use hard money. If you wanted to house hack and move somewhere else that isn’t so expensive, you could have a very low down payment possibly at 3.5%. So there’s definitely different options. If without knowing anything about you, my recommendation would be to move to a less expensive area, cut your living expenses, purchase a house hack where maybe there is some value add to actually do a burr where you’re going to rehab the property and add some value to it. So you could use some of the money for that and then maybe also flip the property on it too. And it’s hard to gauge as to what your price point is, but if house hacking is on the table and you’re able to eliminate a housing expense for yourself and add some value to a property to give yourself some more equity, I would definitely start right there and get a FHA loan where you’re only putting three and a half percent down or even a 5% conventional loan to purchase a property. Tony, you never house hacked, did

Tony :
You? No, never house hacked. The only primary residence we ever bought. It was just for us. But I agree with you Ashra that I obviously think that’s a great strategy, but I think you hinted at something that was important that we don’t know all the nuances of CJ’s personal situation. And what I always try and convey to new real estate investors is that the answer to what strategy should I pursue oftentimes comes down to your specific motivations about investing in real estate. So cj, what is it that’s actually driving you to want to be in real estate? Is it the long-term appreciation of the assets and building wealth over time? If so, then obviously you’re not going to get that from flipping because you don’t actually own the asset once you sell it. Is it the tax benefits? If so, flipping’s probably one of the worst things to do in real estate investing because it’s all active income and you don’t get the tax benefits to come along with holding that real estate long term.

Tony :
If it’s the cash, obviously you’re going to get really big chunks of cash by flipping, as you said, you saved up a hundred K between two flips. It’s a good spot to be in. So I think you’ve got to ask yourself, cj, what is most important to you right now? Is it continuing to build up that stockpile and maybe taking that a hundred K to 300 k or do you feel like you’re in a good spot and you want to say taking advantage of the tax benefits to long-term appreciation and some consistent monthly cash flow? So you’ve got to answer that question first. Now assuming that you are ready to actually start owning some rentals, I agree with Ashley, with your skillset, you’ve already proven that you can find deals with good enough margin to flip, and you’ve already proven that you have the ability to rehab these properties.

Tony :
So in my mind, I’m taking that a hundred K or at least a portion of it like Ashley suggested, and using that to try and bur a property either where you live right now or maybe in another market where it’s less expensive so you can do what you’re already doing, but instead of selling the property, you’re keeping it for yourself. I read this book, I can’t remember what it was called, but it’s like one of the books I wrote when I was first getting into real estate and this author said his strategy was to flip one, flip one, flip one, hold one. It’s like out of four properties he’d flip three and keep the fourth, flip three and keep the fourth. So it wasn’t always exact, but I thought that was always the coolest strategy to say like, Hey, flip, flip to generate the cash and then hold every once in a while to make sure you’re also getting that long-term wealth accumulation as well. We’re

Ashley:
Going to take a short break, but when we come back we’re going to discuss should you hire a general contractor or should you manage the project yourself. We’ll be right back after this short break. Welcome back. We just went over CJ’s question discussing all of the different possibilities that he has available for the money he has saved, but now we’re moving on to Keith Allen’s question. For those of you who have built a brand new home hours away from your primary residence, do you recommend getting a general contractor or finding all the different service businesses needed for yourself? I understand a general contractor would save a build time, but they also would cost much more. Thanks. Okay, so I think first Tony, we should actually break down maybe what a general contractor is in what they do. Have you ever hired a general contractor for your flips you’ve done?

Tony :
Yeah, I mean quasi, right. So yes, he handles, the way our team works for our rehabs is that they do the majority of the work themselves. So he’s not just a GC that’s subbing everything out, but he’s actually self-performing. He’s got a small crew of guys that works with him, so they’re doing pretty much everything themselves.

Ashley:
Well, let’s talk about that difference real quick too, of there are different types of GCs that you can have.

Tony :
That’s true. So we actually hired one contractor before who was just a true general contractor in the sense that he didn’t do any work himself and he subbed out everything. So that’s one type of GC where they’re effectively operating as a project manager for your rehab and they’ve got a list of subs within their network that do things like electrical, plumbing, building out the cabinets, installing the tile work, all those things, painting, and then they’re just getting a margin on or upcharging what those subs are charging them. So they make their profit on the project management fee. So that’s one type. The other type is the GC who also subs things out but maybe does a good portion of the work themselves. Maybe they’re like, Hey, I don’t do electrical, so I sub that out, or I don’t do painting and I sub that out, or I don’t do demo and I sub that out. So you have some GCs who still have their specialties and they’re subbing out the things that either they’re not that great at or maybe they just don’t want to do anymore, and then you have maybe not even a GC at this point, but just the person that’s going to do all the work and they’re going to self-perform everything. So those are kind of the three different options that I’ve seen. Okay.

Ashley:
So I guess in your scenario, what would you suggest for somebody that’s maybe out of state or in this scenario a couple hours from home? When I’ve done one new build for myself, and I also worked for an investor where we did a couple of new builds and we used general contractors for all of them. And my primary residence, the general contractor pretty much did a lot of the work from self just subbed out, I think drywall maybe, and that was it. But when I did these other commercial builds, we actually hired a general contractor like you had said, where they are just the project manager and they’re not doing any of the work themselves. And I actually still had to be on site a lot and there was a lot of follow up, a lot of decisions where I actually had to go to the project and that also could have been the fact that maybe it wasn’t the greatest GC to actually run that project. But I’m curious as to, because you’ve done flips rehabs that have been hours, if not across the country from you, what have you thought of in terms of was it worth it to have a GC or were you involved just as much in the project?

Tony :
I think to answer the question, should you do the GC or should you sub it out yourself? I think a lot of it comes down to really two things. First is your time availability, because as you said, even managing a GC requires a certain level of time involvement from yourself. But when you take on the responsibility of managing all the subs, that’s even more time because you got to source ’em, you got to stay on top of ’em, you got to manage the scheduling. So there’s a time component that you really want to make sure you’re considering. So if you have a super busy full-time job or you have a bunch of family or community requirements that are going to take up the majority of your day for that first go around, maybe hiring a GC is better. Now if you want to go the self kind of GC route where you’re managing the subs on your own, there’s two books I would recommend both written by our friend Jay Scott, but it’s the book on flipping houses.

Tony :
And I think the other one’s like the book on estimating rehab costs, both of which you can pick up from the BiggerPockets bookstore, but those two books will give you the framework for how to manage the rehab and how to make sure your costs are somewhat in line, and then you’ve got to go out and kind of put your scope of work together, put your schedule together, and then do the work to find the subs that they can execute on that work for you. Now what we’ve seen Ash is that typically subs know other subs, right? So our countertop guy introduces to our garage door installer and our garage door installer knew someone that did windows or whatever it may be. They all tend to know each other, so you can kind of go about it that way. But to answer your question of what I found to be best, I love our setup where our guy does a majority of the work, so we’re not paying exorbitant fees for a general contractor and then we just kind of sub in where he needs some support and assistance. What’s worked well for us,

Ashley:
And I don’t know what it would be on the residential side if you were just having a single family or duplex built, but on the commercial side when we got bids, it was I think the lowest was maybe six and a half percent and they ended up not being the best and that’s probably why. But then I remember the other two competitors were 8% and 10% and these were on multimillion dollar projects. That is a large chunk of change to manage a project. And there’s a couple pros that I like of having the GC is that you don’t have to be involved in the confrontation with the subs. Something goes wrong with the subs, that’s their responsibility to take care of it, take care of the issue, address it with the subcontractor because they’re the ones that are actually hiring the sub, not you. So I like that accountability piece and I don’t like confrontation, so it takes it off my shoulders there.

Ashley:
But there are some look at the benefit of how much time they’re going to take and take care of things that you don’t have to. Even something like writing contracts with all of the subs, following up on the timeline, all those things, how much time would that actually take you each week to follow up on and to track and could your time be better spent actually working at your W2 getting overtime or something like that where it becomes worth it? The kind of I see to this having the GC is that they’re paid based off the percentage, and that can often include the change orders too. So if there are change orders that’s increasing your budget, that’s just going to increase what they’re making on the property too. So there’s that little caveat right there as to reading through your contract with your contractor and making sure that prices aren’t inflated on labor materials and those change orders just so they can increase the percentage of what they’re actually making. You look at it as, okay, it’s a hundred thousand dollars rehab and they’re showing me tile options, why wouldn’t it be beneficial for them to have me pick the more expensive one or something like that, because that’s just going to increase the amount that they make on the property too.

Tony :
But I think you bring up a good point, ash, of what we should be doing as real estate investors is not necessarily going with the first or the cheapest bid that we get, but trying to get three bids at least. So you get a good gauge of like, Hey, what is a going rate for a project like this in this specific market? And then using that to make your final decision. I feel like the mistake that sometimes Ricks make is that they just go with whoever’s the cheapest or whoever’s available to start tomorrow, and sometimes there’s a reason those people will have room in their schedule why their rates are a fraction of what other people are charging.

Ashley:
Yeah, I have a great example of that just real quick. There was a remodel we did on a commercial property and it was a big addition and we hired these GCs and there was definitely some issues and we addressed it with them afterwards. And then we were doing a new build, a 40,000 square foot new build, and we had paid them 8% I think when they did the remodel. And they said, okay, since this is a bigger project, we’re only going to charge you as like 6%, maybe even five and a half percent. And that was just for the owner. He was just like, that is so enticing. Yes, we they’re going to fix what they did wrong on the other project, it’s going to run better, blah, blah, blah. Well, what happened was we actually hired all the excavation work directly and did that and they didn’t realize that and there was that disconnect between us and them, so they missed out on, it was like half a million dollars of excavation work and they missed out on the percentage of that and they thought they were going to get a cut of that.

Ashley:
So that was one thing that really made them upset and mad is we gave you this low percentage because of that, and then second we became the project that they didn’t care about because they were making more money on their other projects that they were doing. So there’s always that portion is like even if you’re paying the lease, is that what everybody else is paying? Are they just doing you a favor trying to build that relationship or whatever? But really you’re just going to be the project that they end up not caring about because they don’t end up making that much money on the project.

Tony :
That’s a really good point, Ashley, of sometimes you’re the lower rate, you’re the lower priority as well. I guess one last question on that ask because you bring up the contract piece. I guess, what are maybe some things you’ve seen in a contract with a general contractor that you feel Ricky’s should include?

Ashley:
Oh, it’s been a while since I’ve actually had to do a new development. I mean, I’m just doing my rehabs right now, but one thing I would say is with the GCs, so when I built my house as to, I really liked that there was detailed line items as to what my allowance was for different things. So my allowance for light fixtures, my allowance for tile, my allowance for hardwood floors, so that way I knew if I went into the hardwood store I could say this is my budget for it. And I knew that I would be staying on track. So I always loved that my contractor had done that for me as he took the square footage that I wanted in the house for hardwoods. And when he actually wrote up the scope of work in the contract, he put in like, okay, I think it ended up being like $8 per square foot was my budget for that.

Ashley:
And that was based off of what he knew was something middle of the road, not super high end, not low end, or maybe it was and I just don’t know. But I really liked that detail that that was out and it wasn’t just, okay, this is the cost, and then finding out later on, oh, well our cost only includes these finishes. If you wanted something different, it’s going to be a lot more, whatever that may be. So really instead of them telling me, here’s three different tiles you can pick from, I think home builders kind of do this as do they have their standard model and then you pay per upgrade, per upgrade, per upgrade for different types of finishes. And I like that I was a lot more control and if I wanted to spend money on something I could take not get as nice light fixtures or something and kind of move money around. And then I think just the timeline piece is so important, having in the contract as far as when your finished data is, when your start data is,

Tony :
It’s an interesting point that you make of the contractor having an allowance for finished materials because I’ve never done our own ground up construction. We bought new construction, but it’s always the finished product. But for all of our rehabs, we’re usually working with our designer and then she’s together with Sarah picking out all the finishes and we’re giving that to our rehab team to say, Hey, we already purchased it, it’s going to be shipped to the property. But I guess if you are letting the GC kind of make that decision, you do want to say like, Hey, I don’t want to spend more than X dollars per square foot on flooring because I don’t want to blow this budget out.

Ashley:
And too, think about it, even though tile, a tile, someone can say, I install tile for $2 per square foot, whatever. If you get some crazy horizontal tile that makes, I dunno, arrows and has all these different things or it’s little tiny pebble ones that aren’t on a big mesh, your contractor is going to say, Hey, that’s going to be a lot more, that’s going to be a more time consuming. So I like the idea of you giving them the, if you gave them the packet ahead of time and said to kind of compromise the two ways as to here’s our finishes, can you give me the price to install each of these finishes based upon what they are too, doing it that way?

Tony :
Yeah. One thing that we’ve started doing for some of our rehabs is, and I think, I don’t know, maybe you shared it with me or someone shared with me on the podcast, but it was one of our recent rehabs where we just made, you talked about the tile and our rehab crews, they were over with us. We did get some of that intricate tile that looks really nice, but it’s like a pain to, and they’re like, guys, please stop buying this. So what we did for one of our recent rehabs is we just did the shower niche, like a different tile that was a little bit more popped a little bit more, but it still looked nice in the grand scheme of things. So I love the idea of the allowances. The only other thing actually I think I’d add to that is having the payment schedule also lined out inside that contract also.

Tony :
So there was a new contract we worked with out here in California and the very first project we did with them was also the last, because we were so unhappy with how he managed that project, but the way the contract was set up was that I think we had 10% of his total cost, or maybe even a little bit more than that was the last payment that wasn’t due until the job was fully complete. And by the end of this project I was managing his subs myself, I was talking directly to the subs, making sure that everything was happening. So when it came time for that last payment, I told him, I was like, dude, I’ve literally been doing your job for the last three weeks. There’s no way that I’m releasing this last payment to you. So if you have that payment structure where you don’t release everything until that final checklist is done, that gives you a little bit more leverage over that contract to make sure they do things the right way. And if they don’t, then don’t pay ’em. And

Ashley:
I think too, being clear on who is actually paying the subs, are you going to pay the subs directly or is the general contractor going to pay the subs? And what is the timeline on that? So I have this one contract that I use and we had the flooring done and one day he just text and was like, Hey, the floor guy needs to be paid today, and it’s like a property that’s an hour away from me. I’m like, I can’t drop everything right now and drive an hour to drop off a check. And so there was that big disconnect, that miscommunication of like, okay, I can Venmo maybe, but I don’t even have my business account linked to my venue. So it’s like having that also defined as how will payment be made and how soon does it need to be made? So when the job is finished and can Darryl go out and inspect it and then we submit payment, how does the whole payment process work, I guess is a big thing that I’ve had to disconnect on before.

Ashley:
Moving on to our next question. This one is from Sarah Alley and is from the BiggerPockets forum. So make sure you guys head into the forums if you want to connect with the BP community. So Sarah said one by one, I’m tackling my fears by reaching out to the BP community. My next fear is I’m in my late forties and I have no real estate. Am I too old to get started? No, we’re just going to answer that one right there. No, in 30 years when my mortgages will be paid off, I might be dead. Okay, this is sounding kind of morbid here as Sarah, but you know what, just think about it this way. You didn’t have to pay the full purchase price for the property then and you didn’t have to pay all that extra. So Sarah says, what would a realistic plan for someone my age be?

Ashley:
Ideally I would like to live off income from real estate investing as I cannot currently work in a traditional sense. How can I get there and how long would it take? I’m thinking to house hack or to do a two, three or fourplex where I live in one of the units, but where I currently live, San Francisco Bay area, it is so expensive that I find a place here should I look in other cheaper parts of California or out of state investing? So the first thing I want to address is the 30 years with the mortgage. There are so many investors I know that just continuously refinance even before the property is paid off, they’re refinancing and pulling that money out, and you should be able to write your numbers and make a deal work where even if you have a mortgage on the property, you should still be cash flowing and you don’t have to wait 30 years to actually make money off of the property, then it’s probably not a good investment if you’re having to wait 30 years to actually make money on the property

Tony :
Just on the age topic as well. Sarah, you said you’re 40. I just looked it up. The average female life expectancy in the United States according to Google is 77 years old. Actually,

Ashley:
Tony, I learned something today or last weekend when I went to a real estate conference, is that that average includes all of the people who are born who die as a child or at birth. So it really skews the data, but once you get over, I think it’s 50, the data actually shifts where the lifespan becomes more to 85 or something like that. So once you’ve made it to 50, statistically you have longer to live. Isn’t that interesting?

Tony :
Well, there you go. So at a bare minimum, she’s got another 40, maybe even 50, right? So I think that’s a really interesting data point because you’re nowhere near too old to be investing in real estate. So she’s nowhere near too old to start investing in real estate. And even if we just say like, Hey, let’s buy one property year for the next 10 years, right? Say you house hack every year you live in a threeplex in the San Francisco Bay area, put down three and a half percent, move to the next one a year later and just repeat that every year for a decade. A lot of moving. But now look, you’re 50 years old and you’ve got 10 cash flowing properties in the Bay area of California, which will probably be pretty good investments in another 10, 15 years down the road as well because you’re going to get so much appreciation.

Tony :
So there’s a lot of different ways to get started, but I think the biggest point is that you definitely have more than enough time to get started. The other thing here too, Sarah and I mentioned this when we were talking about cj, the first question on today’s episode is that a lot of the strategy comes down to what your specific investment goals are. So is your goal at 40 years old to try and retire from your job as soon as possible because you’ve been on the job for 20 years and you realize you don’t like it anymore? Or do you enjoy what you do? And your goal is just so that when you retire at age 60 or 65 or whatever it is in another 25 years, that you’ve got something else outside of your retirement from your day job. So you’ve got to answer that question for yourself as well.

Tony :
And a lot of that will then play into what strategy actually makes the most sense for you. So maybe you living in the bay area of California, which is obviously very expensive, if the goal for you is, Hey, I just want to be able to supplement my retirement in another 20 years, then yeah, maybe it is trying to buy real estate in and around, maybe not in the bay, but somewhere in California because 15 years down the road, you’ll presumably have a decent amount of appreciation at that point. If your goal is, Hey, I want to quit my job in the next five years, seven years, whatever it may be, then yes, maybe going into some of the smaller Midwestern markets where price points a little bit lower, you can maybe bur a few deals or kind of recycle your capital a little bit easier. Maybe that’s the right strategy for you. But a lot of it comes down to what your specific goals are as it relates to investing in real estate.

Ashley:
And I think too, if you have the opportunity to move somewhere else where maybe you work remotely or whatever you do for work allows you to live somewhere else, 100% do it. I mean, I go on sometimes on Zillow and I’ll just look like I live in the middle of nowhere, but I look way out out there in the middle of nowhere. It’s like you can live in a really, really nice house with a lot of land for pretty cheap. And that’s the same too. If you move somewhere where it’s relatively cheaper, you can house hack and you can find property and you can decrease your living expenses while probably living in a nicer house than you would if you were to stay in the expensive market that you were in. So I think if you have the opportunity to start looking at other markets, and really the great thing is about house hacking is you’re getting that FHA loan, you’re getting that low down payment, but you only have to live there a year.

Ashley:
So if you hate it so much, you can move after a year and you can rent out your unit, say you get a duplex, or even if it’s in family, you can rent it out, you can go and you can try and live somewhere else for a year. So I think there’s some risk into doing that is you are miserable in your life for one year and you miss your family and all these different things, but there is that opportunity of it’s a one year commitment. And I think there’s a lot of things people do in life that have a longer commitment where they’re miserable or their W2 job or something like that, but they sacrifice it so that they can provide for their family. So maybe living somewhere that you end up not liking for a year isn’t so bad after all, because you can save lots of money and while you’re crying, you can look at your bank account for your saving for your next house hack.

Ashley:
Okay, we’re going to take a short break and when we come back, we’re going to be talking about your DTI and also DSCR and also explaining what those actually mean. So we’ll be right back. Okay guys, thank you so much for joining us. If you have a chance, please check out our show sponsors along with you. They make the show happen. So this next question is from Eli Kim in the BP forums. Hey guys. So I currently have three properties and I want to purchase another one, but the issue is I’ve maxed out DTI. So this is your debt to income, and this shows how much debt you have compared to how much income you bring in. So what are your debt payments every month? Say you have $3,000 in debt, you’re paying, and then your income is maybe say $4,000 a month. What other methods should I use to acquire another property? I’ve been thinking DSCR, this is debt service coverage ratio ratio.

Tony :
Yes,

Ashley:
I was going to say debt service coverage loan, but I was like, wait, no, this is our, but don’t they typically have higher down payments in closing costs? So this is where they actually don’t look at you personally as to what your personal debt is and your personal income. They look at the property itself. So if you rent out the property, how much income is it actually going to be bringing in compared to what the debt is going to be on the property when you get a mortgage with them? I was also thinking of looking for seller finance deals. What are your guys’ thoughts for my best course of action? So first of all, seller finance always a great option if you can get a better rate and a better term. I’ve shopped for deals and asked if they’d be interested in seller financing. And my response is, oh, of course, with a huge down payment.

Ashley:
And to me, that kind of defeats the purpose. I’m looking to put as little money into a deal as possible. But if you can look for seller financing that I think that’s a great option. And you could be looking at these simultaneously. You don’t have to say, I’m only going to go for seller finance deals. You can put in multiple offers. So Tony and I have both done this where here’s, okay, here’s an offer with me getting financing. I’m going to pay you a hundred thousand dollars. Here’s an offer with doing seller financing, and I’m going to pay you $125,000 because the numbers work that way because I’m going to pay you a lower interest rate. So my mortgage payment is lower, whatever that may end up being. So I say, don’t eliminate either option. Keep both of them on the table. So Don, have you done any DSCR loans?

Tony :
We actually did. We did one last summer. We refinanced a property that we were looking to flip, and the market kind of shifted between keeping it, and we did A-D-S-C-R on that one. And yeah, interest rate was a little bit higher. I think we’re like eight point a half percent or 8.7 I think on that loan. So interest rates are higher, but it still made sense for us. It was the best disposition strategy for us given where we were at in the market at the time. But I agree, Ash, I think the seller financing option is great. The hotel we just closed on in Utah, we sell our finance that deal. The big bear property we almost took down summer or a year and a half ago. Now that one, we just, like you said, we offered two different offers. We had one that required us getting traditional bank financing, and it was a slightly lower purchase price.

Tony :
And then we had the seller financing offer where it was a higher purchase price and they ended up accepting the seller financed offer as well. So I think all of those are different options as well. Eli. The other thing I’d recommend too, and Nash and I have obviously talked about this quite a bit as well, but it’s leveraging partnerships to help with the DTI issue that you feel like you’re running into. So if you find a really killer deal and maybe bringing in a partner might make the most sense for you to still get some good debt options on that property. But I feel like as you start to scale, you start to get more creative with how you take these deals down. So just start networking and talking to other folks to see what they’re doing, right? Partnerships, DSER. You start buring maybe where you’re finding underappreciated or undervalued assets and you’re refinancing them after the rehab to build the equity that way. And then maybe the down payment isn’t as big because you’ve got that built in equity there. So there’s a lot of different options to keep growing that portfolio even once you start to bump into some DTI issues.

Ashley:
Yeah, so I actually just did my first DSCR loan. I closed on it last week, the first time I’ve done one, and my attorney hated it. We had to sign papers for 45 minutes. He’s like, this is ridiculous. This is so much information. You need to use local banks again, because there’s only six pages of things you need to fill out. So that was the downside as my attorney did not like it, but the process went actually really great, really smooth. I love the fact that you don’t have to give all of your information. So I’m doing a loan right now that’s a residential loan, and they want every single LLC, every single property, every real estate tax, every insurance paid on every property I own. It is so time consuming to get all that information over. So I like the fact that A-D-S-E-R is just, they want some information on you.

Ashley:
They’re focused on the LLC that’s owning the entity, but most primarily on the property. So that’s definitely a big benefit of doing A-D-S-C-R loan. And then as far as the actual payments and the prices, I got a quote on a property this weekend, so I thought I’d share it with you guys so you can kind of get an idea. So this would be for a purchase price of 299,000. The loan amount would be 80% loan to value, which ended up being 239,000. The interest rate would be 7%, and that was with paying 3.75% points. So I’m paying that based off of the loan amount. The monthly payment would end up being $1,596. The total loan fees would be $10,992. So that’s the loan fees for the actual loan. So the total cash I would need to close on this property, that 20% down plus the loan fees would be about $75,000.

Ashley:
Okay. So this was also amortized over 30 years this loan too. So they gave me also a prepayment penalty. So a prepayment penalty is if you go and refinance somewhere else, or you pay the loan off early, they’re going to charge you a percentage of what the balance is left on the loan. So if I were to pay paid off, the first year would be 5%, then it steps down to 4%, 3%, 2%, and then the fifth year, 1%, and there’s usually a cap two, which this does not say just in this estimate. Usually a cap of even if you pay $20,000, if you pay 2% of whatever the loan balance is extra, they will still pay you that prepayment penalty fee on the amount that you had prepaid. So that just gives you an idea. And they actually gave me another quote too, which was if I did 75% loan to value, that would be a 7.625% interest rate with only paying 1.25% in points monthly payment, 1,592.

Ashley:
So it ended up about being the same, the monthly payment. And then the total loan fees on this one were only 4,806, and my estimated cash close would be $83,622. So that the cash I’d have to bring up front would be more because it’s the 75% loan to value. So actually, I really like this funding company because I’ve never gotten a term sheet this well written out as to what everything, is it just an email of like, this is real quick what it is, but I thought that might interest you guys just to give something to compare to is what it looks like when you’re doing a dscr loan of what an option is right now that’s out there. Well, thank you guys so much for joining us on this week’s rookie reply. If you have a question, you can go to biggerpockets.com/reply and hit it there. Or you can join us on Facebook at the Real Estate Rookie Group, or you can subscribe to our YouTube channel at realestate Rookie. Make sure you guys like and subscribe. Thank you so much for joining us. I’m Ashley. He’s Tony. And we’ll see you guys next time.

Tony :
This BiggerPockets podcast is produced by Daniel ti, edited by Exodus Media Copywriting by Calico Content.

Ashley:
I’m Ashley. He’s Tony, and you have been listening to Real Estate Rookie.

Tony :
And if you want your questions answered on the show, go to biggerpockets.com/reply.