How to financing your way to Wealth with Rental Properties!

Announcer  0:00  

NMLS number 33041 Rick Ripma’s NMLS number 664589 equal housing lender some restrictions apply.

Rick Ripma  0:09  

Hi, this is Rick Ripma, your hard working mortgage guy along with Advisors Mortgage Group and Fix It Mortgage. I want to thank you for listening today, and we hope you enjoy the show. If you want to get a hold of me, if you have any questions on any mortgages, purchase refinance, you want to look at renovation loans, anything like that, just please give me a call or send me an email. The best way is going to my website. And that is hardworkingmortgageguy.com. That's hardworkingmortgageguy.com. Or you can call me at 317-215-7600. That's 317-215-7600. And today, I want to talk about financing your wealth, it's a how to on financing rental properties. 

I know that in our market it's hard out there to buy a home. However, there are many, many, many people buying homes and either keeping them as rental properties or renovating them and selling them on the market. So, it is something that I see a lot of people doing; we're financing quite a few of those. And I thought , this is a time to talk about it and really go over it in case anybody you know anyone, or you have any interest in the possibility of financing a rental property or owning rental properties. This could be something you own, you're looking at short term, you want to buy something, do the renovations, put it back on the market and sell it in this market or maybe something you want to long term rent. There are different reasons to do that. You rent it out, some people will buy a home that later they want to live in but they don't want to live there yet. They buy it and rent it out till they get to that point. Some just want long term rental. They want to take that appreciation we were talking like was last week with Jeremy Page, he said the appreciation rate in Indiana for 2021 was 19%. He projects that the rate will be six to 7% in 2022. Although he says he's being very conservative on that, and we're seeing most people are thinking we're going to be more in the nine to 10% range, no telling, but that's what they're thinking, it is a great way to increase your wealth. And additionally with the home values, which have increased to record levels, like we talked about, and rents have increased at somewhere between five and 12% Year over year, depending on if you look at somebody who just renewed their lease or somebody who's getting a new lease on a property. 

If you're renewing your lease, we've looked at an average of 5% year over a year of increase in rent. And that's direct to the payment, it's a little different than the interest rates going up or the house prices going up. This is direct to the payment. To actually rent a new place you hadn't been renting, the rents have gone up 12% year over year. And why does that matter? Because you can turn that bit of knowledge into your very own real estate empire. And to do that you really have to understand how to finance these jewels. You have to find these homes and how to finance them. As we look at that, and how we go about doing that, there are a variety of options out there. The first piece I want to talk about, the first option I want to talk about, is something called a debt service coverage ratio. The mortgage, a DSCR is the acronym, and it is designed for investors to purchase rental properties. Now, the value of this you'll see here in a minute on what it does, but the basics of this type of product, you're going to need 20 to 30% down. If you're looking at a conventional mortgage, you're looking at 25% down but that can change depending on your credit scores and your debt-to-income ratios. Additionally on a conventional mortgage you will be require to have six months reserves. What does that mean? It means you have to have six months mortgage payments including taxes and insurance available to you to make payments on the property and all properties you own. Let's say this is the first property you’ve bought as a rental and the monthly payment is $1,000 a month you would need $6,000 available to you. Normally we can use a retirement account like a 401k or IRA.

On these types of properties, pretty much if you're going to buy a rental property, you're going to need the reserves. Normally you buy a home, or you refinance a home, and you have an appraisal on this product, you're going to be looking at an appraisal with what's called a rent analysis. That's going to increase the cost of the appraisal. But they're going to do an analysis of the rent. And there's a lot of reasons they need that. But one of the biggest reasons they need that is because we're not going to look at your income, we're going to look at what you netting from this property. That is the income from the property compared to the mortgage payment. If the rent covers the mortgage payment, you have the reserves and your credit scores are reasonable. You would likely be approved. It does depend on which, since different companies have different rules, they're going to have different numbers. But basically, you're going to need to have a middle credit score in the mid sixes to be able to qualify. But we're not going to look at your personal income from your job or business. I need to make sure you understand this only works on non-owner-occupied properties. 

You cannot buy an owner-occupied property with this product. If the government doesn't want that they won't allow it. So, we are not allowed to do that. Some people have tried to do it and 99.9% times they get caught. If you're a first-time homebuyer and you don't own a home and you're buying a rental property in the area that you live in it's not going to go through, they're never going to approve it because even if that is what you're doing, there's no way to 100% prove that and they're not going to make that loan. So, if you're a first-time homebuyer, it is a very difficult program to do. You really need to have a primary residence. It can happen if you're living in Indianapolis but you're buying a rental property in Florida. With enough documentation, we might be able to prove that that's what you're doing. And that might be acceptable. But for the most part, this has to be on a non-owner-occupied property. So that what do you do if this sounds like a product, you think, wow, this sounds pretty good. I think this is something I might want to look at and might be something that would be of interest to me. 

The first thing you'd want to do is get pre-qualified, you'd want to contact me at hardworkingmortgageguy.com. Again, Rick Ripma, you're hardworking mortgage guy hardworkingmortgageguy.com. Again, I'm with Advisors Mortgage Group. We'll get the information that we need. Because you still have to qualify even though we aren't going to use your income we're going to have to get all the documentation, we're going to have to pull credit and we're going to have to get you qualified. However, it's a much easier process than most other mortgages because there's just not as much information needed. As long as that property is going to cash flow, which we're finding the vast majority of them do. We are going to go to break and after the break we're going to talk more about how to finance investment properties and some of the other options that are available.

Ad  8:55

A penny saved is a penny earned was one of my dad's favorite sayings. I was about four the first-time dad said it to me. We were inside a Haag drugstore in the candy area and the smells were heaven. At least to my four-year-old nose it smelled of chocolate. I asked dad for a piece, it was only two cents. He knelt down, looked me in the eye and said you know penny saved is a penny earned. He was right but I wanted chocolate. With mortgage rates at near record lows, you can have your chocolate and maybe a new kitchen. One thing I do know, you’ll likely save a lot of pennies. To refinance your mortgage call me Rick Ripma, the hard work and mortgage guy with advisors Mortgage Group 317-672-1938 that's 317-672-1938 With your savings you can buy a lot of chocolate. You know lots of folks do what we here at Advisors Mortgage Group do, we just do it better.  Dad bought me chocolate that day, which was sweet

Announcer  9:55  

licensed by the Indiana Department of Financial Institutions NMLS number 33041 Witness NMLS number 64589 equal housing opportunity comes very

Rick Ripma  10:06  

Welcome back. And I appreciate it very much. If you have any questions on mortgages, you want to talk about refinancing purchasing buying an investment property, like we're talking about today, please contact me at hardworkingmortgageguy.com, that's hardworkingmortgageguy.com, you can go online, get all my contact information there. If you prefer just to call me, you can call 3172-15-7600. That's 3172-15-7600. And I will do my best to get back with you as quickly as possible. Now it’s time for Questions with the Gurus.

It's amazing, I get so many questions. I probably talk to 10 to 15 people a day about mortgages.. There’re always things that need to be gone over and that people need to understand. This question is from Jennifer and Will who have been thinking about buying a home and they're wondering if they should try and find a property now. Or wait for the market? You know, once it slows down? It's a great question because as you look at this market, it's very, very hot. Last year, in 2021, Indiana, Indianapolis appreciated at 19%. And that is an incredible number. If you think about that, if you had $100,000 rental property at the start of 2021. At the end of 2021 if it had appreciated at the average appreciation rate, it would have increased to $119,000. Now of course the lower priced homes may have appreciated at a higher rate than more expensive home.  It is very beneficial to take advantage of the appreciation if you want to grow your wealth. What are we expecting the appreciate rate outlook for 2022 and 2023 to be. 

We're not looking at the same type of market we were looking at in 2007/ 2008, when we had the housing bubble and everything crashed. There were homes, there were a huge volume of homes on the market. And there were very few buyers out there. Homes would sit on the market for months, sometimes years back then. Homes were very difficult to sell and the appreciation rate was negative. Meaning the home values were going down not up. Somebody had financed the house and owed 400,000 on it in 2007 and 2008. Now that $400,000 house may only be worth 375. And they owe 400. Do they owe 380 on it? They can't get out of the house without paying to get out. So that ends up a foreclosure; you end up with all these foreclosures. 

Today we have record low foreclosures, we have very, very, very few foreclosed homes because there's no reason for anybody to have their home foreclosed on. If you can't make the payment, you can put it on the market, you can sell that home, and you're going to sell it for top dollar. And you should be able to, unless it has a lot of issues, sell it for more than what you owe. That's what we're seeing. So,  very few people who are who are in that situation where they are struggling, and they can't get out of their house if they need to. And that's what Jennifer Wilson is asking. They're looking at it they're thinking, well, with the way that it's gone, man, maybe they don't want to do that. Well, here's another piece that might be, we're thinking about not only are you getting the appreciation on the home when you're renting it out, you know according to the apartment list, national rent report, rental prices went up $300 per month in 2021. That's an average three $300 a month. And sources like MBS highways expect this expects this trend to continue in 2022. They think it might be a little slower pace. But they don't actually know that but they do believe that the prices are going to continue to go up, so not only do you get the appreciation, your rent goes up, and your payment less taxes and insurance goes up, it's going to stay the same principal and interest as long as you're on a fixed rate does not increase. If you're currently renting or are considering running while you have the roof over your head renting doesn't help you build wealth like homeownership does so if you're renting or thinking about renting, that that rentals roof over your head does not help you build wealth like homeownership does. For example, the extra $300 per month you're spending on rent, based on current rates would be like having a $70,000 mortgage meaning if you were to use that extra $300 per month to purchase a home You would have an additional $70,000 in buying power you could put towards purchasing your dream home. This is very important. Additionally, when you purchase a home, that property continues to appreciate helping you build wealth. So, it's going to continue to appreciate, maybe not at the 19%. But we are looking at, still very high appreciation rates. But if you decide to rent, the only person building wealth through real estate is your landlord, they're getting the appreciation, and they're getting the rent increase.

If you go to my website, hardworking mortgage guy, you want to talk about this, you have any questions on this, just let me know. It really does make sense to buy rental property. We have some great financing options. We just talked about one of the easiest ways to finance a rental property, it's a little higher rate and a little more costly but it is easier. Let’s talk about some of the other options and financing rental property. Probably the biggest way most people finance a rental property is conventional financing. And it's really pretty basic, you have to have good credit. And we really want to see on a conventional mortgage, I'm not saying you couldn't go lower than this, but they really want to see for rental property in the upper sixes would be best, up into the seven hundred, the higher, the better. 25% down is required. There are some options at 20% down, but it just absolutely destroys the interest rate, it increases that a lot. I don't know how it's it goes up by at least 1% by going up to earn 80%. It's really not effective for most people to do the 20%. 25% is what I would, if I were looking to buy a rental property, that's what I'd want to have available.  You're still going to need reserves; you're going to need six months reserves. And again, we can use the reserves. If you have a 401k, you have an IRA retirement funds or you have stocks or investments, we just need reserves. And we need six months reserves on every rental property that you have. And also, we very likely will need it on your primary residence. Because we need to make sure that you have the reserves for all properties in case you run into a difficulty. It's one of those changes they made because people did run into difficulties and they didn't have the reserves to cover any short fall for a few months. If you have the security of 6 months reserves it make it less stressful for you, we just want to make sure you have the reserves. And those reserves, we also have to look at, it's not just the monthly mortgage payment, it's going to include the property taxes, any of the escrows homeowner’s insurance, it's going to include any homeowner’s association dues, all of those things are going to be included. 

Now if you pay your property taxes, and your homeowner’s insurance and your rental mortgage, which most people do, then it's just your mortgage plus the homeowner’s association dues. We have to look at all of that. Now when you're looking at that, understand you take a condominium, you're going to see much higher homeowners’ association dues. And those have to be looked at. Those have to be, you know, put into the equation when we're running our debt-to-income ratio. So, we need to look at that.  If you decide, hey, we want to, because a lot of people do, they want to buy a condo, they feel like that's less work, they don't have to do much of the maintenance, but you're paying a service. But to do all that to do all the work. So many times, it limits the dollar amount of a place that you can purchase. A single family or up to a four-plex is easier to purchase than a condo, generally, we also are going to look at if you if this is your first house, it's not your first rental, that's not a problem. But if you have a bunch of rental properties that can cause a problem with financing. With conventional financing you can finance 10 homes.  If you have 10 homes finance and you decide to buy a new primary residence that is allowed. But only for a primary. You can't buy another rental property using a conventional loan.

Now, what if the property needs to be renovated? So now you're looking at a property and you're going to use it as a rental property, maybe it’s an investment property. You’re looking at it and you found a house that needs work. It hasn't sold in this market. It's been sitting on the market for, you know, 60, 70,80 days. You're looking at it and you think well if I could do this work on this property, I could sell it and I can make X amount of dollars on the property. Can you finance that? Well, that is something that we can certainly do. We can do renovation loans on a purchase or refinance of a rental property. And that can be a big boon. If you want to have that work done, especially if you're buying it, you want to have the work done before you move anybody in, you want to buy the property, have the work done. And then right away, you would like it finance, we can finance that. So how does that work? The way that that works is we're going to take the purchase price, and then we're going to have a person, a construction consultant, who's going to look at the property going to tell you what needs to be done. And then you're going to tell them what you want to do. And they're going to come up with a basic idea of what that is going to cost. And then you’re going to find contractors, and hopefully they'll align with the cost from the construction consultant. Once we know what work will be done, we will have the Property Appraised and the appraisal will be based on the home as it will be once completed. And that's another piece of this, that's very valuable. When you're looking at renovation and doing a renovation loan, on a rental property, or on any property, we're going to look at the finished product value, the appraisal is going to be this home, plus the work that you're going to do. And they're going to appraise it based on that finished value. And that's where it can come in very, very handy, let's say on a on a refinance of a non-owner- occupied property or an owner occupied but we're talking not owner occupied. Let's say the house is worth 200,000, you want to do $70,000 In work. And when you get done, they're saying the house is going to be worth 400,000. With that, and right now you owe 300. Or it's worth 300, you couldn't do that to that $270,000 loan, because you're not at 80% loan to value or 75% loan to value. You have to be at a 75% loan to value so you wouldn't have enough equity in that property to do a normal finance of the property. It is extremely important or extremely helpful that there is a product where you can look at the end result. And that's the appraised value, we're going to use it on a purchase, we're going to use the purchase price plus the renovation costs. And that's going to be the value unless the appraisal’s lower and then then we're going to use the appraised value on a refinance, we're going to use the appraised value of the property based on the completion of the home being completed of all the work being done. So that gives you a lot more buying power helps, it usually helps a lot and making that a very doable project. 

Understand though, this type of product, because it takes a lot of additional work from you to get all the information you have to have, you have to have contractors, you have to bids that just takes a little longer to get the mortgages through, it can take from the time you actually have all that information to closing 30 to 45 days, but it could take 30 to 90 days just to get us all that information we need to have the appraisal completed.

We have Fix It Mortgage, which is part of Advisors and renovation loans is all they do. We have the most experienced people I've ever met in this in this realm of mortgages. The person who runs it's been doing it since like 1988, he's helped help them actually develop the product through like Freddie and Fannie. He's actually been on boards to help them come up with the product. He knows these products inside out. And he can really push these through at a much better level than most people. And he understands it. It's not an easy process.

That's fairly easy, but it's a longer process, it does take a little bit more patience to work through it and make sure that in the end you have exactly what you want because there's a lot of things that have to be done so it does higher cost. But a lot of that is inspections and things that have to be done in the process. You have the consultant; you have to pay them. There are things that are going to cost a little bit more money. As long as the value is there, you can usually have those in the loan amount. You can even, on a primary residence, you can even have the payments made. If you buy a house and you, you're not going to be able to live in it for six months you can buy the house close on it and have the payments made through the mortgage if you set it up that way, until you move in the house for six months. There are some other options when you're looking at this type of product for a primary residence. It's a little different. There are some additional flexibilities in it, and it can be of great value.