Investment Financing: DSCR, Conventional, Fix & Flip Loans with Frank from Convoy Loans. Hear invaluable insights into various financing options, including the ins and outs of fix and flips, the differences between conventional loans and DSCR, and other creative financing programs tailored for new investors. Whether you’re making your first real estate investment or expanding your portfolio, Frank’s expertise will guide you through maximizing your investment potential.
Brett
0:00:53 – Thanks for listening to It’s 5 O’Clock Somewhere Real Estate Podcast. We’re not experts, we actually know what we’re talking about. Today we’re going to answer a lot of questions about financing. We have Frank from Convoy Loans who is going to talk to us about different types of scenarios, fix and flips, conventional versus DSCR, and some other creative financing programs that are available to investors, especially new investors that are looking to get into the business, this will be a great episode to listen to.
Sponsorship
0:03:58 – We are sponsored by Title Assurance and Escrow, a title company here in Cordova that does all of our closings, title work, escrows, and we only use Title Assurance and Escrow. That relationship is very important because we can get things done for our investors quickly and easily. So to speak with Title Assurance and Escrow, call 901-737-3332 and ask for Chris or April.
Brett
0:01:48 – Thanks for joining us today. You know, we get a lot of questions about financing and different options and what’s out there and available. And we’ve talked multiple times about this. We’ve had you on the show once before. You know, I’ve got Jeff and Nick in the studio with us and Richard and everybody’s going to have some questions for you, but I guess what I’d like to do is start off by just giving you a scenario and you tell me what you would recommend.
Frank
0:02:09 – Sure.
Brett
0:02:10 – I’m dealing with this right now. I’ve got a brand new investor, a young guy, I think he’s late 20s, maybe 30 years old. He’s got about 60 grand saved. Just got married a couple of years back, just had his first baby, very similar to your situation situation and is now wanting to use those funds to start venturing into investment real estate. But he doesn’t know how he wants to pursue that. His initial question to me was, do you think we could find an owner finance property where I can put 30 grand down? Or do you think we can buy a $60,000 property that I can just pay cash for? And I’m trying to explain to him to use that 60 to leverage and buy four properties or three properties. Right. So in that situation of this young guy, I’m probably going to put him in Dutch with you. What would you recommend to him as to how he can get started? Let’s assume, I don’t know his credit, but let’s assume he’s got a good credit score. Obviously he’s got no cash in the bank. Good job.
Frank
0:03:03 – In that situation. Okay. So he has 60K saved, just married, just had a baby and he’s not sure how he would want to use that, whether he wants to go owner financing, you know, like an owner finance property. Did you say owner finance or like an owner occupied?
Brett
0:03:23 – No, he was asking me if there were owner finance opportunities where he didn’t go through the loan process, he just put a large chunk of money down and worked it out with the seller. The difficulty with that is, I mean, because that’s hard to do because the market is so hot, sellers don’t have to own our finance.
Frank
0:03:39 – I got you, okay.
Brett
0:03:40 – That was just one of his thoughts.
Frank
0:03:42 – Right, yeah, him being a new investor, I would definitely recommend looking into a conventional scenario. Because there are other loan products out there where maybe it’s a little bit easier to qualify for, like a DSDR or other non-QM type loans.
Brett
0:04:03 – Right.
Frank
0:04:04 – But those inherently can come with more cost. With a conventional loan, you’re able to save on the cost and if you can qualify for that, I’d recommend going that route because typically conventional rates, they’re going to be about 1% to a percent and a half lower compared to what you might get like on a DSCR.
Brett
0:04:27 – What are interest rates running right now on an investment, conventional investment loan?
Frank
0:04:31 – You’re looking at the sixes currently today.
Brett
0:04:33 – Sixes, okay. Well, that’s better than it was six months ago when we were talking sevens and upwards to eight.
Frank
0:04:40 – Yeah. Well, yeah, it varies, credit, how much leverage they want to use, down payment, all that good stuff.
Brett
0:04:45 – When you say conventional, that’s the 20% down, 80-20 conventional investment loan or is it larger?
Frank
0:04:51 – With conventional, it’s typically going to be 25 percent down. It’s going to be full doc qualifying, meaning they’re going to want to see your tax returns. If they work for an employer, they’re going to want to see pay stub W2, debt to income qualifying. Versus if you look at what’s called a DSCR, debt service coverage ratio, they’re gonna wanna see that the property can pay itself, essentially. That the rent, the gross rent, can cover the PITI, principal interest tax insurance.
Brett
0:05:14 – What are those running these days?
Frank
0:05:35 – For DSCR, I mean, depending on the scenario, good credit, you’re probably looking at the seven to eight. If you buy it down, it’s pretty similar to a conventional, where you might be able to buy it down into the sixties. It really varies on the cash flow as well. The better the cash flow, the better the term.
Brett
0:05:51 – So a DSCR, you don’t really have to prove income. Basically, they’re going to check your credit. You got good credit and the property cash flows, you can go DSCR.
Frank
0:06:02 – Correct.
Brett
0:06:03 – And what’s the LTV on that?
Frank
0:06:06 – For DSCR, we can go up to 80% loan value.
Brett
0:06:10 – So 20% down. So if he wanted to buy three properties instead of just buying one for cash, then he could go DSCR 20% down on each one of them. We can pick up three homes in Frayser or Raleigh for 90 to 100,000 a pop would be a good scenario. Because if he goes conventional, he can pick up two properties because he’s going to have 25% down, roughly. So I guess it really comes down to what kind of properties and cash flow would determine what’s his best course. Would you recommend conventional over the DSCR?
Frank
0:06:41 – The only reason I would say that is because he’s a new investor. You know, if you can max out on your, you know, 10 Stanley Freddie loans, that’s the route I recommend. A little more documentation but it’s worth, in my opinion.
Brett
0:06:56 – So you would go conventional? Yeah, because you’re going to create more cash flow, you’re going to get a better interest rate, better PITI.
Jeff
0:07:00 – Frank, why are the rates higher on the DCSR loans?
Frank
0:07:05 – The rates are higher on DSCR because they inherently come with a little bit more risk to the lender because with conventional, there’s less risk to the lender. You have the government-sponsored entities, Fannie and Freddie, that are buying the mortgage-backed securities of conventional, the less risk to the lender, so therefore they can offer lower rates. Versus with DSCR, the rates are higher because now it’s a little bit more risk, not debt-to-income ratio qualifying. But these are private individuals that are purchasing these on the secondary.
Jeff
0:07:44 – Okay. So if I use Brett’s scenario, if I had $60,000 and I wanted to buy three properties not two even though the interest rates a little higher I could go with the DSCR loans and put 20% down on 3 properties. So even though the interest rate is higher, if I’m buying three properties, that might be worth my investment?
Brett
0:08:08 – Well, that raises a good question, Frank. If somebody decides to do 25 instead of 20, can you consider that buying down the rate or get a better rate on it?
Frank
0:08:16 – Oh, yeah, you sure can. I mean, the lower the leverage, the better the rate. Because it’s less risk to the lender. The greater leverage, the higher the rate.
Brett
0:08:28 – It’s just like anything else, higher the risk, higher the cost.
Frank
0:08:31 – Correct. Yeah, really important that you talk to a loan officer and someone that has your best interest in mind and they do a comparison, see what’s right for you.
Brett
0:08:39 – Yeah, for those of you listening, Frank is with Convoy Loans. Frank, give your phone number out so if anybody wants to reach out to you and talk about potential loans, they can reach out to you.
Frank
0:08:48 – For sure, you can reach me at 323-673-5782. You can also send an email to frank [at] convoyhomeloans.com. That’s probably the best way, to send me an email letting me know that you came from the Five O’Clock Somewhere podcast. Happy to help.
Brett
0:09:07 – Cool. Now, besides conventional DSCR, which we hear a lot of DSCR talk today, because let’s face it, a lot of investors have some cash but don’t have 800 credit score and don’t have provable income because they’re self-employed for one scenario or another. So, DSCR has become a very popular avenue for investors to get into real estate. But at the end of the day, if you’ve got good credit and you can prove your income and you’ve got cash, conventional is the way to go. DSCR is something for a self-employed gentleman who just deducts way more than he should on his taxes like Jeff does. So a DSCR loan might be a better option.
Jeff
0:09:46 – I’m an expert at devaluing the value of one’s company. Frank, can you talk to us about hard money loans for a minute? Tell us how those work.
Frank
0:09:55 – Yeah. So for hard money loans, that’s a product that you’re going to use if the property is distressed or if you’re looking to add value to the asset, right? So with hard money loans, typically close those in two to three weeks. With that, we’re going to look at what’s called loan to cost. So the cost is essentially the purchase price and the rehab. And we will give a percentage based off of that. So with hard money loans, we can go up to 90% loans to cost. We’ll cover a hundred percent of the rehab and we’ll do 75% of the ARV. But because those come with a little bit more risk because you’re renovating the property, those rates are going to be anywhere from upper nine to 12% interest only, and those will come with a loan. We have 12 month terms, 18 month terms, and 24 month terms, depending on what your preferences are.
Brett
0:10:53 – So if you do a hard money loan, you buy the house, they give me the money to do the rehab, I finish the rehab, I’m all in at $90,000, the house appraised for $110,000, but I’m on a 12 month hard money loan. Can I refi that out to conventional within 90 days or do I have to ride the 12 month loan out before I can refi? And if I do refi early, is there a penalty?
Frank
0:11:13 – So for the 90 days title seasoning, you’d want to look at a DSCR because we can do 90 days for the title seasoning. We can also do delayed finance. So if you have a hard money loan, let’s say you’re under 90 days, we can get you cash out refinance scenario. But yeah, you’d want to go DSCR if you’re at 90 days or less.
Brett
0:11:34 – So instead of a hard money, you do DSCR?
Nick
0:11:36 – No, he’s saying you would at the end of the hard money after you rehab it, he would go DSCR.
Brett
0:11:40 – Oh, go DSCR at that point. Okay, gotcha, gotcha. Okay, so that was my question, is that you’re not locked into that hard money loan for 12 months, you can refi it out any time during that 12-month term.
Frank
0:11:49 – Yeah, no, there’s no prepay on that.
Brett
0:11:51 – Okay, gotcha. That’s what I wanted to clear up. You know, you’ve done some creative things for some of our clients, bulk buying where they’re refi-ing, rolling all the cash into a package and stuff like that. What are some of the other off the beaten path products or financing you put together that you all have that’s available for those really odd situations?
Frank
0:12:11 – Yes, we have a 75-15-10 scenario. So if you want to get a little bit creative, we can do a loan in first position at 75% and you can go up to 15%, the seller will carry up to 15% in second position, and then the investor can just bring 10% down. So that’s also an option as well, so 75, 15, 10, if you can negotiate a career scenario.
Brett
0:12:38 – I got you. So that would require the seller of the property to carry a 15% note.
Frank
0:12:42 – Up to 15%. Yeah, it’s all negotiable.
Brett
0:12:44 – So basically whatever you work out with the seller, does the lender try to control that or is it just kind of whatever works out? Do they try to dictate what kind of interest rate range or the max amount of the 15%, is there a dollar amount or is it just a flat 15%?
Frank
0:13:01 – Not at all.
Brett
0:13:01 – So you work out whatever you want with a seller and you guys can do the 75% of that total loan with 10% down?
Frank
0:13:06 – Correct.
Brett
0:13:07 – That’s a good deal. If you can find a seller willing to carry 15% note without ripping you a new one.
Jeff
0:13:13 – Give us a scenario where a seller would be willing to carry a note?
Brett
0:13:17 – In Memphis, it’s hard to do because as we all experienced and you guys are about to experience when you get into the summertime, especially here in Memphis, sellers don’t have to owner finance. Like they may in other markets because the market is bad and there aren’t a lot of people buying, hard to get money, decent interest rates, so they’re doing some form of seller financing or hybrid seller financing bank loan or whatever. But in Memphis, we rarely see that. I rarely see any properties where there’s seller financing available because sellers know they’re going to sell the property, right? You know, they know they’re going to sell it. They don’t have to carry the note and take any risk.
Jeff
0:13:53 – I’m guessing you’d have to be really desperate to sell your property before you’d be willing to do that. That would be a last case scenario for me if I had a house to sell and just couldn’t sell it.
Brett
0:14:02 – Well, not necessarily. I mean, look, I’ve had some of my investors thought about owner financing when they went to sell because what it does is it lessens your capital gains tax. So they don’t take all the cash. They’re not planning on rolling at 1031 into another property. So at that point, they’re faced with a huge capital gains tax when it closes and they receive that money. So if they only receive a small portion of the money and then the balance of it is being carried out, then really all they’re doing is paying tax on the interest that they’re collecting on the money that they’ve on paper loaned out to this gentleman. They don’t see the capital gains tax until that cash is out or until they show that profit. So, yeah, I mean, there’s some advantages to a seller doing that, but most sellers don’t have that problem that I know of. Usually they’re selling to roll 1031 into a different portfolio or they’re selling because they’re just ready to get out of the market and they’re not in any hurry or desperate for money, so they just kind of put it out there and it’ll sell usually within 30 days you’ll have a contract on it. I like that 75-15-10, that is a cool idea if we run across somebody that may be willing to sell their finance, that might be something we can talk to them about. I got one guy in particular trying to sell a property now and I may approach that with him about an option to do that. I think that’s a good tool to have in your bag for your sellers that are moving money, that don’t need the cash but are moving properties off. This guy is wanting to sell in Raleigh and move a lot of his money, move out to the Galloway area. So, it may be a great way for him to get a good chunk of change back out of it because he owns all the houses free and clear and still carry a note and make some money on the property and then move that balance out to Galloway.
Nick
0:15:38 – Are there any other options aside from hard money for our flippers and our rehabbers?
Frank
0:15:44 – Besides hard money, we can do a fixed and flip loans. That’s gonna come from a little bit less cost than a hard money, but essentially pretty similar when we’re looking at loan structure. You know, up to 90% loan to cost, 75% of ARV, and we’ll cover 100 percent of the rehab. The rehab is held in a non-Dutch escrow account. So for your listeners that don’t know what non-Dutch means, that just means you’re not going to pay any interest on the undrawn funds.
Brett
0:16:13 – I got you. Let me clarify, you said 90 percent of cost or 75 percent of after rehab value. Is that a whichever is greater or smaller? How do you determine that?
Frank
0:16:28 – It’s whichever one’s smaller.
Brett
0:16:30 – Okay.
Frank
0:16:31 – It’s what they’re gonna look at.
Nick
0:16:32 – So what does that loan look like as far as down payment and terms?
Frank
0:16:36 – For the down payment, we’re doing, and that depends on how much rehab is going to the project and what the acquisition cost is.
Brett
0:16:44 – Did you talk to one of my clients, Amish? I sent your way. That ring a bell? So, let’s run a scenario, one that him and I have been bouncing around. House is $65,000 and he’s about 10 grand worth of work. It’s got an ARV of about $105,000. So, what would that loan look like? What would his out-of-pocket be? What would his interest rate be? How long does he have to refi out of that loan to a conventional loan or whatever it’s going to be?
Frank
0:17:13 – Okay, so you got $65,000 for the purchase, and then that’s 10K in rehab, right?
Brett
0:17:20 – Right.
Frank
0:17:21 – Okay, and you said the ARV is $105,000?
Brett
0:17:23 – About $100, between $95,000 and $105,000. It’s based on a CMA.
Frank
0:17:28 – Got it. So we would take $65,000, and we would add the 10K, that puts you at $75,000, that’s your cost.
Brett
0:17:36 – Okay.
Frank
0:17:37 – Right, so if your cost is $75,000, we’ll give you 90% of that, so that’s $67,500. And what we do is we take the rehab out of that. So in this case, it’s $10,000, subtract it from the $67,500. Your initial loan in this scenario will be $57,500. The rehab funds are held in a separate escrow account. So he would just submit a draw request and an inspector would go out there, check the box, make sure the funds are going towards the project, and they would disburse funds.
Brett
0:18:08 – So he’s only putting out of pocket about $8,000?Hmm.
Frank
0:18:12 – Correct.
Brett
0:18:15 – Hmm. I guess that is a little bit over 10% out of pocket? Is that what it comes out to? Okay. I don’t have a calculator in front of me. Apparently you do. You got like one of those old adding machines.
Frank
0:18:28 – Hey, it works.
Brett
0:18:32 – Yeah. So what do you call that type of a loan scenario? What is that?
Frank
0:18:35 – This would just be a fix and flip loan.
Brett
0:18:37 – So it’s a straight fix and flip. So what are the term, like what’s the time limit on that loan to where they have to refi out of it? What’s the amount of time?
Frank
0:18:44 – Terms range from 12, 18, or 24 months. The longer you go on the term, the higher the rate. So, you know, that rate is going to range anywhere from 9 to 12% interest only. And they’re also going to look at the investor’s experience. So, the more experience they got, the better the rate.
Brett
0:19:03 – Okay. So, you’re looking at 9 to 12% interest only for a term of 12 months or sooner, just whenever you can sell the house, or the obviously exit plan is you refi it conventionally and just hang on to it until the market shifts. Why would somebody go 24 months on a fix and flip? That must be one slow contractor.
Frank
0:19:22 – That or maybe a new investor. They like the peace of mind having a 24-month term.
Brett
0:19:28 – What does the rate run on that 24 months?
Frank
0:19:31 – 11 to 12%.
Brett
0:19:34 – Okay, and that’s interest only, monthly payments of interest only on whatever the loan amount is. Pretty simple. So a fix and flip loan, that’s something, do you do a lot of those? You have a lot of investors that use those?
Frank
0:19:46 – We do a few of those. I work with a lot of turnkey companies, so mostly doing long-term financing, but yeah, we can do them. We’re essentially a one-stop shop for investors, so if there’s an investor that needs short-term leverage, we can do it. But I’m doing a lot of these DSCR and conventional.
Brett
0:20:03 – Yeah, but not a lot of the fix and flips?
Frank
0:20:06 – Not a lot of those, I did a few of them. Okay. But not as much as my DSCR and conventional currently.
Brett
0:20:11 – I got a couple of fix and flippers that I’m dealing with, new guys, that have their own financing arranged currently, but I may send them to you. I think they’re using hard money. Maybe the fix and flip opportunity would be a better scenario for them as far as cost-wise, because the biggest problem with fix and flip is the cost of money while you’re fixing it and trying to flip it. I’ve had guys that have gotten close to breaking even because it took longer than they expected to rehab and then cost went up and then it took longer to sell the property than they expected. Pick Frank’s brain, man. You run across somebody that’s looking for a creative way to do something. Frank’s done a lot of creative stuff for a lot of my clients. I’ve never really asked him about the specific type of products because he always says, yeah, I talked to him and here’s, yeah, we got it taken care of. He’ll be able to close in three weeks. He just put something together or found a product that worked. So I sent a lot of people to Frank for that reason because he works hard for the money. You know, he works hard for the business and he takes care of the clients. He’s not always the cheapest, but sometimes you get what you pay for. You can get cheap money somewhere and probably end up getting hit hard on the back end. At least with Frank, you know up front what your nut is, what you gotta crack, and what your time frame is, and what you need to do. So at least you got a better plan in place to move that property when it’s time. All right, Frank, give your number out one more time, your email address.
Frank
0:21:29 – You can reach me at 323-673-5782. You can also send an email to frank [at] convoyhomeloans.com. That’s probably the best way, to send me an email letting me know that you came from the Five O’Clock Somewhere podcast.
Brett
0:21:47 – That’ll work. All right, Frank, we appreciate you, man, as always. Thank you, buddy. Have a good day.
Frank
0:21:52 – All right, man, you too.