Scott Dillingham: 00:21

Welcome back to today's show. Today, I'm gonna show you how I help my investor clients to purchase unlimited rental properties. So before we dive into purchasing the unlimited properties and the process and, the flow that we take the client through, many people have different ambitions. So we've got some clients that want to retire early. So they wanna build up a portfolio large enough that they can live off the cash flow of the investment, and then they don't have to work anymore.

Scott Dillingham: 00:53

We have some clients that want to supplement their income. So they're looking to get an additional rental property or 2 or 3. So that way they've got extra income coming in in case they get laid off from their job or there's a life, a major life emergency. So there's so many reasons why people invest in real estate. Some people wanna travel.

Scott Dillingham: 01:14

Some people wanna just be rich. Right? It just depends on what motivates you. The biggest challenge in buying rental properties is the financing. It's really easy to go out and get private financing on every single mortgage that you wanna get for every rental property, but that's gonna erode your profits, and you don't need to do that.

Scott Dillingham: 01:35

A lot of investors feel that once they hit a certain cap, there there's no other options for them and they're stuck, but that's not true. And I'm gonna go over the process and how it works. So there's a couple types of lenders that you should know about. There's the a lender category. So the a lender category is gonna be your major banks, credit unions.

Scott Dillingham: 01:58

There's also trust companies. So companies that only provide mortgage services, they don't have any other products, just mortgages. So those would be bucketed in the a lenders. Then there is what's called a b lender. So a b lender is generally for someone with higher debt ratios, lower credit scores, or they own too many rental properties and, big banks and the major a lenders will not move forward.

Scott Dillingham: 02:25

And then the 3rd type of lender would be commercial. Now most I will say most commercial experts in our area, they're not in tune to the way that an investor would need to qualify. A lot of them just work at a bank and are only familiar with that specific bank's products. There's not a large commercial force in the Windsor and Essex County area, where we have a commercial team. So there's 3, actually, there's 3 people on the commercial team.

Scott Dillingham: 02:55

There's a potential fourth one where, speaking to him, doing interviews and stuff like that. The commercial is really growing. So I'm gonna touch on commercial and why that's important, but we'll do that shortly. And then the last type of lender is like a private lender or a mix. So a mix is like a mortgage investment corporation.

Scott Dillingham: 03:12

I actually prefer mix to individual private lenders because a private lender could be anybody who's got a line of credit on their house. They could be a private lender. But what I've seen in the past is those private lenders say they're using all of their line of credit to help a client buy a house. Let's say that the private lender is getting a divorce and the wife says, I want my money. He's he's gonna wanna call back in that mortgage and use those proceeds to settle with his ex.

Scott Dillingham: 03:44

I don't like the individual private lenders because they run out of money and they, again, life happens and they might need their money back. So we like to use mix because they're major corporations with 1,000,000 and 1,000,000, some even have 1,000,000,000 of dollars under management. And with that, you don't have that, those relationship issues or any other financial issues. Say the private lender lost their job, that they might want that money back that they've lent out on the mortgage. So there's all those variables disappear when you go with a mix.

Scott Dillingham: 04:14

So that's who we do prefer. I also find their rates to be a little bit cheaper than a private local private. So that's my opinion, but at least now the 4 major classes of lenders. Now we're gonna talk about how you can use them to leverage your portfolio. So when you deal with most of the a lenders, so again, that's major banks, credit unions, trust companies, they're only gonna use 50% of the rental income.

Scott Dillingham: 04:43

Now that's not all of the lenders, so I'll touch on the differences. Most will use 50%. And on top of that, they have to follow government guidelines as far as debt ratios. So that means 44% of your income is allowed to go to debt and expenses like mortgage lending. Now if you have banking products and things with a certain lender, they might make exceptions and go over that 44% for you.

Scott Dillingham: 05:08

But generally speaking, they do try to follow that ratio. So what happens, one of 2 things happen because the banks, they're only using half of the rental income. So the client's debt ratios tend to get maxed out. Because if you're renting a home for 2,000 a month and your mortgage and taxes, let's say is 1500 a month in real life, you're getting a $500 profit. The way that, not again, not all major banks, but, the way that most major banks and major a lenders look at it is your rent's only $1,000 because they're using half of it.

Scott Dillingham: 05:43

But your mortgage payment and your taxes is 1500. So you actually have a $500 loss on this property, which limits your borrowing capacity because it erodes your income that you can use to qualify for future lending. So what ends up happening is most people will get maxed out on their debt ratios after they buy a couple of properties. So if that's not the case, if you're someone who has lots of income and maybe you've bought excellent rental properties, you've got great cash flow. Then what happens there is usually the bank or institution will say to you, you've reached the amount of properties that we're willing to finance.

Scott Dillingham: 06:24

So every lenders has have a different, number of doors or units, mortgages that they'll offer a client. So for an example, some of the major lenders will you allow you to buy 5 rental properties. That's it. It doesn't matter where the mortgage is. If you've got 5 or more, you cannot use that specific lender.

Scott Dillingham: 06:47

Now there's other lenders that will do 5 with them. So you can have 5 elsewhere and then get an additional 5 with this lender. So it's incredibly important to work with an expert and I recommend broker. I know I'm a little biased here. I used to work at a bank and, now being a mortgage agent with access to many different lenders and options that are out there, I'm totally biased because I've seen it from both sides.

Scott Dillingham: 07:16

And I know on the, like, mortgage broker side of things, there's many more options for the clients to move forward. But what I do is I'll strategically place the client in a specific order of lenders to maximize what the client can afford. So if you look back at my example of the one lender will do 5, regardless of how many you have. If you go to this lender first, you're throwing away 5 5 properties that you could buy because they'll do 5 regardless of how many you own. But if you go back to that 1st lender that only does 5, you they're gonna say you're maxed out.

Scott Dillingham: 07:52

You already have 5. So you need to go to the lenders that have the 5 property cap first. And then from there, you go to the lenders that will do 5 with them, with that specific institution, regardless of how many you have. Now I've gotta take a quick pause here. But when I come back, I'm gonna continue this and we'll dive into the other asset classes of lenders, and I'll show you exactly how we can structure your mortgage financing to win so you can get unlimited rental properties.

Scott Dillingham: 08:26

Welcome back. Thanks for hanging out during the break there. I was speaking about the lenders and how to get them in order of qualifying before the break. I want to continue where I left off. Now there are some so I was saying there's most lenders want 50% of the rental income, and they all have caps on how many properties that they'll finance for you.

Scott Dillingham: 08:49

So there are a bunch of lenders that we have that are still considered a lenders. So comparable rates that will use 80 to 100% of your rent when we're using like a rental worksheet. And those lenders will qualify you for so much more. So if your issue is you're maxing out on debt ratio, those lenders can help you to grow. Now the cool thing with this lender is some of the big banks, they wanna see that you have a 100,000 of liquid funds or any specific amount of assets behind you.

Scott Dillingham: 09:21

And I would be a little leery of that because a lot of investors, they don't want free cash sitting in their checking account, doing nothing just so they can qualify to use that mortgage lender. So the lenders that I'm referring to, they have a rental worksheet program where they'll use the 80 to 100% of the rents. But they don't have that liquid asset requirement, which is ideal so you don't have to keep money locked away sitting there idle. You can use that as down payments and grow your portfolio faster. So I just want you to know about that because there's there are some lenders that have the liquid funds requirement and there's some that do not.

Scott Dillingham: 10:00

So again, this is why I recommend speaking to a professional that does investment properties like us. Because we know all of this and we'll structure your application for success. So let's say we get your application maxed out with the lenders that use 80 to 100% of the rental income. And I just wanna take a step back too. The lenders that are using 80 to a 100% of the rental income, they also allow for a larger amount of properties you can own.

Scott Dillingham: 10:29

So the one lender will do 10 properties regardless of how many you own. And the second lender will do 12, regardless of how many you own. Now they do have limits to the dollar amount of money lent, so you might not hit that 10 or 12 based on the dollar amount to the mortgage. But just know like that's they're great lenders, and we'll work with them when the client maxes out or when you max out with the traditional lenders. Okay?

Scott Dillingham: 10:55

So they're great lenders that can keep you going great rates. Let's say you're maxed out with all of the a stuff. You're completely maxed out. Most mortgage agents or mortgage brokers will then refer the client to a b lender or a private lender because that's easier. The B lenders and the private lender.

Scott Dillingham: 11:12

The private lenders, they don't really care. They'll do almost any application guaranteed in there. The B lenders, they're gonna use a lot more income, like rental income, but they also allow for higher debt ratios. So I was mentioning the banks and a lot of the a lenders, they have to stick to the 44% debt ratio. Where a b lender, they don't have to.

Scott Dillingham: 11:33

We have some b lenders that'll go up to 70% debt ratio. So it's a huge difference, right, of the amount that you can qualify for. But we skip the b lending, and we save that as the last resort. So as I was saying, most agents and brokers will go right to the b side. The reason we skip it, the rates are higher.

Scott Dillingham: 11:53

You can expect 3% to 4%. Now this is near the end of 2021. Whenever you're listening to this, rates could be higher or lower. But near the end of 2021, you can expect low threes to low fours as your rate with a b lender. And you can also expect to pay a lender fee of 1% and some even go as high as 1.5%.

Scott Dillingham: 12:12

And then with private lending, if it's an individual private, they tend to be around 10% to 12%. Where some of the mix that we work with, the rates are between 5 to 8%. So it is cheaper. But again, those guys are gonna have lender fees as well, and it's gonna be more than a b lender. So a b lender will be nearly 1 to 1 a half percent of your lending amount as a fee.

Scott Dillingham: 12:37

But a private lender is gonna be like 1 a half to 3 percent, depending on the risk of the file and the lender, the property's location, loan to value. There's a bunch of variables there, but you can see that it gets more and more costly. The riskier, the lender accepts for an application. Well, what we like to do and why it's super important is we'll go to commercial. A lot of people think commercial means you're buying an apartment building or a mall and that's a commercial mortgage.

Scott Dillingham: 13:06

And so that is true. But you can also get a commercial mortgage on a single family house. So the benefit of doing this is it's the way that the lender looks at the application. So in residential, they're looking at it based on debt to income ratio, all the standard government guidelines stuff. In commercial, they look at it based on the property's cash flow.

Scott Dillingham: 13:28

So they still look to you as a person. I would say if I was to give you a mathematical ratio, I would say on commercial, it's probably 5% of the whole application is based on the borrower. And then 95 is the property. Where on residential, the property is still very important. I would say it's probably worth 20 to 30% of the application, and we're in that 70% is the borrower.

Scott Dillingham: 13:51

There's a lot more that the borrower needs to prove to move forward on the residential side. But when you go commercial, that's where things really open up. Now you have to be careful, and I don't recommend just walking into your lender that you bank with in getting that. A lot of lenders are good, but I'll give you an example. 1 of the major banks, they have it's called debt ratios or sorry, a debt service ratio, a DSR, or debt service calculation.

Scott Dillingham: 14:20

That's how they calculate investment properties on the commercial side. And the, they get a ratio of the income to expenses. So they wanna see 1.3. This is just one lender. Okay?

Scott Dillingham: 14:34

So every lender has different policies, but this one lender, major bank, big bank, they wanna see a 1.3 on their rental worksheet of the d DSR to qualify you. Now what that means in English is pretty much they want you to have 30% positive cash flow based on the total expenses of the property. So it's not like a crazy figure, but still they wanna see, a DSR of 1.3. And then they also qualify your application using the stress test. Or we have some commercial lenders that will go down as low as one on the DTSR.

Scott Dillingham: 15:10

It's also called the DCR. There's so many acronyms for it. So your lender might have a different term for it, but it's a rental worksheet that calculates the ratio of rental income to expenses. So we've got other lenders where they look to as low as 1 on the DCR. And they're also not using the stress test.

Scott Dillingham: 15:29

They'll qualify you at the contract rate, which means the rate that you're given or a number slightly above that. Oh, we just had a property. It was a 4plex 800,000. And, at the bank, there would have been about 40% down. And using a different lender, we got the client 25% down.

Scott Dillingham: 15:47

So we saved them lots of money. The rates are can be better as well. So I just want you to know, at least on the commercial side, I would not recommend just going to your bank because they're they differ so drastically depending on how aggressive that specific lender is to grow their commercial book of business. And some are not very aggressive right now due to COVID and some are more aggressive. Right?

Scott Dillingham: 16:10

So the more aggressive ones will generally work things out, give you better deals, that type of thing. Now on commercial as well, there is a lender fee slash broker fee, which is gonna be between 1 to 1 a half percent of the total mortgage lending. So I do want you to be aware of that as well. So that is there. However, that is a better alternative for someone who's maxed out than going with a B lender or a private lender.

Scott Dillingham: 16:37

Because rates on those currently are low twos for a commercial mortgage. So again, much better rates. The fee is, pretty well equivalent. But then you're getting, you don't have to have a full time income. You could be maybe an investor that retired from their job, and they just wanna invest and manage their properties.

Scott Dillingham: 16:56

They look at things like this where they can't do that on the residential side. Ultimately, with the roadmap and game plan that we've created for our investors, we can help you to get a limited rental properties. Next week, we're gonna dive into more of the commercial stuff. We're gonna have our commercial rep on, and we're gonna go into the nitty gritty and different things that are available and options to you. So you're aware, and then we can set up a custom plan for you if you're interested and get this, get the ball rolling for you and create more success within your real estate portfolio.

Scott Dillingham: 17:27

So thanks so much for tuning in today.