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 took the client through, many people have different ambitions. So we've got some clients that want to retire early. So they want to 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:We have some clients that want to supplement their income. So they're looking to get an additional rental property or two or three. 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 want to travel.
Scott Dillingham:Some people want to 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 want to get for every rental property, but that's gonna erode your profits and you don't need to do that. 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.
Scott Dillingham:And I'm going to 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. There's also trust companies.
Scott Dillingham: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 the big banks and the major A lenders will not move forward. And then the third type of lender would be commercial.
Scott Dillingham: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 worked 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 three, actually, there's three people on the commercial team. There's a potential fourth one where, speaking to him, doing interviews and stuff like that.
Scott Dillingham:The commercial is really growing. So I'm going to 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. 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.
Scott Dillingham: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 going to want to call back in that mortgage and use those proceeds to settle with his ex. 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 there are major corporations with millions and millions, some even have billions of dollars under management.
Scott Dillingham:And with that, you don't have that those relationship issues or any other financial issues. Say the private lender lost their job, they might want that money back that they've lent out on a mortgage. So there's all those variables disappear when you go with a mix. So that's who we do prefer. I also find their rates to be a little bit cheaper than a private, local private.
Scott Dillingham:So that's my opinion. But at least now the four 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 going to use 50% of the rental income. Now that's not all of the lenders.
Scott Dillingham: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:But generally speaking, they do try to follow that ratio. So what happens, one of two 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 1,500 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 a thousand dollars because they're using half of it, but your mortgage payment and your taxes is 1,500. 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.
Scott Dillingham: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. 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 five rental properties.
Scott Dillingham:That's it. It doesn't matter where the mortgage is. If you've got five or more, you cannot use that specific lender. Now there's other lenders that will do five with them. So you can have five elsewhere and then get an additional five with this lender.
Scott Dillingham: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. And I know on the, like, mortgage broker side of things, there's many more options for the clients to move forward.
Scott Dillingham: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 five regardless of how many you have. If you go to this lender first, you're throwing away five five properties that you could buy because they'll do five regardless of how many you own. But if you go back to that first lender that only does five, you they're gonna say you're maxed out. You already have five.
Scott Dillingham:So you need to go to the lenders that have the five property cap first. And then from there, you go to the lenders that will do five with them, with that specific institution, regardless of how many you have. Now I've got to 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. Welcome back. Thanks for hanging out during the break there.
Scott Dillingham:I was speaking about the lenders and how to get them in order of qualifying before the break. 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. 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.
Scott Dillingham:So if your issue is you're maxing out on debt ratio, those lenders can help you to grow. Now, cool thing with this lender is some of the big banks, they want to see that you have a 100,000 of liquid funds or any specific amount of assets behind you. 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.
Scott Dillingham: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. 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 want to take a step back to the lenders that are using 80 to a 100% of the rental income.
Scott Dillingham:They also allow for a larger amount of properties you can own. 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.
Scott Dillingham:Okay. So they're great lenders that can keep you going great rates. Let's say you're maxed out with all of the ACE 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.
Scott Dillingham:The B lenders and the private lender. The private lenders, they don't really care. They'll do almost any application guaranteed in there. The B lenders, they're going to 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: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 can 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:You can expect three to 4%. And now this is near the end of twenty twenty one. 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. You can also expect to pay a lender fee of 1% and some even go as high as one and a half percent.
Scott Dillingham: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 five to 8%. So it is cheaper. But again, those guys are going to have lender fees as well. And it's going to be more than a B lender.
Scott Dillingham:So B lender will be nearly one to one and a half percent of your lending amount as a fee, but a private lender is gonna be like one and a half to 3%, depending on the risk of a 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. So 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: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. So they still look to you as a person.
Scott Dillingham: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. 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.
Scott Dillingham:Now you have to be careful. And I don't recommend just walking into your lender that you bank with and getting that. A lot of lenders are good, but I'll give you an example. One of the major banks they have, it's called debt ratios or sorry, a debt service ratio, a DSR or debt service calculation. That's how they calculate investment properties on the commercial side.
Scott Dillingham:And the they get a ratio of the income to expenses. So they wanna see 1.3. This is just one lender. Okay? 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.
Scott Dillingham: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, where we have some commercial lenders that will go down as low as one on the DTSR. It's also called a DCR. There's so many acronyms for it.
Scott Dillingham: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 one on the DCR. And they're also not using the stress test. 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.
Scott Dillingham:It was a fourplex 800,000. And at the bank, they would have been about 40% down and using a different lender. We got the client 25% down. So we saved them lots of money. The rates are, can be better as well.
Scott Dillingham: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? 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 one to one and a half percent of the total mortgage lending.
Scott Dillingham: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 because rates on those currently are low twos for a commercial mortgage. So again, much better rates. The fee is a pretty well equivalent, but then you're getting, you don't have to have a full time income.
Scott Dillingham:You could be maybe an investor that retired from their job and they just want to invest and manage their properties. They look at things like this where they can't do that on the residential side. Ultimately, with the road map and game plan that we've created for our investors, we can help you to get unlimited rental properties. Next week, we're gonna dive into more of the commercial stuff. We're gonna have our commercial rep on, We're going to go into the nitty gritty and different things that are available and options to you.
Scott Dillingham: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. So thanks so much for tuning in today.