Avery Carl [00:00:03]:
What’s up, guys? It’s Avery Carl from the short term show doing the intro for the panhandle of Florida. We are doing a ten episode deep dive on two markets here, both the Emerald coast and the forgotten coasts of Florida, which basically makes up the entire Florida panhandle. So ten episode deep dive here. We are going to add quarterly updates, so make sure you hit that subscribe button. We also have some supplemental materials for you guys on our website. So anything you need to know about current short term rental property pricing in terms of how much it costs to buy a property in these markets, you can find that on our website@theshorttermshop.com, dot. You can also find current air DNA income data thanks to our friends over at, you guessed it, AirDna. And we’ve got all that for you guys.

Avery Carl [00:00:50]:
So that you can listen to this at any point in time and go find live pricing and live income data. Also, if you guys want to buy a short term rental investment with a short term shop agent on the emerald or forgotten coast, you can just email us@agentshorttermshop.com and we will get you hooked up. These are two of my very favorite beach markets, by the way. I’ve chosen to live in the Emerald coast. I also invest in the Emerald and forgotten coast, so very near and dear to my heart. Also, if you guys just have more questions and you want to chat about short term rentals, we’ve created an amazing community over on Facebook with over 50,000 short term rental investors just talk and shop all day. It’s got the same title as my book. It’s called short term rental, long term wealth.

Avery Carl [00:01:33]:
So head over there to chat more about short term rentals. And if you want to chat live on Zoom, we’ve got a call every Thursday that you can join@strquestions.com happy investing, y’all. Hey guys, welcome back to another episode on the Emerald and forgotten coast of our special episode series on different markets. We have an amazing panel of people on here today to talk about financing. So financing your short term rentals on the emerald and forgotten coast, basically the entire panhandle of Florida. I’ll introduce them in order of the way they appear on my screen. January, you are first. Go ahead and introduce yourself.

January Johnson [00:02:20]:
Although, hi there, January Johnson. I am a Panama city native who never thought I was coming back to the Emerald coast. And then I got smart and I bought myself a vacation home here. And I’ve been back seven years now and I’m the longest running Airbnb host in the city of Panama City. I’m a community leader for Airbnb, and I own four short term rentals, and I love this team, and I love the Emerald coast.

Avery Carl [00:02:42]:
We love you, too. All right, next we have Rush Valentine. We’ve got some great names on the scene, by the way. January Johnson and Rush Valentine. Rush, you want to introduce yourself really quick?

Rush Valentine [00:02:54]:
Hey, I’m Rush Valentine. I’ve actually been with Avery in the short term shop since I guess it’s kind of close to the beginning or when it became the short term shop. So the past three or four years, just 100% been dealing with investors and all the complexities of making that the smoothest, smoothest possible process along the Emerald coast. Condos to massive single families, to pretty much anything you can make a dollar on as far as the short term investment goes. So I’m just here to help any way I can.

Avery Carl [00:03:26]:
Awesome. And next we have our licensed loan officer. So we don’t have to answer any questions with. Oh, sorry, I’m not a licensed loan officer. Megan Winterberg. Megan, introduce yourself really quick.

Megan Winter [00:03:38]:
Thanks for having me, avery. So, Megan Winterberg, I’m a senior loan originator at the mortgage shop, and I’m an investor turned lender. So my portfolio is all short term rentals. And then I left corporate America and made the jump to the lending side.

Avery Carl [00:03:52]:
And I think you might have been the most nervous short term shopper so far when you started. And now look at you go, yeah, I know. Seven properties later, she’s like, stop bringing that up, please.

January Johnson [00:04:06]:
It’s just that anybody can transform from nervous buyer, first time buyer, to, like, a pro. Yeah, that’s what we’re good at. So I think it’s awesome. I think you should tell that story every. Every time.

Avery Carl [00:04:17]:
Yep. She has, she has come such a long way. I’m so proud of you.

Megan Winter [00:04:21]:
Thank you.

Avery Carl [00:04:22]:
She’s like, all right, stop. All right, so today we are going to talk about financing. So first we’re going to go over just some general terms and types of loans, and then we’ll go over some things that are really specific to this market because there are some very specific things. So first type of loan, what is the easiest type of loan to get? That you can get, basically, at any mortgage company or bank, et cetera. Megan?

Megan Winter [00:04:48]:
So basically you’d be looking into a second home loan, conventional loans, Fannie Mae, Freddie Matt guidelines. They’re looking at your income, your expenses, your debt to income ratio, your credit score. And that’s usually always going to be the easiest to qualify.

Avery Carl [00:05:05]:
Right. So conventional loans guys are always going to be the easiest to find because basically every mortgage company in existence is going to do them, unless they’re specifically a commercial or portfolio lender, which we’ll get to in a minute. So conventional loans, those are your. There’s conventional investment loans, there’s second home loans, which we’ll go into more in a minute. Um, but they are using your personal debt to income ratio to qualify you. So what that means is the ratio of your income versus all the debts that you have. And if it’s above a certain percentage, then you will only qualify for a certain amount. What’s typically that percentage, Megan?

Megan Winter [00:05:44]:
So the max is going to be 50% up to the conforming loan limit for 2023, that 726,200, and then above that, it’d be 45% as a maximum debt to income.

Avery Carl [00:05:59]:
And that 740 something thousand. That is the loan amount, right. Not the purchase price, correct? Yeah.

Megan Winter [00:06:06]:
So 726,200 loan amount, which could make your purchase price around 800,010% down. Up to 900,020% down.

Avery Carl [00:06:16]:
Awesome. And you cannot, unfortunately, get a conventional loan in your llc. You will have to get that in your personal name. Conventional loans also limit how many financed properties you can have. So you can have ten conventionally financed properties in your name or your spouse’s name. If you have both of your names on each loan, you can only have ten collectively. But if you each are able to alternate and qualify individually for each house, then you can have ten each. So a total of 20.

Avery Carl [00:06:48]:
So keep, keep that in mind if you’re starting investing and you want to put both people’s name on the loan, think twice about that, because you may be able to get more loans if you don’t do that. Um, one thing I want to hit on that a lot of people don’t realize is for a conventional investment loan, the minimum percent down for a single family is 15%. It’s not 20%, it’s not 25%. A lot of people assume that it’s. That it’s actually 15% up to that 740 something dollars loan amount that Megan mentioned earlier. So a lot of people think they’re jumping straight into 20. Actually, 15. That 5% can go a long way for you.

Avery Carl [00:07:27]:
Um, so that would be. Guys, that is my favorite type of loan. If you can get it. If you’re not out of conventional financing, I mean, which the goal is as real estate investors, to get to the point that you have to find other types of financing because you own so many properties, but, uh, if you can get them. Conventional loans, always going to be the easiest to qualify for. They’re typically going to have the lowest interest rates. And I think a lot of real estate investors listen to a lot of podcasts, and they just consume a ton of content and they hear buzzwords like creative financing or which we are going to talk about in a little bit, or hard money, et cetera. And they’re like, oh, I’m buying a real estate investment.

Avery Carl [00:08:07]:
I better go find me a hard money lender. When you don’t need to go nuts like that. There’s a time and place for that, which, again, we’ll get into later, but conventional loans get those if you can. Now, the second type of conventional loan that a lot of people use on these things is the second home loan. So second home loans are for second homes. You do need to be this. It needs to be a scenario where you plan to use it for a certain amount of time out of the year and just rent it when you’re not using it. Megan, do you want to give the rest of the guidelines for that, per Fannie Mae?

Megan Winter [00:08:39]:
Absolutely. So when you’re purchasing a second home or vacation home, your intent truly needs to be to vacation there. That is the primary reason that you’re purchasing this property. You are absolutely allowed to rent it while you are not there. There are three main criteria that you need to consider if you’re looking at a second home loan. One is that you need to have the intent to go there at least two weeks a year, at least 14 days. If you never plan on going there and you’re buying it purely as an investment, do not look at this loan. A second part is it needs to be at least 45 miles from your primary residence.

Megan Winter [00:09:17]:
So you cannot buy a second home in your hometown. Needs to be able to be at least that distance away, and then you need to self manage it. Can’t be putting it under a property manager, because then you no longer have the ownership and control of that property. And you can put as little as 10% down with this product, which is pretty awesome.

Avery Carl [00:09:38]:
Thank you for that textbook, almost. Why can I not think of my words today for the textbook description? I almost said textbook discrimination. That’s where. Where I was going. But anyway, textbook description of that. So, guys, be very careful with this type of loan, because it’s very easy to want to skirt the rules, to want to play in that gray area, and a lot of people do. I have not heard of anyone getting in major trouble for that yet, but I don’t want any of our listeners to be the first one. So my rule of thumb is if you’re running spreadsheets on a property, you should probably just pay that extra 5% and do the 15% down investment loan.

Avery Carl [00:10:18]:
So then you don’t have to worry about what you’re using the property for. Because I think a lot of people are getting really cute with adding people to title after the fact and doing all these things where what they’re really doing is, you know, buying deals with partners and using them as investments and, and ways to scale with putting the least amount of money down. And I think, you know, short term shoppers, I want you guys playing by the rules. So, um, if you’re running spreadsheets, get that investment loan. But if you just want to own a house in this market or a condo, well, you can’t do a condo house in this market and, um, have it pay for itself or make a little money when you’re not using it. Great. So anyway, that’s my spiel about that. Uh, so the second major type of loan that people typically get on short term rentals is what’s called a DSCR loan.

Avery Carl [00:11:10]:
So, Megan, what is a DScR loan?

Megan Winter [00:11:13]:
So basically that’s looking at a debt service coverage ratio loan. So let’s say you can’t qualify with your debt to income ratio and you’re not going to be approved conventionally. Or maybe you don’t have the two year income history, but you have assets available. So DSCR is basically looking at three main things. They’re going to be looking at your credit score, they’re going to be looking at your assets for down payment, and then they’re going to be looking at the property itself. So want to make sure that they’re looking at what that gross revenue should be for that property coming in compared to the mortgage payment. And now the way these loans are approved is looking at the ratio, the DSCR ratio. So most commonly it’s going to be a one to one ratio.

Megan Winter [00:12:01]:
What that means is your gross income, let’s say it’s $5,000. If your mortgage payment is $5,000 a month, that’s a one to one ratio. It would pass. If your mortgage payment was 5500 and we’re pulling gross revenue at 5000 a month, it would not meet the required ratio. So then you’d have to increase your down payment. The good thing is we still can go as low as 20% down, no matter the purchase price, high or low.

Avery Carl [00:12:31]:
Thank you very much for that description. And so when they’re looking, when you guys, you guys being loan officers or underwriting or whoever’s looking at this, where are they getting these income numbers from? Typically for short term rentals, when they’re doing these DSCR loans.

Megan Winter [00:12:48]:
So there’s different ways based off the DSCR lender we’re using, since they don’t follow the Fannie Freddie guidelines, they can choose how they’re going to pull it in. But most commonly is, does the property already have at least a twelve month history? Well, that’s going to help us right there. What if the property wasn’t managed well and that’s not what the true revenue is? That’s a question we get. Also, we can pull market rents for the area in two different ways. Most commonly is going to be air DNA. So looking at those comps for the area is really going to help in a true short term rental market like this one, we also have a way to do an income appraisal. But those notoriously pull in long term rental because it’s a 1007 appraisal, it’s actually designed for long term rental income. So that’s a route we prefer not to go down and to use the property itself or looking at the whole market.

Avery Carl [00:13:45]:
Awesome. And so what are the major differences? You hit on them already, but I want to kind of go into them a little more. The major differences between a DSCR loan and a conventional loan.

Megan Winter [00:13:55]:
So we are looking at increased down payment slightly. Since it has to be a minimum of 20% down. Rates are usually going to be about 1% higher than conventional. So you need to factor that in. There are prepayment penalties. The most common prepayment penalty that you’re going to see is called a five year, a step down prepayment penalty. All that means is basically if you refinance that loan in year one, you would pay five years of interest as your prepayment penalty. If you, it was a 54321.

Megan Winter [00:14:31]:
So let’s say year five you chose to refinance, you’d pay one year of interest as your prepayment penalty. Year six, no more prepayment. And you can always buy that down. Basically the most important would be to talk to your loan originator about what your goals are. I’ll tell you just from my own personal experience, I have a property with a one year prepayment penalty and two with a five year prepayment penalty. Because of what I know, my plan is over the next three to five years. Another awesome thing about these loans are you can close directly in an LLC if you want to.

Avery Carl [00:15:06]:
Awesome. And you can have unlimited finance properties with these.

Megan Winter [00:15:09]:
Yes. Yeah. You don’t. You’re not capped at the ten.

Avery Carl [00:15:13]:
That’s awesome. So these, these types of loans would be either for people who are already maxed out with their ten conventionals, or maybe you’re not maxed out, but maybe you’re out of DTI. Maybe you bought a property this year already and you’re not able to show the income from that property yet on your taxes to qualify at a higher DTI for your next one, but you have the down payment ready to go and you’re ready to buy another one, then a DSCR loan would be a really great option for you. Or if you are someone who recently switched from w two to 1099 work and you don’t have two years of 1099 income to show a lender for a conventional loan yet, DSCR might be a great option for you. So it’s definitely more of an option for if I always kind of look at it as my second option. So if you’re not able to qualify, not able or not necessarily qualify, if you’re not able to go conventional, then you come over here to DSCR. Um, can DSCR do non warrantable condos and or condo tells? So we are going to transition into the condo conversation now before we get to other types.

Megan Winter [00:16:20]:
Yes, they can. And that’s really common too, when talking to your loan originator about getting your pre approval. If you’re able to get pre approved conventionally, your debt to income is great. That’s fantastic, especially for single family townhomes and warrantable condos. But if we know you’re looking specifically at non warrantable condos, you really need to be upfront. Or if your plans change, communicate with your loan originator because that most likely is going to be going down. A DSCR loan option.

Avery Carl [00:16:52]:
So before I move to a question for Rush in January, what, what is non warrantable versus warrantable when it comes to condos?

Megan Winter [00:17:01]:
So basically what we’re looking at specifically is with the HOA information and the condo itself. So how are those condos in that complex? Are they self managed? Are they managed by an hoa? Is there a key code where each person can provide their individual code, or do you have to stop at a front desk with a lobby and get a key card? Are at least 50% of those owners primary residents who choose to live there, or is it primarily owned by investors? That would lead it to be non warrantable, because it’s not basically used for more primary residence. It’s really looking at investment, and there’s not just one item that’s going to make it non warrantable. Every condo is looked at individually. Sometimes they’re warrantable one year and non warrantable the next. Something could have changed with the HOA, so it’s always good. We have a whole list too, of complexes that we already know are warrantable. But majority, when you’re looking with investments, it’s probably going to be non warrantable.

Avery Carl [00:18:06]:
So January and rush in your careers, how many warrantable condos have you actually seen on the emerald or forgotten coast?

January Johnson [00:18:16]:
I’ve seen one building or one complex, and I’ve sold two condos to two brothers. Everything else not warrantable?

Rush Valentine [00:18:24]:
There’s a few that I’ve had clients buy in the, I guess, the Miramar beach area specifically. There’s a little spot, I guess, kind of between, like crystal beach and where Miramar beach kind of, I guess we’re scenic. Gulf drive runs into. Back into 98 before you get to 38. Most of those are a good bit off the beach, though. You know, I tell a lot of clients typically, you know, if it’s. If it’s a Gulf front, if it’s, you know, if it’s got. It looks like a resort, chances are it’s unelectable.

Rush Valentine [00:18:50]:
However, you know, there’s. There’s still been some prices specifically over the past, you know, six months to a year where, you know, the numbers do make sense. You can still make some money being three blocks back from the beach. However, you’ve got to really underwrite it properly because the occupancy is going to be a lot lower. There was a post we’ve made this morning on the Facebook page, and I happen to see one of my clients who bought a non warrantable already talking about how they had really high occupancy for May, and they bought a smaller unit than some of the people that have bought, you know, larger two or three bedroom condos off the beach. And although the numbers show that those two or three bedrooms off the beach may still be a good profit for what they’re purchasing, and they’re able to do 10% down, just a lot more up in the air about the occupancy rate and what you’re actually going to get just because we’re still in a beach market and the beach is the draw. So I kind of. I don’t know, I think there’s.

Rush Valentine [00:19:44]:
I think that the warrantable non warrantable is sometimes looked at it as a negative thing but in my opinion, a lot of times, if it says non orange bowl, it’s probably a good option.

Avery Carl [00:19:53]:
Yeah. And I’ll give a little example of my own. I don’t want to say stupidity. That’s not nice. I interviewed Chris Voss, who wrote never split the difference last week. And he gave me the advice to be kinder to myself. So since Chris Voss told me to be kinder to myself, then I will be kinder to myself. It was my inexperience as an investor.

Avery Carl [00:20:16]:
So I owned a few cabins in the smokies already. And I said, well, you know what? We’ve always gone to Destin and Panama City on vacation. It’s a very similar market to the Smokies, just a different natural resource that people are coming to. So I’m going to go buy a condo down there. And I had two under contract for an unmentionable amount of money because it was so low that I really could put my head through this window right now that we did not buy them. And I went and I used my usual loan officer that I got conventional loans with often. And we got three quarters of the way through the deals. And she was like, hey, these are non warrantable, so we can’t finance them.

Avery Carl [00:20:56]:
So what I did was said, oh, crap. Well, I guess everybody who owns these hundreds of thousands of condos on the Emerald coast must have paid cash for them because they’re not financeable. And walked away from it, when really all I had to do was find a different lender. A different type of lender, I thought, not conventionally financeable meant not financeable at all. And I walked away from two good deals. And so I think that that presents an opportunity with condos because people can be scared of them, because you just have to get a portfolio loan or a commercial loan. It’s no big deal, just a different type of loan. And so I don’t want you guys who are listening to pass up any good deals because you have to get a different type of financing.

Avery Carl [00:21:37]:
I was really scared of the word non warrantable. I thought that. That it made the property somehow not desirable or something wrong with it. And it’s not. It just means that it’s owned. The units are mostly owned by investors. And anyway, that’s my little spiel about don’t. Don’t be intimidated by that word.

Avery Carl [00:21:57]:
So why rush in January? Might a lot of people get really worked up about condos and hoas and things like that? Why is buying a condo in a market like this different than buying a condo? Like in Houston, to short term rent. Why is it okay to do that here? And you don’t have to worry about the HOA, but when people have anecdotes from other markets where a lot of people live and they’ve said, oh, no, the Hoa can kick you out and change the rules, why is that not really a thing here?

Rush Valentine [00:22:29]:
Robert, from my experience, first off, for example, if you’re to go to Nashville or Houston or one of these larger cities, if you buy a condo in a lot of those, I’ve even seen where you have to be approved by the HOA. If you look through this market here, because this is a vacation market, an investment market, almost every single condo rotter will say Hoa, approval not required, as in the HOA does not have to approve the buyer who’s buying in that building. After that. I mean, pretty much everybody in the entire building. I mean, there’s, I don’t know about you, January, but I don’t know a whole lot of full time residents around here that live in condos, specifically, not gulf frontlets. You know, almost, you know, even though I even know people that live here that have them, they still don’t live in them. Those are just their vacation or their Airbnbs or their investments. It’s just a, you know, it doesn’t, it’s not quite the same appeal as if you were to live in a city and you’re just, you know, you needed to be close to downtown or whatever.

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Rush Valentine [00:23:19]:
I mean, here, if you’re in a condo, you’re probably surrounded by a bunch of vacationers and screaming kids and just all the chaos and long elevator waits and everything else that goes along with them. But it’s kind of a requirement if you want to have a vacation rental. So in that case, I just think it’s really safe because everybody kind of has the same mindset. You know, if you’re in a condo, the HOA’s main goal is probably rentability and everybody making money, whether it be from a, you know, just a appreciation standpoint or from actually renting.

January Johnson [00:23:50]:
I think also we people conflate the word hoa with a bunch of angry owners. And when we say hoa, what I said, when I say hoa, I mean the monthly cost for the amenities and the insurance and the things that you pay for in a condo that the HoA fee covers. When a lot of people who don’t know the condo market here or are not familiar with it, when they say hoa, they mean the actual people who are trying to prevent you from having, you know, red playground equipment in your backyard or whatever the wrong thing is for the hoa. And that’s not the same. So when we say hoa, we just mean the fee, we don’t mean the group of people.

Avery Carl [00:24:31]:
Yeah. So basically, in all the condo buildings down here in this market, in the Florida panhandle, 90% of them are short term rentals. Like the reason these buildings were built was to house vacationers. Whereas if you’re buying in a Houston, again, for example, where a lot of people live and these condos were built for people to live in, that’s where you run into problems. The primary purpose of it was built for people to live in. They don’t want to live next to short term rentals, whereas down here the entire economy would basically collapse if there was not enough places for the vacationers to stay. So you don’t run into hoas trying to run you off when you’re short term renting your condo here because that’s the reason that the condos exist. So a lot of people will say like, oh, no, stay away from condos.

Avery Carl [00:25:20]:
They’ll kick you out. No. Or they can’t kick you out. But you know what I mean? Not in certain markets. Another market very similar to this would be like Myrtle Beach, South Carolina, where almost everything’s condos and they exist for the vacationers, not, not typically for people to live in.

January Johnson [00:25:37]:
And we do have areas of Panama City beach that are not short term rentable because we do have to have neighborhoods for regular people to still live. But there’s not going to be a chance that the beachfront condos are going to rise up and all of a sudden become non short term rentable. So don’t worry about that. We’ve got you covered on that. There are certain areas that are not, but we can sort by that to tell you if it’s short term rentable or not, whether it’s a house or a townhome or a condo.

Avery Carl [00:26:02]:
Yeah, exactly. So DSCR loans you can lend on non warrantable condos. What’s the difference between a non warrantable condo and a condo tell? Because a lot of people use those words interchangeably and they’re not the exact same thing.

Megan Winter [00:26:16]:
Yeah. So when you’re looking specifically at a condo tell rhymes with hotel. So very similar amenities there. Are there swim up bars, are there restaurants? Are there different outdoor activities for these guests? That’s where you’re really leaning into the condo tell market. We can lend on those as well. Not every DSCR can do it, but we can. And with non warrantable condos, too. Something I want you to think about.

Megan Winter [00:26:43]:
Same criteria rates, 1% higher prepayment penalties. If we’re looking at non warrantable, you’re going to be putting most likely 25% down across the board, unless it’s a long term rental, non warrantable, which is few and far between. And then if we’re doing a condo tell, you’re probably going to be putting closer to 30% down. So just kind of factor that in when you’re going in for it.

Avery Carl [00:27:10]:
Okay. Anything else on condos? Before we move on, anything, I want.

January Johnson [00:27:16]:
To say from an agent perspective, it is very, very important that whomever you are pre approved with has experience in the non warrantable condo market. Please don’t come at us with the Farmers bank of Kansas letter and tell me that they can do this condo loan, because I will tell you straight up, they cannot. I literally just had this happen to me recently, and we almost wasted two or three extra weeks because they thought they could do better than the experienced condo lender. And they tried to go around me, and I just had to. I just had to wait and let them go through the process. But really, you need people who are experienced with this because they know the questions to ask. They know how to get the information they need to determine if it’s warrantable or not. And that’s a lender decision.

January Johnson [00:27:59]:
That’s not an agent decision. That’s not a short term shop decision. Lenders decide whether it’s warrantable or not. And so just use people who already know how to do this.

Megan Winter [00:28:08]:
Trust us, reach it. January.

Avery Carl [00:28:12]:
Yeah. And I mean, I get the sentiment behind not wanting to just like, take someone’s word for it, because I. I’ve been in that situation, too. I think a lot of new investors will be like, oh, they’re getting some kind of a kickback from this lender. A, that’s not legal, but b, they think like, oh, they just want to get their buddy the loan. And this other one is giving me a better rate or something. Farmers bank of Kansas. And really, it’s not that.

Avery Carl [00:28:39]:
It’s that we want you to be able to close on the house. We want you to not lose your earnest money if this is what you’re trying to buy. Sorry, condo, not house. You know, we’re trying to protect you because we know that this lender over here has done ten of these condos in the past six months. They know exactly what’s going on. They don’t have to do all this due diligence, they know it. They’ve done deals in this building before, and Farmers bank of Kansas may not, you know, they’re going to say things like, what might be warrantable. I might be able to let you do 10% down.

Avery Carl [00:29:09]:
I’ve got to do some due diligence. I got to call so and so at the HOA and get the condo questionnaire, and then I’ll let you know. And the next thing you know, three weeks into the deal, they get the condo questionnaire back, or they’ve called whoever at the HOA and find out that they can’t do it. So they want, I mean, and everybody wants to keep business, okay? There’s nothing wrong with Farmers bank of Kansas wanting to keep your business and saying, well, let me at least try. But you just have to understand that it’s, when people are saying, hey, it really needs to be this bank or this bank or that bank or the, you know, there, there will be several. It’s, there’s not going to be just one mortgage company or one bank that can do the loan, but it might, it just might not be like the one you use all the time when you live in Ohio. So nobody’s trying to just give their buddies business when it comes to, hey, if we’re buying in this certain building, you really need to use one of these three or four lenders. It’s just that we’ve been down that road before, and you need to use a lender who’s done it before, too.

January Johnson [00:30:08]:
And it’s a red flag when, when the lender, and this is the same situation, they told me they left a message with Picasa to get the information that they needed about the HOA. And I said, picasa is not an HOA. Picasa is a property manager company. Like, they didn’t even know that. So if you don’t write, if you don’t even know that, get out of here.

Avery Carl [00:30:28]:
Yeah. So anyway, not to be like, mean about it, but just if your agent in any market is saying like, hey, this is a kind of a special, unique situation with this building, you might need to use this or that lender. Definitely call around, draw your own conclusions, but at least call around and talk to people and get gauge what their experience with it is. All right, so we’re going to move on from condos. Now. We’re going to talk about commercial financing. So this is the hardest type of financing to find for short term rentals. Typically it’s going to be a local bank or credit union.

Avery Carl [00:31:03]:
It will need to be local to you or local to the property. These types of banks are going to want to start a relationship with you. If you say, hey, I want to buy this one house in Panama City, and then I’m done, I’m going to go buy somewhere else, they’re probably not going to approve you. They want longevity. They want a relationship. They’re going to want you to put a significant, maybe not a significant amount, but they’re going to at least want you to put some money in their bank. They’re going to want to see what’s called a PF’s, which is a personal financial statement. And they’re going to want to, they’re going to want to see what your business plan is.

Avery Carl [00:31:35]:
And it’s exactly like on a movie. The loan officer is going to take your personal financial statement and your business plan to what’s called committee, and a bunch of people are going to sit there and they’re going to say, do we want to approve this person or not? And if you’re only planning on buying one property in one mart in their market, or maybe you don’t have a lot of experience that that can affect whether they give you the loan or not. Now, if you can get a commercial bank to do a short term rental loan in the market that you’re trying to buy in, by all means, like do it, a lot of times they’re much more flexible with their approval process and their terms and things like that. Not all ways, but it’s just difficult to find commercial lenders who will do short term rentals. And again, they like their business to be local. So if you live, we’re going to use examples of cities we’ve already used in this episode. So if you live in Houston and you’re trying to buy a house in Destin, Florida, farmers Bank of Kansas is probably not going to be the one to give you the loan. It’ll be somebody local to you in Houston or somebody over here in Destin.

Avery Carl [00:32:38]:
So just keep that in mind. But again, really difficult to find. I haven’t seen any, I also haven’t looked very hard. Full disclosure. Seen really any commercial lenders around here that will do short term rentals, have you guys? Janet rush I do.

January Johnson [00:32:53]:
I have two with a local bank, but I am local to my market. So my rentals are in my market. And I’ve been with this bank. Now, they’ve changed names three times, but the people are still there. And I mean, I’m on their advisory, their community advisory board now. And I have to them as well. And all my personal money is with them.

Avery Carl [00:33:12]:
So I just want to have a relationship.

Megan Winter [00:33:14]:
Yes.

January Johnson [00:33:15]:
And that’s what I, you know, very early in my investing journey, I read something that said relationships are important in banking. And of course, at the time, I didn’t have banking relationships. I didn’t even know what that meant. And, yeah, and I went in and I had a, you know, I had a sentimental family connection with a board member. And I just said, hey, this is who I am. You know, my family’s been in this community. This is what I’m doing. I’m new at this, whatever.

January Johnson [00:33:40]:
I want to create relationships. And they did, they funded, you know, they, they loaned me money on my first one. And we’ve built this relationship over time. And it’s, it’s very, it’s great, you know, great.

Avery Carl [00:33:53]:
Those small banks are like that. Like in the town I grew up in. My dad’s best friend was the president of the bank. And I could do all kinds of things that I could never do with, like a Wells Fargo. I, if I like, lost a debit card or something, I could just call Mister Sammy’s office and say, can you move this from my parents account to my account and do blah, blah, blah. And they would just do it.

January Johnson [00:34:14]:
I mean, I call and say, you know, hey, I got to do such and such. I mean, I go up and I know the teller’s name. I don’t even have to pull out my id at the bank to, you know, if I want to deposit a check and we chat it up and, you know, it’s great.

Avery Carl [00:34:25]:
Yeah.

Rush Valentine [00:34:26]:
And I have had a few larger banks where we just happen to have a local, you know, a local branch of that same larger bank where I’ve had buyers be successful with the, you know, with a commercial loan, but at the same time, oh, really? Using a different branch, and they still have that relationship that goes back 20 years or whatever it is. However, anybody that’s just kind of picked a local bank without having a relationship with them and tried to get one, the majority of them turned down.

Avery Carl [00:34:51]:
You ain’t from around here, especially with.

Megan Winter [00:34:55]:
Your first deal, too. So just going, you know, all right, I want to do commercial, not worry about my DTI of personal experience as well. They’re not going to give you the time of day, but, okay. You already own four in this market and you’re growing and expanding in that market. Okay, we’ll continue the conversation. And if you have never done a personal financial statement, I suggest practicing. It can be overwhelming the very first time you see it. I think it’s a great thing to fill out on a quarterly basis.

Megan Winter [00:35:23]:
That’s what I do for one of my KPI’s key performance indicators. So it’s good to just have on hand as an investor if you’re looking to scale.

January Johnson [00:35:33]:
That’s great advice. I love that.

Avery Carl [00:35:35]:
Really good advice. Yeah.

Megan Winter [00:35:39]:
I like Excel sheets. Can’t help myself.

Avery Carl [00:35:42]:
Yeah. So it kind of goes back to like, if you can get the conventional loan, go with a conventional loan. Don’t over complicate things unless you have to. And speaking of complicating things, that was mean. I shouldn’t call this complicating. So creative financing, there’s a few like, that’s a big buzzword right now, as it should be, as we’re in kind of a weird economy. So I would consider creative financing, owner financing or subject to anything like that. The first thing you’re going to want to look for and like if you want your agent to make these kinds of offers, great.

Avery Carl [00:36:16]:
But you need to see if the seller owns the property free and clear owner financing is usually off the table. And if there’s any kind of a loan on the property because they can’t transfer the deed to you without triggering having to pay off their mortgage. So keep that in mind. That’s pretty much a deal breaker when it comes to owner financing. The next one is not so much so subject to. This is a big one right now because interest rates were much lower two or three years ago than they are now. So subject to is where they sell the house to you, but you’re basically taking over their loans. So why this is really applicable here is because if I want to go buy a house now and I’m going to have to pay 7% interest, I could take over the seller’s loan.

Avery Carl [00:37:01]:
Maybe they bought it at 2% interest subject to and just start paying their mortgage payment at 2% rather than my new one at 6%. And you know, you’re typically going to have to make a pretty significant down payment. From what I’ve seen, sellers will typically want you to pay them all of the equity in down payment. So if it’s, if they bought it at 800,000 and it’s worth a million now, you’re probably going to put down that 200,000 in equity and take over their loan. Not all of them will do that, but some of them will. The main downside to this kind of stuff is I have never, and I’m sure Rush and January and Megan can attest to this. Walked away from a closing table and been like, man, I wish I could talk to that person on the other side of that closing table every month for the next 1015 years of my life or however long I’m holding this property. And that’s essentially what you’re signing on to do when you get.

Avery Carl [00:37:57]:
When you get subject to, because is the loan’s still going to be in the seller’s name. So there’s going to be times for like taxes or other things where you have to reach out to the seller and say, hey, do you have this information on this or that? And I just don’t want to be wrapped up with somebody like that. Now, there can not. Everybody is in the same position. There are definitely people who are more people people than I am. I’m not. I don’t want to talk to anybody. Nobody.

Avery Carl [00:38:22]:
I want to stay in my cave all day and not be talked to. So if you’re a people person, maybe this works better for you. But everybody’s laughing at me, and I’m serious. Um, so, but it’s not. It’s not impossible. It does happen. There are people out there, especially with days on market now, properties are sitting on market longer. Those sellers that have properties that have been sitting on the market for a while are going to be more at least willing to hear you out on a subject to deal than not.

Avery Carl [00:38:52]:
But at the same time, like, at the end of the day, in markets like this, these are not usually distressed sellers. These houses are either vacation homes that they don’t really care if they make money or not their investments, which they’re making money already, and they’ll wait for their price. Most people, again, I don’t want to discourage you from trying to get creative, to go ahead and get a deal where you might not be able to otherwise. But most people just want to take their money and be done with it and call it a day. So, you know, it might be one out of a hundred, it might be one out of a thousand that’s willing to entertain the, the whole creative financing thing. So I’m not trying to discourage any listeners, but I do just want to set the expectation that it will take a lot of. Of searching to find one that is going to be willing to do something like that.

January Johnson [00:39:39]:
And I want to add to that that, you know, when you hear news about the housing market, I tell my clients, this is not the housing market. This is the short term rental property investment market. They’re different. And depending on where you live versus the market that you’re buying in, it could be a completely different market altogether. So what works in your market? Just great. Keep doing it. But it’s probably not going to work that way. Exactly.

January Johnson [00:40:03]:
Over here in the, this vacation rental market.

Rush Valentine [00:40:05]:
Yeah, kind of like Avery said, I’ve yet to come across a buyer or seller, at least, you know, past four or five years that wasn’t selling their property with the plan already set for what they’re doing afterwards. You know, every single one of them, whether it be taking that cash and scaling it into a few more properties or buying another market or whatever it is, like, there’s always some other plan that has kind of, I guess, you know, just kind of deterred my buyers specifically from being able to get a deal. The subject to, again, not saying it’s impossible, it’s just that the majority have gone that route and we just not had the best luck with it because of that. And the same time, that’s probably what the same buyer, whenever they sell one day, is probably going to be looking to scale it or move into another market, too.

Megan Winter [00:40:50]:
Well, there’s such strong investment markets. I mean, you could have that one offer that you’re submitting subject to, and then they have two other ones. Maybe they’re five to ten grand less. But here’s your cash in 20 to 30 days. Can take that all day long.

Avery Carl [00:41:04]:
All right, so last thing I want to talk about is creative ways to finance your down payment. Typically, if you don’t have the cash saved up, some people do 401K loans, some people do helocs or heloans. But what I, before I let Megan kind of talk about that, I want to make sure that everyone listening understands. If you’re doing any type of transaction like a HELOC, in order to fund your down payment, make sure that your loan officer knows all of the details of any transaction, whether it’s for your down payment or not, or you’re selling another house, or you’re buying another house at the same time. And that’s going to affect your DTI. Make sure you disclose that to your loan officer up front. And don’t think that, oh, well, you know, I’m buying this other house in California. That doesn’t affect this here in Florida.

Avery Carl [00:41:53]:
It does, and it can cause surprises towards the end of the deal, which is when sellers are least likely to negotiate. And so just make sure that you’re disclosing everything going on, both inside and outside the deal to your loan officer up front so they can properly work through that with you. So you don’t have something jump up and bite you two days before closing, like, oh, gosh, now my loan’s denied because we didn’t know about this other loan in California, or we didn’t know that this HeloC wasn’t closed yet, or, you know, whatever the case may be.

Megan Winter [00:42:26]:
And if you don’t tell us, we’ll find it. So that’s why if you try to open a business credit card, get a car loan, we will hear about it. Underwriting will find it. There are third party searches. And yes, if it affects your debt to income, it could definitely change things for down payments in general. We need to know where those funds are coming from. We as the mortgage broker side, so, and the lenders are going to want to know that. Let’s say you’re putting $200,000 down, that they didn’t just get them from their friend Megan down the street, but they’re actually your funds.

Megan Winter [00:43:02]:
We want to see them sourced if they’re not seasoned in a bank account for at least 60 days. So if I show a large deposit one week ago of $200,000, I need to now know where that came from. So that’s something. If you’re trying to figure out your finances in order and what it’s going to be if it’s not seasoned again, 60 days to full bank statement, we’re going to source it. We need to know where it came from. Otherwise we won’t be able to accept it for down payment. If it’s a conventional second home, the funds can come from you. They can also come from a gift from a family member, not just a friend, but like a family member, a spouse, a brother, a mother.

Megan Winter [00:43:46]:
So that’s something to consider if that’s a route you decide to go. If you’re looking at a conventional investment, down payments need to come from you. There’s no longer gifts being allowed for these. So maybe you have the funds available you’ve been saving. That’s fantastic. Or if you don’t, 401K loan can be fantastic. If you’re comfortable pulling it out of your 401K because you’re paying it back to yourself. We don’t look at that towards your debt to income ratio.

Megan Winter [00:44:16]:
I mean, we’ll make a note of it on your income if you’re starting to have lower pay stubs, but it’s not factored in with your debt to income ratio. And then a HELOC and a Heloan are two pretty common ways to get down payment. HELOC home equity line of credit so you can get this on your primary residence. Most common, sometimes second homes. Not as easy to get done, but you’re basically pulling out equity of your property that you have available to use as your down payment. That does not have to be seasoned for 60 days because we know where it’s coming from. The HeLOC payment that you have to pay monthly does need to be factored into your debt to income ratio. If you are pretty sure that’s a route you’re going to go, start your HELOC first, so.

Megan Winter [00:45:05]:
Or make sure your loan officer knows so we can add an estimated HELOC payment when we’re doing your pre approval. If you do not disclose that you’re going the HeLOC route and you assume you’re going a different route, and we don’t have that payment in. Maybe it’s 500, maybe it’s the thousand. It could be enough to sway your debt to income. It can be reused. So let’s say you’re paying your loan back. You can draw from your heloc again. Usually it’s a ten year draw period with interest only payments over a 20 to 30 year payback.

Megan Winter [00:45:37]:
Now, if you switch to a HeLOC loan, this can be done on investment properties can also be looked at on primary and second. But I’d still suggest probably looking at HeLOC first. A he loan is a one time draw. So I have ill just give myself. For example, I have a he loan on one of my investment properties. I had equity in there. I bought it. Right.

Megan Winter [00:45:57]:
I could not touch that equity. A he loan allowed me to pull equity out of that property. Looking at your debt to income ratio to qualify, but I was able to pull out a significant amount of equity that I could use for a down payment. He loans are not for the faint of heart. They can have high interest rates. So you just need to make sure you’re factoring in and are comfortable with that and you cannot reuse it again. It’s just a one time draw that you pay back.

Avery Carl [00:46:27]:
Awesome. Really good. I didn’t, I knew about helocs. I didn’t really know about Heloans. So that is good to know. Yeah. And just guys, as you’re doing these things, make sure that you’re not over leveraging yourself. Like, it’s not worth it to sacrifice your cash flow on the altar of buying more properties.

Avery Carl [00:46:48]:
So don’t leverage yourself to the point that your property stops cash flowing just so you can pull that equity out and buy something else. Just make sure that you’re being conservative. If you’re pulling equity out of properties to buy other properties, I don’t want you guys to get over leveraged, but I think that’s it for financing. Unless you guys have any, any last points that you want to add.

Megan Winter [00:47:12]:
I just want to add, make sure you’re open and speaking with your loan generator about your goals. It’s really going to help strategize and plan ahead if we would know you want to buy four properties here. Okay, well, let’s look ahead and see how you’re doing that. If you pull out this t lock, how’s that affecting your DTI or plan for option a, B and C? So just be as transparent. I know I’m a broken record, but tell us everything. I mean, it doesn’t hurt. We’ll only use what we need to. If you’re not sure, just, just be upfront about it.

January Johnson [00:47:41]:
And I want to add that, you know, I, I like very much to work with my clients about their financing, not given their personal business about it, but I check in with the lender. Is everything going smoothly? Do you need any information from me? How can I facilitate something? You know, have you chosen a lender yet? Are you pre. I mean, I want to be involved in the process to the extent that I need to be, but it’s an important partnership too, between you, the agent and the lender altogether to get it done smoothly. So I just wanted to add that.

Rush Valentine [00:48:08]:
And one thing for me too is just, you know, I love the idea of familiarity and knowing who I’m working with and everything like that, but I’ve seen a lot of people get discouraged lately because, you know, maybe, maybe somebody that they worked with on a loan before is giving them some options and it’s just not working for their current situation yet. I know specifically of somebody else that just helped somebody through the same situation and gave them an option that did work for them. And so, like, don’t, you know, don’t be scared to, to explore your options and don’t get discouraged if one thing, you know, one person tells you, well, this is the best we can do because again, these things change all the time and, you know, just, you know, just explore. Don’t, don’t take no for an answer and keep going.

Avery Carl [00:48:46]:
Yep. Great advice. Keep going till you get a yes. All right, well, that’ll do it for our financing episode. Thank you guys so much for coming on, guys. If you want to buy with us in the emerald or forgotten coast, email us at agents at the short term ship, you’ll be able to work with January or rush or any of our other amazing agents. And if you guys just have, like, more questions that you want answered about short term rentals, we have open office hours every Thursday, and you can sign up for those@strquestions.com. thanks, everyone.