The Investor’s Guide to Financing a Gulf Shores Short Term Rental

Avery Carl [00:00:02]:
Hey guys, welcome to our 10 episode deep dive of the Gulf Shores, Alabama market. I’m your host, Avery Carle and I wanted to let you know really quick before we get started that we do have some supplemental materials for you to go along with this podcast on our website, the shorttermshop.com. so what we have there is the current purchase prices in this market. So you can set yourself up a search, look at properties, do all that fun real estate stuff like kind of like Zillow. We’ve got it on our website and you can check out exactly how much it costs to buy a condo or single family home or townhouse in the Gulf Shores market right now. Also to go along with that, we have the Air DNA data, thanks to our friends over at airdna for this market for the past few years. So you can compare purchase prices versus the Air DNA data and kind of do some analysis there. We’ve also got a really cool calculator on the website that I built around short term rental investing to go along with all these things.

Avery Carl [00:00:53]:
Or if you know you want to buy in Gulf Shores and you’re ready to start talking to an agent, you can, you can reach out to us at agents the shorttermshop.com and we’ll get you connected with our agent in Gulf Shores. And last but not least, if you just really like us and you want to hang out with us more, we’d love to see more of you. There’s a few ways you can do that. You can join our Facebook group. It’s called Short Term Rental, Long Term wealth, same title as my book. It’s a community of over 60,000 investors sharing best practices and just kind of being friends with each other. It’s pretty cool. Or if you want to talk to us in person, you can do that every Thursday.

Avery Carl [00:01:28]:
You can sign up at stm. We have a one hour lunch hour, just office hours, where you can ask us anything you want about short term rental investing. So we appreciate you guys listening and please reach out to us with any questions. Follow us on Instagram TikTok Facebook. Join us in our community on Facebook as well. And I guess we’ll get to the episode now. Thanks guys. Hey y’ all.

Avery Carl [00:01:56]:
Welcome back to another episode of the short term show special episode series on investing in Gulf Shores. Today we are talking about financing and we’ve got the usual suspects, Tim and Jonathan here, so we won’t introduce them but we do have a licensed loan officer so we don’t have to keep saying, well, I’m not A licensed loan officer. But we’ve got one of those here to talk to us about financing today. We’ve got Johnny Vang from the mortgage shop. Johnny, you want to introduce yourself real fast?

Johnny Vang [00:02:25]:
Yeah, thanks, Avery. Johnny Vang over at the mortgage shop, the EVP over here, trying to help run the show. Of course, we have a ton of different products here for the Gulf Shores area. And so I’m glad to be on here. Thanks for letting me join.

Avery Carl [00:02:41]:
Thanks for coming on. So we are going to talk about all things financing today. Let’s start off with conventional financing. So conventional financing, I think is the easiest way to do it. Well, I mean, depending on a number of factors. So conventional financing is going to be the easy, easiest type of financing to find. So any mortgage company you go to is going to have conventional financing available. But Johnny, let’s talk about how are you qualified? What, how do you determine how much a person can spend using a conventional loan? And what is a conventional loan?

Johnny Vang [00:03:18]:
Yeah, so a conventional loan is a loan that go is basically a Fannie Mac or sorry, Fannie Mae, Freddie Mac type product that goes along with their guidelines. And they typically require debt to income ratios that we have to take a look at your income, take a look at your assets that in the monthly payment to determine whether you guys qualify. We go based off of your credit as well as the amount of assets that you want to put down. Typically conventional is going to be the type of product that has the lowest down payment. And if you’re going to be, if you already own a home and you aren’t living in the specific offshore area. Right. And you’re going to be doing like a second home or investment property type product. Those two products are typically around 10 to 15% down, depending on what it is that you’re going to be doing.

Johnny Vang [00:04:10]:
So it’s actually conventional financing is the easiest way. The only thing is that you can’t close in an llc. Some people like to do that. But what you can do is afterwards, if you decide that, you know, you want to, you want to put it into an llc, you can deed it in through title later on.

Avery Carl [00:04:27]:
Awesome. So I think that’s. There’s a few things that I want to pull out of what you just said. So a lot of people mistakenly think that a conventional investment loan, that the minimum down payment you can make is 20 or even 25%, but the minimum is actually 15%. Right?

Johnny Vang [00:04:42]:
That’s correct. Yeah, absolutely.

Avery Carl [00:04:44]:
Yeah. So that’s a big help. It’s a, that can be a big Difference, especially now when interest rates are, are pretty high. So let’s talk about the qualifications. So debt to income ratio. So these types of loans you have to get in your personal name, you cannot get them in an LLC and they’re based on your debt to income ratio. So what’s a debt to income ratio?

Johnny Vang [00:05:07]:
Yeah, so debt to income ratio, is it. It’s exactly what it sounds like. Right. So it’s your debt divided by your income. And so whatever your monthly expenses are, they’re going to include everything that’s listed on the credit report. So of course we’re going to pull your credit, we’re going to take a look at how the credit, like how much monthly payments you have. Right. And how much credit you have extended.

Johnny Vang [00:05:29]:
And then once we take a look at all of that, we’re also going to go ahead and take a look at your income, depending on the type of income that you have, whether it be self employed, W2 bonus. And we’re going to take a look at all of that, we’re going to average that income out and then we’re going to take all of your monthly expenses on top of the new payment. And then, and when I say new payment, I’m talking about your monthly payment, principal, interest, taxes, insurance, and anyway dues on top of all the expenses that you have. And then we’re going to divide it by the amount of income and if the percentage exceed 50%, typically you’re not going to qualify. But if it’s under that, we could probably make it work. Now once you go over what they call the conforming loan limits and you move kind of into a jumbo type loan, you will require a 45% debt to income ratio versus a 50% debt to income ratio.

Avery Carl [00:06:21]:
Okay? So that, all that stuff is really important to remember, guys. It’s super important to make sure that when you’re going through the loan process that you are getting everything the loan officer could possibly need to them upfront. So I’m not talking about just the documents that they’re asking for, but if you’ve got any other transactions going on outside of this one, they need to be aware of that. I have seen people be doing, you know, one transaction over here in Massachusetts and the other one over here in Gulf Shores and they don’t think that they need to tell the people involved in each deal about the other one. And what can happen is, yeah, it’s not technically anybody’s business what you’re doing in another market, but it can affect the loan process and can, especially if you’re getting a conventional loan, it can affect your debt to income ratio and cause problems once we get to the underwriting phase. So once you’re already under contract, it can blow your deal closer to the end. So you want to make sure upfront they know everything they could possibly need to know. Don’t finance anything while you’re under contract on a conventional.

Avery Carl [00:07:26]:
Don’t buy a new car. The big one that I see is people will go open up a new credit card to furnish or outfit their new short term rental that they’re about to close on. That can mess you up. Don’t open a credit card, don’t do anything, don’t finance nothing at Home Depot, none of that stuff. Because it can mess up your DTI and blow your deal.

Johnny Vang [00:07:44]:
Yeah, I like to add that these days underwriters have way more access to that information. And so the moment you go out there and you get a new auto loan, they’re going to find out about it. And the moment that they find out about it, it’s going to hit your debt to income ratio. So it’s better not to hide anything, not to do anything without talking to your loan officer and make sure they’re fully aware of what you have going on before you actually purchase anything new. And most of us, I think most loan officers across all companies will definitely tell you before you go out there and finance anything else, you need to talk to us. Like make sure you have that conversation with us.

Avery Carl [00:08:18]:
Yeah, absolutely. So let’s talk about now the difference between a, gosh, sorry, I totally lost my words between a conventional investment loan and a second home loan. Because a lot of people have read and listened to a lot of things out there where second home loans are mentioned and they are only 10% down, which is why a lot of people like to try and use them. But let’s talk about the differences in some of the rules because there is the potential to commit mortgage fraud with a second home loan and we want to keep you guys who are listening from doing that. So tell us about that.

Johnny Vang [00:08:53]:
Yeah, it’s definitely, definitely not worth it to try to, to try to circumvent the process. Right. So the deal around second homes. Right. Second homes require that you, your intention is to use it as a second home. Like whenever you’re going to go on vacation, whenever you’re going to take time away, you’re going to be using it, or if you’re going to be, you know, home away from home, that you would be in this specific unit that you’re going to be purchasing. Right. However, some people like to use it as a rental property.

Johnny Vang [00:09:22]:
And the thing is that you can, on the times when you’re out of the property, you can use it as a short term rental or as a, like a rental property in general. However, the thing is, is that, so from our perspective, how we like to give that information because we go based off of the IRS, on the IRS website, there’s a required 14 days for you to be able to consider that property. You, meaning you occupy it. Right. And so that being said, as a second home, you actually have to occupy the property. Like it’s a requirement for you to occupy the property for a certain amount of time. We Recommend More than 14 days out of the year. But for an investment property you don’t, the moment that you get it, you can go ahead and rent it out.

Johnny Vang [00:10:09]:
You never have to like for some people, they don’t even have to see the property ever or even be close to it. And as long as it goes in and you’re making money and you’re able to make your payment, you’re probably going to be good. In addition to that, the difference between them is, you know, the second home is a 10% down product, right. And the investment property does require 15% down. Right. That’s the minimum that is required. However, the great thing about the investment product is that we can actually use the projected income from that property to help offset some of your debt to income ratio. When you’re doing a second home, you have to fully qualify with on that on your own.

Johnny Vang [00:10:47]:
But when it comes to an investment property, we can use typically 75% of the income that’s listed on your appraisal. Based on the appraisal income value of the area, we’ll be able to use that income towards your debt to income ratio, which sometimes help out pretty well.

Speaker C [00:11:05]:
Hey Johnny, I’ve had, I’ve had clients ask me, you know, kind of the opposite when it comes to like investment loans. I’ve had people ask me am I allowed to use the home? And I’ve always thought the answer is yes, absolutely. But is that, is that correct in you know, they just want to know about them using it personally. Is that still okay?

Johnny Vang [00:11:22]:
Yeah, you can still use it. It’s still your property you can still use is going to be recommended that it’s used like an investment property. However, in all like how you look at investments is that’s actually the most risky type of loan that the investors are already giving you, right? And so like, let’s say you buy a primary home, right. And all of a sudden the next door house, right. They’re selling it and you want to buy it. Right. You can’t buy that as a second home. The only way to buy it is as an investment property.

Johnny Vang [00:11:54]:
Now, whether you move into it as your primary or you actually, you know, use it as a second home or something else, that property actually has to be done from a financing perspective as an investment property, although it may not be technically used specifically for income investing. Right. It might just be you bought it so you can keep it so that the value can appreciate it is really just there for. For whatever it is that you decide to use it for from an investment perspective, if that kind of makes sense.

Speaker C [00:12:24]:
That makes perfect sense.

Johnny Vang [00:12:25]:
Yeah.

Avery Carl [00:12:26]:
All right, cool. So, guys, all of that to say, just make sure that you’re following the rules about the second home loans. Like, I’ve seen people try to get different partners and put different vacation home loans and different people’s names and have like 10 in one market. Guys, that is a great way to get in big trouble. And we don’t want any of our listeners to get in big trouble. We want you guys to have long investing careers. So do it the right way, please.

Johnny Vang [00:12:56]:
Yeah, I’d like to add, when you’re doing those, if you commit any kind of fraud and whether it’s intentional or unintentional, you could spend some time in jail. In addition to that, lose your whole entire portfolio. On top of that, have to pay fines. And then that’s. It’s just not worth it. It’s not worth getting involved in that. Us as loan officers, you know, we’re held to a specific level of like just trying to make sure that everybody is doing the right thing. And we could run into trouble with that as well.

Johnny Vang [00:13:31]:
Right. And that’s not something that we would ever want to do. We could lose our license. And we don’t want to put anybody in a situation where. Because it’s not going to hit you right away. It’s not going to hit you on the first one or the second one. It’s going to hit you when you have 20 and all of a sudden they’re going to come and they’re going to take everything because of mortgage fraud. And so you want to just be careful.

Avery Carl [00:13:51]:
Yeah, absolutely. But if you really do plan to use it and you want to buy a property in a place that you like to vacation and then rent it out when you’re not there and it makes money, great, that’s awesome. Yeah, so that’s totally allowed. But just want to make sure you guys know the difference because I know with the high interest rates right now, a lot of people are trying to get super creative, which, which is great. I love a good creative way to get a deal done. But just make sure you’re coloring inside the lines. We’re going to get into creative financing here later in the episode. All right, so conventional financing, 15% down or 20% down investment loan, you’ve got your 10% down vacation home loan.

Avery Carl [00:14:28]:
Let’s talk about portfolio or DSCR loans. So these types of loans, and I’ll let Johnny take it deeper in a second, but these types of loans are really great for people who may not have a W2 or people who might have recently switched from a W2 income to 1099 income and they don’t have two years of 1099 to show yet in order to be able to get pre qualified for something. So these DCR loans, you can get them right in your llc, you don’t have to close them in your personal name. So that’s pretty awesome too. With conventional loans you can only have 10 financed properties to be able to get conventional loans. So with dscrs, you can have unlimited, which is pretty cool. Also Johnny, you want to go into the rest of the DCR rules and regulations.

Johnny Vang [00:15:16]:
Yeah, yeah. So DSCRs, they typically have a prepaying penalty, right? So when you’re going to be going into a dscr, you got to be prepared for that. You’re going to be, you’re going to want to be prepared to keep that property for about like most of the times it’s going to be somewhere between a three and a five year prepayment penalty. We, we see more of the five year prepayment penalty. So you’re going to want to keep the house and the loan for at least five years unless you’re willing to pay up that prepayment penalty. In addition to that there’s going to be more down payment required. Right. So typically you’re going to need somewhere between 20 to 25% down.

Johnny Vang [00:15:56]:
That amount is required for you to be able to come in and get a, get a loan without having, without using your personal debt to income ratio. So what what we look at and what all of our wholesale lenders look at is they’re going to be looking at, you know, is there going to be a 1 to 1 or 1 to 0.1215 debt to income servicing ratio? Right. And so when we’re Looking at the debt service coverage ratio, if your income comes in for this specific property at $1,000, right. Your payment has to be at $1,000 or lower in order for us to be able to finance you. And so that’s, some of that is required as well. And so when, when you guys are coming through, depending on the type of products that we have, some products require that you know, the income generated from a 1007, which is, you know, a valuation based on the appraisal. Some will come from their own in house underwriting guidelines. Right.

Johnny Vang [00:16:57]:
And so when, when we use those guidelines, typically we can use short term rentals, which is beneficial for what we do here. Right.

Avery Carl [00:17:05]:
Okay, so the, I’m summarizing like I’m a five year old here. So DSCR qualification is based on what the property will make rather than what you make and your debt to income ratio, correct?

Johnny Vang [00:17:18]:
Yeah, absolutely, yeah. In addition to that, your credit score and then your, your, the amount of cash that you put down.

Avery Carl [00:17:25]:
Right, gotcha.

Speaker C [00:17:27]:
So there’s some, there’s some cash reserve stuff there too. You have to, you have to have a certain threshold too, correct?

Johnny Vang [00:17:32]:
That’s correct. Yeah. Usually it’s about six months, sometimes there’s a 12 month. And then I believe we have one product that requires a 24 month. But that product, you know, typically the rates are going to be a little bit better, down payment is going to be a little less. It could be, you know, like it. And of course DSCRs, they’re not like regular normal loans where they stay pretty consistent. The lenders can change their products at almost any given moment.

Johnny Vang [00:17:57]:
Right. And so you got to be prepared for that in the process as well.

Avery Carl [00:18:01]:
So these types of loans are also really good for people who might have the down payment ready, but just your debt to income is off. So this is the part where a lot of investors are all of a sudden very excited because they’re like, oh wait, I can get unlimited. And it doesn’t, it’s not based on my dti. So Johnny, what’s the catch? Because this is kind of a risky loan for a bank to give an investor because really they’re just giving it to you based on the idea that you’re going to manage it well enough to be able to pay your mortgage and you know, not your own income. So what, where does the bank make their money? Because it’s a riskier loan.

Johnny Vang [00:18:39]:
So to be honest. Right. It’s going to be the interest rate and the interest rate is going to be much higher. Right. Typically It’s, I tell most of my clients, it’s going to be between 1 and 2% higher, right? It’s going to be 1% higher than that of a normal typical conventional amount. And then it’s going to be like if you’re looking at primary rates, right, because that’s what everybody blasts out there are the primary rates, DCRs are usually 2 points higher to 2% higher than that. Right. And then on top of that, the cost of the rate is going to be more.

Johnny Vang [00:19:12]:
Usually you’re going to be paying between anywhere between two to four points, right. Somewhere around there are the amount of points that you’re going to be paying for it. So there’s that. And then of course there’s, like I was saying earlier, there’s the prepayment penalty. If you don’t keep that house for five years, right. You’re going to have to pay a prepayment penalty. If you pay off that loan, you’re going to have to pay a prepaying penalty. So they require you to be able to stay in that high interest rate even after paying a high amount of points.

Johnny Vang [00:19:43]:
You have to stay in there for at least five years or have the loan for five years. Otherwise you get hit with a pretty decent sizable prepayment penalty. Like for example, 1. One of the prepayment penalties that we have is in the first year if you pay it off or if you refinance the property or if you just cash it. Right. And just pay off the loan in full. It’s a 5% hit, right. Based on your current principal balance.

Johnny Vang [00:20:07]:
If you’re. And it gets really, really expensive. So those are the kind of things that you have to be aware of and be prepared for.

Avery Carl [00:20:14]:
There are a few DSCR products that don’t have a prepayment penalty, right?

Johnny Vang [00:20:18]:
That, yeah, that’s absolutely correct. We, we have one specific one. That one is one of those that requires, you know, 12 months of reserves. But if you got that 12 month reserves, you got that down payment, you can handle the interest rate until, you know, you could probably turn that loan. There’s no prepayment penalties. So of course, you know, we recommend that you stay in the house for about six months, but then after that, if you decide you want to pay it off, sell it or refinance it, we’re here to help. Right?

Avery Carl [00:20:47]:
Okay. So there’s a lot of really cool things about it, but the interest rate is higher because at the end of the day, it’s a riskier loan for a bank to give you. So Pretty cool product that there. It didn’t really exist for short term rentals until about 2021 and then it kind of like exploded. But pretty cool product if you’re planning to hold it and, and you’re okay with that interest rate? If the numbers work at the interest rate. And while we’re talking about interest rates, Johnny, so I see people talking like posting on Facebook groups about what the interest rates are almost every day. What I’ve found in trying to track on myself is most of the time people are posting those rates that are for primary homes. So when people are looking at these just, you know, listeners perhaps that are on these Facebook groups and they see all these things about, well, the rates today are six and a half, but that’s not what the rate is for a, that’s for a primary.

Avery Carl [00:21:39]:
So what is a kind of loose rule of thumb to know? Because I haven’t really seen any like trackers that track what the, what the investment loans are. Maybe you’ve seen them. I haven’t. We were texting about this the other day. So when they’re looking at all these rates online that people are posting what you said you could typically add about 2% for DCR. So what about a conventional investment loan?

Johnny Vang [00:22:03]:
Yeah, so normally I tell my clients that you got to add at least 1%. Right. If you want to be conservative, do one and a half. The likelihood is that you got to add at least 1% to the regular typical rate that everybody’s advertising for investment properties and for second homes, they have the LLPAs, right. Loan level price adjustments that Fannie Mae and Freddie Mac has decided to add on for those specific types of transactions that it’s going to cost you a little bit more when you’re doing those type of transactions from a interest rate perspective. So 1% is typically what works. But if, like I said, if you want to be conservative. One, one and a half.

Avery Carl [00:22:44]:
Good to know. So good to know, guys. All right, so now let’s talk about a true commercial loan, which DSCRs are kind of close. They’re more of a portfolio. So what’s a commercial loan?

Johnny Vang [00:22:56]:
So a commercial loan. Yeah. So DSCRs are pretty close. A commercial loan will be fully qualified based on the performance of the property. I do want to add that they do look at performance. Right. So they’re going to look at. Are you, have you been doing this for a while? Right? Do you have other properties? Do you.

Johnny Vang [00:23:20]:
And then they’re going to look at the property itself like, so they look at you kind of from a management perspective and then they look at the property from a qualifying perspective and usually like most of the, the commercial stuff that we have, you have to qualify with a 1.25 debt service ratio. Right. And so it, it requires a little bit more these days. Like I haven’t checked the interest rate for a while on commercial loans, but from what I’ve heard, they are much higher than they used to be. Yeah.

Avery Carl [00:23:52]:
And commercial loans for short term rentals are usually going to be the hardest type to find. So conventional is the easiest. Dscr, there’s a handful of lenders out there who do them and then commercial is going to be much, much smaller percentage and also it’s going to be very, very local. So if you’re buying a property in Gulf Shores and you live in Houston, Texas, you’re probably not going to find a loan. A commercial lender in Kansas City is not going to do that loan. Typically commercial lenders are going to want to have a relationship and they’re going to need to be either local to you personally or local to the property. And by starting a relationship, I mean they want you to put money in their bank. They want to see that you’re going to buy more than one.

Avery Carl [00:24:34]:
So if you’re coming, if you only plan on buying one in Gulf Shores, then commercial is probably going to be pretty difficult to get. And it is the, the approval process, yes, it is based on the income that the property will make, but it’s also based a lot on you. A lot of times they want to see a full personal financial statement and it’s like on a movie, the loan officer will take all of your stuff to what’s called committee and they’ll all look at it and say, are we going to give a loan to this person or are we not? And so if you can find a lender who will do commercial for short term rental, that is a really, really good thing to have. But typically it’s the hardest type to find. Highest interest rate can be awesome because you just can deal with one lender for multiple purchases. In terms of paying, a lot of times conventional loans and DSCR loans are sold after the fact. Maybe not dcr, but conventional are sold to different servicers. Whereas commercial, they typically keep it in house.

Avery Carl [00:25:30]:
So if you buy 10 properties with them, you’re paying that one bank for the 10 properties every month. So great thing to have. You can get it. Go ahead.

Speaker C [00:25:38]:
I’ve used a few commercial loans with great success. But I will say I agree with everything Avery said. There as far as they are kind of the hardest, but they’re, they’re really useful for certain things. You know, if you’re doing, you know, if you’re getting into rehabs, you know, things that aren’t really financeable in a normal type of loan. Like if you’re looking at, you know, certain markets, sometimes you have a piece of property that may have three houses on it, you know, and that wouldn’t qualify for a normal, you know, Freddie Fannie loan. You know, things like that are kind of where the commercial comes in. And another note I guess I just touch on. There is, I expect it’s very, it’s very up to the bank that you’re working with.

Speaker C [00:26:11]:
They’re, they’re all over the place on what they’re what it looks like. So there is no, like this is what it is. But from your, your rate lock is going to look way different. You’re not going to get, generally not going to get any kind of a long rate lock. It’s usually going to either be an ARM or a balloon with a, with a commercial loan. So you need to be ready for that. And a lot of times amortization is, is shorter as well. So a lot of times you’d be looking at like a 20 or 25 year instead of where some of the others that Johnny was talking about are more typically like a 30 year.

Speaker C [00:26:38]:
And quite frankly, I think a lot of DSCRs are having a 30 year lock. Right Johnny?

Johnny Vang [00:26:41]:
Yeah, that’s correct. Yeah. Yeah.

Speaker C [00:26:43]:
So, so when you get into commercial loan, you need to be ready for more like a, you know, a five, one arm or there’s, there’s all different ones. So I don’t want to go way deep into that. But you need to understand there is a difference between a balloon and an arm. And there’s just a lot more that you kind of got to know and it’s, it’s a little more involved, but it can be, it’s a, it’s been fantastic for me. I’ve done a bunch of them. I actually love them. But it’s, it’s a kind of a different thing than just buying your first house. So.

Avery Carl [00:27:05]:
Yeah, well, let’s dig into that ARM thing. So ARM stands for Adjustable Rate Mortgage. And Johnny, so if I come to you and I want to get a conventional loan, a lot of times, you know, the 30 year fixed will be one interest rate, 15 year fixed will be a little bit lower and then the adjustable rates will start at a much lower interest rate. But then they, they can potentially change. So do you want to explain that to the audience real quick?

Johnny Vang [00:27:32]:
Yeah. So the, the arms. So there, there’s a couple of different arms that I’ve ran across, right. And a couple different ones that we carry here at the mortgage shop. We have the like the 51 arms, which, and 5 1, 7110 1, those are arms that once they reach that 5 year, 7 year or 10 year, the rates will fluctuate, Right? They can go up at about 2% in the initial year and then a percent every year that follows based on the market rate. Right. And so that being said, we also have what they call a ARM 56 ARM 76 and ARM 10 6. And what those are is that they, they move every six months right after the fixed period.

Johnny Vang [00:28:22]:
And so the, when, when we say ARM five, right, that’s, that’s a five year arm. That means your rate is going to be fixed for five years. If it’s a seven year or a ten year arm, those, it’s going to be fixed for those terms. However, after that, the rate can fluctuate at any point in time based on its cycle. So if it’s a six month cycle after five years, like so if it’s a five, one arm or a five, sorry, five one arm, it’ll fluctuate every year. But if it’s a five, six arm, it’ll fluctuate every six months after the five years. And so rates can change. You just have to be prepared for that.

Johnny Vang [00:29:00]:
A lot of people that go into it, go into it with the hopes that, you know, rates will come down and they can refinance. In the past I’ve seen where, you know, people have done arms and the rates actually went down and they decreased dramatically that they didn’t even have to refinance because their rate started to actually go down. And so it depends on the market right now, I believe, you know, everybody’s anticipating the Feds are going to be increasing rates in the next couple of weeks. And so that being said, if your ARM having to expire after those five years, right, you got to find one arm. It expires after the five years. You’re, you’re going to have to anticipate that your rate’s probably going to fluctuate in the upward pattern, right? And so just be careful, make sure your numbers are good before you go ahead and purchase those transactions, those types of products.

Avery Carl [00:29:49]:
All right. Makes a lot of sense. So let’s move on to creative financing. So this has become especially popular with the rise of pace Morby and his subject to philosophy, which is very cool, you know, it’s very creative and I’m all about that. Let’s first before we do that, talk about owner financing. So owner financing is when basically the seller acts as the bank and you’re making mortgage payments to them every month. That is something that really can only happen if the seller owns the property free and clear. Probably not going to happen if they have any type of a mortgage because if you sell the property, most mortgages are going to have, you know, you’re going to have to pay it off.

Avery Carl [00:30:36]:
You can’t just sell the property and still hold onto it. Which we’re going to get into that in a second. So I don’t want to say you can’t ask. Of course you could always ask when you’re buying a property, have your agent ask. But in most cases, most properties are not owned free and clear. They’re going to have a mortgage on it. So that’s going to kind of negate that potential opportunity there another thing. Well, I’ll, I’ll get to that in a minute.

Avery Carl [00:31:01]:
We’ll, we’ll. So that’s owner financing. It’s a type of creative financing. Do you guys have anything to add to owner or seller financing? Before I move on to subject two.

Speaker D [00:31:10]:
I will say I’ve tried that a couple times. The owner financing here and the only the times I found people that were willing to do it because it is such a high demand vacation market, there is a price that they could sell it for on the open market. And most people do know this, the terms are not pretty. So some, a lot of people are like, hey, can I go 0% down and a competitive interest rate that’s better than market rates and then it’s not very likely to happen. I’m not saying anything can’t happen, but normally it’s like they want a 30% down with a slightly higher interest rate than the market current market rate. So it’s normally not the best terms for the buyer to do that. It’s normally buyers who can’t qualify for any other kind of financing that need that as their last option. It’s not, from what I’ve seen here in this specific market, it’s not something that you’re just going to get a, a killer deal by seller financing.

Speaker D [00:32:01]:
Anything can happen. But that’s just the, what I’m seeing mostly happen.

Speaker C [00:32:05]:
Yeah, yeah, I agree. You got to put yourself in the seller’s shoes is why, why would they want to do that? You know why do they want to be tied to you for the next however many years, you know, versus just getting a paycheck, you know.

Avery Carl [00:32:15]:
Yeah, I have never as a buyer or seller come to a closing table and been like, oh man, I wish I could be wrapped up with you for the next 30 years. No, I wanted like take my money and go or take my property and go be done with you. I don’t want people in my life, I just want to, to get my deal done. So keep that in mind. And a lot of times too. So that works typically more in like metro market C class neighborhoods on truly distressed sellers that own free and clear or maybe they inherited from somebody. There’s just kind of a pretty specific set of circumstances where it actually works. And typically if somebody has a paid off property in a vacation market like this, they’re, they’re probably just going to go ahead and sell it at retail and take their money and move on.

Avery Carl [00:33:06]:
There’s very little incentive for somebody with a paid off property in a high demand market like this to, to want to do that. But it’s out there, it can happen. Not saying it can’t. That’s why we’re discussing it here.

Speaker C [00:33:16]:
I’ve seen some pretty gross stuff with that and like the more like D class, you know, where you know, a seller might like purposefully offer seller financing and they’ll just keep doing over and over knowing the people that are buying are going to default and they’ll keep that, they’ll keep the down payment and do it again. You know, it’s just, it’s gross. But I’ve seen it for sure.

Avery Carl [00:33:35]:
Yeah. So next type subject to. Now this is specifically popular at the moment because it involves quote taking over the existing mortgage from the seller. And why this is popular, especially right now is because there’s a lot of sellers who bought short term rentals back when the rates were 2 and 3%. Now there’s 7, 8%. And it can make sense for a new investor to want to come in, pay you maybe the down payment of the equity and then start taking over the payments on that lower interest loan. Now where that gets hairy is that most loans are not, if they’re, they’re not a primary home loan. Johnny, correct me if I’m wrong, they’re not actually assumable.

Avery Carl [00:34:19]:
So they’re, they’re not really transferring the loan to you, you’re just taking over the payments that are still in the seller’s name and the seller deeds the property over to you. Which to me sounds like a Whole lot of opportunity for a whole lot of bullshit to go wrong. But I’ve never done a subject to deal and be honest, I do see the value in that. Especially if it’s a distressed seller who maybe didn’t run numbers conservatively a few years ago and has a lower interest rate payment. I can see the opportunity there. But there’s definitely some things that need to be ironed out that I don’t know necessarily enough about it to really comment on. But what do you guys think?

Johnny Vang [00:34:58]:
Yes, I want to comment on the whole assumable, right. Most conventional loans are not assumable, Right. If it’s a government loan, like a VA loan or a FHA loan, they can be assumable. But you have to go through the qualification process. Right. And you have to go through the lender to make that happen. I do think that just my personal opinion, the subject to type transactions, they’re very slim to come by, right. You’re not going to probably find it very often in places like, you know, the Gulf Shores.

Johnny Vang [00:35:33]:
I assume that, you know, there’s a lot of investors out there that are already wanting to get in and they have the ability to finance, they have the ability to get in. If the property is in good shape, they’re going to go through the traditional route and they’re going to, they’re going to close on it. Right. But maybe you can find a one off in the middle of nowhere. I don’t know to make it work. I can see it work. Like Avery said, you know, there are, there are places for it and I think that there is definitely a possibility where all circumstances point towards the right direction and you can do it. But in most cases it’s going to be a little tougher.

Johnny Vang [00:36:08]:
I think it just personal opinion.

Avery Carl [00:36:10]:
Well, I’m actually personal example. We had a client who bought a property with us probably two years ago. So the interest rate was not bad and they started advertising it as subject to. They actually asked us what we thought they could sell it for. We told them. Then they went and, and started advertising it as subject to FSBO and they sold it to some poor guy who bought it for 150,000 more than the current comps say which at that price and that property I don’t think is going to cash flow at all. So be very careful if you are looking for a subject to deal. Just because it’s being offered as subject to does not mean it’s a good deal.

Avery Carl [00:36:56]:
So I’m not exactly sure what happened there, but I saw that and I was like, oh my God, that guy’s going to have, he’s got some hard times coming.

Speaker C [00:37:03]:
Another issue there that, that brings up, you know, when there’s a big discrepancy in what the person owes on the loan versus what the sale price is, let’s say they bought a house, you know, and it’s appreciated a bunch. So they say they owe half a million dollars on it and they’re selling it for 900. Johnny, that, that difference there, that can’t be a second, can it? Or could it be like if they did get it, like assumed, like they assumed the loan for the 500,000 but they’re still left with, you know, more than 20% down. Do they have to compare that cash or is that, could that be a second mortgage that they could get?

Johnny Vang [00:37:33]:
So from, from the assumable loans that I know of, it cannot be a second. Right. They actually have to come in with cash. However, if it’s a commercial transaction, everything kind of goes out the window and they like depending on the investor, depending on the bank, things might be allowable, right?

Avery Carl [00:37:51]:
Yeah. So again guys, it can be something that works, but it’s just because it’s a subject to or just because it’s owner financing, it doesn’t mean that the price makes sense. Doesn’t mean that payments make sense. So still run your numbers, look at your data, enemy method, make sure everything makes sense that you’re not paying 150,000 over the next closest comp. Just because it’s a subject to. Because that doesn’t make sense.

Johnny Vang [00:38:14]:
No.

Avery Carl [00:38:15]:
Anything anybody else wants to add on.

Speaker D [00:38:17]:
The subject to, I’ll just say, I mean you hit the nail on the head. I think these mark, it’s more about distressed sellers and in a lot of these markets they are, even if they’re selling, they’re still getting a certain amount of rent revenue. So it’s not like they moved out of a primary and they have to sell it or they, they’re in a buying because they’re stuck with this note. They can be in a bond but it’s just not as prevalent in some of these markets because of the amazing rental numbers they’re getting. So you just, it’s just not as prevalent.

Avery Carl [00:38:45]:
Yeah, yeah. And I’m not trying to poo poo it by any means. I don’t know enough about it to really make any kind of argument either way. I need to get pace on here and just educate me but I just want you guys to be careful with the, with the creative financing. It can be a really great solution sometimes. But I just want you to make sure that you’ve got all your T’s crossed in your eyes dotted correctly so you don’t get yourselves in a bad situation. Anything else that we haven’t covered regarding finance thing that you feel like the listeners would benefit from hearing? 10 the new sleeve looks great.

Speaker D [00:39:20]:
I’ve got one thing to ask you, Johnny. So one thing I’ve been doing a lot of is to help within this market when the numbers aren’t as great because of the interest rates is using some concessions to make the deal work better. Like okay, it’s not working at this rate, but what if you get a, you know, a rate buy down of some sort and you can use all the credits. But one thing just, I mean, so for the, the different types of loan you get a certain amount of credits, right?

Johnny Vang [00:39:48]:
Yeah.

Speaker D [00:39:48]:
Kind of going over like what the max amount of credits is because if they try to get too many credits on the loan that only has 2% let’s say, then you know, you can’t use what you’ve negotiated. So just curious about that.

Johnny Vang [00:40:02]:
Yeah. So from a perspective of second homes, right, the max concessions you can get is 6%. And sometimes if the seller is willing to do it, you know, you get, you get that put on and you can reduce the rate or you could do a buy down or you can, there’s multiple different things that you can do that allows you to get in it. Now like as a lender we can only charge people so much, so much cost, right. Like even if you guys want to pay like 6% to knock your rate down, we can’t do that because legally we’re binded to the laws. Right. And so when the seller pays for it, that allows us to be able to do and, and get lower rates for you. Right.

Johnny Vang [00:40:48]:
Which, which is, which would be great right now for an investment property it’s actually a much lower amount. It’s only 2%. Right. And so you got to be, you got to be kind of a little bit more careful with the amount that you are trying to get from a seller concession. You know, like what I’ve seen in the past is they would do, someone would come in with 3% and because it’s an investment property, we’re going to have to say like you’re gonna have to go back and renegotiate that because 3% is not going to work on this specific transaction. And so these two are conventional types on dscrs. What we’re seeing is most of the times it’s right around 3%, right. So anytime you can get the sellers to pay for some of your financings, it’s likely going to be beneficial for you.

Johnny Vang [00:41:34]:
However, you know, it’s, it’s always tough in markets that are hot like the Gulf shores. It’s tough to get them to, you know, pay for seller costs. So if you can, if you can negotiate that and make it work, more power to you.

Speaker C [00:41:50]:
Another quick note on that just I, I get, people get messed up on this a little bit when you, the concessions are great and they’re, you know, it’s 20, 23 right now and I’d say there’s a fair amount of that going on. So. Woohoo. But that is the total concessions is it doesn’t matter what you use it for, you don’t get any more. So it’s like where I see people get caught up is they’ll ask for concessions for some repairs and then think that there’s an additional concessions for, for on the, on the closing side. And it’s, if it’s 2%, it’s 2% total no matter what it gets used for. So just, just know that going in. So if you, if you ask for a bunch of repairs and you want it all, you know, to come that way, then you can’t use it for your closing costs as well.

Speaker C [00:42:32]:
It’s, it’s just one or the other. It’s just, you can just kind of, kind of combine it to whatever your total max is. So say that right Johnny?

Johnny Vang [00:42:39]:
Yeah, absolutely.

Speaker C [00:42:39]:
Stepped in your shoes there.

Johnny Vang [00:42:41]:
It’s all good. You’re right about it, so it works out.

Avery Carl [00:42:45]:
All right, so anything else that we think the listeners would benefit from hearing regarding financing? I think we covered a lot of great stuff here, so there may not be much. No. All right, well guys, if you have more questions on the financing process, you can get a hold of the mortgage shop. Johnny, how can they get a hold of you?

Johnny Vang [00:43:02]:
Yeah, so for me, they can get a hold of me at Johnny at the mortgage shop. Co if you just need information, you can do info at the MortgageShop Co of course you can always go on our website. Right. Mortgage shop. Or when you’re on the website, if you want to just go ahead and call our 800 number, you guys can reach out to us and one of our loan officers will pick up that, that call and go over whatever scenarios you guys have. So.

Avery Carl [00:43:28]:
All right. And that’s.conot.com on those email addresses. And if you guys want to buy with the Short term Shop you’re ready to come by with Jonathan. You can get a hold of him at Jonathan at the Short Term Shop.com or just email agents@the Short Term Shop.com if you’re not quite ready to do that. We’ve got a few other options for you. We’ve got a public Facebook group, same title as my book. It’s called Short Term Rental, Long Term Wealth. Lots of great community knowledge sharing there.

Avery Carl [00:43:52]:
And then also we have a weekly Q and A session live and you can sign up to join that. It’s every Thursday@strquestions.com thanks guys. Sam.