Avery Carl [00:00:03]:
Hey all, welcome to the short term show special episode series on the Smoky Mountains in Tennessee. We are doing a ten episode deep dive into buying short term rentals in the Smoky Mountains. So we’re going to talk about a lot of things in these episodes and we’ll probably be doing a quarterly update from here on out after we finish these ten. So make sure you hit that subscribe button so you get those delivered straight to your phone when they come out of. We do have some supplemental materials for you in addition to the content on this podcast. So any information that you need on current property pricing you can find on our website@theshorttermshop.com, and we also have, courtesy of our friends over at Air DNA, current air DNA data for this market on our website as well. So you can check that out on the shorttermshop.com. and if you guys are interested in buying a property in the Smoky Mountains with a short term shop agent, you can email us at agents@theshorttermshop.com or if you just want to learn more about buying short term rentals in this market, you can join our Facebook group.
Avery Carl [00:01:07]:
We’ve created a 50,000 person community on Facebook all about investing in short term rentals. You can join that. It’s the same title as my book. It’s called short term rental, long term wealth. See you guys over there. Hey, everybody. Welcome back to the financing episode of the investing in the Smoky Mountains with the short term shop in Mortgage Shop podcast series. As you have probably understood throughout this, we haven’t come up with a name for this just yet.
Avery Carl [00:01:39]:
So I’m calling it something different in every single episode. But anyway, I digress. Today we’re talking about financing. Definitely a very important piece of the puzzle when it comes to buying properties in the Smoky Mountains. So we’ve got a really cool panel today of experienced investors and lenders. And we’ll start with our lender from the mortgage shop, Brenna Carls, who is not related to me. Two different last names, Carl and Carls. How’s it going, Brenna? Good.
Brenna Carles [00:02:08]:
Glad to be here.
Avery Carl [00:02:10]:
Why don’t you introduce yourself real quick.
Brenna Carles [00:02:13]:
My name is Brenna. I’m the co founder and owner of the mortgage shop. And we literally specifically specialize in short term rentals, long term rentals and vacation home loans for you guys. So any and every financing question that you could possibly imagine on those topics I can most likely answer for you and as an experienced investor as well. But then obviously, Derek and Tim are here for the investment part as well.
Avery Carl [00:02:40]:
Thanks, Brenna. And we’ve got a few familiar faces here. The next one’s Tim Griglio. How’s it going, Tim? And introduce yourself.
Derek Tellier [00:02:46]:
Good.
Tim Grillot [00:02:47]:
Good morning, Avery. How you doing today? Well, she muted herself, so I’ll just keep going. Anyway, my name is Tim Grillio. I live in the Smoky Mountains and I’m an investor in short term rentals in both the smokies and in Gulf shores. And I own some long term rentals as well in a couple other states. And, you know, just in relevancy to this, I’ve used a variety of different kind of loans to get there, all the way from, you know, your basic conventional stuff all the way to commercial and some rehab loans. So excited to talk about this today.
Avery Carl [00:03:21]:
Really excited to hear about that. And last we have Derek Tellier. How’s it going, Derek?
Derek Tellier [00:03:27]:
Super fantastic. Yeah. Derek Tellyer, agent with the short term shop going back three years, basically, and going back much further than that with Avery Carl and her faithful companion Luke. So, yeah, I’ve primarily in the smokies a little bit, trying to make myself a nomad, kind of somewhat unsuccessfully, bounced around a little bit, spent last year in Gulf shores, Alabama. But I came back to the smokies because it feels like home. I’ve got more than a handful of short term rentals. I’ve done conventional financing with vacation home loans, conventional investment loans, loans, commercial loans, lines of credit. I’ve played around with a lot of stuff, not everything, but done quite a bit, so hopefully can bring some enlightenment to the conversation.
Avery Carl [00:04:17]:
Thanks, Derek. And I think we’ve all done enough deals in our investing careers that will have some insight into most loan types, maybe not every single thing. So I guess let’s get started with the easiest out. There’s typically loans fall into three categories, which I’m not including creative financing that I’m talking about, actual loans from banks, credit unions, mortgage brokers, et cetera. The first and the easiest to find is going to be a conventional loan. And Brenna, do you want to give a definition of what conventional loans are? We don’t need to get into vacation home versus, versus investment just yet, but just conventional loans, how they qualify you all that?
Brenna Carles [00:05:03]:
Yeah. So conventional loans, or what’s known as full doc loans, just literally go off of your personal income and personal debt. So you would show your, you know, employment income, your assets. We pull your credit report to see the debts coming on it, and then we take that debt divided by your income. And that’s how we come up with your debt to income ratio. And that’s what conventional loans are based off of.
Avery Carl [00:05:29]:
All right, so conventional loans, you are given a limit or a pre qualification, up to a limit or pre approval. We can get to the difference between those two things in a minute. Up to a certain amount. And it’s based on the amount of money that you make versus the amount of debt that you have. Right. And that’s your DTI or debt to income ratio.
Brenna Carles [00:05:48]:
Yes.
Avery Carl [00:05:49]:
Awesome. All right, so there are two kinds of. Well, there’s several kinds of conventional loans. We’re only going to be talking about investment loans and second, home loans, and we’re not going to be talking about anything that you use, you know, for a primary home. So let’s first talk about investment loans. There’s one main thing that I want people to know about this, a lot of people don’t, is that actually the minimum percent down you can put on an investment loan is 15%. It’s not 20, it’s not 25. So I’ve seen investors come to me and say, hey, I can’t make the numbers make sense on this.
Avery Carl [00:06:27]:
Can you take a look at it? And I’m like, well, you’re putting 25% down. Why are you putting down so much? You could put down 20 or 15. And they said, oh, I thought I had to put down 25. So, Brenna, do you want to talk about the limits and the guidelines on being able to put down 15% on an investment loan?
Brenna Carles [00:06:46]:
Yeah. So conventional, or what’s known as conforming loans, can be a conventional size loan or a jumbo size loan. So if you’re looking at investment only and you’re just doing a conventional sized loan, you can do 15% down, investment only up to the 2023 conforming loan limit, which is 726,200, that is the loan amount. The purchase price would be higher. Anything over that $726,200 loan amount is considered jumbo. So when you get into jumbo, then that would require the 20% down. But if you’re in that conventional loan range, then you’ll be good with putting 15% down.
Avery Carl [00:07:25]:
And to clarify, the loan amount is different than the purchase price. So a loan amount of 726 is roughly like an 800 ish thousand dollars purchase price. So you can put 15% down up to that 800 ish thousand purchase price. So that’s pretty cool. A lot of people don’t realize that. And if you’re somebody who’s really looking to maximize your cash on cash return by making as small of a down payment as possible, that is a really, really great option. Is there anything else we need to know about traditional conventional investment loans?
Brenna Carles [00:07:58]:
Yeah. So a lot of people think, well, if I get over that 726 two loan amount, then I automatically have to put 20% down. That’s not the case. Let’s say your loan amount came out to 728. Well, you just need to pay that extra little bit to get it down to 726 two. You wouldn’t have to put the full 20% down. So just keep that in mind. And we can also use projected rental income if we need it.
Brenna Carles [00:08:21]:
On the property that you are purchasing for investment.
Avery Carl [00:08:23]:
Only conventional loans, they’re government backed. Right?
Brenna Carles [00:08:28]:
Fannie Mae and Freddie Mac are backing them.
Avery Carl [00:08:31]:
Okay. Conventional loans mean they’re backed by Fannie Mae and Freddie Mac. And that’s. Those are the rules we’re having to follow. All right, I’m second. You mentioned a jumbo loan. What is that?
Brenna Carles [00:08:43]:
So a jumbo loan, is anything over that conforming loan limit? So anything over 726,200 loan amount would be considered jumbo. So it doesn’t mean that it’s not conforming anymore. A jumbo loan is conforming because we go off of those Fannie Mae and Freddie Mac guidelines. So that just means we follow, like, the rules that we have to put in place to make sure it’s safe for you. So it does go off of your debt to income ratio? We do. It is also a full doc loan. So it’s exactly the same as a conventional size loan. It’s just a higher loan amount.
Brenna Carles [00:09:16]:
So that’s the only difference.
Tim Grillot [00:09:17]:
Just to clarify, just make sure I’m right and every chairman is. Fannie Mae and Freddie Mac are not involved in jumbo loans. Those are other investment, other investors or who’s actually backing up those loans on those. On those jumbos.
Brenna Carles [00:09:30]:
Yeah. So a lot of people like Goldman Sachs and things like that will back the jumbo loans. However they go off of Fannie Mae guidelines because they still will be able to sell them to the secondary market.
Avery Carl [00:09:39]:
Okay, so, like, if we approve you.
Brenna Carles [00:09:41]:
As investment only conventional, we’re going off those Fannie Mae guidelines if your debt to income ratio allows for it. We still go off of Fannie Mae guidelines on jumbo. We run what something is called automatic underwriting system with Fannie Mae, and we also run that on your loan, if it’s a jumbo. Still to make sure we’re following the Fannie Mae guidelines. So it’s literally just like a conventional loan. It’s just a higher loan amount.
Avery Carl [00:10:07]:
Awesome. And these are, let’s talk about the interest rates on investment loans. Are these more or less than primary home loans and what are typically the terms in terms of years?
Brenna Carles [00:10:21]:
Yeah. So they’re going to be generally higher than your primary residence alone. Second homes and investment properties right now seem to be around the same interest rate. It just depends on what that interest rate is going to cost you for a second home or an investment property. So for an investment property, what I mean by that is if your interest rate shows as, let’s say, 7.625, you may see a charge for that interest rate. Fannie Mae put in place what’s known as loan level pricing adjustments. And that’s why you see a charge for your specific interest rate. So that specific charge for the interest rate may be a little higher in an investment property rather than a second home or definitely a primary residence.
Brenna Carles [00:11:02]:
Primary residence is always going to be lower than your second home and investment properties.
Avery Carl [00:11:09]:
And with investment properties, are there any limitations on what you can do with the property in terms of renting it out or putting it with a property manager? I know you can’t live in an investment property. What else? What are the other rules?
Brenna Carles [00:11:21]:
Nope, that’s it. I mean, it’s your property. You can do what you want with it. You can even vacation there outside of within the year. You know, I know there’s tax implications for that. So you want to make sure with your CPA that you can do that. But besides that, you can put it with a property manager. You can self manage to make more cash flow.
Brenna Carles [00:11:39]:
You can, you know, do whatever you want with it. Your friend can manage it if you, if they want. You know, as long as you’re paying the mortgage on time, we don’t care how you’re receiving that income from the property.
Avery Carl [00:11:51]:
And if I’m getting a, excuse me, an investment loan and I’m a little short on DTI, can we use the projected rent income from the property to bump my DTI to where it needs to be?
Brenna Carles [00:12:05]:
Yes. So two different categories with that. Let’s say it’s your first time investing and you don’t have any previous landlord or short term rental experience within the last three years. For conventional investment or jumbo investment, it will only, you will only be able to offset the mortgage payments. So let’s say the proposed rental income comes back at $5,000, but your mortgage payments only $3,000 and you don’t have any previous rental landlord or short term rental experience. You’re only going to be able to use that $3,000 out of that total, $5,000 to offset your mortgage payment. The second way to use it is if you already are a landlord, let’s say, on a long term rental, and maybe you’re just getting a short term rental, you can use the fully projected net rental income amount because you have experience. So again, let’s say that net rental income comes back at 5000, your mortgage payment is 3000, and you’re offsetting your mortgage payment plus adding an additional $2,000 to your monthly income for that specific deal.
Avery Carl [00:13:04]:
Okay, that makes sense. And are these typically 30 year fixed loans 15 or do you have options on these for. Yeah, you can do.
Brenna Carles [00:13:13]:
You can do a 1520 or 30 year. I always say you can do a 30 year amortized loan because there is no prepayment penalty on conventional loans. So you can do a 30 year and you can pay more if you want, per month. But the 30 year amortized loan is what we mostly see 99% of the time.
Avery Carl [00:13:33]:
Is the interest rate higher on a 30% than on a. I mean, sorry, on a 30 year than on a 15 year fixed?
Brenna Carles [00:13:41]:
Yeah, it’ll be a little bit higher, but you have to think that your payment doubles if you do a 15 year. And then your debt to income will go up quite a bit. And so we can look at those options for you. But for cash flow purposes, you would want to be looking at that 30 year amortized loan.
Avery Carl [00:13:58]:
All right. And what about arms? Are those, which arms are adjustable rate mortgages? Are those available for conventional loans or does it have to be fixed?
Brenna Carles [00:14:07]:
We don’t have any for conventional, but we do have some for jumbo. We have adjustable rate mortgages. However, right now they are quite a bit higher in costs than you would just for your 30 year fixed loan. For arms, you do have to remember, the rate that you go in doesn’t necessarily mean that’s going to be your rate for the whole period of the mortgage. You have to talk with your loan originator to see what your interest rate can go up to, because it can go up possibly six points, you know, at a cap, you know, at 10% or something like that, when your initial interest rate is 7.625. So you always want to watch out for that. And we’ll, you know, we compare the different scenarios for you and give our personal opinion on which one would be best suited towards your goals.
Avery Carl [00:14:48]:
All right, I think that’s enough questions on that. Do you guys have anything else on conventional investment? Questions for her?
Tim Grillot [00:14:55]:
I don’t have any questions I think it’s, you know, just highlighting, you know, some of the basics, you know, of people here, Fannie, Fannie Mae or Freddie Mac. And as investors, we throw those terms around, and a lot of newer investors don’t recognize what those terms even mean. And I think we’ve done a pretty good job of highlighting, given the basics of it. So you’ll hear people talk about Fannie Mae and Freddie Mac. Just means it’s a conventional loan. And Avery, you mentioned government backed. Those are not government backed. Fannie Mae and Freddie Mac are not government backed.
Tim Grillot [00:15:22]:
They just kind of managed to put themselves in that position to take all those loans. So they’re the primary mortgage lenders ultimately, in the end, in the single home space anyway. And I know they do some bigger stuff as well. That’s about it. I think we’ve hit the details. Now we can get in the deep stuff.
Avery Carl [00:15:44]:
Well, we got a couple other loan types to hit first before we can get into the deep stuff. Okay. So there’s one more type of conventional loan that I want to talk about that we see a lot when it comes to short term rentals, one that you want to be careful with, in my opinion, and that is the vacation home or second home loan. A lot of people really like to use these because they are 10% down. So obviously 10% is less than 15%, and that’s attractive to a lot of people. Brenna, what are the rules and regulations when it comes to second home loans?
Brenna Carles [00:16:22]:
Yes, your second home loan, you want to. Your primary intent needs to be to vacation there first, and then you can rent it out when you were not vacationing there. The rule of thumb is 14 days out of the year that you need to vacation there. And that is the person or people on the loan. It can’t be. Let’s say you did a second home loan and then your sister wants to go on vacation and she’s not on that loan. Those days don’t count towards vacation days. It would be for the people that are on that specific loan.
Brenna Carles [00:16:49]:
And then Fannie and Freddie do allow you to rent out property when you are not occupying it. You just need to be honest with yourself and your loan originator up front and tell them what your primary intent for that property is going to be.
Avery Carl [00:17:01]:
Okay, so I can rent out a second home as long as I’m using it for at least 1415 days out of the year myself, and I can rent that out for a profit the rest of the year?
Brenna Carles [00:17:15]:
Yep, 14 days.
Avery Carl [00:17:17]:
All right. And can I put that with a property manager or do I have to self manage?
Brenna Carles [00:17:24]:
You can, but at that time, if you’re doing it with a property manager, then your primary intent is to be an investment. Right? Because they’re going to want to try to rent that as much as possible. So I would say you would want to self manage because you’re, let’s say that the lender comes back and say, why do you have a property manager on this? You’re going to have a hard time explaining how that really was a second home. So self managing is key for second homes because again, your primary intent for it is to vacation there.
Avery Carl [00:17:51]:
Oh, go ahead, Tim.
Derek Tellier [00:17:52]:
Can we have multiple second homes? And if so, what are rules around that?
Brenna Carles [00:17:57]:
Yeah, so you can have as many second homes as you want as your debt to income ratio allows for it. However, you can only have one in a specific area. So, like Tim, you could have one in the Smoky mountains, or you could have one in Destin, you know, the panhandle. We can have one in California, Texas, because those are all different markets, right. You just can’t have two in the same market. Now I do get the question. What about, you know, can I have one? And then can my parents have one in the second, you know, same market? Yeah, you can, because you’re two different households. You may have two different needs.
Brenna Carles [00:18:31]:
You know, let’s say your mom or somebody is in a wheelchair and they need a handicap accessible property, and yours is the one that you want is not. That’s why it’s okay, because you’re two different families. However, if you were on the loan together, and that would cap you for that 1 second home loan in that area.
Avery Carl [00:18:49]:
Can two spouses who have the property in their names only. So a husband has one in his name only and a wife has one in her name only. Can they have them in the same market?
Brenna Carles [00:19:01]:
No, because the lenders are going to hopefully want you to vacation together. If you don’t, we don’t want to know why. We don’t want to get into that, all that mess. So it’s just 1 second home loan per married couple per area.
Avery Carl [00:19:14]:
Gotcha. And guys, we’re giving you this information not because you need to go run around and try to trick loan originators. We’re giving you this information so you don’t screw up and make a mistake and commit mortgage fraud. So my kind of rule of thumb nowadays is if you’re looking at a property and you’re running spreadsheets on it, that’s probably your primary intent, is an investment and not a second home. So also, my advice is getting a bunch of second home loans in a bunch of different places and getting partners involved and things like that, and just trying to get really cute with skirting the rules as a strategy. That’s second home loans are not a strategy. They are something that can work really well if you want to buy a house in a place that you like to vacation, also that you plan to rent out when you’re not using. So I want you guys to be really mindful of nothing trying to get in there, because I see this every day, all the time.
Avery Carl [00:20:13]:
Not trying to outsmart everybody and get really cute with the I’m only going to put 10% down on all these investments. That’s technically mortgage fraud. I’ve never heard of anyone getting in trouble for the second home thing, but at some point it’s going to happen and I would prefer that it not be any of you who’ve already listened to this podcast. So, you know, use the second home loan if it’s something that you want to use for your personal vacations and then rent out later, but don’t use it as a strategy, guys. If you’re running spreadsheets, it’s not a second home in my opinion.
Brenna Carles [00:20:46]:
I do want to point out as well, if you have one in the smoky mountains, for example, in the panhandle, that equals 28 days. You have to vacation somewhere, right? So keep in mind of your vacation time. I know that most of you are trying to quit your w two job, but I know that a lot of people only may have two to three weeks vacation out of the year. So just keep that in mind.
Tim Grillot [00:21:04]:
Well, one other thing too, you mentioned with the multiple markets is DTI, right? Because it’s a vacation home, it’s not an investment property, meaning that there’s no other income other than your household income coming in. So if you and your spouse and you’re married and you make $100,000 a year, and you’ve got your mortgage payment, you’ve got a car payment, you’ve already got one vacation home that you qualified for, you go to try to get a second one, your income still has to qualify you for that loan. So at some point, the average person is just not going to have enough income to justify having three, four, five vacation homes. Now, if you’re in that income level, you’re probably not watching this podcast anyway, so. But the reality is, you know, there are people out there that can do it. I think for the average person there’s going to be a limit on that anyway. So you know, by all means, if you’ve got the right intent, get a vacation home loan. But know that you’re going to need investment properties.
Tim Grillot [00:21:56]:
You’re investors, you’re looking, you’re watching this show because you’re investors. Just plan on using those 15 and 20% downs and take the money you made from the first one and roll it into the second one. Work harder, work more hours, increase your income, decrease your expenses, start scaling it up. The effort that I see people put into what Avery is talking about, trying to skirt the system, if they put that kind of effort into just making more money or reducing their expenses, they move faster than trying to play the game.
Derek Tellier [00:22:23]:
Totally agree. I think once you, once you get a little more seasoned, you want to have some skin in the game on these things. There’s nothing wrong with having some of your own money in this. And that’s, that’s. I mean, I see that as a good thing.
Avery Carl [00:22:34]:
So that’s the goal eventually. I mean, that topic for another podcast. But there’s so much content out there about how to own all this real estate with other people’s money. Well, the goal is eventually to do it with your own and own it by yourself and not with a zillion partners. So, a topic for another time. But yeah, what Derek said was, was perfect. So I think that’s enough on conventional loans. So on to, I would say the second most used type of financing when it comes to short term rentals is the DSCR loan.
Avery Carl [00:23:02]:
Brenna, what is that?
Brenna Carles [00:23:05]:
DSCR loan, or what’s known as debt service coverage ratio loan. Remember I told you guys conventional loans were known as full doc loans that went off of your personal debt and personal income. Well, DSCR loans are not. They go off the property or purchasing proposed monthly rental income and the proposed monthly mortgage payment, that is not a conforming loan. So that means we don’t go off your personal debt or income. We don’t follow those rules. It’s not Fannie or Freddie backed, it is a portfolio loan. They usually want a one to one ratio, which means if your mortgage payment is again $3,000 a month, your monthly proposed rental income coming back from that property needs to be at least 3000 a month or higher.
Brenna Carles [00:23:48]:
And so it’s basically an asset loan because we look at the assets to make sure you have at least 20% down for those at least six months reserved for that mortgage payment. And obviously you have to qualify with your credit score. You can also close those in an LLC. So a lot of clients, you know, if you’re a doctor or lawyer, they like to close in an LLC for anonymity or anything like that. And you can close those directly into an LLC and would not have to quit claim or what’s known as transfer title to your LLC from your personal name.
Avery Carl [00:24:21]:
Oh, yeah, that’s something we need to jump back to on the conventional. So conventional loans, Fannie and Freddie will only lend to individuals, not to LLC. So if you’re getting a conventional loan, you have to get it in your personal name. DScr, you can drop it right in your LLC from the get go. So people can’t find who you are on the chain of title. I mean, anybody can find who you are at any time, but a little, you know, it doesn’t hurt to add another layer of protection, which is also a topic for another podcast. So let’s talk about the differences in what it costs to get a DSCR loan versus a conventional loan. So I know a lot of people when DSCR loans for short term rentals came on the scene about was that like 18 months two years ago that they really kind of blew up and everybody lost their damn minds over it.
Avery Carl [00:25:13]:
There’s, it’s. It sounds really great. However, tell us about the difference in the interest rate and the cost to get that.
Brenna Carles [00:25:21]:
Yeah, so it’s at least 20% down. Some companies will say 15%, and I’ve yet to find a company that is really good and offers that 15%, but it’s usually 20% down. And then a lot of them have what’s known as prepayment penalties. So conforming doesn’t have a prepayment penalty. Prepayment penalty means if you refinance within three to five years, they will make you pay the interest on that loan for whatever their prepayment penalty is. So if it’s a three year, you’d be paying interest for three years at closing so that you subtract that out of what you’re getting in the proceeds for that property. It is a little more pricey in interest rates because guys, they aren’t qualifying you off of anything, right? They’re qualifying you based on their hope that you manage this property well and that you bring in good rental income from it. So that’s more risk for the investor, right? So.
Brenna Carles [00:26:14]:
Or the lender, I should say. They are investing in you. There’s a lot of risk. So guess what? Risk equals higher interest rates. So you will see a higher interest rate for DSCR loans as opposed to conforming investment loans. I do want to point out that because it is really popular, everybody hears about it and they automatically think they need that type of loan. If you aren’t capped debt to income ratio wise and you don’t have max number of finance properties for conventional, conventional is probably always the route you want to go because it is a 30 year amortized loan. It’s better interest rates, better terms, and it’s just a better product.
Brenna Carles [00:26:54]:
So if you’re able to do that product first, then do that product. If not, let’s say you went from w two to self employed from last year. W two. Now this year you’re self employed. Well, you don’t really have any self employed income to show. So a DSCR loan would probably be your number one option at that point, because again, it doesn’t go off of your personal income, but just know that a lot of them will have a prepayment penalty. So you do want to talk to your lender about that and get the specific details on that. And if you’re willing to hold that property without, you know, for three years and pay that prepayment penalty or nothing, and just get all the specific details on that property, type of loan, DSCR loan.
Avery Carl [00:27:36]:
All right, so to summarize that, and another thing we forgot to mention in the conventional section is you can only have ten conventional loans. Fannie Freddie cut you off at ten. So this can be a good option if you’ve already got your ten conventionals. And I will agree with Brenna that, I mean, just a conventional investment loan is always going to be the easiest to find cheapest money in most cases in terms of interest rates. So if you can do that, I’d always do that first. But as real estate investors, the goal is to get to the point where we run out of conventional loans. And DSCR can be a really great option. But also everybody kind of lost it last year or two years ago when they’re like, oh my God, this is going to be so great.
Avery Carl [00:28:17]:
And then they get in there and they’re like, but wait a minute, the interest rate’s so high. Well, like Brenna said, the interest rate is higher because the risk to the lender is higher. They’re giving you a loan based off basically nothing, based off the idea that you will manage this thing well enough to make the mortgage every month. So they are going to charge you for that risk that they’re taking on with that interest rate. So keep that in mind. It can be a really great product in a number of scenarios, but you just have to make sure that you understate it’s going to be more expensive. You’ve got that prepayment penalty, but you can get unlimited DSCR loans as long as your credit score qualifies. Right.
Avery Carl [00:28:59]:
Brenna. And you can drop it right in your llc. So it can be a really great option. And the last form of financing, like when I’m saying financing, I mean that you go to a bank or lender and get, uh, not creative yet. Uh, is true commercial financing. And this is going to be the hardest to find when it comes to short term rentals. Um, mainly because you’re not just dealing with a big national lender. It’s most of the time going to be a small bank, local to either you or local to the property.
Avery Carl [00:29:34]:
So if you live in Tennessee or. No, sorry, let me, we’re, we’re doing a podcast on Tennessee. Let me reverse that. If you live in Texas and you’re buying a property in Tennessee, a bank in Ohio is probably not going to lend on this. So you need to find a bank that’s local to you or the property. And these guys are not going to want to do just one off loans like a lot of big national companies. Well, they want to build a relationship with you. So if you just, if you come to a local bank and say, hey, I only want to buy one property, they’re probably not going to give you that loan.
Avery Carl [00:30:07]:
But if you’re saying, you know, I plan to buy 510 or, you know, do these other things, put x amount, they, they’re always going to want you to put money in their bank. And it actually does go to a committee in most cases where they sit down, like on a movie and say, okay, here’s this person’s business plan. Here’s their personal financial statement, which a lot of times you’ll have to send to get a commercial loan. And they all look through it and say, am I going to, are we going to lend this person money or not? And so it can be a little more difficult to do. If you can find a local bank who will do short term rental loans, that is a really good thing to find because a lot of times they’re not interested in short term rentals. You’ll have an easier time finding it in markets, excuse me, like the smokies, to do it on a short term rental, but if you’re just in a random metropolitan or suburban area, they’re probably not going to want to do that. Derek, you’ve done a few commercial loans for some of your short term rentals. Do you have anything to add?
Tim Grillot [00:31:07]:
Yeah, I want to tie it in a little bit from the beginning to this point because I agree with what we said before, that first and foremost, the conventional loans are the way to start. That’s the way to go. You want to do conventional loans as long as you possibly can. They’re easy. You call a mortgage broker, they line you up, they have multiple options out there. They have multiple lenders. In the end, usually you’re dealing with a mortgage broker, like the mortgage shop. They’re an in between.
Tim Grillot [00:31:33]:
They’re helping facilitate getting to the actual lender. Most of them are not lending out their own personal money. And if it’s a conventional loan, they’re lending because they know they can sell it to Fannie Mae and Freddie Mac to get it out there. When you go into the DSCR loans, Fannie Mae and Freddie macro. So a DSCR, I always, you know, I like to keep things really simple. So to me, I always look at a DSCR as kind of like a commercial loan. Basically, it’s what, it’s the same underwriting process. The difference is a commercial loan, a true commercial, you’re going to a bank and that bank is lending you the money they have.
Tim Grillot [00:32:06]:
Whereas a DSCR, you’re going to a broker who has private investors, other companies out there, I don’t. Brenna can harp on who the actual end lenders are with DSCR loans, but it’s going out to, again, they’re trying to find multiple options. Commercial loans are absolutely relationship based businesses. First and foremost, you have got to be a seasoned investor or have a partner who’s a seasoned investor to even have a conversation with a bank about a commercial loan. Now, if you have a relationship with your local credit union or bank, and like you said, you live in Texas and you’re going to go buy a property in Tennessee, they may be willing to work with you. And that’s the thing about commercial lending. It is. Everything is on the table.
Tim Grillot [00:32:48]:
There are no rules, if you will. There’s obviously rules around lending, but the bank can pretty much loan on what they want to lend on. So the better relationship you have with that bank, the better chance you have of getting a loan. My first commercial loan came into a situation where I tried to get creative on credits and down payments and where the money was going to come from. And I had this great deal all structured and all agreed to. I went to my mortgage broker at the time and I said, man, I’ve got this great deal. Here’s the terms and here’s everything else on it. And they looked at it and they said, derek, this is an investment loan.
Tim Grillot [00:33:26]:
You’ve got to put at least 15% down and the sellers credits are capped at 2%. You can’t do the deal that you’ve just structured. And I was like, oh, shoot. So what can I do? So I had a relationship with a bank, with the manager of a bank. I had not ever done a deal with him, but I had done deals. I went to him and I said, here’s my deal. Here’s what I’m looking at. Can you help me? And he was able to get it done.
Tim Grillot [00:33:52]:
So that relationship is going to be the key, but at some point you’re going to cap even at that. The commercial bank that I use right now has already told me right now they’ve capped me out. They’re like, we want you to get everything you’ve got established and done before we lend you any more money. So what am I doing? I’m building relationships with another bank because I want to have multiple places I can go to. A lot of these banks will have different levels. Maybe it’s up to. I’ll use some round numbers, maybe it’s up to 500,000. The person that you’re actually talking to that manages the branch or handles their commercial lending can probably approve that without having to go to the committee.
Tim Grillot [00:34:29]:
There’s usually a number that that person has that they can approve up to. So if they know you, they like you, they’ve. You’ve given them your PF’s, they know that you’ve got your stuff together, they can probably approve that. If it gets over that, they may have to bring maybe the president or one or two other people involved. If it gets up to another level above that, then it’s going to a committee. And then you’ve got to hope that the guy you know at the bank is going to that meeting and arguing for you to say, look at this guy’s history. He knows what he’s doing. I trust him.
Tim Grillot [00:34:57]:
He’s going to get us money. Big, big caveat to commercial lending. It’s only going to be a five to ten year term. They may amortize it over 20 or 25 years. I’ve seen 25. Usually it’s 20. But at some point, usually in the five year mark or the ten year mark, the interest rate is going to change. It’s not going to stay locked.
Tim Grillot [00:35:18]:
Some interest rates are going to vary, so you better make sure you understand what your interest rates are. And at the five or ten year mark, there’s going to be a balloon payment, meaning whatever is currently owed on that mortgage at that time, you either have to refinance it or pay it off. This is why a lot of people lost everything in 2008 and zero nine, because they had balloon payments. It wasn’t necessarily because their property wasn’t making money, it was because they had a payment come due for a million dollar loan, but they didn’t have a million dollars and nobody was willing to finance it. So that’s where you’ve got to watch out. You’ve got a five year balloon. By year three and a half, you better be looking at what are my options to refinance this? Even if the rates aren’t good, it might be worth doing a refinance early to make sure that you don’t put yourself in that position where the note comes due and you can’t pay it off and no one else will finance it. So that’s the absolute most important part of commercial lending, is that balloon payment.
Derek Tellier [00:36:13]:
And I’m going to add to that, that’s something that you need to have a conversation with when you’re talking to different local banks and building those relationships, because different banks have different rules around that. And even along with a personal relationship, you need to ask, is this a balloon or is it just simply an arm? And I quite frankly have both. And there’s pros and cons to both. Typically a balloon is going to get you a better deal, in quotes, if you will, where an arm might be a little bit more expensive, but it’s a little safer too. So I’ve got deals with a balloon that I know, you know, I got to be prepared at the end of that term to pay that off. But I also have deals with commercial banks that I’ve done as arms. I pay a little bit more interest, but those properties I intend to hold for a long time. So I wanted an arm in place because it gives me more protection on not having to be locked in, into that refinance at the end of the term.
Derek Tellier [00:37:03]:
So that’s just really important to know what you’re getting into if it’s a true balloon or if it’s just an arm, because you can do both and different banks do do both. So.
Tim Grillot [00:37:11]:
And there’s hybrids. I mean, I have one of mine that’s locked for five years with a ten year balloon. So it’s an arm in the sense that after the five years, it’s going to adjust whatever current interest rates are plus a point or whatever, and then at the ten year balloon I have others that are straight up five year balloon. So it’s really going to vary on the specifics of that. And ill say this today, its February 2023. When I started investing two, three years ago, conventional loans won. The interest rates were rock bottom. I mean we were seeing sub 3% interest rates.
Tim Grillot [00:37:42]:
It was amazing. Everybody wanted commercial loans. I mean, excuse me, conventional loans. Back then, commercial rates would always be in the fours and fives and everybody thought that was crazy high. So the last 18 months, 1218 months, my experience has been commercial loans, if you have the relationship with the lender, are actually lower. I locked in a commercial loan at 4.6% back in August when everybody else was paying 6.57. But I’ve got a five year balloon on that payment. So I need to recognize that I don’t have the security of that 30 year fixed loan, but I’m getting a better interest rate today.
Tim Grillot [00:38:19]:
So as long as you’re planning ahead, they’re great and they’re fine. And once you hit that ten, you’re going to have to dive into that anyway. So start building the relationships with the lenders now. Put some money in their bank, make some deposits, show them what you’re doing, have a conversation so that you want to build that for the future while you’re building up your conventional loans, start the relationship with the commercial bank. So when you need them, they already know you don’t wait until you need them.
Brenna Carles [00:38:45]:
Do you want to tell people like, you know, you said, you know, it might not just be up to your guy. If it’s over 500,000, they may have to take it up the chain and they may have to go through a committee. And so let’s say your contract though, that purchase contract is, you know, only 40 days, you know, do they need to be prepared to have a longer contract in case, you know, that happens? I know a lot of people come to us and say, you know, I want a commercial loan. And what you said was correct. The bank basically wants three things. It’s like the spiderweb effect. They want a loan from you, they want a credit card, or they want you to have a checking or savings account or security deposit account, whatever it may be, to tie you in because you’re with them for three things, so why not go to them for something else? But if it comes to that commercial loan, you know, if they have to bring it up, you know, if they’re conservative bank and things of that nature, it could take longer than those 35, 40 days to get approved for funding.
Tim Grillot [00:39:42]:
Absolutely. I try to get 45 days on those course. Two years ago, as crazy as everything was, as backlogged as appraisers was, I was getting 45 days on everything anyway. But again, this is where the relationship comes into play. And I cannot stress that enough that commercial loans are relationship based business. And this is why you set it up early. My lender already has the new lender. I’ve started talking to the new bank.
Tim Grillot [00:40:06]:
They already have my PF’s, they already have my asset sheet, my balance sheet. They know where I’m at today, so therefore it makes it easier on them. So when I go to it again, if you just had to dump this on them, it’s definitely going to take longer. And these are smaller outfits, meaning it’s not like where they have a whole bunch of underwriters and people can look at it. It’s going to take time. It might take two weeks before your committee even has a chance to look at it. The committee may only meet once a week. It might be three weeks, four weeks before they even look at it, and then they may come back and ask more questions.
Tim Grillot [00:40:39]:
So you definitely want to have a longer close period on that type of loan.
Derek Tellier [00:40:44]:
100% what Derek said. And it can actually go the other way. And he kind of alluded to that. And the more preparation you do on that and the more relationship you build over time, it can actually go the other way. I had deal structured. I have several commercial banks I use. Some are in Kentucky, somewhere in Tennessee. But the one I went as far as doing PowerPoints and everything, and they took that to their board.
Derek Tellier [00:41:06]:
And I have almost say a pre approval, if you will, where it’s almost like I can buy like I have cash within the parameters of my personal, I’ll say, business plan that I put together for them. So we just kind of a mutual trust that they know that if I’m buying a property, it’s within that business plan. And they have already pre approved at the board level to do that. Now, like Derek said, that’s not something you’re just going to walk in and do in a day. You know, that that takes time to get to that relationship. But it can be a really cool, powerful thing. Once you kind of get that and, you know, talking the differences of terms and stuff, it really, that I see, it kind of typically falls in between a DSCR and a conventional, as far as interest rates and stuff go. But the caveat is that relationship thing, you have to have that, be ready to build that, to be able to get those terms.
Tim Grillot [00:41:55]:
And Tim hit a great point there. It was professional. You’re a business owner. When you’re going and talking to a commercial lender, they want to know that you’re sophisticated, that you know how to run a business, that you know how to make money, because they’re not, most cases, they don’t care about your credit score. They don’t care about your debt to income ratio. They care that you know how to make money. So you have to show a track record that you know how to make money, that you know how to open the same type of business or some similar to what you’re about to do with short term rentals. Rental real estate is a business, make no mistake.
Tim Grillot [00:42:25]:
If you think differently, you’re kidding yourself. These are a business. They want to know that you know how to run the business. One other caveat I want to throw in here. One of the other commercial loans I did. The reason I did a commercial loan is because it straight up would not qualify for conventional financing or even probably a DSCR loan. We haven’t hit on this yet, but multiple structures on a property, and there’s caveats to this. There’s accessory dwelling units, adus, there’s duplexes, there’s triplex, things of that.
Tim Grillot [00:42:53]:
I bought a property that had five individual cabins on one five acre parcel of land that was not going to qualify for any type of conventional financing out there. I needed to go to a commercial, to a lender, to a local lender, in order to get that deal done. I was fortunate because the day that deal fell on my lap, which it totally fell into my lap, I already had the relationship with the commercial lender to be able to have that conversation. If I didn’t have that relationship, I would have had to find partners. I would have had to find other people to bring in to do that deal. And because I had that relationship, and obviously I had other resources, I was able to actually close on that by myself.
Avery Carl [00:43:36]:
And that’s a really good segue, Derek, into some of the things that you might run into when financing properties in the Smokies. Because it’s not super common for there to be five cabins on a parcel, but it is common for there to be two. And I’m not entirely sure why that is common, but it is. We’ve sold quite a few at the shop, and sometimes you have to get creative and get that. And there’s nobody that will do that deal except for a commercial bank. Although I have seen. I have seen two cabins on one parcel go conventional. If the lender is able to get them appraised as a single family with an ADU rather than just two parcel.
Avery Carl [00:44:20]:
Two, sorry, two structures on one parcel. Brenda, do you have anything to add to that?
Brenna Carles [00:44:25]:
Yeah, I mean, like the smokies, there’s a lot of places that do have that other cabin on the same parcel. Land versus Derek’s situation had five. Right. So with just two, you can usually work around it. Like, hey, I’m. This is the main cabin, let’s say the main living area, you know, investing area. But then there’s also this other one that is going to be known as the accessory dwelling unit since we have, where you guys have sold quite a few in the smokies, because I believe it had to do with something back in the, was it seventies or eighties of how they parceled out land and then they changed the parcel requirements after that. And that’s why there’s some on the same parcel.
Brenna Carles [00:45:04]:
But if we can do it that way because we have enough comps or comparables where we can compare your property to somebody else’s property that had two cabins on one parcel, then it’s most likely that we can get that approved and to go through. But if not, let’s say it is like Derek’s three to five cabins on one part. Like that’s going to, that’s going to have to go like a commercial loan.
Derek Tellier [00:45:24]:
And Brennan, correct me if I’m wrong, isn’t there something around with that, like the appraisal matters? Like it has to, like the main property has to appraise for enough to carry both if you’re going to do like two on one. Is there something around that or am I?
Brenna Carles [00:45:36]:
No. I mean, they can give value to the accessory dwelling unit or what they could do is not even consider, they wouldn’t even consider that other second cabin and they would just give the total value. I think what you’re talking about is to that primary cabin, but most of the time you want, there is value in that second cabin here. A lot of the reason why some people will deem something zero value is if they’re buying a house and there’s like a trailer on it or something on the same parcel. And we would just deem that zero value. But with cabins, there’s value in each of them. So we do want to get that value for that accessory dwelling unit as well on that appraisal.
Tim Grillot [00:46:09]:
Cool.
Avery Carl [00:46:11]:
Let’s talk about true log cabins for a minute and whether it is a true log cabin or not, how that can affect lending with different lenders and different back end, like wholesale lenders, sometimes you can get under contract on something. Well, let me back up a little bit. Basically, I would say like 85% of the, quote, cabins in the smokies are just houses that have cabin look siding on them. So when you’re looking at it, it looks like a cabin, but it was built the exact same way as any other house. And instead of wood or vinyl siding, they put something that looks like logs. I don’t know the exact term for it. So it’s rare that a lender would be lending on what would be a true log cabin. And by true log cabin, which I do own one, by the way, is when they like stack the logs on top of each other and you’re looking at the same log on the outside that you are on the inside, and there’s that white stuff in between them that’s called chinking.
Avery Carl [00:47:15]:
So actual stacked logs, a lot of lenders don’t like that. And Brenna, I will let you kind of take it from there on what lenders look at when they see that.
Brenna Carles [00:47:27]:
So, yeah, I mean, if it’s common for the area, then it’s fine. But some investors for specific portfolio products will not allow, allow true log. And most of the time it’s because they don’t understand it. They think of a true log cabin as what? The cabin that Abraham Lincoln lived in. And they’re like, that’s not stable. We’re not lending on that. So there are some products and investors that won’t allow true log. I don’t know if people can see us when you post this, but like for example, Avery’s background right now is a cabin, but it has drywall in it and it just has that wood look.
Brenna Carles [00:48:01]:
That’s not true log. I don’t know if you guys, I’m going to tell my age, but when you were little, you played with Lincoln logs. If, if you’re in that age range and the logs would do this, it would stack on each other. And that’s what she means by true log. Or you’ll see log with chinking in the middle. Way back in the day, chinking used to just be horse hair and dirt, and they put it together and it hardened and it made that chinking. Now, chinking is a lot more, it’s a lot more sophisticated. Now, chinking is not made by horse hair anymore, but that’s what it means.
Brenna Carles [00:48:36]:
So like what she said, like if you’re in Texas and you’re buying a property in Tennessee, you probably don’t want to go with that Ohio lender because they’re not going to know the market. So you do want to have a company that knows the market and be like, yeah, it’s going to fly for this type of product. However, this product’s not going to work with that type of property. Here are your options.
Tim Grillot [00:48:58]:
Well, I want to say that one, I think it might be lower than 85%. That are not true log. I may be wrong. Maybe I’m just, it’s the world I live in, but I own four true log cabins. Four of my cabins are true log. My very first one, I’ve got several of them, but I have had clients who have, at the last minute, had lenders say, oh, wait, this is true. After getting the appraisal report saying, oh, wait, this is true log, we won’t lend on this. So I think it’s really important when you’re looking in a market like the smokies, there are other markets, I’m sure, but we’re in the smokies, so that’s what we’re talking about.
Tim Grillot [00:49:33]:
There are a lot true log cabins. So talk to your lenders right up front and ask them, are there any concerns if this is a true log cabin? And make sure that you realize the person you’re talking to is not the person making the decision. So when they say, oh, no, no problem, make sure they’re following up with their underwriters, with the actual lenders to make sure that it’s not going to be a problem. Now, I’ve never seen a problem with Fannie Mae and Freddie Macdje on true log. I have heard of it come up a few times, but I’ve never actually witnessed that. I have seen it come up with DSCR lenders. I have seen situations where one DSCR lender at the last minute, dropped it and another one stepped in and picked it right up. And we still closed on time, or maybe closed a day or two later, which is why it’s really good to work with a broker, because they’re going to be working that angle of it for you.
Tim Grillot [00:50:23]:
But there are a lot of true log cabins around here, and it does come up, and I don’t understand why some of them think it’s a problem. Maybe they think it’s a stability thing. I don’t know. But I love my log cabins. The people vacationing to the smokies love the log cabins. Again, if it at least looks like a cabin, we tell people all the time when you’re buying here. You do not want to buy a three two rancher in the middle of town that looks like the house that you live in. There’s got to be some rustic cabin experience to it.
Tim Grillot [00:50:51]:
And if you’re working with lenders that know the market, this is why we like working with local lenders who know the smokies, who do a lot of lending in the smokies because they understand that aspect of it. And they’re going to get you to close a lot, a lot quicker and a lot easier than somebody from out of state.
Derek Tellier [00:51:07]:
No, I was going to piggyback on that. I also have two of my cabins here at true log and I’ve had clients get a little bit. Nobody really got seriously burned, but I’ve had some go through some struggles. Exactly what Derek said. We get really close to the end and ultimately it can be the appraiser is the one that, you know, they market as true log. And that can cause a lot of problems, you know, and an extra appraiser may not. And that doesn’t. It kind of comes down to who’s defining it and what.
Derek Tellier [00:51:35]:
What is truly log cabin. And there’s different answers around that. So really, if you have any questions on that, if you’re putting an offering on something that could be a true log cabin, ask the questions. And, you know, Brennan and Derek both touched on this, that it’s nothing really, hardly ever an issue with a conventional loan. It’s more if you’re doing a DSCR or something like that. So, you know, ultimately my client went through three different lenders and thankfully we were able to get extensions and stuff to get us all done. But we ultimately found a DSCR lender that was able to do it, but it wasn’t without a lot of pain and headache. So just, you know, those are questions to ask up front.
Derek Tellier [00:52:10]:
And there’s nothing to be really scared of about a true log cabin. They’re awesome. It’s just make sure that, you know, the loan is going to go through.
Avery Carl [00:52:16]:
So, yeah, I got conventional on my true log and it was no problem. Sorry, Brenna. Go ahead.
Brenna Carles [00:52:22]:
Banks will have what’s known as overlays as well. So Fannie Mae’s have these rules. Fannie Mae has these rules, right? And then banks may have their own rules on top of it because they’re lending their own money. So some banks will not lend on cabins. And I remember, like, my career started at a bank and they were like, we don’t lend on cabins at all. And I was like, well, that sucks. Because that’s all my area is. And I was like, why? They couldn’t really tell me why.
Brenna Carles [00:52:45]:
And then it’s because they didn’t understand what the cabins were in this area. They were thinking Abraham Lincoln’s cabin. And you want to work with a realtor or lender that knows what they’re looking at when it comes to the property. So Derek and Tim would be like, yeah, this looks like a true log. Let’s make sure what product you’re in. Let’s send it to your lender and things and make sure they can do it. The ones that look like logs. So, Avery, you touched on how there’s a log on the outside.
Brenna Carles [00:53:13]:
It’s the same log that’s in the inside, and that’s true logs. Some of these cabins, guys, don’t get afraid. Like, we’re scared. When you look at the property and there’s, like, logs that are like this on the outside, but if you look on the side of it, it’s like half of a piece of wood, and it looks. It’s just like. It looks like it’s a cabin, but it’s really not. It’s drywall on the inside, and they just put those half of pieces of wood on the outside to give it that cabin look. I could do that in a bedroom here at my normal ranch or house or whatever and make it look cabin y, but it’s really not.
Brenna Carles [00:53:43]:
So just keep that in mind. Always check with your realtor and lender on this.
Tim Grillot [00:53:47]:
And we’ve mentioned drywall a few times. You will see a lot of places around here that have tongue and groove wood finishes on the inside. Same thing. Again, back to what Avery mentioned about it looking the same on the outside as the inside. That’s kind of. Usually your test of the true log is when you open the front door, do you look inside and can you actually see what looks like the same piece of wood and the same chinking? Tim mentioned appraisals. And one thing, Brenna, you may be the best person to answer this, and it’s a question I have that I think I know an answer to, but I’d rather hear it from you. When we’re getting appraisals on these cabins, are they looking at bedroom count? Are they looking at square footage? What is kind of.
Tim Grillot [00:54:28]:
As to your understanding, and I know you’re not an appraiser, but to your understanding, what is the kind of the primary item that they use? What determines the most value? Because we’ll see 1800 square foot, two bedrooms, and we’ll see 600 square foot, two bedrooms. Surely those can’t qualify the same because they both have two bedrooms. What would you say is the most important aspect when they’re comparing value?
Brenna Carles [00:54:52]:
I would say, well, there’s a lot. So it’s like all of it ties in together. So I’m trying to think of the most important. One would be age, and then two would be the square footage if it’s more, you know, and then they look at. They look at below grade differently than they look at above grade. So above grade has what you have, the roof, which costs more for the building. And so below grade, they’re going to appraise those basement rooms, even if they’re finished lower than what they would with the above grade room. So it depends on that.
Brenna Carles [00:55:22]:
They also look at the view. So if that little 600 square foot has a beautiful unobstructed view of Mount Lacante in the smoky Mountains, then that’s going to appraise more for possibly more than that one that has double the square footage and it’s in the woods and it’s on a hill that you can’t get up unless the weather is right.
Tim Grillot [00:55:43]:
So if we put two properties side by side, they’re both two bedrooms, but one’s 1200 square feet, one’s 600 sqft. View is the same, everything else is the same. Square footage is going to be the item that kind of probably puts one to be more valuable than the other, correct?
Brenna Carles [00:55:58]:
Yes, as long as they’re close in age.
Tim Grillot [00:56:01]:
Okay.
Derek Tellier [00:56:01]:
Also, bathroom count, let’s throw that in there too, because bathroom count can make a difference in my, what I understand almost more than bedroom count.
Tim Grillot [00:56:10]:
And the reason I bring, one of the key reasons I bring it up is a lot. We’re in a very urban area out here in the smokies. And one of the things that comes up a lot is, excuse me, we’re in a very herbal urban area, you know. You guys know what I meant?
Avery Carl [00:56:25]:
We’re rural.
Brenna Carles [00:56:26]:
Rural?
Tim Grillot [00:56:26]:
I feel like Brandon Turner. I can’t say rural. Anyway, a lot of septic systems and the septic system is going to determine what you’re allowed to advertise your property as in the local mls. So if it’s a one bedroom or a two bedroom septic, that’s what you’re selling it as. But if it’s 2100 square feet and people have additional rooms with beds in it and it has windows and it has all the things that the fire marshal requires, but it’s only a two bedroom septic and it’s only a two bedroom property. So you’ll see two bedrooms priced at six, $700,000 and you’ll see two bedrooms priced at $300,000. And this is one of the reasons I brought it up, is you might call it a two bedroom, but it’s set up with five sleeping rooms in it and it’s 2100 square feet. The value is going to be a lot higher.
Tim Grillot [00:57:15]:
So when you’re looking at properties, when you start getting that in your head about what’s this going to appraise for? What are my values? What kind of loan am I going to get? You got to take all these things into consideration. And don’t harp too much on the bedroom count. Obviously, it’s important, but focus on, make sure you understand the rest of it.
Brenna Carles [00:57:33]:
Yeah. The septic thing is the big key for when you’re listing a property. So I’ll see you guys list one. And it’s like a one bedroom, but it has a loft, which obviously you would use that for like another bedroom or a game room and you could rent it out for more. But it is true to that septic. And sometimes, and I won’t get in the weeds with this, but sometimes these cabins will share a septic with each other. There could be two cabins that share a septic. So, you know, just watch out for that.
Brenna Carles [00:57:58]:
And your, your realtor would be able to kind of let you know about all that when you’re looking at the listing.
Tim Grillot [00:58:03]:
I think a key point here is that the bedroom count and even the bathroom and the septic, we’ll say septic. The septic, you know, amount, what it’s qualified for is not going to have a big impact on the appraisal or on the lending. I think that that’s kind of the key point I was trying to make on that. I think.
Brenna Carles [00:58:19]:
Oh, yeah.
Avery Carl [00:58:21]:
Yeah, yeah. It doesn’t typically, and there was something. Oh. Related to loft bedrooms. So I’ve seen appraisals go both ways where they will count the loft as a bedroom or not count the loft as a bedroom, or they’ll only count a portion of the square footage of the loft as a bedroom. Because if it, if it slopes down, I’m trying to think of a word, a descriptive word to use. Oh, yes. A frame.
Avery Carl [00:58:51]:
So if it’s like an a frame where the, the ceilings in the top bedroom slope down, they only count like what you can stand up in kind of other things to watch out for is, are below grade space. So that can really affect the appraisal value negatively, you’ll think you have x amount of square footage and then the appraisal will come back because they lower than what you expected square footage wise, because they count the below grade square footage for less than they count the above grade. So it’s not that the actual square footage is less, they’re just saying that it’s worth less. So the price per square foot comes back less. Anything else I’m missing, Brenna or Tim or Derek, that sometimes can get, can get you on the loft screwed up.
Derek Tellier [00:59:39]:
On the loft thing with an appraisal. I’ve seen the access, the way the access is make a difference whether it’s. Some of these have like some of it’s a straight up ladder and some of it’s like a ladder staircase, you know, hybrid and some of its true staircase and different appraisers, you know, if it’s not like an actual staircase, they don’t want to count that space. So access to the law sometimes matters.
Tim Grillot [00:59:59]:
Yeah, I think that. Go ahead, Brennan.
Brenna Carles [01:00:02]:
I was just gonna say, a lot of people like probably gonna listen to this and be like, well, how do I know? You don’t. It kind of, the thing is, it’s the appraisers opinion. Good appraisers, I will say around here, will value what, like how avery said they will value. If it’s an a frame, they’ll value the space you can stand in. But if it’s just a ladder access, they’re not going to give it much worth of because I mean, I don’t think a 70 year old is going to be quick to climb up that ladder to sleep up there. It’s going to be kind of maybe a kids thing. So just keep that in mind. It is up to the appraiser’s discretion.
Brenna Carles [01:00:34]:
And you can always ask your real turn lender, like what’s your opinion? Because again, it’s your opinion. And most good real appraisers will appraise accordingly. There are some appraisers out there that won’t appraise like won’t count that at all. So just keep that in mind.
Derek Tellier [01:00:48]:
I think that’s another point is using local lenders that. No, you know, local lenders typically lead to local appraisers. And the more local the appraiser is, they more, they know the market more, you know, and they understand what’s normal, where you are, whether it’s the smokies or anywhere else. And same thing with the lender. I mean, if it’s not even just the area, but using lenders that are familiar with a short term rental or these other loan products. If you, if you work with a lender that only does primary home loans, they can almost get, I’ll say, scared of doing a investment loan. And because they’re scared, they sometimes underwrite more conservatively and don’t give you the proper preapproval. So using someone that knows this space is really important.
Avery Carl [01:01:30]:
Oh, go ahead, Derek.
Tim Grillot [01:01:31]:
We could probably do an entire episode just on appraisals and probably wouldn’t do us good because none of us are appraisers. And the chances of us getting an appraiser on the show is probably pretty tough because they tend to be pretty introverted and not want to be people that are out there putting themselves out there. Appraisers are held to a very high standard. As much as we’d like to think that there’s this like perfect check the box and everything works on appraisals. Appraisals are like anything else. They are one person’s of value, opinion of value on any given day, regardless of who the appraiser is, regardless of where they came from, if they’re having a bad day, that’s going to hurt the value of your property. That’s just reality. Right.
Tim Grillot [01:02:07]:
So it’s unfortunate and big, big caveat. We don’t get to choose our appraisers. The lender doesn’t get to choose their appraiser. There are rules that came in because of the great Recession and the big crash we had in 2008. There were rules that were put in place that prevent us from doing that. Now, a commercial loan, you can pretty much pick your appraiser. Your lender can pick your appraiser. Doesnt mean its going to work to your advantage, but you do have a lot more say in that, or at least your lender does in who the appraiser is on those commercial loans.
Tim Grillot [01:02:39]:
But in conventional and dscrs, you dont, you have no say whatsoever. Correct me if Im wrong on the DSCR stuff, Brenda, but I mean, you have no say in that. So we can talk about appraisals all day long. Ultimately, it’s not going to matter because whoever appraises your property is going to have an opinion whether you like it or not.
Brenna Carles [01:02:56]:
I want to say you also want to work instead of just a local lender, you also want to work with somebody that’s really known, like they like the Smoky Mountains. You guys are well known, you know, in the Smoky mountains. So they would want to work with someone like you as opposed to someone outside of our market that may still be able to show properties and things of that nature, but it doesn’t necessarily mean they’re going to know our appraisers around here. You guys will develop relationships with the appraisers around here because you’re going to see them, you know, and that carries a lot of weight. Appraisers are not supposed to go off of, based off of what their mood is that day, but we all know that that is a factor. So if they do not like you as a realtor or do not know you, and they’re having a bad day, like, and I’ve seen an impact appraisal before, so, you know, it’s good to have those realtors local in your market to really know what they’re doing and get around that.
Avery Carl [01:03:51]:
Yeah. And I will say, too, that you can have two different appraisals on the same property by two different very qualified appraisers and have wildly different numbers. So just because it appraises for one thing one time does not mean that a different appraiser would not appraise it completely differently, and it doesn’t mean that either of them are better or worse than the other. It’s just kind of how appraisals work sometimes. It’s not a perfect science. And I’ve seen. I’ve seen it come back. We had one that was like 75,000 under, and everybody was like, oh, my goodness, this can’t be right.
Avery Carl [01:04:31]:
Like, this cannot be right. So the buyer went back, switched lenders, got a different appraisal, and it came back at value. So it really just depends, like anything.
Brenna Carles [01:04:41]:
Robert.
Derek Tellier [01:04:41]:
Hey, can we expand on how to touch just right there, Avery, you mentioned switching lenders and getting a new appraisal. You can’t. You can’t just, if you get a bad appraisal with a loan, you know, whatever your first lender is, you can’t just say, oh, I want a new appraisal. So it’s a little bit of a. You have to switch lenders to get a new appraisal. And there’s, you know, with a broker.
Brenna Carles [01:05:03]:
That’S a pro about a broker I didn’t think about versus a bank. So if you get a, the bank gets you an appraisal, and it sucks, well, then you have to go to a whole other bank or somebody else to do that loan with the broker. They work with multiple investors. So if we know that appraisal came back really bad and the investor won’t let us order a new appraisal, sometimes they will on the same deal. It just depends on the circumstances. We have other investors we can send that to and reorder an appraisal, things of that nature where you’re still in how we have all your documentation, or the brokerage that you’re working with has all of that. And so there’s different opportunity as opposed to a bank. It’s like, nope, you’re done.
Brenna Carles [01:05:41]:
Either go somewhere else or you’re not getting this property.
Tim Grillot [01:05:43]:
And there’s an in between in that. If the appraiser, assuming the appraiser is reasonable, if he missed something, or you can show him different comps, you can request a reconsideration of value on your appraisal. So let’s say you get an appraisal that comes in $100,000 low and you’re working with your agent and your agents like, I’ve got five comps here. I’m looking at the comps on his appraisal. I’ll give you an example. Because of the Smokey, Smokey Mountain association of Realtors is ultimately a smaller association, very niche to severe county, and are adjoining Cock County. Knoxville is a large MSA, biggest MSA. Ten times the number of members in the realtor association.
Tim Grillot [01:06:23]:
And there are a lot of appraisers that are Knoxville appraisers that will take jobs down here. But they may not have access to our mls. So they’re only using listings that are in the Knoxville MLS, which means they may be missing a lot of really good comps. I have had appraisals come back that I thought were low. When I looked at their comps, they were all comps that were only listed in the Knoxville MLS. Now they were local properties in the Smokies. They just weren’t listed in the smokies MLs, meaning that they missed some really good comps. I went in and found additional comps that were very good, very justified.
Tim Grillot [01:06:55]:
Turn those in with my concerns to the lender. Turn them over to underwriting. Underwriting approved. Yes, this looks legitimate. Sends it to the same appraiser. So this is where the appraiser has to be open minded and willing to reconsider his value. And many of them are very egotistical and stubborn and will not. But if they are willing to, they might come in and say, oh, thanks, I missed these.
Tim Grillot [01:07:19]:
I didn’t know. I have had some very significant changes in appraised value because I put in the effort to do that. So recognize that if you do, we don’t see it much today. It’s not a big problem right now. Values have climbed. Everything’s caught up. But two years ago, this is a market cycle. You might be watching this two, three years from now, and we’re back in that upswing cycle again, where you’re hitting what we hit back in 2021, which is values were climbing faster than the comps could, could get us.
Tim Grillot [01:07:46]:
People were willing to pay. So this is where this type of strategy is going to come into play. But you will have that option if you can justify an increased value of getting that appraiser to reconsider it.
Avery Carl [01:08:01]:
All right, let’s switch gears real quick and talk about creative financing, because with interest rates going up over the past year, a lot of people have been interested in that method. So by creative financing, I mean a number of things. So could be owner financing could be subject to financing. So does anybody want to give me, the listeners, a definition of either of those things?
Tim Grillot [01:08:28]:
I’ll jump in. Seller financing is pretty straightforward. It means that the seller is carrying the loan. Maybe usually the seller has to own the property outright in order to do that. Maybe they have a low balance and your down payment is going to pay it off and they’re going to carry the rest. Maybe youre getting a loan for. I looked at a property earlier this year that was coming through a wholesaler where I was going to get a loan for 500,000. The seller was going to carry a second for like $86,000.
Tim Grillot [01:08:58]:
So he was basically covering a portion of my down payment. Now, that only works with conventional financing, I mean, commercial financing. So seller financing is the seller is carrying the note. Terms can be whatever you and the seller agree to. It doesn’t matter. Whatever the two of you agree to, subject to means that you are taking over the existing loan. People who bought two, three years ago might have a 2.53% interest rate, and you want to keep that rate. So.
Tim Grillot [01:09:25]:
Okay, a couple of problems with that. One, the seller is probably not selling it to you for what they owe, and they probably want more than 20% on top of that. So let’s say it’s a $600,000 valued cabin and they have a $300,000 mortgage at 3%. It sounds great. I want to take over that mortgage, assuming you can get everybody else to agree to it. They still want another 300 grand. So you still have to come up with another 300 grand somewhere, somehow to cover it. You may or may not be able to do that.
Tim Grillot [01:09:51]:
So that’s the briefest definition of the two of them. There’s tons of resources out there. There’s tons of people that preach about this. We’re talking about the smokies. So I want to hit on the most important aspect of it is neither of those are going to be common in the smokies. Doesn’t mean they don’t exist. I’m not going to try to pretend that they’re impossible, but talk to the people who are doing tons of that stuff or look at their stuff online. The most important thing that every one of them is doing is spending a ton of money on marketing direct to sellers who have specific circumstances based on their previous loans.
Tim Grillot [01:10:25]:
Because they’ve dug in, they’ve spent a lot of money to try to uncover these deals. The average person is not going to find these deals. Many of these properties have been second homes. They are not paid for. People owe money on them. They can’t sell or finance it. They want their cash. They’re trying to sell today because market’s up and they want their money.
Tim Grillot [01:10:44]:
Again. Do they exist? Sure. Are you going to find them every day? Absolutely not. You’re going to work long and hard to try to find one of those deals. I’m in this market every day. Tim’s in this market every day. I promise you. So if we could find these seller financing or subject to deals, we’d be buying them, guaranteed.
Tim Grillot [01:11:06]:
They’re just not. Again, they’re out there. You got to ask the questions sometimes, but you’re not going to see them often.
Avery Carl [01:11:12]:
Yeah. Yeah. And I wouldn’t say don’t ask if they wouldn’t be willing to ask if the seller wouldn’t be willing to. But I would just say, like, don’t, don’t bet on that. Anybody who’s. Because getting those kinds of deals, like Derek said, is spending a lot of time and money digging and marketing in a multitude of different markets at any one time. So it can be difficult. It’s certainly not impossible and always worth asking.
Avery Carl [01:11:39]:
But just don’t be discouraged if someone doesn’t give that to you. Because, I mean, if it’s me, I mean, I’ve, I’ve said this a number of times, so sorry if you guys heard this already. If I’m selling a house, there has never been in all of the 245 doors that I’ve bought and all of the several thousand deals that the short term shop has done, I’ve never sat across the closing table from the, the person who’s buying or selling with whether I’m buying or selling and said, I want to be wrapped up with this person for the next ten years. It’s just not something I’m willing to do. So, um, it’s, it’s difficult. It’s out there. It can be. But just understand that most people are going to want to take their money and run and be done with it and never think of it again.
Derek Tellier [01:12:23]:
Robert and Seller financing doesnt necessarily mean better. A lot of times a conventional loan is going to have better terms, those kinds of deals. Ill kind of compare it to DSCR a little bit. Its more like if theres a reason you cant get another kind of loan, its like why would you want seller financing? Exactly. Kind of what Avery said. I dont want to deal with an individual coming knocking on my door for my payments or whatever. I just dont want to deal with the person. The only reason to do that is if they’re like at like you can’t get any other kind of deal, you.
Brenna Carles [01:12:52]:
Know, so, so really quick on top of that, I will see a lot of people in these groups be like, I’m looking for creative financing. Why? And you know, a lot of people just see that. And again, they think that they need it. They don’t need it if they’re just, you know, starting out their real estate investing venture. But on top of the creative financing they just mentioned, we also have hard money loans and we didn’t touch on HeLOCs. So HeLocs can be, if you have equity in a home like your primary residence, you can pull equity out in a home equity line of credit and use that towards down payment or you know, maybe coupling that with seller financing. If you do find one of those unicorn deals, that would be an option. Hard money loans are loans that can be given.
Brenna Carles [01:13:33]:
It can be a person with a lot of money. It can be a company or what have you, but they, it means what it says. That is hard money. Which means that interest rate is astronomical. Probably the terms aren’t like the 30 year amortized. You’re going to have to refinance out of that as soon as possible, you know, if you need to. So those are other ways of getting money towards your down payment or purchasing a home. If you don’t have that cash flow on second homes, you can also get a gift.
Brenna Carles [01:14:03]:
So if you’re just putting 10% down, 5% has to come from your own funds and the remaining 5% can be gifted to you as well as closing costs. If you’re putting 20% down on a second home, Fannie Mae throws that rule out the window and you can get a gift for 100% of those, of that down payment and closing costs gifted to you?
Avery Carl [01:14:25]:
Yeah, I guess we didn’t talk about gifts. So can you get gift funds on what’s what, how much, how much of your down payment can be gift funds on a conventional investment versus a second home?
Brenna Carles [01:14:39]:
You can’t have gift funds on investment only. You can only have it on primary and second homes.
Avery Carl [01:14:45]:
And what’s the limit on that second primary?
Brenna Carles [01:14:49]:
You can do 100% no matter how much down.
Avery Carl [01:14:51]:
I don’t care about that. On the second home.
Brenna Carles [01:14:54]:
Yeah. 5% has to come from your own funds. The other 5% has to come, it can come from a gift. And then if you’re paying 20% down on a second home, 100% of it can be gifted.
Avery Carl [01:15:05]:
Okay. Gotcha. All right, I think we’ve kind of covered all of the financing strategies. Do any of you guys have anything that you feel like warrants sharing, anything you run into often with either yourselves or your clients?
Tim Grillot [01:15:19]:
I wouldn’t say often, but I’ll throw in a, you know, again, the creative side is things. I bought one cab in cash a couple years ago and then six months later took out a line of credit on it. So I have financing that is secured by that cabin, but it’s a line of credit. So that’s, you know, it works the same way. So if you sometimes, if you can buy cash, you recognize that you can buy cash, you can refinance later, or you can get a line of credit. There’s other ways to tap into the equity. If you’re buying real estate, you’re doing a lot of real estate. You want access to that equity.
Tim Grillot [01:15:52]:
That’s what allows you to continue grow. Forget Dave Ramsey telling you you should pay it all off. If you pay it all off, youre not expanding. Great. Youve got a house that you own, but meanwhile, youve got three, four, five, $600,000 that you could have bought 345 more. That would lead to cash flow, were about cash flow, were about making money, were about creating financial freedom. So theres lots of ways to tap into the equity on your house. Refinance obviously being the easiest one, as long as the interest rates and numbers make sense.
Tim Grillot [01:16:22]:
But there are other options out there. We could go, I mean, really, we could go on for hours about the different aspects of it, so, but just know that there’s more out there. Hopefully, this was get your balls rolling and get you thinking more and get you asking more questions. We can’t answer them all today.
Derek Tellier [01:16:38]:
Yeah, I could talk about this all day.
Avery Carl [01:16:41]:
Yeah. And, well, one thing I want to hit on with that is as you are potentially tapping equity to buy more properties and things like that, especially now, be very conscious of your home’s value and the market. Don’t get yourself into a situation where you’ve tapped so much equity that if one house doesn’t perform that, then you can’t pay back your heloc. And don’t, don’t create a house of cards for yourself. There are lots of conservative ways to do that. But just don’t, I would say don’t tap like every single dollar and get yourself so stretched that you cannot unstretched if things get tight.
Tim Grillot [01:17:20]:
Definitely.
Avery Carl [01:17:22]:
And on that note, I guess we’ll wrap it up, guys. If you have any questions on buying short term rentals in the smokies, we have a free zoom every Thursday@strquestions.com. or also join our public Facebook group. It’s called short term rental, long term wealth. We are all on there answering questions every day as our 45,000 other investors. So you know how to find us and we will check back with you guys soon. Thanks, guys.
Derek Tellier [01:17:51]:
Thanks, everybody. Bye.
