On this Flash Back Friday show, Jason Hartman is joined by Joe, who gives us details on financing. They take listener questions and discuss various concerns of real estate investors when it comes to financing. Joe goes into what is needed when taking loans out for 20 properties. You’ll learn the differences in refinancing methods and how much you need in reserves.
Jason Hartman 0:00
Welcome to this week’s edition of flashback Friday, your opportunity to get some good review by listening to episodes from the past that Jason has hand picked to help you today in the present, and propel you into the future. Enjoy.
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it on now. Here’s your host Jason Hartman with complete solution for real estate investors.
Jason Hartman 1:03
Welcome to the creating wealth show. This is Jason Hartman, you’re grateful host, thank you so much for joining me today. Gosh, several things to report on today. But our main topic of the show will be something that we did at our recent Jason Hartman University event in San Diego. And that is a lightning round of lender questions. I thought this was a pretty good idea at the event. And so what we did is we added a bunch of questions to that lightning round and rather than, you know, allowing the lender who we’re going to have on our lender, Joe, we thought we’d make him answer the questions really quickly and just get to the point so that you can have some some just quick, snappy, memorable, take home value. You know, a lot of things get lost in details. In fact, I was Well, I do this I know it’s probably not the best use of time. But I was having another debate on Facebook yesterday, when I was in Austin, Texas. And, you know, I just won’t learn my lessons. Good friend of mine, very, a young young friend, very left wing has these silly ideas I used to have these silly ideas to when I was young and didn’t know any better. Anyway, he criticized me for posting memes, you know, you know what a meme is? It’s that little, it’s like a little photo image. These spread around pretty virally on social media. Not you know, really writing a little mini essay. And I said, you know, a lot of times the simple truths are the best. The quick answers, the just the simplicity. It just cuts through all the BS. I don’t know if you remember that scene in The movie Amadeus. You know, the movie about Mozart. Mozart was really one of the greats. No question. I love Mozart. You know, I really almost never listen to classical music anymore. Yet it is really so good. Mozart is phenomenal. But there’s a lot of great music new and old, of course, anyway, at the risk of being on another tangent here anyway, he said, You know, I said, Look, a lot of BS comes in a lot of words sometimes and just the simplicity of cutting through it with an image and very few words on it really makes a lot more sense. So that’s what we do with a lightning round and we’re going to see this more often on the show. Maybe Actually, we should turn the tables and have somebody lightning around question yours truly. The guy who does get off on tangents after I just settled on, I felt like a bit of a hypocrite.
Jason Hartman 3:58
But anyway, Whatever. We’re all hypocrites a little bit for sure. So we’ll get to that in a moment. But first, a couple things to report on a couple of news stories. This one’s funny, but it relates to commandment number three. fruit cake executive punished for wild embezzlement. Yes, this is a Newser story. I just saw it yesterday, and I just had to share it with you. Because you know, my commandment number three, thou shalt maintain control. And this is not an example really about shareholders. But who knows this company could have lots of shareholders. We don’t know. That’s not what the story talks about. Much. It’s just about embezzlement and what happens and what risk you are at when you are one of these investors who does not maintain control in your investments. So you could leave yourself susceptible to the fruit cake executive. I know that’s kind of funny, but this is a fruit cake company. Okay. It says a former comptroller at Collin street bakery in Corsicana, Texas. Famous for its fruit cakes will have to go without, as he spends the next 10 years behind bars. Prosecutors say Sandy Jenkins 66 years old, ran a massive scheme to defraud the bakery and forged 888 checks. Now why did they just catch him before 889? Or did he quit? I mean, I don’t know. It’s just kind of funny from December 2004 until he was eventually fired in June of 2013. During that time he embezzled over $16 million from the bakery. This is unbelievable. Like, how could this happen right over $16 million and use that money to bankroll this lavish lifestyle prosecutor say, and the article goes on care to get a taste of it. You know, they’re being funny here. It involved 223 trips on private jets to places like Aspen and Napa a second home in New Mexico, a new car whenever they needed an oil change, so they didn’t even you know why go and wait 2030 minutes to get an oil change when you can just buy a new car right? Crazy. Remember, you’re listening to flashback Friday. Our new episodes are published every Monday and Wednesday.
Jason Hartman 6:52
$11 million charged on a single black American Express card. Now you gotta wonder Does the credit issuer American Express black card in this case, you know, they invited me to get one of those cards a few years back, and I declined because they couldn’t tell me. What was so good about it. I think my American Express Platinum card is the most overrated overpriced credit card around. But I gotta tell you, now we’re on a tangent, aren’t we? Jason? Yes, we are. Okay, keep going a little bit longer. Those airport lounges are the coolest perk. But all of those points, I have almost 1 million points on my Amex card, I find them kind of a ripoff to actually use so I rarely use them for anything. Because the exchange rate which by the way, listeners is an example of what happens in inflationary environment, because your dollar becomes worth less right. And that’s really how these points systems work on these reward cards. Oh my God, we really are Getting on a tangent, aren’t we, Jason? And what they really show you is the devalue the debasement of your points, every time they change the rules or raise the price and their silly little stores, or they try to have you exchange them. They say, well, you can exchange the points for dollars on the card. Well, sure, you can, and you can turn those dollars to buy an airline ticket. But the exchange rate stinks. It’s awful. What you really want to do is exchange those points for airline miles, because those have a pretty good exchange rate where you can buy, you know, a business class ticket to Europe for maybe 120,000 points, right, or miles, whatever you want to call it. But otherwise, that same ticket if you convert it to $1 price ticket, it’s an absolute ripoff. And then of course, you need to do that because they have so many flippin rules and restrictions and blackout dates and you know, like one seat available on each plane. Once a week when they fly you know many many planes every week. It’s it’s of course a ripoff. Of course all of you listening I’m sure have had this experience. It’s a bit of a scam, isn’t it? Yes, it is. Okay, whatever. Anyway, I digress, of course. So
Jason Hartman 9:15
the American Express black card i thought was outrageously overpriced. I didn’t get one but this guy got one stealing all this money with his, you know, embezzlement career. Now think about it. You could have been a shareholder in this fruitcake company, right? And you would have lost money because of this embezzlement so you leave yourself susceptible when you don’t follow commandment number three, to all of these levels of risk. And you know, I think the financial advisor community and we’ve had many representatives on talking about that about you know, how not to get screwed by your financial advisor your your guy that wears the nice suit, you know, that works at Merrill Lynch or Ameriprise or Edward Jones, who just got fined for some big scam They were engaged in blah, blah, blah. I don’t know, search it on the internet. I’m sure you can find it. I don’t have the details in front of me. I heard it while I was listening to Rick Edelman’s show, over the weekend, rarely ever listened to terrestrial radio, because it’s a waste of time with 22 minutes of commercials for every hour of content. Well, 38 minutes of content, 22 minutes of commercials is about the equation there. But I had Rick Adelman on the show as a guest before and you know, you can find that episode if you go to Jason Hartman calm and search it and I like his By the way, you know, you can look it up on my website, Jason Hartman calm or just find the source material that Edelman did with the 10 what it’s called the 10 great reasons to carry a big long mortgage and never pay it off. And he doesn’t even mention really, in any real way, at least the concept of inflation induced death destruction. That is my big point about that, but he does mention some other Really good benefit. So I like Adelman and that’s Ric Ric Edelman. So you can you can find that, but it’s it’s good material, but see the financial advisor community in general. And I’ve had many of them on talking about how to pick the right advisor and all of this kind of stuff. But they’re only talking about the front end of the equation, right? They’re not talking about all of the layers of the onion that you have to peel back as you go along in the supply chain. You know, they’re not talking about what so say you get a great advisor who’s honest, who’s competent, who’s just, you know, got the best integrity of the world, but they put you into investments, various funds, and so forth. And all those managers could be skimming the profits off the top, ripping off the investors, and then all the companies in which they invest that those funds invest another layer, the Board of Directors, the C level executives, you know, they’ve got their hand in the till, and then You might have some employee like the fruit cake bookkeeper who’s got his hand in the till, okay? You know, there’s just no way you can control all of this stuff. So be a direct investor. You know, we complain that, gosh, you know, our property manager is a problem that’s like one layer. And it’s really easy to catch him, by the way. Anyway, you know, you get it. You understand. We’ve talked about it on many episodes. But just to finish out this article, it’s mind boggling, okay? It says he pleaded guilty to mail fraud, conspiracy to commit money laundering and making false statements to a financial institution. His wife also pleaded guilty to money laundering, the money laundering charge, was sentenced to five years of probation and 100 hours of community service. You know, the woman always get off easier. Now, you know, they, you know, if they were to get divorced, right, wouldn’t she get half? Shouldn’t she be just as liable? Or is it because he was the one really doing it? Because he was on the job and she was just the recipient of the she’s like an accessory after the fact. Isn’t that what they call that? Why is it that, you know, you look at Jim and Tammy Faye Baker, you look at any of these like couples that basically commit these financial crimes or at least, you know, the second tier the spouse at least gets all the benefits of it just like the husband does. Right? Maybe the husband does it. You know, Bernie Madoff’s wife lived this lavish life for many years. Let I mean, what’s her name Ruth paid off? I mean, did she go to prison, but she gets sentenced anything even community service, go to a class, learn how not to learn how to know if your husband is screwing everybody. Right? That could be the class. You know, it’s like, when people get arrested for drunk driving, you know, they have to go to like a class right and then pick up garbage along the freeway and all that good stuff and spend a night in the drunk tank, you know, in jail. So, I don’t know. It’s, it’s just one of these things. It’s our society’s inequitable and ways, but here’s the deal. So the woman she had she has to pay the couple must also pay $12.7 million in restitution after $4 million in cash and property was recovered including a $150,000 car get this 41 bracelets. I bet none of those were his I bet they were all her bracelets 15 pairs of cufflinks. Well, admittedly those were probably all his okay 21 pairs of earrings I bet those were all hers but you know nowadays guys wear earrings too. But you know, he was probably a comptroller conservative type writes probably wasn’t wearing earrings and bracelets. 16 furs. I bet none of those were his maybe he had one for and she had 15 furs, okay. 61 a handbags. Those were probably all hers. 45 necklaces, probably all hers. Nine sets of pearls. 55 rings 98 watches I bet a lot of those watches were his a $50,000 wine collection, and a
Jason Hartman 15:06
$58,000 Steinway electric piano reports CNS. And CBS Dallas.
Jason Hartman 15:14
Evidence suggests that this couple was spending $98,000 per month, though there’s legitimate income was $50,000 per year. Okay. So that’s why I raised the question of, does the issuer of the credit card have any liability when a guy that is legitimately making $50,000 a year, gets an American Express black black card and charges all this stuff? It’s kind of an interesting question. Does any of the liability fall on the issuer of credit? Interesting question. Okay. I’ll let you ponder that. under the category of that it’s an amazing time to be alive. It is an amazing time to be alive. You always hear me say that. It’s my, my trademark quote. It’s an amazing time to be alive. Speaking of an amazing time to be alive, us real estate so desirable around the world. You know, I’ve been on the financial survival network many times as a show guest I’m a monthly commentator on their show. They’ve been on my show, one or two times. Victoria strainer i think is how you pronounce it. I think I’ve had her on my show. Well, she was on there is commenting recently about how China the Chinese government is now making it even easier, and I don’t know why they’re doing this. There must be a lot of pressure on them to do this. Because if I were in their shoes and want to be the, you know, typical controlling Communist Party, I wouldn’t do this but they probably just have a lot of pressure. And I don’t know the details, but they are now making it easier for their citizens with net worth over $160,000 to buy Assets overseas. And they are all we are looking for a rush another flood as if there hasn’t already been a big enough flood of Chinese buyers buying up us real estate. Well, supposedly that flood is going to even get bigger in the months and years to come, because they are devaluing their currency. And their citizens are looking for a safe harbor. And the US has always historically been that Brinks truck. That’s the metaphor of the Brinks truck for foreign investors. You look at you know, Florida is full of European and South American and Central American money all over the US is full of Chinese and Russian money and Ukrainian money. And, you know, I tell you, we have your complaints about the US, but when you compare it and it’s all game of relativity, in comparison You look around the world and just do your comparison. This is the best poorly managed country in the world. Okay, the best poorly managed country. And I’ve certainly got my complaints and I understand them deeply and I spout off about them all the time. But you just do that survey around the world. And you look at relativity and, and that’s what the game is. It’s a process of elimination. When people look for places to invest their assets and store their wealth. It is nothing more than a game of elimination. And they just go down the list and they say, Look, my country isn’t as good as the US. Okay, let’s eliminate, eliminate, eliminate the choices, and the US looks pretty darn good for these people. So let’s get to our lender. But I guess before we do that, Newport, Rhode Island coming up in just a few days. We’re looking forward to seeing all of our venture Audience members and guests there. We’re going to have a great time. You can still get in as a last minute attendee if you want, go to venture Alliance mastermind.com and check that out. You can always come as a guest without being a member. And we’re going to have an awesome time there, masterminding. We’ve got a couple of great speakers, one that’s going to teach us all about the ins and outs of hard money investing, investing in notes and paper assets. Another one who is going to share his story of how he went from zero to 1800 units, 1800 units in just about four years. some amazing story. I’ve heard it, and he’s gonna be there sharing that with the venture Alliance members. So again, this is the elite group of real estate investors. We’d love to have you come as a guest, venture Alliance mastermind calm kind of my special group, of course, coming up we’ve got meet the masters of income property early 2016 Go to Jason Hartman comm check that out. We got some great properties, by the way in Orlando. Oh, and I do have to mention one more thing. We made a mistake, which we have done many times. Episode Number 565 of the creating wealth show was supposed to be the Orlando market profile. So that episode was replaced, go listen to Episode 565. We’re gonna replay that in the not too distant future on an upcoming episode here because some people just won’t catch it. Because it doesn’t appear as a new episode in your feed just the mechanics of podcasting, but Episode 565 Orlando market profile, check it out some really good properties there. Go to Jason hartman.com and click on the Properties page and you’ll see those only we’ve got a bunch of other great shows coming up. So stay tuned. Just some really good interviews I’ve been recording coming up. And again, my intro is going long. I never think it’s going to be that way here. But this episode will go a little longer. Here’s our lightning round with some quick answers to lending and financing questions. So let’s get to that. Here we go.
Jason Hartman 21:08
Hey, you know, we get so many questions from all of you great listeners about financing and financing is obviously a complicated subject. But we all know from listening to the show that I talk about the beautiful power of leverage how the mortgage on your properties is really a huge asset. Most people think of it as a liability, but it’s really an asset, and how this mortgage is susceptible to the wonderful process of what I call inflation induced debt destruction, inflation induced destruction. And as we talk about this stuff, it raises so many questions about overcoming the hurdles and jumping through the hoops and getting financing on properties. And I know you all have lots of questions. So I brought Joe in one of our preferred lenders to talk about some different things. And what we’re going to do first is we’re going to start out with a lightning round. I’m just going to throw quick questions at him. He’s going to give you quick answers. And then we’re going to dive into another topic, maybe it’ll be calculating debt to income ratio, talking about closing costs, or talking about buying down the rate and pricing a mortgage in terms of points versus rate. So let’s dive in. Joe, my first question for you. You’re ready for the lightning round? Yeah, sure. Let’s go. Okay, good. It’s gonna be quick. How many properties? Can I Finance? And can I finance them all at the same time?
Well, you can finance up to 10 properties through Fannie Mae and yes, with one lender, you can finance them all at the same time, if you purchase them all at the same time, under under different contracts,
Jason Hartman 22:45
okay. And that should also you should say 10 per spouse. So if each spouse can qualify for the loan, you can do 10 each, right?
Correct. And we have income income for both spouses and they both qualify, we can we can do 10 each.
Jason Hartman 22:59
Okay, fantastic. Up to 20 on the normal agency loans, then we got to get creative with some more special financing. And we’ve talked about that on other shows, what is the required downpayment for each property? And how are the interest rates affected depending on the downpayment?
So for the first four properties that you have financed, the minimum downpayment is 20%. And then properties five to 10 would be a minimum of 25% down, and there’s about a quarter point differential and raised between 20% on 25%, down on a 30. year fixed,
Jason Hartman 23:31
okay, so in other words, if you’re willing to put 5% more down, you can get the rate reduced by a quarter point because it’s, it represents lower risk to the lender, right?
Right. It’s a stronger fire with a larger down payment.
Jason Hartman 23:43
Okay, good stuff. And again, personally, if I were getting that loan, I would not put the extra 5% down. I’d rather pay the quarter percent more and have more leverage, but that’s a personal decision each of us need to make, Okay, can I finance properties instead? I have an LLC inside of an entity. And I know the answer to this, but go ahead,
not not to residential financing. No, you must find them and finance them in your individual names with your own income and credit,
Jason Hartman 24:12
good stuff. There are ways that you can deed them over to a single member LLC later. Of course, we’ve talked about that on the show before, there are some some relatively minor risk in that due on sale clause problems. But I’ve even though that’s a theoretical problem, I’ve never seen it happen in actual real life. But again, there are some things you should know we’ve discussed on other shows not time for that here. Is it possible to take one loan out for multiple properties? Some people refer to this as a blanket loan blanket financing. And when you go over 10 properties for each borrower, you know, I’m talking about spouses that could do 10 each, or 10. If you’re single. There are companies out there that we’ve had on the show and we’ve talked about on the show who do these blanket loans, do you deal with that kind of stuff at all.
Not really as a direct lender to the to the investors, Fannie and Freddie, we, we would need to have we would not be able to cross collateralize multiple properties under one loan. No. Okay. Not residential. Yeah.
Jason Hartman 25:13
So each loan goes with each property. In other words, right keeping it right. It’s the simple standard way. And again, these the the stuff we’re talking about today, listeners are the most desirable types of financing with the lowest rates, the longest terms, the maximum leverage, this is the most desirable stuff. You can do more creative stuff, with commercial financing with specialty financing from hedge funds and private equity groups that we’ve talked about on other shows, of course, hard money, you can do really creative stuff. But again, what we’re talking about is the premium, fantastic, low interest rate, really inexpensive financing here, the super desirable stuff that you use for your first 10 properties. So you can’t do blanket loans. How is that The borrower’s credit score affected by multiple applications on multiple properties.
Well, if you have multiple applications, multiple lenders, each lender is going to make an inquiry on your credit score, which can obviously impact the score over time. You know, when I do multiple deals for one client, that credit score is good for 120 days. So at most, I would pull a credit, you know, three times in one calendar year for each client,
Jason Hartman 26:28
and each inquiry on that credit report reduces the FICO score, right? Because lenders do not like to see inquiries,
it can, it can. It can have an impact if you do it like regularly, like every month or so. Good bugs.
Jason Hartman 26:44
Okay, if I finance properties in my own name, can I quick claim them to the LLC that really goes back to the other question we discussed a moment ago. Did you want to make any additional comments on that besides the ones I made or was that good? What I
said, No, it’s good. It’s good. You said there’s one the one thing that I Seeing is you know, if you change the if you change the title into your LLC ports closing and changing insurance, then the insurance company will notify the lender and that due on sale clause could come into effect. And I’m glad
Jason Hartman 27:14
you brought that up because a lot of investors miss this important point. Remember, if you do put your properties into an entity, like an LLC could be a corporation, but most people use LLC s. For real estate, it’s usually better if you do that. Don’t forget to change your insurance because a different now a different owner owns the property and that’s the owner that needs to be insured. It’s the it’s the LLC in this example, not you personally. But of course, that’s how the lender is going to know that you did the transfer and it could create other problems. So this stuff does get kind of complicated. That’s what we’re all here for to help you navigate this. And we can refer you too attorneys to dive into this stuff in more detail if you want. Okay, speaking of attorneys, we all love attorneys. Right. Just kidding. Can I use a power of attorney? And this is one of your frequently asked questions. I’m not exactly sure what they mean by that question. Does that mean a power of attorney to go to the closing? And this depends what state you’re buying and because closings are handled differently in different places, is that what they’re talking about when they say power of attorney?
Yes, to certain degree like domestically, we can always send a notary anywhere in the country to have you sign the documents, but for borrowers who may be out of the country or who may be traveling, at the time of closing, a power of attorney may be required for for that person to sign on their behalf. Okay,
Jason Hartman 28:39
good. And they can do that, right?
Sure. Yes, absolutely. Okay. Do I need an attorney? Or do I just have the title company close my loan? We never, by the way, want to say don’t have an attorney. If you have legal questions about your transaction, you know, we’re always just going to say see an attorney. Okay to get your questions answered, but mechanically speaking, you don’t have to have an attorney to go to the title company to close the loan, close the deal, right? Or do you? Yes, that’s not necessarily it’s not really required. Some people will have their attorney review the documents in advance before the remote notary shows up for them to sign so that that can happen as well. We can email the documents to the clients attorney if they wanted to have them review the paperwork before they sign it, but it mechanically speaking, it’s not really necessary. The notary from the title company. We’ll go through all the documents with each custom gripe.
Jason Hartman 29:41
Just a reminder, you’re listening to flashback Friday. Our new episodes are published every Monday and every Wednesday. But again, the notary can handle legal questions and things like that.
They’re just there. They can explain the documentation.
Jason Hartman 29:59
Okay. Some of those explanations from notaries are pretty marginal. Okay, so I just want to throw that in there. I don’t want people to feel too confident with that one. But you know, yes. If they do it all the time, they’ve seen them before. Okay, do I have no this is an interesting one, because post Great Recession, I see lenders paying more attention to this. And this is kind of an interesting, interesting thing. Do I have to have landlord experience to use the rental income to offset the payment on the mortgage or the debt service on that property? landlord experience. So lenders or
they’re asking for resumes nowadays? No, I mean, not necessarily resumes. But you know, Fannie Mae direct and Freddie Mac direct have differing guidelines with regard to you know, customers who are purchasing their first investment properties. Like Fannie Mae, for example. You do not need to have Have a two year landlord experience or history of renting properties out to use the rental income to offset the payment. Whereas with Freddie Mac, if you wanted to use the rental income to offset the payments, you would need to have a two year history of being a landlord or having rental properties documented on your tax returns.
Jason Hartman 31:20
Let’s talk about credit score, what is the minimum credit score requirements
will be your first four properties, we can finance them with a minimum credit score of 620 or better. But once once you get to property five through 10, the minimum score there is 720.
Jason Hartman 31:39
Ah, so so 620 which, you know, that’s that’s actually a relatively low score. So you can get your first four properties going. And if you manage those well over a little bit of time, probably even not too much that can help actually raise your score, right?
Yes, absolutely. Yeah, payment on time. Payment History is crucial. to increasing your score,
Jason Hartman 32:02
yeah. So you actually can see your score go up by borrowing more and owning more properties, ultimately, because you’ve showed that you can you can handle that financing and take care of it 620 for the first four properties, and 724 properties five through 10, can I do cash out refinancing on my investment properties?
Yes, you can. And again, there’s a caveat to that. You can cash out on investment properties, if you have less than four, if you have four or less finance properties. But once you go above for finance properties, then cash out refinances on any investment properties is ineligible,
Jason Hartman 32:39
and totally ineligible. No way to do it. Hmm. So you can refinance them, but you can’t refinance them with cash out as what you’re saying,
Jason Hartman 32:48
Okay. That’s just a I mean, even if you’ve owned them for five years, and they’re going well, I mean, in five years, this will probably all change but, and you know, and I do have to say just in general For all the listeners, this stuff changes. Okay. So, you know, it’s all subject to change. Don’t take this as the gospel a year from now, we know this may be a totally different set of questions and answers. Do you want to speak to that a little more about the cashout? refi?
Yeah, guidelines are always evolving with the agencies. They’re constantly updating their guidelines. So they and when you say agencies, you mean Fannie Mae and Freddie Mac, correct? Yes. You know, they will, they’ll tweak those guidelines all the time to make things more lenient or you know, stricter in some regard. Okay, if I
Jason Hartman 33:31
have 10 investment properties, finance, can I also finance later a primary residence in addition to my 10?
Yes, you can always find out your primary residence regardless of how many other properties you’ve got financed. Okay, because
Jason Hartman 33:45
that’s a common misconception or that changed one or the other. Because I always remember that being counted as one of the 10
Oh, it’s counted as one of your 10 properties. But if you have, let’s say 15 properties already financed and wanted to do another project. primary residence, you could do so okay. All right,
Jason Hartman 34:02
any credit score requirements on the primary residence or downpayment requirements or that’s really a different ball of wax, right?
Yeah, your primary residence has kind of different guidelines with regard to the credit score there. You don’t necessarily need to have the 720 score when financing your primary, even if you have more than four finance investment properties.
Jason Hartman 34:23
So we always recommend that people keep at least 4% of the portfolio value in cash reserves as a minimum. So in other words, if you have a $1 million portfolio value, you would have $40,000 in the bank to cover contingencies, emergencies, vacancies, whatever, and that’s not money that you use for anything else. It’s earmarked for the properties. How many months of reserves do people need in terms of the lenders requirements?
Well, particularly with investment property financing, you need to have six months reserves on the subject property, and six months reserves on all of the other finance investment properties. And one, of course, one month reserve is just one mortgage payment, including your taxes, insurance. So you need to have six times that amount on each property that’s finance.
Jason Hartman 35:18
And you know, what’s interesting about that, that based on today’s interest rates, probably works out to just about 4%. You know, it’s probably not far off. Interestingly, so that’s, that’s, I’d love to do the math on that to really know.
For example, if you’re if your total interest taxes insurance payment is $1,000 on each property, you would need to have $6,000 in reserves on each property. Right. And that thousand dollars. P it I might finance maybe I don’t have anything in front of me, but maybe $150,000 property, right? Oh, sure. Yeah, absolutely.
Jason Hartman 35:55
Yeah. Yeah, yeah, yeah. So even more than that, so it’s probably about four percent interestingly, are the lenders copying me? I don’t know. Okay, can I use the projected rental income on the property to offset the projected mortgage payment? In other words, am I bringing the rental income that does not exist yet to the table to qualify for financing on a loan that does not exist yet until we close? Right, you see how
that works? Right. So how about Fannie Mae allows you to do is take the comparable rent market in the in the market that you’re purchasing the home in and use 75% of that average rental market to offset the projected mortgage payment on the property. So the property does not necessarily need to be tenant occupied and leased out for us to use the projected rent in the market to offset the projected payments,
Jason Hartman 36:55
okay, and they impute a 25% hit That rent though, right? So in other words, right 25% of vacant Yeah, that’s really conservative. But they’ve always been that way with income properties. It’s been, it’s been that way for decades. I mean, decades, I remember years ago, it that that rule still being there. So basically what they say is if you’re receiving $1,000 in rent, they only view it or actually I should change that. If your projection is that you’ll receive once you own the property and get at least $1,000 per month, they are going to only allow you a credit of $750 per month, a 75% of that projected rental income,
right? Yes, that’s correct. Okay.
Jason Hartman 37:45
And that goes into calculating your dti or debt to income ratio, which will probably given our time have to talk about on a future episode. But I think that’s a good interesting topic to dive into on a future Show did you want to say something about rent loss insurance on that, because that’s another type of insurance that is available to investors. For example, if there was some damage to the property, and you had to do a lot of work on the property to bring it back up to par, you might have to move your tenant out and lose rent during that time. So, there there are some insurance policies that cover that rental income loss, right?
Yeah, that’s correct. A good segue there. For example, if you’re using the projected rental income to offset the projected payments, we would need to have a rent loss policy added to the premium for the homeowners insurance.
Because if the tenant were to be
or if the house were vacant, or like you said, if there was damage to the home and the tenant needs to be moved out for a very good time, then you can claim the insurance to help offset the loss of rent.
Jason Hartman 38:58
Okay, good. And there’s another FAQ here that I wanted to ask you about,
but I don’t really know what you mean by it talks about cash out refinances and technical refinances. Right. So a delayed financing or a technical refinance is really for those guys that might go out and purchase the property with cash. Maybe they need to purchase it quickly and buy it with cash, but yet come back in within six months, and then take the cash out, do a cash out refinance to, you know, to leverage the property. So a technical refinance or sometimes called delayed financing allows you to take cash out of the property, if you’ve purchased it with cash, but you must do that within six months of purchasing the home. Okay, so that’s not
Jason Hartman 39:45
the same as what we addressed earlier where you said if they have 10 financed properties, there’s no cashout refi. If it’s done within six months, that’s really just a delayed financing. Rather than it’s not considered a refinance,
right, right. It’s almost it’s almost considered like a purchase. Right? Yeah. Got it.
Jason Hartman 40:07
Okay. And that’s, by the way listeners, that’s one of the things I absolutely one of the many things that has really helped sustain my love affair with real estate over all these years. And that is that you can get your money back out of the asset and still own the asset. I mean, tell me what other what other asset class you can do that with? It’s, it’s, it’s a beautiful, beautiful, beautiful thing. So and in this case, it’s not gonna be all your money out, right? It’s gonna be 80 or 75%. Is that correct? The delayed financing idea, right?
Okay. Yeah. up to 75% of the purchase price. Correct.
Jason Hartman 40:47
Talk to us for a moment about homeowners insurance. I know you’re not an insurance person. What type of insurance is out there? There’s cash value replacement costs. What type of insurance is required to get this really desirable? Fine?
Well, funny ID, let’s go like the agencies, they require that we have replacement costs insurance up to 100% of the loan amount. Okay? So the cash value insurance may be a cheaper policy, but it is not an acceptable form of insurance on these investment properties. You must have the 100% of the loan amount with replacement cost insurance.
Jason Hartman 41:28
Okay, so I want to tell the listeners, here’s something you’re gonna love and you’re gonna hate. If you go listen, you know, we’ve had many, many clients on the show over the years. But if you go listen to David Porter, who’s one of our wonderful clients who has been on the show a couple of times, you can just go to Jason hartman.com. Search David Porter, you can find his episodes and listen to those. And what he talks about the first time he was on the show, and then we recapped on this, I believe the second time he was on a few years later, is he talks about how You know, it’s great to buy these properties below replacement cost. But he was slightly upset, but overall very, very happy when he bought a property through our network in Indianapolis, he paid. I’m not going to remember these numbers Exactly. I’m just very roughly stating that he paid around $80,000 or something for the property. It was way below the cost of replacement. And the lender required him to get like $220,000 worth of insurance on the property. And he said, Why is my insurance bill so big? And basically the reason was, is because his deal was so good. So, you know, this is this is one sort of over billing scenario where you might be happy to pay because it really shows that you’ve had a fantastic deal on the property. In other words, if it burns down, the lender will not be able to rebuild the property and protect their collateral for anywhere near the price. You the investor paid. So that is a beautiful thing buying below the cost of replacement. And experiencing this beautiful concept that I talked about, called regression to replacement cost, which I view as different than appreciation, regression to replacement costs different than appreciation. So very interesting point there. How many months of reserves are required on you know, we talked about reserves earlier on one, four properties and then five, five to 10. It doesn’t vary there. Did you already say that?
Well, if you’ve got multiple, more than four finance properties, you got to have six months reserves on them on each one, but if you’ve got less than four or finance properties, it’s a little trickier. You’ve got to have six months ago on the subject property that you’re purchasing, but only two months reserves on the other two or three that with your total being less than four. So in general, like tenfold If you didn’t document six months reserves on all your investment properties, you know, you’re gonna be pretty safe there.
Jason Hartman 44:06
Good stuff. And it was great to have you speak at our San Diego event recently, we ran through a few of these questions there. But we got in a little more deeply and added more to the list on this interview. So that was valuable for listeners. I’m sure, we don’t have time to talk about some of the other things I really want to get you back on to talk about I want to talk about calculating debt to income ratios, so people can know what they qualify for and take the mystery out of this. I want to talk about mortgage points and how loans are priced in terms of prepaid interest, otherwise known as points and overall interest rate for the term, potentially 30 years. And I also want to talk about closing costs, and how you know what the closing costs should be, how to know if you’re being overcharged, how to protect yourself in looking at those closing costs, just to having an understanding of it. So we’ll have you back to talk about those on a future episode, but Is there anything I didn’t ask you just maybe a general comment that you want to share with the listeners before you go.
And you know, I always say to folks, it’s good to do your due diligence when shopping for loans. But be careful about pulling your credit multiple times. You know, shopping for closing costs and shopping for race is a due diligence that you know, you should do to a certain degree. But be careful about pulling your credit with multiple lenders.
Jason Hartman 45:25
Okay, good advice, good advice, because that will have the effect of lowering your score. So that’s good to know. Thank you so much for joining us today, listeners, go check out Jason hartman.com. contact any of the investment counselors at my company, they will be glad to put you in touch with our lender, you can get all of your questions answered, and get financing for your investment properties. So thanks for joining us. We will look forward to talking with you in a future show. Thank you.
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