Financing Rental Properties The Right Way | Turnkey Investing | REI | EP. 36

All right, welcome back to another episode on Real Talk. I'm Tiffany, our transaction coordinator. I'm here with Mark, who is our director of investments. And we'll be talking about different ways to finance properties. So, Mark, I'm gonna just jump right into the first question. Are there any benefits to financing properties at the beginning of the year versus now?

Well, I mean, I guess, you know, by no means am I an expert in financial strategies. Consult your financial expert or something like that, but there's obviously different ways of looking at that, you know, where, whether you want to buy something at the end of the year because you're going to need a write off and the kind of investing. So, you know, during our podcast here, we'll sit there and discuss like, you know, the different kinds of financing. But, you know, the long way to answer that is you can always, at the end of the year do this because there are tax advantages to that. But then at the beginning of the year as well, it's a good time to buy because you can have more expenses build up through the year. So, for example, like when you're talking about, like what are some of the benefits and things that you can write off on a, on a rental property or a second home or something like that, you can deduct your mortgage interest, you can deduct operating expenses, you know, the property depreciation itself, any ownership expenses. So if you're using a property management, like we have with Independence property management, you can write that off. And of course, if there's any repairs. So if you're thinking about all those things, like the interest and expenses depreciation, ipm, like property management and maybe some repairs on the house. If you did that at the beginning of the year, of course, then you would have 12 months of those, you know, and so that would be a better write off versus say you're gonna buy a house, you know, in cash and you're rolling over like a 1031 exchange or something like that, then of course, you know, I mean, it might make sense to do that at the end of the year. Right, so.

Right.

Yeah. So it's a loaded question. It is one of those ones where I guess depending on whatever situation you're in, you know, talk to your financial advisor, talk to your CPA or the person that deals with your taxes and come up with a strategy that's obviously best for your tax situation. Long winded.

Right? Just depends on your goals. Right?

Exactly. Right. So who knows, everybody's in a different spot for that.

Right. So you mentioned tax Benefits, which actually I think kind of leads us into the next question. So are there any tax strategies that you can use to finance a property?

Yeah, absolutely. So I mean, again, make sure that you contact, you know, I know enough to be dangerous. But you know, so, so what like we had mentioned earlier, like a 1031 exchange. And so in essence that's just deferring, you know, your tax obligation. So it's, you know, for when you buy a property and you make money on that property, taking what you've made on the sale of that and rolling it into another property, of course, like would defer that tax payment for you. And so, you know, it's popular, you know, the 1031 exchanges. I mean interest rates right now are so low, you know, borrowing money, and I know that we'll probably get into this a little bit later, the different kinds of financing that you could do, but borrowing money right now is so cheap. And so, you know, I mean it's, it's, there's, there's different ways. And another one that we'll probably touch on in a little bit as well is the, the BRRRR method. And so, you know, one of, one of the things of that is putting your own money into, you know, either the, the rehab of a turnkey property or putting some of your own money into upgrading or updating your, your rental property. Those are things that can definitely be a tax strategy because those are write offs. Now again, I'm not an expert by any means, but some states I know that here in Ohio, you know, for your primary residence, any updates that you make to the house, that's just living expenses that you don't get to write that off on a primary. But if you or I own other properties here in Ohio, any dollars that we do and improvements, those are, those are definitely write offs.

So awesome.

There's those tax benefits and like I said, some of those other ones that we talked about really allow you to leverage your tax liabilities at the end of the year.

Awesome. Yeah, you mentioned. That's funny because you said the BRRRR method and that is the next one. Are you reading this list?

I'm reading your mind. You and I work closely together. That it's like another day at the office.

Yeah, that was the next one. So the BRRRR method, how, how is this a smart financing decision? Tell us a little bit more about, about that.

Yeah, so the BRRRR method, you know, again, so that what is an acronym when you use all the letters so you buy the property, get it Rented, refinance the property. You know, pull that money back out, rinse and repeat. So I think maybe what I got.

Or I missed one rehab in there.

Yeah. So you buy it, rehab it, then you rent it, refinance it, rents and repeat. So you go, I missed an R. But like I said earlier, I mean, so with that, you may be able to buy a property that you're financing and then taking your own money to put back into it and writing that off, you know, the rehab of the property. And I mean dollar for dollar, I mean, I imagine that that comes right off the top of your 1040. So again, check with your expert. But that's. To me, that would seem like a popular one. If you had it, if you had the disposable money in order to offset some of your taxes, why not put your own money in the rehab or as much of it as you can. I mean, if you had 10 grand sitting around you, I mean, put that in it just to be able to write that off, dollar for dollar. So in some of our other podcasts and blogs, you know, I'm sure that we've, we've described like our Equity Advantage series. In essence, that is the brrrr method. You know, for our investors, we have properties that you can purchase before we start rehabbing them. Now, they go quick because again, like in this market, our construction guys, they're working and they're working and they're working. So as soon as a crew is assigned to that, we as a company have contractually told them, you're going to get paid to rehab this house. So if somebody's wondering, well, why is it in this EAS for like a week? Well, because these guys are looking to pick up contracts and looking to get work, and so that's why they go so quickly. But going back to the equity advance series, it's a great way for you to buy a property, have it financed, pay for the rehab, maybe even our instant cash flow. Same thing. Buy a property that's currently renting.

Right.

Buy it, sit on it until. Until somebody turns. And when they turn, take your money, do the rehab, write that off.

Yeah.

You know, increase your rent. So there's just so many different plays. And so, I mean, that's what's fun about real estate. That's what's fun about, like, you know, the turnkey market is there's so many different avenues. You really have to do your homework as to, like, what would be best for you as the investor.

So, yeah, so really figure out what you want. You Know, and then let us help find what fits for you. Right, Absolutely.

So that's, you know, a lot of that comes back with those strategy session calls, you know, whether they're with me or they're with C.J. you know, a lot of people, you know, will talk to either of us, but a lot of that is fact finding. You know, what. What are you doing? What. What ultimately do you want? Like, everybody's always like, I want passive income. Of course you do, but what do you really want? What's the second goal behind the passive income?

Right, right. Yeah. And you mentioned this isn't on my notes, but you mentioned how fast those go. I mean, they're hard to even hold those equity advantage. So I know we're literally holding our contractors back at the door sometimes, you know, give us a couple more days.

Is that crazy? It's like, you know, we get an email saying, hey, we have this property available. And then by the time I send out like some emails or something like, oh, that's gone.

Yeah, we've had contractors, I think, sitting in the driveway of properties we've closed ready to. That's a whole nother, you know, thing.

But that's a whole other vlog.

But it's, it's just funny, you know, it is hard to hold those. But knowing you want to do that, I think is. Is cool because I know you've been able to help people find properties that work for them.

Absolutely. I mean, these are so, you know, here in our company, we can find those turnkey properties. Again, I'm a licensed real estate agent for the Cincinnati and Dayton mls. So if our investors want me to just shop on the MLS and find them a house that maybe doesn't need as much rehab. So, I mean, again, it's endless possibilities.

Right? Awesome. All right, back to some different loans. So, home equity. What is a home equity loan and the benefits to that?

So home equity. So you'll hear this one, the acronym, the heloc Home Equity Line of Credit. In essence, that is you using your primary residence and pulling the equity out of that in order to use money. Now, different banks have different formulas or how much they'll lend. I know here in our area, typically a credit union or something like that will give you better than a big bank or something like that would. But what they're going to do is they're going to give you 70, 80, 90%. I mean, I don't know. I've seen some. I guess that'll give you 100% of your equity. So when you're trying to determine how much you have. You have to take, like, what is your home worth versus what do you owe? And then it's 80% of that difference. So let's just say that you have, you know, $250,000 house. You. You owe 150, so there's 100 grand of equity. You take 80% of that. So now you can take out, you know, an $80,000 HELOC.

Okay?

Now, in essence, what that is is a second mortgage on your house. So you have your first mortgage, and then in your second position would be your heloc. And typically those have great repayment structures, and that's why people use those, because you can pull out, let's just say, for our example, in that you pull out that $80,000, and you can then use that $80,000 on purchases, and you'll only be paying the interest on it. And so now you can pay the principal down, but you, in essence, only pay the interest for so many years. So typically it's like say, 15 years. So if I use all $80,000 on the purchase of a house or refinance or, I'm sorry, like flipping or whatever, you know, I want to buy a new car. It doesn't matter. You can do the heloc, whatever you want. But let's just say that I use that $80,000, well, then I'm only paying the interest on that $80,000. So, you know, sometimes people use a HELOC to buy a car because it's cheaper than going to the car dealership. But for our purposes, when you're talking about turnkey and you're talking about, you know, maybe paying for a rehab or buying the house itself, once you refinance that money out, or say you put the money in to get the rehab and improve the value of the house and you pull that money out, well, then you just pay the HELOC off again and again when you set up these HELOCs and check with your bank, because again, they all have different structures. So I don't want to. I don't want to point out point one or another, but, for example, I mean, let's just say the same HELOC, you're paying down the interest of it for 15 years or whatever, but it also means that it could be open for 15 years. So it's like having an $80,000 credit card. You make purchases, you pay off the credit card, the money goes right back, and you can just keep using it. So, you know, so that, you know, it's a powerful tool. If you have equity in your, in your primary residence where you can do that. I'm sure you can. There's banks out there that'll do helocs on rental properties or what have you. So as you build the equity and you start paying off your mortgages on these rental properties, you really put yourself in a power position. I think those first like couple that you buy, you know, one, two or three houses or rental properties, that just kind of gets you going. But once you get where you have a portfolio loan, and again, I'm sure you know more about that than I do. Portfolio loans, God, you have some real buying power.

Right.

You know, so whether it's helocs or what have you, just equity that you pull out, cash out equity, there's just so many, so many possibilities. It's just, it's crazy. So, yeah, get started.

Right, Yeah, I know we've done some helocs, some closings just this year. I think we did a couple of them.

So I was gonna say as the transaction coordinator, you probably see way more how it gets financed versus for myself, you know?

Yeah, yeah, I might see, see those things come across my desk. I don't always understand them. So I'm learning a little bit right now. You know, maybe I didn't know, like.

I said, just enough to be dangerous.

Yeah. Awesome. So how does, so I mean, you kind of answered how that differs from a conventional loan. But what would be the advantage of getting just a conventional loan on that or disadvantages or anything different?

Yeah, I mean, so again, obviously you'd have to check with your bank to see, I mean, sometimes those conventional loans, we talked about it earlier, the money right now is in essence free. I know that, you know, when I'm talking to some of our lenders that we work with here, whatever the rates are that you see, they're always going to be a little bit higher on your rental property. So I mean, if you see that rates are out there at three, three and a quarter, assume that you're going to pay like four, four and a quarter because again, it's a little riskier of an investment. But you know, sometimes it's good to obviously shop your rates. But yeah, a conventional loan of course is the gold standard. You know, you're 20% down. I've heard some of our clients even say that their banks, they work with 25% down, especially when you start getting into multiple doors, like a duplex or four unit, those conventional. So with those, of course there's going to Be a little bit more lending guidelines and rules and stuff like that. And so always check with your bank and ask them some questions, you know what I mean? Like, how quickly do you close these?

Because.

Because again, at the end of the day, the goal is to close on the property as quickly as you can so you can start cash flowing. If they're a 60 day, 90 day close, do you really want to wait three months to start generating income or do you want 30 days and start doing it? I know that for us, when we're talking to our clients, we always want to know what kind of lending are you doing? We're trying to pry, we're trying to help you, you know, get there quicker.

So. Right.

But yeah, conventional loan, like I said, that's like the gold standard. I'd say probably what, 75% of what we see is that.

Yeah, yeah. Honestly, it's a lot. It's conventional. Like I said, we had a couple HELOCs and we have some cash purchases as well. But I would say most of what we're closing is conventional, right?

Absolutely, absolutely. And so, I mean even that, and even taking that a step further, so when we're talking about some of the different kind of lending things as well, is that there are some banks that will actually loan on rehabs, you know what I mean? So you might, again, let's just say it's $100,000 property, right. They may give you 80% loan to value on that. So they'll give you $80,000 towards that $100,000 property and you're putting down your 20%. But then let's just say that there's 30 grand of rehab to make it a 150 property. They may give you that $30,000. So there are different lending programs and banks that just have all sorts of kind of. I mean, literally it just takes some time for the investors to find that. But there are banks out there that will lend, you know, on a rehab too. So you don't necessarily. Like when we were talking about, you know, having to have all this money for a rehab, you don't have to. There are banks out there that will pay for that. And so we'll pay 100% of the rehab. So there's definitely that.

Awesome. And you can also. So we have on here you can also use like a private money lender. Right. How would that work out?

Yeah, So I mean, I know that you are going to be more the expert here in the private money lending because, you know, you and C.J. and a couple other you know, folks in the office deal more with private money lending, but from what I understand, you know, private money lending is another investor loaning you the money to do this and then them taking back a set percentage of this when it closes.

Yeah.

So I think you'll hear these also be called a hard money loan or something like that. I mean, the rates could be 8%, 10%, 12%. Sometimes they have different things like that they want, like if you're late, you know, on the close, they want some sort of points or you know, juice on top of the loan. But they're definitely the riskiest. But, you know, there are investors out there that to them it's a safe investment because they're investing on this property. And if you don't live up to the terms of it, well, they own your property.

Yep.

Right.

So they got a property out of it, you know.

Yeah. So it's not really too risky for them, but it is definitely risky for the event for the person that wants to take the hard money loan.

Yeah, yeah. And I know we, you know, we work with private money lenders every day. I enjoy that space that, that we're in. I know we have had, we have actually had an investor, I remember at least one that we've had who used a private money lender. I think the benefit of that is for their timeline, that's as good as cash, you know, that's, we don't have to wait for your, your private money lender to underwrite it. You don't have to wait for them to ask you for this, this, this, this, this. You know, underwriting sometimes can go on for a while. Right. So it does kind of cut through some of that stuff. You can, you can still get an appraisal if you want to. You know, it's, it's just, it's in my mind it's as good as cash, you know, when we, when we do that. So when we use them. So I'm sure for our investors it would be the same thing, maybe a little bit harder to find somebody who would do that.

But because when you're doing, correct me if I'm wrong here, so when you're doing a private money loan, you are presenting to the investors at least like a broker's opinion price of the property. Right. Like an after renovation value. Like here are some of the comparables that we use. Because this is what we feel in our professional opinion, that it'll be worth. Correct?

Yeah, absolutely. Yeah. I give them, you know, typically, you've probably approved the price you know, you and somebody else on our team. I know it goes through a few eyes before it gets to me. So we've got, you know, kind of here's, here's what we think it'll sell for after value, and then here's what we actually just want the loan amount for. It's never the full, the full after rehab value, but.

Yeah, yeah, no, absolutely. And I mean, so that, that brings me to, you know, the cash, you know, so, you know, when you're talking about financing, you know, cash is king. The reality is that it is because again, it ultimately gets you to close on a property sooner.

Yeah.

Because you do not have to wait for the appraisal. I know that sometimes when you're talking to investors, they don't understand why a property is ready to be bought in cash versus it's finance ready. And the simple answer for that is finance ready means that it's ready for an appraisal. A cash buyer can buy the property on the promise of it being rehabbed.

Yes.

You know, I mean, and again, as a company, and we've been doing this for a long time. Yeah. You know, we're going to finish the rehab. You still can do inspections, you can still do all the things. Except for an appraisal.

Yeah, yeah.

I mean, you're buying that, taking our word for it. And we're pretty good. You know, I would think on honor and appraisals, you know, nobody.

You could do. I mean, you could do an appraisal. Right. You could do like a hypothetical. If you're not using a lender. It doesn't that. Because that's really the point of not getting an appraisal for financing, not doing it early. They're going to come in and say, well, it's subject to all of these things. Well, maybe we were going to do all those things, but that just gets us in this whole, you know, we're probably going to do all of that.

Right.

But you're going to come back in and have to inspect every single, you know, it's just getting to a mess. So of course we're not going to do that. You know, we're going to wait till it's, it's good and ready for you.

Especially because appraisers right now, I mean, they weeks, weeks out to get an appraiser in. And then. So if you have a subject to list, you know, by the time you do those things and then get them to come out again.

Yes.

You're talking about delaying the process so you're 100%. Right. That, like, the reason we hold off to say when something's finance ready is because. Cause it's ready. Ready.

Yes.

Rehab's done. We're very close to a punch list. Yeah, yeah, we're not dealing with that subject to list. But I mean, so again, like with those cash closings, it doesn't mean that if you close on one in cash, wait six months, three months, whatever the seasoning period is or whatever, you want to wait, refinance it, pull your cash back out and apply it to another purchase. So again, it's. Once you get into those different positions and you've talked to a tax professional or a financial planner, map it out, you know, map it out like, you know, see yourself. Don't, don't just talk about what you're doing this year. I mean, 2022, in my opinion, should already be planned. You should be talking about what you're going to do in 2023. You know, how much money are you gonna pull out of each property? What are you gonna do with that? What tax offset is that gonna do? So they have all these things ready to go. You should be thinking 2023 already for sure. But, yeah, that's the short and dirty of financing, right?

Yep. Yeah. And you covered the last question, which was cash. I mean, that kind of all rolled in together with private money. So, you know, it kind of rolled seamlessly into the next question of cash.

Yeah, exactly. So hopefully, after everybody watching this podcast here, is that you know a little bit about the different kinds of financing, the different kinds of tax benefits that you may or may not have. But I mean, ultimately, I guess if you were to have some takeaways, is that there's many different options to finance properties. There's not one more correct than the other. It's just what's most correct for you, right, that time of year, what makes the best, you know, advantage to you and your family and, and your investments. But I mean, those should be the takeaways from after watching this is, you know, start planning.

Yeah.

Have a plan, stick to it, and get creative.

Right. A little bit. I mean, I, I've heard, I've heard you go on, you know, you'll. You'll go on a call with me and you're like, hey, what if, what if we do this and this and we help them do this? And it's always over my head. But I know you've got creative ideas, you know, so I'm sure other people do. So, you know, get creative and figure out what works for you, right?

Most of the time, it's, like, so creative. The bank's like, you can't do that. What are you talking about?

I'm like, mark, what are you talking about? Listen, if you want to do it, do it. Awesome. Well, anything else?

I think we nailed it. I think that should be a good little piece for people.

Awesome. Well.

We always like to sign off, right?

Yeah. Invest smart and live happy.

We'll see you next time. Thanks. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate, financial, or business professional for individualized advice. Opinions and information on this show are not guaranteed. All investment strategies have the potential for profit or loss.