DSCR vs. Hard Money Loans: Your Ultimate Funding Guide with Gary Brown

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This is the no Closer show where you get the latest developments in distressed note investing and learn the secrets.

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Dollars worth of property. For panties on the dollar, get educated and entertained by someone who has closed thousands of deals and lives to support you in achieving the same. Now, here's your host CEO of We Close Nodes, Scott Carson. Good morning, good afternoon and good evening, everybody. Hey, welcome to this episode of the Note Closure Show. As always, Scott Carson, I am jacked up with you today. It is a Friday here in the WCN headquarters here in Austin, Texas. We're excited to get some snow in the next couple days and stuff like that. But today's episode, I think you guys, you investors out there are going to get a ton of value out of not only a ton of value, but possibly a couple tools to your tool belt to help you maximize more profit out of your end deals. The properties you end up taking back in foreclosure. If you're looking at some distressed stuff or other things out there and you new investors out there as well, let's not forget about you guys looking to hustle. Maybe you're looking to buy your first rental or first investment property. A lot of folks struggle with, hey, how do I find money? I can't raise private money. There's maybe some programs for you. But honestly, I have to tell you this, that my pure, pure selfish stuff with our guest today. Somebody he had me on his Tick tock live. It's been his video three before but I had a family situation happen over the holidays. I've got a nephew who inherited a property from his dad. It needs some work, needs a lot of work. And he's like, oh, I'm gonna sell it. I can't fix it up. I'm like, dude, this would be perfect for it because you're living in an apartment. He'. Renting. Him and his wife, my niece are renting this place. I'm like, this would be a great for a blank type loan or use this to help you if you, if you want to invest, if you don't like the property to move into it. So who do I have on today? Well, he is known across the social media as hard money Gary. And this guy hustles. I mean this guy is producing some great content. He is doing loans all across the country. And like I said, he works with so many investors out there who are existing. You know, they closed on tons of deals. But also works a lot with new investors out there. Now what type of loan product we Talking about? Well, he's been funding flips, rentals, multifamily new construction all across the country for the past couple years, going helping his clients go from zero to a portfolio of rentals and building the foundation of flipping homes. He focuses a lot. And probably what you've heard about this is the DSER loans. And so we are honored to have my friend, Gary Brown, Hard Money Gary, join us here on the podcast today. What is going on, Gary? How you doing, buddy?

Well, Scott, my, my blood pressure is, is through the roof now. You're getting me all jacked up. You're. The energy is transferred through the screen. I'll tell you what, I will introduce myself again to the audience. My name is Hard Money Gary. Gary Brown. I fund real estate deals all across the country, helping business owners build and scale their rental portfolios and get into flipping houses through Hard Money and DSCR loans. I do that so that people can get into real estate as newbies or experienced investors can scale their rental portfolios or get into flipping. I got into Hard Money because I was a wholesaler. I was seeing the transaction happen up close and I wanted to get into the action and control my own income. I've been a fan of Scott for a while. He didn't even know that I existed. But he found me on TikTok and then we connected and now here we're on his platform. Thanks for having me on, dude.

I'm glad to have you on. And you probably tell the ex linebacker, ex captain of the football team, the ex guy that wanted to be the next Stuart Scott or Dan Patrick on ESPN was what I originally wanted to get into. But I love it. You know, you and I both, you know, you're in a mortgage broker, I'm a previous mortgage broker. So we talk a lot of the same language, stuff like that. And I love, I didn't know the, you know, I knew that I think you'd wholesale some stuff beforehand, but you got tired of being a wholesaler and decided to get in the action, you know. Yeah, I'm a, I'm a big believer. Wholesaling, okay. Is a process, but I think wholesalers end up getting the short end of the stick most of the time when it comes to investing in real estate. What's, what's your thought on that?

So wholesaling is a sales and marketing business.

Yeah.

Buy and buy and hold rental properties. That is a service based business. And when you're in your business as the bank, that is more of a business to business transaction, not so much Emotion involved, it's just cash flow. So I saw the transaction up close. I couldn't deal with the emotional sellers anymore. And being coming from the cowboy outlaw wholesale style, that's how I got into hard money and DSCR loans because it is commercial loans, there's no licensing required and you can do it in 46 of the 50 states virtually unimpeded. So yes, I got my home office here. I'm able to cater to clients all over the country and build a life for myself. It's a lifestyle business for me. Right. So I'm a sales guy by nature. That's what this is. I help people, I build up a clientele, I help them build and scale their rental portfolios and do the flipping business. And I'm still able to have time for my kids and my family and my wife's a teacher. So we have a very balanced schedule throughout the year. It's, that's how we've made it out. I'm not standing in front of Ferraris, I'm not standing in front of mansions, acting like it's my, acting like that's mine. Like some gurus out here. But douche douches. Exactly. But you know, we're at, the longer you're in the game, the more people you get to meet and the more skills that you get to add to the tool belt. And I like that you mentioned the tools because wholesaling is a tool, private lenders are a tool, business funding is a tool, credit cards are a tool, DSCR and hard money are tools. And you have to have the tools for the specific scenario that you come across. So that more so than anything else, a good investor has the ability to close on the deal that's in front of them when it makes sense for the tools that they have available.

So true, so true. You couldn't say to anybody in that because you know, we've all as new investors got you scraped together funds, funded stuff off our credit cards, you know, borrowed money from investors or we did a hard money, long way to borrow private money to finish up. There's a whole variety of different ways out there. But you couldn't put it any better. Understanding the finance game in real estate is just as equally as understanding the strategies of rentals or multi family or notes. You know, it's almost absolutely. I think it's even more important because it gives you, it opens your eyes up so much, you know, because most people are sitting out there thinking, oh, I gotta go to a bank, I gotta borrow money from the bank. I don't have a good credit score, you know, and that's good. I mean there are those options out there. If you do have really great credit, you can get cheaper money. But you've got to jump through so many hoops to get things done. But let's talk about what. We'll talk about two things. Let's first talk about what a hard money loan is and kind of specific stuff. But I know it's kind of basic if you're you and me. But let's talk for those that are brand new and then let's talk about a DSCR loan, how that's different and then we, we can dive into some different things for you.

Okay, sure. So a hard money loan is a real estate investing tool that real estate investors use in order to be able to buy, fix and flip properties as well as buy fix up properties to rent. A fix and flip loan is the same thing as a hard money loan. A hard money loan is the colloquial idiom that was coined in the 90s and carried into the early 2000s. But early in the 2000 teens, the commercialized product started to come to the market that was securitized and sold to hedge funds. Essentially big words saying a fix and flip loan gets you money towards purchase price and up to 100% of the rehab budget reimbursed as you go through the milestones of the project. Now there's a lot of confidence in this type of loan because the investors know that the real estate investor is buying a property at a discount. They're oftentimes securing it with a valuation upfront, either a desktop appraisal or an appraisal that's going to determine the as is value of the property and the as repaired value of the property. The structure is bound by the appraisal so that the note investor knows what it's going to be worth when it's all fixed up. And the exposure that the true lender has is not going to be any more than 70 to maybe 70% of that after repair value. So there's a lot of security in knowing that. Whether the real estate investor is able to get the job done, you still have an asset at a discount. So if you had to actually foreclose on it, take it back and sell it, you still have enough wiggle room in the deal. And you know, obviously the, the best outcome is the where the investor is effective in their project management. You're able to get them their draws very, very quickly and they can sell the property or refinance as soon as possible. It's a short term high interest loan.

By short term you're talking six months or 12 months on average, depending on.

Where or so a private. So the standard fix and flip loans that are securitized on the market and commercialized is going to be anywhere between 6 to 12 months. You will see an 18 month or a 24 month in the case of a new construction, but extremely rare. And you're not going to get the best pricing for those because the, there's not a lot of confidence in it getting paid back quickly.

Right. And let's talk about rates on a hard money loan. Are there any points involved with it? What's, what's kind of. And look, I know you can't be specific, but let's just talk ballpark because we know it'll vary a little bit, depend on experience and things like that too for folks and people.

Yeah. So if you're in, if you're a new real estate investor, just understand this one thing, that interest rates, when it comes to hard money, you know, I mean, can I, can I curse on here?

Hell yes.

Okay. Yeah. Well when it comes to hard money loans, interest rate, it doesn't mean shit. Okay, just think about it this way. You're not supposed to be in a hard money loan very long and the interest rate is carried over APY. So if the interest rate range on average is 10 and a half to 13% and you're landing right there in the middle of it and you're paying APY, that means that you're paying 1% of the loan amount due each and every month, that's 12. Over 12 is 1%. So if it takes you three months to rehab and three months to sell, that's six months. How much interest are you actually paying? It's 6%. So when you're shopping for a hard money loan interest rate, it can be a little jarring because you're, you've been conditioned over time to see interest rates in the framing of a traditional 30 year loan that's bound by government guidelines. So you're, if you've been conditioned to see 4, 5, 6, 7% interest rates for mortgages and then a hard money loan sticks out to you at a 13% interest rate. Yeah, it should. But understand that this is not supposed to be something that you're in very long. It's the other fees that are going to make it more expensive. That's the points, the origination points. So origination points are basically the cost of doing the loan where the interest rate is the price of the loan, the cost versus the price. In addition to origination points, you're going to see junk fees. Anything above and beyond a underwriting fee or a processing fee, I'm going to call a junk fee. And just to let your listeners know exactly what I am in this, I'm a broker, I work with nationwide lenders. So my goal here is to provide my clients with cost effective capital regardless of the market that they're investing in. And they're working with me based off of the experience. So my fee is baked into the points. A point is a percentage point of the total loan amount. Every hundred thousand dollars is $1,000 in origination points. Hopefully that was.

On average people are going to pay what, how many point? One to four on average. It varies.

Yeah. So on. On loans that are $100,000 or more, you can expect to see two to three points. On a loan under a hundred thousand, you're going to see more to 3 to 5 point range because there's costs.

There'S flat costs no matter what happens on a loan. That's why, that's why banks, banks don't like to do any loans under 100. Because you're losing money.

Exactly.

When you look at appraisal, you look at servicing title, you know, that's our, it's hard to, to make any money on their loans under a hundred thousand. That's why it's got to be a little bit more. But let's, let's go through some numbers here. You've got some great. Let's say somebody's looking at buying a house, it's worth let's say 100 grand right now if they put some work in and that's as is, if they put some work into it, it can be worth 175.

Okay.

So if they're buying it at 100, are you going to finance 100 of that? Are going to finance like 70 grand of that if they need, and if they say they need 30 grand in repair costs along the way, what's kind of the. Where would you guys look at that as far as what you would finance that you would carry versus them having to get out of pocket.

So I love this question because the way that you just presented that scenario, we're going to get into some letter salad. All right, so we have ltc, which is loan to cost, and then we have ltv, which is loan to value and then we have loan to arv. Okay. So a hard money lender is going to evaluate Those three metrics and is going to lend on the least amount between those. Okay, so let's start with the first one, loan to cost. What is cost? A cost is purchase plus rehab. So you said $100,000 buy price, $30,000 rehab. Your total cost is 130,000. The next one would be the loan to value. So what's the value most of the time? When you're working with a hard money lender, the value is what the property will appraise for today. The third one, loan to arv. That ARV is after repair value. What will the property be worth once it's all fixed up? So each lender is going to be different in their guidelines as to what they will lend. Max to the value to the cost or to the after repair value. Most of the time it's coming into what is the least amount. What the least amount is is to the cost. Okay, so in your scenario, you said $100,000 buy price and a $30,000 rehab budget. If, if the lender was only at 85% of the cost, then the max loan amount, the loan amount is going to be 110,500. Okay, now you have that $30,000 rehab budget. The way that a hard money loan is structured is that the incentive is to have those that rehab funds set aside so that the borrower has skin in the game up front. And then we'll rely on the draws to get through the rest of the project.

So if we go through that, the loans must be 110. You're going to kill that 30 grand in escrow. So you're going to fund 70, and the investor is going to need to bring an additional 30 to the table somehow to complete the purchase of the property. Is that about right?

Exactly. So with a 30% down payment, that could be the deal killer for the dependent, depending on the individual that's that's doing it. First thing that I would want to look at is that you said that the after repair value was going to be 175. So let's look at the cost to ARV. Right, 130 over 175. That's a 74% cost to ARV at those low loan amounts or low value. Is it, is the time value of money worth it to spend six months in the deal to maybe make a 25% return on your money? So that's also what you have to consider. So I really would wish that if someone gave me that deal, I would say to them, hey, can you beat the seller up on the price just a little bit so that we can get, so that I know that you're going to make a better return on this. And that's how I would approach it. And that's the consultative approach that I bring to my clients. I'm not going to try and force a deal home on every single one because that doesn't do them any justice, me getting them into a deal that they're going to fail on. I have two responsibilities on every deal. I got my responsibilities to the investor client that I work with, but also to my lenders. As a broker. Yeah, I'm in between. I'm a middleman and I, and I'll be transparent about that. So I got two clients on every deal. If a loan defaults, that's great for Scott Carson who buys non performing notes, but it's not great for my lenders because they're not going to get their money back. They're going to say the next deal that Gary brings, you know, maybe we kind of shuffle it to the bottom of the pile or maybe we just don't fund it.

Well, let's talk about, let's talk. I love that I'm going to bring that up. So let's say the value is at 175. Let's say the values after a pair of values, 200 grand.

Okay, now we're getting somewhere. That's a great deal.

So you're basically 130 would be at 65 cents. The dollar in my math is right.

Yep, right there.

And would you still fund, still fund the one, you know, the 110? Is that what you're looking at, funding the 110 still on that even with the value being a little bit higher on the rv.

So when we're, when we're in the scenario where you have your total cost at 65% to the ARV. Now I want to understand who the borrower is because an investor with 10 deals worth of lips within the last couple of years, okay. We're probably going to be able to get him 90, maybe 93% of the purchase price. So he's not bringing a whole lot of skin into the game to close on it. And he's also going to have a pretty aggressive interest rate because he's got a deal that appraises for the after repair value at where there's some juice on it.

So that's good. So, and let's just say interest rate on this would be 12%. So let's run some numbers on that. Now the payments aren't 30 year P and I. It's all interest only. My correct on that.

It's interest only payments.

Yeah.

The way that the interest can be structured is also lender dependent. They will do things. That's called and this one is take your pen and paper out because I get confused about it too. It's Dutch and non Dutch.

Okay.

The way that you can think about this is Dutch is the full boat. That means if your loan amount was going to be 110,000 in the previous scenario, you'd be paying interest on that 110,000 the whole way through. If it's non Dutch then you're only paying interest on the used funds. So it would be on the purchase advance. In the scenario that we're about to talk about where they're getting 90% of the purchase price, they'd be paying on the 90,000 at a 12% interest rate. Their payments would be 900amonth until they started drawing down on the $30,000 rehab budget where their max payment would then be 1200 per month. So there's some games that you can play and that's where the business funding and additional lines of credit and different tools come into play. Because do you want to be paying the hard money loan interest by the end of the term or do you have a 0% interest credit card that you've liquidated? Have it in your account because you've working up against that 0% interest intro period. You're using those funds to fund it and then you take your draw right before closing. You get all your money back as far as what you spent on rehab, pay down the credit card and now you're already at closing. You take the profits and then everyone goes home happy and you had minimal exposure on the along the way.

Love it. Yeah. That's the great thing. Now unfortunately you can't use hard money loans to go buy non performing notes.

Right. Let's make that clear.

I get that question all the time. Now you will see some hard money loans that you can buy. Exactly. And they're usually at a higher rate, 10 to 14% usually going to sell it at par because it's at a 70, 65, 75% LTV of the property. It's a short term loan. So some of the stuff there for you. Now you mentioned something that was really good. I wanted to get into the draw aspect of it. There's usually a minimum draw amount too that people are sending out or there's when you're looking at an asset, are you giving the clients basically some timeframe for things to be completed, or are you going to look at the repairs that they're planning for a property to see if they justify that increased arv?

So when you're working with a hard money lender and you're doing the draw process that you. You've already, you're already working directly with the servicer, it's not, you're not working with Gary for. Okay, but the way that I explain this process is that you're going to have draw fees to access the money. So they're not going to limit you on the number of draws that you can have, but you have to be able to time it so that it's appropriate for the overall cost of the project. If a draw fee is anywhere between 150 to $300 and you're doing a small deal like the one that we're flushing out here, you know, if you're paying $300 for each draw, you do five draws, that's another 1500 bucks. So I'm not saying that that's going to make or break the deal, but that's some contingencies that you may want to account for. Now, if you have a larger rehab budget then, and your funds available are only xyz, yeah, maybe you want to do four or five draws. But in general, the least amount of draws that you can do, the least amount of fees that you can pay, and oftentimes the more work that you can help your contractors get done, because, hey, you're paying them out for all the stuff and you're not waiting on draws to be funding you. And that goes into a lot more than expertise than I have at not being a flipper. But keeping your contractors accountable to the work that they're doing is extremely important. And the reason why you use a hard money loan is for efficiency.

Yeah, exactly. So let's go through the numbers on this deal. Let's just value the 200,000 after repair value. Buying it 100. Let's say you did fund the 93% because somebody's got some experience, somebody's funding at 93. Right. The draw of $30,000 over time. Let's just say you take four draws. So four, 300 is another 1200 bucks. And let's say deal's good. It sells in six months. All right, so if we figure you borrowed, what's six months of interest on that 93,000 or that 93.

So that would be the 930 payments times six.

Yep.

So that would be just under $5,600.

$5,600. Yep.

So $5,600 in interest if you only paid just on the purchase advance. If you were, it would be harder to say how much money did you draw throughout the process. But yes, 5,600 in there. And then when you took that one draw, let's say you held it for a month. So in the seventh month you took the draw and 93 plus the 30. So that would be an additional $1200. Okay, so you're in it about 7,000. Let's just call it round numbers. 7,000 in all interest. And then on that same $123,000 loan, you paid three points.

So it's 3,600 bucks roughly.

Another. Another 3,600 bucks. And then your junk fees could be as high as another 2,500.

Okay, so let's just add those up to real fast. So 2500 in fees, processing all that good stuff. 2500 plus, how much was it you said? 3.3, 600 bucks in points or 3700 in points, is that right?

That's right.

3700 plus.

Then total interest paid, we estimated around 7000. So we're right around 14, $15,000 in interest. And so let's add that to the total cost where we had it at 130,000. So 145,000, let's say in total cost, over a $200,000 ARV. 72%. That's pretty good.

Now let's just say you sell it at 200. Let's just say you're going to lose 10% to closing costs and commissions on realtors.

Right, Exactly.

So you're netting 180, you're into it at what was it, 145 you said?

Yes, 145.

That's a, you know, that's a $35,000 profit.

Exactly. On a $200,000 after repair value property. That's exactly what you would expect for a profitable deal.

Right. And if you had to bring the seven grand to the table, then you would cat you thinking for your cash flow. So that's a, you know, that returns, it's pretty high. As we say it's enough, right?

It's enough. It's enough because obviously you're making money.

On that using somebody else's money. They're making a decent return. You made a great return with money you didn't have and you got a deal done in six months and you know, great. It's phenomenal deal there for everybody.

Exactly. So where it becomes a little bit More interesting is the. When we're talking about percentage to ARV and the closing costs and things like that, when you start to do bigger houses, then if your goal is to make $40,000 on a flip, it's a lot more achievable when you're selling a 400 or $500,000 property because. And then you can look at it and justify certain down payments, certain closing costs, certain fees. Because your goal here is to make 40 or $50,000, not the same percentage wise, which could end up being, you know, 75 or 80 or 90 or 100,000.

Yeah, and that's the thing. I totally, totally agree with that. In the traditional real estate base or the fix and flip side, what's great about what we see in the notes side that I like is that we're usually buying that asset cheaper, you know, at 40, 50 cents of the dollar of not considering after repair, but as is value. And that gives us a little bit more room. Going through the foreclosure. Now, being the REO holder on that, that's one question I wanted to ask you on there. If you see somebody's bought an REO or they took the property back in a foreclosure and they're looking to rehab it, is there any seasoning of value in that property? Do they have to own it for 90 days before you would give them a hard money loan to rehab the property? Or hey, you foreclosed on it, the redemption period's gone, you're on title, now you own the property. Would you do like. I would say it's a purchase. It would be more like a cash out for that investor because they bought it so cheap.

Okay, so the scenario is that the investor bought the property or foreclosed on the property.

So let's say they bought the note. Let's use the same scenario. They bought the note originally, the borrower was not paying, they bought the Note to say $50,000 on the same property. Now they're technically the bank that holds it as an reo. Okay, so they're into it at 50. Now they've, they paid cash for that on the front side, say six months ago, went through the foreclosure process, now they own the property. How would you, how would you evaluate this deal?

So it would be when their entity becomes the deed holder and if they. That's a great question. Most nearly it would be looked at for a seasoning of six months. So they would probably have to hold it for six months to get cash out. Unless they're Unless depending on the, on the property value, like if it could appraise for a lot higher than what they paid for it or if it's in good condition, they most likely could get a no deal DSCR note on it and not necessarily a hard money loan.

Okay, well, let's go into DSCR in a second.

Sure.

But on the hard money, if they were, if it needed rehab work, if.

It needed rehab, there's probably a re. A hard money lender that would do it. That's, that's always the answer that I have. There's probably a hard money lender that.

Will do it as its value is 100 and they're into it for 50.

Yeah.

You know what I mean? And after pair value is 200, you know what I mean? And you know, maybe it's a lesser loan amount and they're getting, you know, reimbursed for their 50 on the back end when they sell it. Maybe it's, you know, that's, that's the thing to look at. They just need a rehab. Because technically you would be in a first lien position.

Exactly. It could be review, it could be reviewed and placed in a delayed purchase status because they would be looked at as purchasing the property even if it was something where they foreclosed on it. There is, there could be scenario, but you know, that's, that's another one that's really inside baseball that I don't talk about on Tick Tock.

Sure. Well, most people don't understand the note business, but for our audience out there, if you're foreclosing on something, you know, and we, and we got to fix it up, it's an REO at that point. It's no longer a note deal. It's a deed purchase. You can be in first link position and go from there. You know, usually we see, you know, 70% of, you know, whatever the, you know, as, as is value. So if somebody gave 70 grand on a first lien position on 200,000, that's a great position to be in. L low LTV, you're at less than, oh, you're about at 35% LTV on the after repair value side. You know, if somebody put 70 grand and I put rehab into it, that'd be great to give me a little bit of maybe my cash back of whatever I didn't pull. But that would still get, make the deal, get done. In a lot of cases, you know, Absolutely.

There's definitely a lender that would do it right now.

Let's dive into the other Four, the other acronym salad, dscr. And talk about some of that, how is, how is that different from a hard money loan or a traditional 30 year mortgage that people are getting at banks?

So a DSCR loan is a debt service coverage ratio loan. It's another real estate investing tool that investors use in order to buy and refinance properties without having to go through the proctology exam that a normal bank or traditional lender would give you. It's not based on cough exactly. It's not based off of your personal income. It's primarily based off of the property's ability to pay its own debts. Now being in the position that I am, again, I'm going to remind everyone that I'm a broker, I'm a nationwide lender. So I work with people that originating notes that are getting bought by hedge funds. So they set the guidelines, they do have credit requirements for these loans. And the influence of your personal credit does matter on the loan to value max that you'll get. But the primary driver here is the property's ability to pay its own debts. So what I mean by that is a cash flowing property is measured by its ability to pay its principal interest, taxes and insurance. And in cases where you're buying in different neighborhoods like an HOA or a condo, the condo fees or the flood, if in a flood area, you're going to have to cover the flood insurance, otherwise it's going to look very similar to a conventional loan. So the reason why you would get a DSCR loan versus a conventional loan, and by the way, I'm not anti conventional loans, I'm not anti traditional loans. They have their time in place. A lot of times when people are using a DSCR loan versus a conventional loan, it's because they've maxed out on the number of conventional loans that they have. Their DTI can't support another 30 year loan. So they'll go an investor loan or a DSCR loan which is based off of the property's ability to pay its debts. So getting into that equation, it's an equation.

Let's, let's talk some numbers on that. So let's say all that stuff you rolled into is 2,000amonth.

Okay? So principal interest, taxes and insurance, if that equals 2,000amonth, ideally we're looking for fair market rent to be at or more than 2250amonth because you want to.

Hit a multiplier of what that's one point.

Yes, that would be 1.25. But in, in one point with 2250 that would be 1.1, 2500 actually. Okay, 20. Exactly. 2500 would one. It would be 1.25.

Yeah.

2200 would be 1.1. Are there DSCR loans that go down to 1.0? Yes, but does that make sense?

No, because you're not making any money.

It's not. That's zero cash flow. I've even seen some DSCR guidelines where it goes down to 0.75, which means that every month you're taking in negative cash flow. Now why would that, what would that justify? Well, you understand that every time you make a mortgage payment, you're building back equity, but it doesn't make sense to even collect rent at that point. So yes, you're looking at the goal here is to have the highest ratio. So 1.25 or more. So you're bringing in 2,500. That's $500 gross cash flow. This is not accounting for, for vacancy and capital expenditures or property management.

Big one. Yeah.

So it, you can be approved at a 1.25 DCR that doesn't account for that. So the cash flow still could be pretty tight if you do the max loan to value.

And what is that? And what is the max loan to value that you see?

So with my clients, we're doing 80% loan to value on purchase. Whether the, if the appraisal comes in lighter than the purchase price, you're making up the difference because it's going to be 80% of the as is value, not just 80% of the purchase. Because it cash flows, it's still going to be the lesser of the two. Then when we do a refinance, you can do a rate and term refinance up to 80%. And you could also do a cash out refinance up to 80%. Just we got to watch it because again, we want to make sure that you're still going to cash flow and that it makes sense. And for the options that I offer, the 80% loan to value cash out is really only available for single families. It's not for duplexes, triplexes or quads.

So let's, let's run some numbers here like on our previous scenario.

All right, let's do it.

Okay, so $200,000 property as is after repaired, your 80% max to finance that would be at what, 160, am I right?

Yes.

So somebody's bringing 40 grand to the table. Okay.

Yes.

And are these loans short term? Are we talking longer term on a dscr? Is there a balloon period fixed Rate or how's that kind of work as far as terms?

Amazing. We didn't even get into that before. So These are traditionally 30 year amortized mortgages. So if you have a rental property and you're going to a bank or a credit union, they may be offering you slightly lower interest rates, but it's going to be a 15 year AM or a 20 year M or a 25 year M. All of those still with a 5 year reset on the.

Rate and usually a cap of usually about 65, 70% value, correct. On an investment property, right?

Exactly, exactly. So the DSCR loan, just selling this product here, there's no cap on the number of loans that you can have outstanding. You have a 30 year amortization which feasibly could give you a smaller payment each month and higher cash flow and you're going to be able to borrow more money against the property.

So on this scenario you're 200, you borrowed 160. What kind of rates are people saying? Let's just say somebody's got a decent credit score in the 660 to 680s or is there a cutoff on that? You know, where do you guys look at a baby or crap credit?

Sure. So as of recording we're in January of 25, so I don't, I want to make this as evergreen as possible. So in the first quarter of 2025 we're seeing rates in the sevens for max leverage. You're going to have a higher interest rate based off of your qualifying credit score. I tried to say that at the top here. So if, and then again how much money you're looking to borrow against the property, the lender will need to stay within their ratio guidelines as the primary driver. So if you do have that 660 to 670 credit score, you're already capped at 70% loan to value. You may also have a higher interest rate. So this could be a scenario where if you tried to get 70% and you have the 660 to 670 credit score, you could be looking at closer to an 8 or above an 8% interest rate and a tighter DSCR. In that scenario it still may be at the 1.15 or the 1.2 range. Whereas someone with a 760 or more, they got nothing to worry about, they're in the low sevens, they can borrow up to 80%.

So wait, okay, so 760 and higher is where you guys figure the A, A plus, stuff like that, right?

Yeah, that's going to be no one's going to have a problem really over 720. But 760 is going to be your A plus plus credit that you're going to get the max leverage, you're going to get the, the lowest interest rate available. There's also opportunities for buy downs and things like that. But when we're talking, but when we're talking about buy downs, buy downs are for primaries because if you look at this, as long as the cash flows, the interest rate again, as long as the cash flows, it doesn't mean because someone else is paying the mortgage and every time that, that they pay the mortgage, you're building back equity in the property. And if we're in the cash flow game, then if the cash flows it cash flows. If you, if, and this is coming from a guy that sells debt, you're a guy that buys debt. Debt is good. If you have a free and clear asset, which is what people feel like they're buying rental properties to have a free and clear asset, all you have is a liability because anything that happens to the Property, you're exposed 100%. You don't have any cash. It's all tied up in the property.

Yep, so true on that. Now a question for you. On the DCRS, let's say somebody bring in 75% is what they qualify for. Would they. Will you guys allow or some of your lenders allow a say owner carried second for the remainder 25 purchase if it's still cash flows at that 1.25 with the debt coverage on the owner finance second or no, there's still, there's.

Still going to be some skin in the game that a DSCR lender wants to see. I have one lender that is more commercial focused and they're a no DSCR but still will give you 30 year AM and go on the MO and they like the duplexes, quads and tries and they'll do a 90% combined loan to value. So that would be something where you're bringing 10 of your skin in the game and they'll still want to be at their max 70% allowing somebody to.

Bring in the 25 second or let the exact area that, that's, that's a great bargaining technique too to talk to a lot of people out there if you have that lender to do that. And a lot of these sellers, I don't necessarily want to sell because I don't want to take the full tax hit on it, but I can carry a second and delay some of my tax burden. You know, and reduce that. That's, that's a, that's a great aspect of that. Now you mentioned something a little bit earlier too about oh, hey, refinancing or a seasoning issue. So if somebody got this rate and they bought it, you know, at 200, but let's say depreciation goes up in two years and now it's at $300,000 value. Right.

The way that, the way that I talk about seasoning is because of my core clients being business owners that are looking to build and scale their rental portfolio. They're hitting that brrrr strategy that's buy, rehab, rent, refinance and repeat. So they're using the hard money loan up front to get the money for purchase and then the money for rehab. Now where the repeat part comes in is not only are they looking to buy with enough, with enough equity in the deal where they can pull the cash out to pay off their hard money lender and their existing costs that they had in the deal, but potentially be able to pull out cash and then use that cash to roll in to the next deal. This was a lot easier in 2018, 2019, 2020. Right now in 23, 24, 25, it's a little bit harder to pull that extra cash out. But we're still doing it.

So let's, okay, let's say that somebody rehab the property hard money instead of, you know, instead of it being, instead of them selling the property at 200, maybe it's it the while they held it went up to 250 in value, they could technically refinance the hard money.

After 90 days and pull cash out. Seasoning is 90 days of ownership of owner of ownership.

Not fix and fixed up and sold or anything but actual ownership. So that's a 90 day period to rehab it and, and get through all that stuff to get it a point value. Nice.

Correct. So if you are an effective project manager and let's say you're flipping, let's say you're just a flipper. Not just, but let's say you're flipping and you've nailed it down. So I have a couple of clients where what they do is they will flip three properties and then on the fourth property they'll hold that one for a couple of different reasons. One, they want to build up cash flow. Number two, they understand that they're going to get hit with capital gains every time they sell a property. So if they don't want to pay everything to Uncle Sam, they'll use the tax advantages of holding on to real estate and cost segregate and things depreciate everything out into the future.

It's almost like a built in 1031 exchange for a lot of their profit there to delay exactly that aspect. Okay, nice, nice, nice. I love that. Any minimum loan amounts on a dcr? Since a little different from hard money, does it need to be at least 100 or 200? What's, what's kind of the better bang for people's bucks on the assets that they're looking at.

So the asset value, so the, the actual property value needs to be at $100,000 or more. And then the minimum loan amount that I've seen across the lenders that I work with is 75,000. To work with me, I'm going to be pretty expensive on a $75,000 loan. But being a flat rate, a flat rate broker, if we're doing $150,000 loan, what you can expect is two points.

Okay, so three grand.

Yeah, yeah.

That's not bad at all. For. And any prepayment penalties on any dcr. Is there like a two year prepay or anything like that or. No.

So I live in Pennsylvania and so there's some funky things going on here In Pennsylvania when you have loans under $320,000, there's laws in the books where there can be no prepayment penalty on single family residences.

That's your lovely Attorney General with a hard on time to affect investors out there. In a lot of cases we dealt with.

Exactly, yeah.

It's contract for deeds and oh my gosh, don't get me started on. So basically anything over 325, there's going to be a two year prepay.

Correct. So I just wanted to put that out there that there are different laws in different states as far as prepayment penalties are concerned. But traditionally you're going to see a three to five year prepayment penalty with a step down. So if it's a three year prepayment prepayment penalty, it'll be 3%, 2%, 1% that also goes in. You can toggle these prepayment penalties to affect your interest rate. So if you have a five year prepayment penalty, so for 60 months, you're planning on staying in this rate and this property without additional principal penalty. So just so that everyone knows what a prepayment penalty means, it means that if you were to sell or refinance, depending on how long you've owned the property, you may still owe the bank not only their principal but an additional fee on top of that because they projected the interest that they were going to make over a certain period of time and they want to capture that now on a $160,000 loan. A 2% prepayment penalty is not all that bad if you're selling the property anyway, especially with equity. But for someone that is if they were, if they bought. So there were loans that I did back in at the end of 2023, we were probably at the highest interest rate of this fluctuation season. And I did a couple of, in a couple of DSCR loans in the high eights. If someone's looking at the scenario now in 2025 where they may qualify for mid to low sevens, they could be facing a prepayment penalty and it may not be worth it to get out of even that 8% interest rate.

Yeah, hold on to it for another 12 or 24 months.

Exactly on it.

If anything like it go up now on the rents. Are you single family homes? Are you guys? I had one guy tell me, oh yeah, if you do single family homes we can make up a rental rate. I'm like, wait a second, you got to be a little stricter on that. What kind of tools are you using? Are you using like a retrometer you have in a Realtor comps? You're looking at Craigslist ads, what how you kind of calculate and the rental rate on those things.

So with DSCR loans it is extremely dependent on the appraisal. I mean this is a scenario where there's probably the biggest drawback to the DSCR loans is that the fair market rent appraisal, the 1007 form, is going to affect the loan more so than the actual sales comparable. So I've had scenarios where we've gotten a really nice sales comparable value and then someone's like, yes, I'm going to be able to get all this cash out. But the fair market rent just doesn't support the DSCR. So they're still limited then to their 65 or 70% loan to value because rents in the area just aren't competitive with what the value would support on a sales comparable approach.

Makes sense. And that's not a traditional like a 12 month rent or something like that. Is there any leeway if somebody's gonna be using like an Airbnb or short term rental aspect on a property?

So there are lenders that are, their niche is going to be based off of the, the vacation rental. However, they do come with a little bit of a higher interest rate. And what I tell anyone that asks me about vacation rentals and short term rentals is that you're leaving it in the hands of government. That's the people of New York City. Ask the people of Charleston, South Carolina. Ask the people of Pigeon Forge, Tennessee.

Austin, Texas.

Austin, Texas. Exactly. At any moment the hotels can say, listen, we're the ones actually providing the service for the hotel tax. You guys aren't getting any of this and then immediately boom, overnight, no short term rentals. Now for your midterm rentals, where it's like six months for the traveling nurses and things like that, corporate leases, those can DSCR as well.

Now if when you look at DSER can also be for multi family like the commercial, like small apartments in a lot of cases too, correct?

Yeah. So DSCR is actually from the commercial asset world. It's relatively new to the single family one to four space. So you can do a DSCR loan on commercial multifamily on commercial buildings like light industrial, warehouse, office, retail, things like that. So but those, the DSCR calculation does account for net operating expenses in that as well when you're talking about a commercial multifamily. So be mindful of the additional fees as it goes into the dscr.

Awesome. Now if somebody's looking at buying a property they're thinking about getting with you on a hard money loan or dscr, what are some things that they can put together ahead of time? Maybe not pay for a full appraisal, but what are some things like in a loan packet will make this a smoother process versus just throwing against the wall? You know, I'm sure you probably get enough against the wall from people just hey, can you finance it? And haven't pulled any numbers or anything on a property.

So that is where experience is going to come into play. And as a broker, I understand that a lot of my clients are going to fall between the deals 0 and 10. So I try to make it a point to go over the top and walking through each deal with everybody and seeing exactly if they're going to make money or not. But if you're somebody that wants to go and shop around for a hard money loan, having your scope of work, actually having your contractor have gone through the property and know what your repair costs are going to be, are probably going to be more valuable than even the after repair value because anyone and everyone that is going to try and sell you a loan is going to try and do their own comparables for the sales and you really can't control what they See they're going to go on whatever resources they're using and trying to influence them as to what the property is going to be worth. That's going to be just a waste of hot air. What you want to show them is what your buy price is going to be and the discount versus what it is worth today and then your repair costs. So you want to be able to present to them the total cost. They will come up with their after repair value.

That makes sense. Are there any application fees things to start the ball to kind of get pre approved on as, as a borrower with their you know, credit score and experience kind of already checked off before they're out going shopping.

So if there are fees up front, I'm, I'm very. It's such a different world. The, the commercial lending world. There can be an application fee, but what are you getting in return for that? Because think about the way that I get paid is on a success fee. The only fees that, that my clients are going to be paying upfront are going to be an appraisal fee or something related to maybe a credit check. But I want to eat that $50. I don't want that to be something that you're. I don't want that to be my competitive advantage. Right. So if they're paying maybe a collateral desktop analysis, a CDA fee, maybe that's an additional $129 on top of the appraisal. Sometimes we're able to get that all in but none of it should be directly towards any one broker or loan officer. That's where your getting into more of a scammy territory.

I'm glad you bring it up because that's the reason we want to go. I can understand a credit, credit score poll, you know, some of those little things. Appraisal K Are they gonna, they're gonna pay for the appraisal or you guys gonna pick the appraiser to do that?

That's a great question. So it depends on the lender that you're working it with. So if I work with my desktop lenders or my virtual BPO lenders, they're doing the underwriting themselves and they are coming up with the value and they're. You're not paying for that. There is a paid BPO option that I have and a full appraisal option. What you get with both of those options is most likely a lower interest rate and maybe a little bit lower fees. Because again when we talked about how these notes are getting sold at the end of the day they're going to hedge funds. That gives more security to the note buyer. That, hey, there's an appraisal with an appraisal license on the line versus some guy that stares at numbers on a computer all day.

You mean you don't trust Zillow values? That's your value. Hey, listen, I can't tell you you're probably tired. Oh, my value is at this on this property. It came back at this. Yeah, exactly. In avm, automated value doesn't mean in a lot of cases. So one question I wanted to ask her too. Can people finance these into LLCs S Corps or is it all. Is there any personal guarantee involved with the. Either the hard money loan or the DSCR loan?

Yeah, if you're working with me, you know, I don't want to speak for, I don't want to speak blanket for all hard money lenders or all DSCR lenders, but working with me, LLCs, LLPs, S Corps, corporations are all okay as long as they're not owned by trusts. We got to have a personal guarantee and a trust prevents that. So there is a personal guarantee on these loans. However, they don't report on your debt to income because they are business funding.

But if somebody does get, if a rehab goes south or gets burnt up by the Palisades fire or something like that, it's not insurance and you foreclose on the property. You, I guess the lender, the lenders will only go after what isn't recouped in a foreclosure, basically, for the most part. Is that about right?

So all, all of the projects are going to have an insurance policy. So and I'm curious as to how all of that is going to play out over there. And again, you know, keeping this kind of evergreen, we're here in, in January 25th, so I'm curious as to any projects that were going on that had builders risk policies and things like that. What, what is effective? But as far as my knowledge, all of the loans that I have out there have either a builder's risk, a hazard policy, or of course a construction policy.

Okay, good stuff. Good stuff. Now, most important question, most important question, this whole thing is how do our listeners and followers reach out to connect with you to get the ball rolling on a project or.

Yeah, well, it's hard for me to say Evergreen, because you could find me on TikTok at Hard Money Gary, but you can also find me on Instagram Hard Money Gary. You can find me on Facebook Hard Money Gary. You can reach me on my personal Facebook Gary Brown, if you search me up and I'm actually if you go on Google and you search hard money Gary, I should be the third or fourth post.

You have a website as well?

I do. I got hard money gary.com.

There we go. What we're looking for.

There we go. It's hard moneygary.com and my company is Gershom Flipping Rental loans. It is gershom loans.com.

Awesome. We'll make sure. But the hard money, Gary, for everybody that makes it the easiest way, got to brand yourself hard moneygary.com. that's right up there for you. This has been really great, Gary. Thank you for taking time out of your busy Friday afternoon to sit down and talk with us and kind of go through the two and I'm sure, I mean I know that you're really good like you said about talking with people and steering in the right direction, the right product for the right type of deal.

Yeah. Appreciate it, Scott.

One of the things I used to like to do when I was doing a lot of fix and flip is always, always run the project you had by a hard money lender at first and if they would approve it, it was a good thing. If it was, it wouldn't approve it. I mean I wasn't getting as good a deal as I should have.

Yeah, for sure.

But another thing too, we did this a little bit is we would run a deal by a hard money lender on a deal and they would basically, oh yeah, it's approved and they would even market it to their list of investors. If we didn't want to do the full fix and flip on stuff. Is that something that maybe you got because I know you've got a network of investors and buyers out there too, right?

Absolutely. So coming from the wholesale world, if I'm familiar with the territory that you're looking to buy your deals and you may get something under contract that you don't necessarily want to take down yourself. And I got borrowers in there. I'm happy to look at the deal.

There we go. Your one stop DSCR hard money loan spot. Hard money gary.com Gary Brown thank you so much, buddy. Got big plans for the weekend.

We got two kids. It's always that.

Good stuff. Well, thank you so much for coming on here and sharing your insight and valuable. It's been really, really great, man.

Absolutely. Take care.

Thanks, man. All right, guys and gals out there, listeners out there, if you've got a fix and flip, a hard money, maybe potentially refi stuff like that do some cash out on your investment property, stuff like that. Reach out to Gary Hardmoney, Gary.com great knowledge, great guy. Just absolutely got a great heart for helping investors take their business to the next level. So go out, take some action and we'll see at the top. Bye. Hey, real estate investors. My name is Scott Carson, known across the country as the note guy. And as somebody who's been a real estate investor living in the loan Lone Star state for over 20 years now, I often get questions from people looking to invest in Texas, whether they live here in Texas or they live outside of the Lone Star State. Where do we find our distressed leads? Where do we find our foreclosure list? And the number one source is Roddy's list. This list has been around for 20 plus years. George Roddy over here, Smiling Face is a friend and his source for foreclosures on residential or commercial properties. The sheriff's list. The struck offs list is second to none because it's just focused on Texas. And if you're looking for Texas deals, which is the fastest state to foreclose in, then you definitely want to check out Roddy's list. You can go to Foreclosure listing service is what it's known for. Flsonline.com if you use the code we close notes. That's right, we close notes. It'll get you $20 off your order. Whether you're ordering a foreclosure list in Dallas county or Harris county or Travis county or Bexar county, whatever county you're looking in, or whatever source list you're trying to buy from them, that'll get you $20 off of the price. Can't beat that. It's a great resource. We use it all the time to find distressed notes, banks with bad debt, private investors who are foreclosing, private individuals who are foreclosing on assets, and also potential REOs for us to purchase or students to buy. So make sure you check it out@flsonline.com that's flsonline.com or foreclosure.info as well. But make sure you tell them that Scott sent you. Use a discount code. Once again, we close notes to get your $20 off.