Rookie Reply: How to Buy Rentals Once You’ve Run Out of Cash

Ashley:
This is Real Estate Rookie episode 220. My name is Ashley Kehr, and I’m here with my co-host, Tony Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast where twice a week we bring you the inspiration, information and motivation you need to kickstart your investing journey. I want to read a review from someone in the Rookie audience. This review comes from Sarah Fries and Sarah says, “Absolutely amazing. I highly recommend listening to this podcast for some inspiration and to hear valuable tips on how to get started in real estate investing.” Sarah we appreciate you.
And if you’re a listener to the Rookie Podcast and you haven’t yet left us notes, rating and review, please do. The more reviews we get, the more folks we can reach, the more folks we reach, more folks we can help, which is our goal here at the Rookie Podcast.
So Ashley Kehr, what is going on? How are things in your world today?

Ashley:
Well, today was the first day of school for my children. My little baby went to kindergarten. It’s amazing, the difference of your oldest going to kindergarten, then your youngest is like, eh, the third one is off to school. But I drove him to school this morning and then picked him up and yeah, they had a good day.

Tony:
How far apart are they?

Ashley:
I have an eight year old, a six year old and a five year old, so little Irish twins.

Tony:
So is that kindergarten-

Ashley:
Kindergarten, first grade.

Tony:
…. Kindergarten and first.

Ashley:
And then third grade, yeah.

Tony:
Gotcha. Okay, man, time flies. I was telling Ashley before we started recording that my son started high school a little over a month ago. And me and my wife Sara, we were more emotional than he was. After we dropped him off, we literally cried on the couch like hugging each other, because we were so obviously happy that he’s getting older, but it’s also so sad to see your kids get older in front of your eyes. It’s a weird, weird time as a parent.

Ashley:
This week’s Rookie Reply, we actually pulled from my DMs @wealthfromrentals on Instagram. You can also send Tony a DM @tonyjrobinson on Instagram.
Today’s question is coming from Jerry Willard. “Hello. I’ve been listening to your podcast for a while and I finally made the plunge and bought three 750 square foot homes in Houston. I cash out refied my home to buy these. My question is, after I rehab, rent these and refinance these, where can I get more money to buy more properties? Is there a type of loan for investors or do I need to look for a hard money lender?” Tony, what would be your recommendation?

Tony:
Yeah. First of all, congratulations on just getting started. There’s a lot of folks that listen to this podcast for months, years, and they never pull that trigger. I think first you just want to give you credit where credits due. But to answer your question, your question is, “How can I get more money to buy more properties?” There’s a couple of things here.
First is that, recognize that once you refinance each one of these properties, hopefully you’ll be getting some kind of cash back from those refinances. Because say, we know the numbers on this deal, but say you bought each one for a $100,000, now they’re worth $200,000. You’ve got some equity in there that you’ll be able to pull out. You’ll hopefully be able to recapture the majority if not all of what you put into those first three properties, and you can start recycling that capital from there.
Secondarily, let’s say that you’re not getting any cash back. Let’s say that you’re just refinancing and it’s just like a written term, refinancing, you’re leaving that capital on the deal. There are still tons of other options when it comes to financing your subsequent real estate deals. I’ll rattle off of a couple.
First is there’s DSCR loans. Just let me take a step back. When you apply for a traditional type of loan, they’re looking at you as the borrower and saying, “What is your debt to income ratio? How much income do you bring in? What kind of expenses do you have every month? What’s your credit score?” They’re looking at your credit worthiness as a borrower. When you buy a DSCR loan or a debt service coverage ratio loan, instead of qualifying you per se as the borrower, they’re qualifying the property.
And they’re saying, “Can the property afford to cover the mortgage payment?” Not necessarily will Jerry be able to cover the mortgage payment? And those loans typically they have more aggressive terms. It’s not going to be like a 30 year fix. In most situations, the interest rates are typically a little bit higher, but it’s a tool that a lot of investors use to scale, because it’s easier to get approved for those kind of loans.
And the last thing I’ll say is that if you already have experience, looks like you have good experience finding good deals and are renovating those, going the hard money route is also an option as well so that you can obviously find a property to speed up, put the money into it with the hard money loan, refinance to get that money back and keep scaling from there.
Just a few quick thoughts on my end. Ash, what do you got on your side?

Ashley:
Yeah, I think all of those are great options and you can also go to the commercial side for your lender too, for a bank. There’s a residential side where you get the nice low interest rate, 30 year fixed rate mortgages though the property is in your personal name.
You can put the property into an LLC and then you can go and use the commercial side of banking where they look more at the property than you. You’ll still need to submit your tax returns, your personal financial statement, and you can go and get a loan through the commercial side. It tends to be usually a higher down payment, so one need to 25%, would be the down payment. That is still another chunk of cash that you should come up with.
In this scenario if you are pulling money back out of the properties and you’re getting some cash from those refinances, instead of paying that primary resident’s mortgage off to pay it back, I would take that and I would use it as down payments to purchase more properties using a commercial loan, or if you’re able to get approved on the residential side and just putting those down payments down. I think that is a great option.
Also, if you go to small local banks, they have so much more flexibility and just options. Just tell them what you’re trying to do. Don’t tell them, “This is what I’m looking for. Can you do this?” And they say yes or no. Tell them, “I have these three proper properties. I just want to refinance them. I want to buy this property. What kind of options do I have? Here’s all my financial information,” and see what they can offer to you and do this to multiple banks. You never know. I had this property where I got it under contract for a cash yield. I had no idea how I was going to pay for it.
I was maybe going to use my private money lender and I happened to be talking to a loan officer. And he’s like, “Here you go, 90 day unsecured loan. You can go and purchase this. We’ll give you the exact amount that you need to purchase this property. And then once you close on it, come and refinance with us for a long-term loan.” We did that and it was great and it was awesome, but I never, ever would’ve even known if that was an option if I would’ve just said, “Oh, I’m buying this property. I need it 20% down, 30 year fixed rate mortgage to purchase this property.”
I think that is a valuable tool, is asking the right questions, and asking questions instead of just commanding, or telling, or saying to someone what you want to do or what you want from them. Let them offer to you what they have available to you

Tony:
And Jerry, I think the only other thing that I throw your way is that, now that you purchased three houses, and in your circle of people, now you have a track record of real estate investing. And there’s probably people who are in your network that like the idea of investing but maybe they don’t have the time, ability or desire to do it themselves. And now you can go to them and be the resident real estate investing expert in their circle and you can find a good partner that maybe has the capital to help you fund your next deal.
Obviously there’s a bunch of different ways you can set up your partnership. I feel like we’ve probably done replies on the partnership structures before. I won’t spend too much time on that. But now that you’ve got this track record of like, “Hey, I found these three houses, renovated them, rehabbed them, refinanced them, here’s what it looks like.” Moving forward, take them to start sharing that story with people and see if there’s anyone that might have an interest in partnering with you.

Ashley:
If you guys are interested in having your question played for a Rookie Reply, you can send us a DM. You can leave us a message on the Real Estate Rookie Facebook group if you haven’t joined yet, or you can call and leave us a voicemail at 1-888-5-ROOKIE
Thank you guys so much for listening to this week’s Rookie Reply. I’m Ashley at wealthfromrentals and he’s Tony at tonyjrobinson.