Meet The Masters is a once a year event hosted by Jason Hartman. Over the course of two days, there are speakers that discuss the local markets, real estate taxes, and finance. In this episode, we are playing a segment from the lender panel. You will hear from our three preferred lenders about getting loans in today’s real estate market.
ANNOUNCER: Welcome to Creating Wealth with Jason Hartman! During this program Jason is going to tell you some really exciting things that you probably haven’t thought of before, and a new slant on investing: fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine, self-made multi-millionaire who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it! And now, here’s your host, Jason Hartman, with the complete solution for real estate investors.
JASON HARTMAN: Welcome to the Creating Wealth Show. This is your host, Jason Hartman, and thank you so much for joining me today. We’ll be back with today’s guest or segment, in just a moment.
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JASON HARTMAN: So, anyway, let’s talk about financing! These are all experienced lenders. Now, one of the things I want to say about financing—when you’re an investor, and since almost everybody in the room is already an investor, you probably know this already. But, investment financing is definitely, especially nowadays, a specialty. It’s not very practical to go to the lender that did the loan on the house in which you live at Bank of America, and have them do your loan. You’ve really gotta have a lender that specializes in working with investors. And all three of these people do. They’ve built their careers on the investor specialty. They’re not just mortgage brokers, they’re not just mortgage lenders; they specialize with working with investors. So, I’d like to just start out by asking, do you have maybe just a guess at what percentage of your business is from investors, Aaron?
AARON CHAPMAN: I would say 70%.
JASON HARTMAN: 70%.
AARON CHAPMAN: Still do the owner occupied [unintelligible], but 70%’s investors.
JASON HARTMAN: Okay. And give Caeli the mic, if you would—oh, you’ve got it. Okay. And Caeli?
CAELI: Same question. I would say 95%.
JASON HARTMAN: Wow, okay.
CAELI: We focus almost exclusively—we can do everything, but we really focus our attention on the education and financing of the investor.
JASON HARTMAN: Okay. And Steve?
STEVE: Well, I don’t remember the last time we financed a primary.
JASON HARTMAN: A primary resident? Yeah.
STEVE: I do a few for basically my clients, but it’s probably higher than 95. Almost 100.
JASON HARTMAN: Higher than 95 investors, okay. Good, good. And by the way, I should have actually just asked you all to kind of introduce yourself, and give your 30-second elevator pitch, if you would. So, Aaron, you want to start?
AARON CHAPMAN: Aaron Chapman, the last time I was sitting in this seat I was unaffiliated, because the bank that I was with was sticking it to me and all of my clients. But we found a spot that works for the moment, and they’re doing pretty well. I’ve been 17 years in the industry. Came from mining and heavy equipment operating, so really, quite the transition. Now, most of the time is invested in working with you and your investments, and strategically placing that. Then…I’ve got four children, my wife who’s in the back, and then my wife and I both do rescue for the Sheriff’s department when I’m not sitting in the office.
JASON HARTMAN: Yeah, so that’s interesting. Because one night Aaron was on the news; he rescued some guy from the side of a cliff while he was dangling from a helicopter, or something like that. I mean, the guy is just—you know, if you need rescuing, he’s your man.
CAELI RIDGE: That’s what I was up against last year. I was competing against his heroic energy. He stole the show from all of us last year.
AARON CHAPMAN: You stole the mic, so I had to do something else.
JASON HARTMAN: Aaron has an interesting hobby; it’s rescuing people. So, cool. Caeli?
CAELI RIDGE: Hi, everybody. I want to just take a quick second and say thank you to his eminence, Jason.
JASON HARTMAN: I thought you were talking about Obama!
CAELI RIDGE: I appreciate being here; I love coming down. I especially love the opportunity to come down and put the faces to the names, and the voices and the emails that we spend all year together, and it’s kind of intimate, and I just—I like getting the opportunity. I really like seeing everyone, and getting to talk about personal stuff, and it kind of adds that extra thing for me. Caeli Ridge, we focus almost entirely on non-owner occupied financing, but more than that, I think that what I’d like to—what I’d like to share with you guys is the focus that we put on the education of it, and I’ll be quick. Maybe we can get into this more later. Financing is that black box. Many of you have heard me say that before. It’s the thing that kind of—people glaze over when we start talking about financing, and it can be fairly intimidating. And it can hurt you if you don’t understand it in terms of what you’re able to do, and what you’re able to leverage. So, the education of it is profound for us, and we spend a lot of time on that. We’re licensed almost everywhere in the country, and I love what I do! I’m excited to be here!
JASON HARTMAN: And just to make sure, I don’t know if you said it. You’re based in Portland, where young people go to retire.
CAELI RIDGE: Yes. Don’t pull any Portlandia jokes on me up here. I don’t—
JASON HARTMAN: That show is hilarious. And then Aaron is based in Phoenix, and Steve is based in Seattle.
CAELI RIDGE: So, I’m looking forward to speaking with each of you about questions, comments, anything you have about financing. That’s what we’re here for.
JASON HARTMAN: Great.
STEVE: Thank you. Well, first thing I’d like to say—look at the three of us, because we’re probably the best in the nation at doing this. We really are. Both of these people—got a lot of respect for them. And so, you know, if you go with one of us, we’ll get your deals done. And that’s what we gotta say. So, 25 years in the business, got a few years on both of them. Security National has been in business for about 20 years. They’re backed by Security National Financial, which is a life insurance company. They’ve got money, which is real nice for me. And because of that, we’re in the process right now of developing some products to finance foreign investors, and so I’m real excited about that.
JASON HARTMAN: Excellent. Good. Okay.
AARON CHAPMAN: But just to point here, there’s 60 years of experience sitting up here. Mostly driven towards investors. So, call around, shop all you want for the best and greatest rates and costs. It’s gonna cost you a lot more in the long run than plugging into one of us three. And we’re not—we’re in competition, but we’re really not. We call each other, we work off each other to try and make sure we get the best deal for you.
CAELI RIDGE: It’s actually kind of a unique thing. I mean, you wouldn’t normally get all three of us up here at the same time. I do the circuits, and I go travel across the country and put on the educational part of the financing, but only once a year do I get to hang out with the two other men in the country that know really how to navigate. Has anyone ever heard the term navigating a battleship in a creek? Anybody ever heard that? But that’s what financing can be sometimes. And if you’re not working with someone that really understands the non-owner occupied like the three of us, you’re jeopardizing a successful transaction, for sure.
JASON HARTMAN: So I want to ask you now, and maybe start with Aaron, what’s the biggest problem in the lending world nowadays? What’s your biggest challenge, what are clients complaining about the most, what’s the hardest part?
AARON CHAPMAN: I would say, it’s patience. Quite honestly. Because a lot of times, you guys—you come to these types of events and you get really charged up about it. But the planning was not in place to dive into that perfect sale you see on the screen. So you jump right into it, and there’s not been enough planning ahead of time to set yourself up to have an easy transaction. So what we’re dealing with here—you’re stepping into a pretty maddening process, regardless of who you’re working with. It’s just, who do you want to work with, who do you think is gonna get you there. And you’ve got the last 20, 30, 40 years that you’ve put together your finances—you’re giving us a week to dissect that mess. So, think about what you’re asking here. So really, if you’re patient and you get a hold of somebody as quick as possible, let them start engineering your process ahead of time, that’ll help us to prepare your package in a way that gets through faster. And then there’s a lot of other problems that are big problems, but I think that’s probably the toughest one for us, would be just having the time to really figure out your background well enough to make it happen and be successful.
CAELI RIDGE: I would add to that and say, it’s about setting the expectation. Who has gone through the loan process in the last 12 months? Okay. On a scale of one through five, one being the best experience of your life, and five being the worst, where would you guys—I mean, anybody? Six? Any sevens?
JASON HARTMAN: Terrible.
CAELI RIDGE: It’s tough, no doubt. This is not—it’s an imperfect process. We make it as seamless as we can, and we try to keep you guys from the roller coaster. I mean, there’s a lot that’s going on in the background. You feel frustrated—I mean, there’s some elements to that that you don’t even get to see. So, setting the expectation, and making sure that you have your DNA samples ready up front—
JASON HARTMAN: [LAUGHTER] DNA samples.
CAELI RIDGE: —is going to be an important thing for the success of the transaction. Yeah? Setting the expectations is kind of big for me.
JASON HARTMAN: Okay. Planning, and setting expectations.
STEVE: You know, the other complaint that a lot of customers have is the amount of documentation that they have to provide. And it’s tough. I mean, it really is tough. They look at the—you know, not only your tax returns, but they’re gonna look at your bank accounts. They’re gonna look at deposits going into your bank accounts. Now, it’s going to vary from lender to lender. When I was [unintelligible], I’d have a guy making 10 grand a month, they’d question $500 deposits. I mean, it was just absurd. Absolutely absurd.
JASON HARTMAN: So, how far back are they looking at bank accounts now? Three months? Two months.
STEVE: Two months.
JASON HARTMAN: Oh, that’s not so bad.
STEVE: So typically, the rule with Fannie Mae right now, and it’s about time they put some guidance out there, 25% of your gross monthly income. Anything below that, they’re not going to ask. Now, there’s a caveat to that too. 25% of your gross monthly income. Anything below that, they’re probably not going to look at. But you get a lot of people, and coming from the banking world the way I did, you get a lot of people that know the game, and so they think that they say, okay, so I make 10 grand a month. If I’ve got a $5000 deposit, I’ll just deposit $5000—five $1000 deposits each time. And so, instead of—well, instead of doing the full $5000. So to do that, it’s the same thing when we used to look in banking, and if you were trying to structure your deposits to get away from it.
JASON HARTMAN: Okay. So, what he’s saying here is that the lender becomes suspicious. When you deposit money in your bank account, they wonder where it’s from, right? Because they think it’s a gift.
CAELI RIDGE: And non-owner occupied, you can’t have a gift for your closing. It’s not allowed.
JASON HARTMAN: We were talking about that before.
AARON CHAPMAN: And some people pull the cash from their credit card.
STEVE: Oh, yeah.
AARON CHAPMAN: I mean we have people, put 20% down pulled from a big credit card, then go get 80% financing, you’re getting 5% rate of interest on 80% of it, and 17% on 20%. Is that a sound strategy? No. But that’s what people are doing. That’s why we need to know—
JASON HARTMAN: It depends how good the deal is though, honestly.
AARON CHAPMAN: True, but we’re still not gonna allow it. Just—no matter how sound it is in Jason’s or your mind.
JASON HARTMAN: The banker’s not going for it. Yeah. Okay.
AARON CHAPMAN: I won’t advise on that particular thing, but Steve, see him afterwards.
JASON HARTMAN: You know, I want to open this up for questions, because I know you guys have a zillion questions for them, I’m sure you do. But one thing let’s talk about—well, first of all, on this paperwork—two things. So, first of all on the paperwork and documentation nightmare, prepare your DNA samples, right? How much tougher is it now than it was in, like, pre-financial crisis. Say in 2005. And it got really bad, and then has it gotten any easier? I mean, kind of take us through what’s happened over the last eight years, maybe.
CAELI RIDGE: I would say that ’05, ’06, you could fog a mirror and get a loan, right? You could have a pulse and get a loan. And now, it really—I mean, I make jokes about this just to break the ice, and that’s sort of the expectation I set—it almost is like providing your DNA samples! So in terms of it having gotten better, I think that we’ve gotten used to it, and I think most people are more expecting that you’re going to be handing over your first born. I think that some systems have been created to ease the process a little bit, and we know more what to expect, and I don’t know that it’s necessarily easier for the end user that has to go through it. I think it’s maybe easier on us, just because it’s more routine.
JASON HARTMAN: Yeah. And maybe software systems too.
STEVE: Yeah, the other thing that I see on that too is, I tell a lot of my clients it’s like going back to what lending was 20 years ago. Now we have some added tools. We have the automated underwriting, you know, the way we can get credit reports. But you know, the other thing that I’ve seen over the years too, is that my clients are getting more sophisticated. They’re looking at the LLCs, and so they’re looking at different business structures to try and do things. They’re probably better financially with their cash. And because of that, that creates some additional—a few extra things that we have to look at.
AARON CHAPMAN: The question is really a lot deeper than what we can I think answer up here. Because with what we see—with all that trend, all those things that did happen, those events in the market that got us to where we are today—you’re still talking about a lot of other factors involved that are not just your income and your assets. It’s not just the simplicity of looking at numbers. Although it should be. And if I may, you know, take a couple of moments here to kind of illustrate what I’m talking about here, we’re dealing also with people that are in this industry. We’re talking about underwriters and investors and people that work for them looking at documentation. Basically a dossier on you that’s in paper form, and trying to decide whether or not they’re comfortable. Because it’s really their butts on the line when they sign off on it and say yes, we’ll do this loan. Because if it goes bad, it comes back on them. It comes back on the originating entity, no matter how far down the road it was. That’s the way it’s been established now. So, I’ve had a situation—I’ll step into my little prop scenario, and it might take a minute or so, so I apologize—
JASON HARTMAN: You have magic tricks for us?
AARON CHAPMAN: Well, it’s a story, more or less. What I have is a person in the audience who—there’s two instances where this has happened, and it’s at the company I’m with now—where when I came aboard, they weren’t used to the investor world. So I’m very, very new to these guys, as far as doing these particular types of loans. So, the underwriters were uncomfortable, they’d go up to the head of underwriting. They would sit on it for sometimes weeks. And in this particular instance, Neil’s sitting in here, and he’s patient enough to let it go by for 30 days. I had to fly up to meet with this individual and sit face to face with her. When I sit with these people, you have to shake them up a little bit, because you’re going to talk with an underwriting manager. They have an idea, so they have a loan officer coming in, that looks like me, because she met me before that, and I’m gonna come argue a loan with her. She’s made a decision. In her mind, the decision’s over. So I walk in and I set this on the table. And I pull out this, which is a guideline manual. I set this down on her table. [SILENCE] [AUDIENCE LAUGHTER] Razor knife. [RUMMAGING SOUND] Duct tape.
CAELI RIDGE: You did not do that.
AARON CHAPMAN: Oh, it gets better. My zippo.
CAELI RIDGE: There’s a can of gasoline in there.
AARON CHAPMAN: Bottle of Jim Beam.
AARON CHAPMAN: Two condoms.
AARON CHAPMAN: I set them on the table and I asked her, and she goes, what the heck is all that. And she’s looking, because she’s going to negotiate a loan. I said, we’re gonna get an answer on this loan today using one of these items you choose.
AARON CHAPMAN: And if you don’t know—if you don’t think that I have the balls to use it, I have two that clank.
AARON CHAPMAN: And I set them all down there. Now, it took her completely off of her guard. And we talked about the loan. By the time we were done, she approved it on the spot and we moved on. But see, what I’m dealing with here—you’re dealing with a situation which is not normal. People are in fear. So when they’re looking at your set financials, I’m dealing with an individual. Now Neil, I put him on the spot here, but it was his loan. There was no reason it should have gone that long. But she took all these little tiny little issues in the guidelines and applied them to somebody they didn’t apply to. So I had to go back and explain to her, this is why that guideline exists. This is where that guideline exists. We’re talking about a senior engineer at Microsoft, for crying out loud, who has x amount of money and assets. Quite literally, he does not need us, a thousand times over. And so, when we got down and started looking at the fundamentals of it, I was able to explain that, it took her off of her guard, and she signed off on the loan. And I’ve done it again. I’ve used it on other individuals. So we have to get—
CAELI RIDGE: —borrow that bag.
AARON CHAPMAN: I’m actually going to market these; this is my new—this is the underwriting negotiation kit for loan officers. I was walking to the office and I was pissed off—
JASON HARTMAN: You can also use it with appraisers.
AARON CHAPMAN: You can use it really with any—go buy a car.
JASON HARTMAN: And maybe clients.
AARON CHAPMAN: So—to tell you where I got this from, I was driving to work extremely pissed. I stopped by a Walgreens. I can’t remember—for something. As I’m walking, I’m seeing all these things, like, I could use that. And I put it in a paper bag, so it’s somewhat sturdy. But—
JASON HARTMAN: Now, you didn’t drink much Jim Beam.
AARON CHAPMAN: That was—actually, I used that stuff—you have to empty a little bit out so it looks like it’s—
CAELI RIDGE: Official. The bag is ominous. The bag is what does it for me.
AARON CHAPMAN: It’s an ominous bag.
CAELI RIDGE: Yeah.
AARON CHAPMAN: They don’t have any Louis Vuitton paper bags at Walgreens. So, the reason for that is, you gotta know one, the people you’re working with are willing to go through some serious extents here to get these deals done. When we believe it—believe I’ve not had a deal turned down in over a decade.
CAELI RIDGE: That you know that qualifies.
AARON CHAPMAN: Exactly.
CAELI RIDGE: So, let me—can I just add to that? What he’s speaking of, is we are dealing with underwriters and investors that—keep in mind, this is to put it into perspective—the percentage of loans that fund, in this country every year, that are non-owner occupied specific, are what? 3%?
AARON CHAPMAN: Very, very small percent.
CAELI RIDGE: So, they’re not familiar. They don’t live in the world that we live in. and that’s why we’re such a unique group, and we’re so focused in on what those—did you see that guideline book that he pulled out? That’s probably half of it, really.
AARON CHAPMAN: That is just—that’s like the cliff notes. You see I even marked just the cliff notes one up, just so I could go in there and fight with them.
CAELI RIDGE: That’s friggin’ brilliant, man. That’s awesome.
JASON HARTMAN: She wants to order 100 of your kits
CAELI RIDGE: I’m using that!
AARON CHAPMAN: It’s $150 a piece.
JASON HARTMAN: Steve, are you a taker too? You want a kit?
STEVE: Yeah. I like them.
JASON HARTMAN: Buy Aaron’s kit.
STEVE: I like our head of underwriting. She gets it. You know, it’s funny, because when I flew down to Salt Lake and met the president of our company, he was sitting in there and he goes okay so you live in Seattle, and he goes, you gotta tell me—how do you develop business 2,000 miles away? So, I went through this whole shpeel, Cheryl Gray walks in, I mean it’s just—they get it. They see it. And the other thing is, and you folks out there—contrary to what everybody’s telling you, that the investor deals are risky, the servicing portfolio proves otherwise. Because when you look at the servicing portfolio if you’re an investor, I know that when I was at Guild, and when I was Security National, it’s the best performing part of our servicing portfolio.
JASON HARTMAN: Well you know, that’s an interesting point. So, it’s always been more expensive and tougher, at least so far as I know, to get a loan for an investor than it is for an owner occupant. And the rationale that I was brought up with when I started at Century 21 when I was in college and then worked at RE/MAX after that, was, a homeowner—the last thing they’re gonna give up in a crisis is their own home. Their residence. And the first thing they’re gonna let go is their investment properties. But you know, kind of the Robert Kiyosaki concept of the Rich Dad Poor Dad author, what he says is, rightfully so—your home is a liability! The home in which you live! That’s a liability, because it costs money. It doesn’t produce income. Anything that costs money is a liability. It’s making you poorer. Okay, now granted, maybe your home that you live in went up in value. But that’s just luck, okay? You know, I’d rather be lucky than good, right? But that’s just luck and speculation and toss the dice. But an investment property produces income. So, you should—it seems more likely that you should be able to hold onto an investment property that’s not a liability to you the borrower, but, you know, you’re saying it does work out that way in practice. I don’t know. Well, see, the last time around, people were not really investors. They called themselves investors, but they were really just speculators.
CAELI RIDGE: Exactly. And that’s what the knee-jerk reaction is.
JASON HARTMAN: They didn’t buy it for cash flow; they bought for speculation. Greater fool theory. So, you know, that’s like a counterintuitive way to think of it. The banks, really, in linear, cash flow oriented markets, the non-owner occupied loans should be less expensive and easier to get! It’s less risky!
CAELI RIDGE: Should be now, yeah.
JASON HARTMAN: Now, if you’re an investor in a place like California, where cash flow doesn’t work, then of course you should pay a premium, because you’re more risky….
CAELI RIDGE: But they raise the bar. They’ve raised the bar. But that knee-jerk, they’ve raised the bar—thank you, sorry—any more, you’ve got minimum 20% down, right? You’ve got higher credit standards, you’ve got higher asset requirements—I mean, so, in terms of what Steve is talking about, the numbers won’t lie. I mean, those are some of the strongest—I’m not gonna say risk-free, but those are performing better than the owner occupied’s are right now. Yeah.
JASON HARTMAN: It’s just sort of an odd thing in the system. Fernando? That was the next question! So, what Fernando’s referring to is, before the financial crisis, you could get an unlimited number of loans, as long as you could qualify for them, which is fog a mirror. One day out of prison, one day out of bankruptcy, one day out of foreclosure—get a new loan for a 100-property portfolio, no problem. And since the crisis, initially it was just four loans. Four mortgages was the maximum you could get. And then it went to 10. And are we—is the state still a 10-loan limit, and where do you see that going, and what are the ins and outs and ways around it?
CAELI RIDGE: We’re still limited to 10. I have a friend that works for Fannie Mae, and I’m hearing that at some point this year they’re considering looking to move it to 12. I mean, that’s two more than we have now—
JASON HARTMAN: It’s money. It’s a 20% increase.
CAELI RIDGE: Right. Good point. And the guys can help me touch on this. There are alternatives, past the conventional. You want to first and foremost, you guys will agree with me, you want to use up the conventional spots first. As far as I’m concerned. You’re gonna get the best leverage at the lowest interest rate, and then you move on to the alternate things like cross collateralization of commercial loans, and things like that. But there’s portfolio lenders out there that will let us exceed the 10. The terms are—there’s some out there that are very good terms. I don’t know, should I go into that? If you have questions about it, certainly—
JASON HARTMAN: Yeah, let’s maybe go into that after the others address the topic, yeah.
AARON CHAPMAN: I’m going off what Caeli said, because I don’t have a friend at Fannie Mae. None of them like me that much.
JASON HARTMAN: See, now Aaron’s sucking up, because Caeli’s gonna buy 150 of those packages from him. So he’s just being agreeable. Either that or you drank the Jim Beam.
AARON CHAPMAN: I had to come up with an excuse to how it got to the level it’s at. But, I would think that over time—because Fannie Mae, all of them, they’re such data hounds. They’re gonna start seeing this trend. They’re gonna start seeing that the fear that was created by people buying on speculation of a increase in value, and then of course they’re gonna walk away from that. And then you’re dealing with—when you think about people all over the country, we’ve got people who have finally—they’ve walked away from their home. They’ve experienced that. And it hurt for a second, but it didn’t feel so bad after that. So now we’ve got people that probably would be—who would easily do that again. So, they’re gonna look at these investors. I’m hoping they’re gonna take that data that they love to look at and say, wait a minute, these are performing very well. It makes a lot of sense when you’re talking about people with this particular type of net worth, and all they’re doing is building an empire one home at a time. Why would we not want to securitize more of these particular types of transactions?
JASON HARTMAN: Well, there’s one issue with that. Since Fannie Mae is a pseudo-governmental agency, of course, how politically popular is it to help investors? Not very, right? Obama thinks we’re all flying around in private jets. But you know, helping homeowners—that’s more saleable, for a politician.
STEVE: And there’s been some rumors floating around that they’re gonna try and increase that limit. You know, part of it is what I see, you know, Fannie Mae, where they tried to do it. They tried, they had a product at their HomePath—
JASON HARTMAN: Tell them about HomePath. What’s HomePath?
STEVE: Basically the HomePath in that are Fannie Mae owned properties.
JASON HARTMAN: So, these are properties that were foreclosed on by Fannie Mae.
JASON HARTMAN: And then they’re being resold to investors.
STEVE: To investors.
CAELI RIDGE: Well, homeowners gets first right of refusal.
STEVE: That’s correct.
JASON HARTMAN: Okay. But if the—yeah. I think the deal was, because I financed a bunch of those. I did hard money loans for rehabbers. And they had to stick them in the MLS for 30 days before they could sell them to an investor. Or, it was 30 at the time.
STEVE: But they had a caveat that allowed an investor, that once they filled up their 10 buckets—their 10 homes in their bucket, where they could continue to buy up to 20 through the HomePath.
CAELI RIDGE: It was a sweet deal.
STEVE: Yeah, it was. It’s gone.
JASON HARTMAN: What was the quality of the HomePath properties? Were they priced well, were they what you’d want to buy as an investor?
CAELI RIDGE: I wasn’t super impressed.
STEVE: Yeah, I wasn’t either. I saw some of them, and we saw some of them in the Seattle area where they had tarps on the roof. And they’re pretty bad.
JASON HARTMAN: Like, the troubled asset relief program?
STEVE: Yeah, kind of.
JASON HARTMAN: Tarps to keep the rain out.
STEVE: The thing that disappointed me, and the reason they did it—they discontinued the program, is because they didn’t get any support from the big banks. It just went right down the tubes. And it was really unfortunate.
JASON HARTMAN: Yeah, interesting. Okay, so, the 10 loan deal is, 10 loans each spouse. So it may be a good reason to get married. Especially if your spouse can become a real estate professional. So, 10 loans, each party. But that other spouse has gotta be a working spouse that can qualify with income and good credit.
CAELI RIDGE: Right. And they have to keep it very separate. They can’t be on title with them. There’s gotta be a veil between the two. The loan and the title qualify independently, but other than that, yeah.
JASON HARTMAN: Any questions about the 10 loan limit? Yes.
CAELI RIDGE: Sure. The question is, if you don’t make a W2 wage, and you have irregular pay, 1099s throughout the year, it’s inconsistent, how can you get a bank to acknowledge that the income is there. Is that the question? How can I look better on paper, maybe, if I’m not just a wager, a W2 wager. Well, first and foremost, if you’re talking to B of A or Wells Fargo or Chase, they’re gonna be very restrictive to that kind of thing. The three of us up here would know how to navigate that, and the guidelines specifically—you’d probably take a 24 month average. You’d probably look at the income from a couple different angles and figure out how you can work it so the—I mean, if the income is there. Ultimately it’s gotta be there for the debt-to-income ratio, right? But there’s certainly ways to navigate that. The other thing is, if you have a Schedule E—we talked about this a little bit when Mark Kohler was up here, and I think we touched on this last year, guys. Do you remember? I spent a lot of time talking about this, because it’s kind of an important piece. The Schedule E’s, unless you have unlimited resources and income, they can bite you in the rear. I mean, you gotta be careful with the write offs for that. If you’re in your acquisition phase, you just want to be careful to have the draft prepared, let us look at the draft, and then we can—at the very least, we can give you what the computation is, how it’s gonna look from an underwriting perspective. And then you can make an informed decision whether you want to carry those write offs forward, or you want to pay less in taxes. Do you want to qualify for a loan, or do you want to pay less in taxes?
JASON HARTMAN: So, the Schedule E is where your real estate is listed on your tax return. Yeah, okay.
AARON CHAPMAN: The simplest answer to that one question really is experience. The majority of the world out there is not that experienced with looking at a self-employed borrower or 1099 wager—borrower. Any of that type of thing. They’re not—they don’t have the capability to dig into your tax returns, and really dig out the income. It takes a lot of experience and time. I remember the first few years of my career, there was one person in, really our whole area. We’d go to her, and have her do it for us. Because nobody wants to take the time. To be honest, loan officers are lazy. That’s why they’re doing the job. And they would rather not go through the headache to do this. That’s why not a lot of them do what we do. Because it is a very, very difficult process, to analyze tax returns.
CAELI RIDGE: You can do whatever you want with your taxes, absolutely.
CAELI RIDGE: Well, depends. Let’s say we run the computation on the Schedule E, and knowing what your goals are for 2014, for example, we’re—first of all, we’re in a unique time and space. I mean, we’re at the beginning of 2014, so you have that window of opportunity. You can get the draft and look at it. Once the bell is rung, once you’ve filed the return, you’re not gonna amend it. That actually raises eyebrows.
AARON CHAPMAN: Nobody likes seeing an amended tax return. Nobody likes seeing that.
CAELI RIDGE: Yeah. So, getting a jump on it would be important. But yeah, you can carry forward—what might be missing, the element that might be missing, is that from an underwriting perspective, there’s a formula that we go through on the Schedule E, that more often than not—there’s two ways to calculate rental income. Do I have time for this? I’ll be fast. This is important.
JASON HARTMAN: I don’t know, how long are you gonna take?
CAELI RIDGE: Two minutes. There’s two ways to calculate rental income. The first way is a very simple 75% of your gross rents, minus the PITI, right? Principal, interest, tax and insurance.
JASON HARTMAN: So in other words, your total cost of ownership on the properties. Say it’s a thousand dollars on one property, and the lender will only assume that you’re actually receiving $750. In other words, they’ll compute a 25% loss.
CAELI RIDGE: It’s called a vacancy factor, yes.
AARON CHAPMAN: That’s for transactions—that’s for homes that do not appear on your tax returns yet.
CAELI RIDGE: Right. That’s for the acquisition year. That’s the only time you get to use this formula is in the acquisition year, or before it hits the Schedule E is a more accurate statement, okay? That is almost—it’s always favorable to you. In that scenario, you will have a positive number at the end of that calculation that’s gonna go into the income column when recalculating the debt-to-income ratio, right? When those properties hit the Schedule E for a variety of reasons we don’t have time to get into right now, almost invariably, at least in the first couple of years, that positive number that you would have had prior, is now a negative number. When you continue to acquire property, depending on how aggressive you are, or how many repairs there were for that year—how many months it went vacant, whatever the story may be, it can be damaging, because it can add up quick. It can add up real quick, and it’s gonna go right against the income, again, and recalculating that debt-to-income ratio, you may not qualify anymore. That’s why this is so important to get ahead of, and knowing what your goals are for the next year. It’s important to look at that draft before you file it.
JASON HARTMAN: Okay, so just talk a little bit about depreciation. The best tax write off known to humankind, okay? Depreciation—I mean, are they penalizing you for taking depreciation?
AARON CHAPMAN: I—in my experience, at least with the new institution I’m with, they don’t penalize you for the depreciation. That gets added back in.
JASON HARTMAN: Depreciation is not a true cost.
AARON CHAPMAN: Correct.
JASON HARTMAN: It’s a benefit.
AARON CHAPMAN: It’s gonna show up as a benefit, and then we just add it back—so, you’ll have your total rents received at the top of your Schedule E, then it’ll go up to the expenses. Part of those expenses, they’re gonna throw depreciation in there. At the bottom you’re gonna see your net income off there—or negative income, off of it. But we’re gonna add back in that depreciation, so that’s not a consideration. There was a time with the previous lenders that they were actually not allowing me to add that back in. Which made no sense. But that was the slow roll that got them to the point where I had to leave. It was one of the factors.
STEVE: And here’s another reason why you want to use somebody like us. I get a lot of my clients who go, hey listen, I can go to Quicken, I can get a better rate. And I say, that’s fine. Go for it. But what they’re not gonna do in that is they’re gonna miss out on opportunities. They’re not gonna work with a professional like yourselves. When we’re looking at tax returns, we’re looking at your Schedule E—we’re gonna look for items that we can go back and add back too. I had a gentleman that came to me from another lender, got denied, and he had paid his mortgage insurance fee up front on his property when he bought it. And had it on his tax returns, right? I said, we’ll add it back in, you’ll be fine, right? And the lender wouldn’t allow him to do that. So you’ve just gotta know what to look for. I mean, I look for repairs on the property.
CAELI RIDGE: One-time repairs.
STEVE: That’s correct. One-time repairs, add those back. The other thing I look for on the tax returns when I go back, we’re talking about depreciation—I go back to when you placed the property in service. So, you might have four new properties that you bought in 2013, but you didn’t buy them until September. And so, really what we’ve gotta do is I can make an argument where I go back to the underwriter and I say look, it’s not a really good representation of what the property’s ability to cash flow is. So we just throw the tax returns out and get the leases.
JASON HARTMAN: Because it was placed in service toward the end of the year.
JASON HARTMAN: Especially seasonally, because the fall is probably not as good as the spring.
AARON CHAPMAN: We just average over the three months, instead of the 12, which is traditional.
CAELI RIDGE: Most wouldn’t know to do that.
AARON CHAPMAN: And most won’t. And then also, your big expenses, that you go into remodel, you put a lot into a one-time expense, document that. Hang on to it. So when you go and you come to us, you hand that to us and say, okay, I have this property, I had a lot of losses that year, but here’s the reason why. I replaced the entire roof. Well, that’s good for 10, 15 years. And I’m going 16 years on my roof.
JASON HARTMAN: Well, hopefully it’s longer than 15 years for a roof, right?
AARON CHAPMAN: Depends on where you live.
JASON HARTMAN: Okay, fair enough.
CAELI RIDGE: So this is where we get to that distant stare. Remember I was talking about how there’s so many moving parts, you guys, and to take the time to really understand this, is more than a panel conversation. So, please, call on any one of us. That’s what we’re here for. And it’s such an important part of this process. It may be one of the most important parts.
JASON HARTMAN: It’s kind of like you have to be forensic accountants.
CAELI RIDGE: Totally.
JASON HARTMAN: To go and recast the person’s financials, and make it fit into the box.
CAELI RIDGE: It takes a long time to learn all of this. Very good questions. So there’s two buckets. Am I hogging? Is it okay?
JASON HARTMAN: Mic hog.
CAELI RIDGE: Okay. So, yes. There’s really, for the 10 spots that we’re talking about, the conventional 10 spots—there’s two buckets. One through four financed properties, and let’s talk about the 5-10. You lose about 5% of leverage, so, when you were putting 20% down before on a single family, you’re now at 25%, right? Your minimum credit score, hard and fast, there is no getting around this, it’s straight Fannie, is a 720. So be careful with that. You have to maintain it once you get past four. And then the reserve requirements get stupid. They get dumb. So, before, in spots 1-4, it’s six months on the subject property and two—
JASON HARTMAN: What she means by reserve requirements is the cost of owning that property if you had to have six months of ownership costs in reserves.
CAELI RIDGE: PITI.
JASON HARTMAN: So, if the principal, interest, taxes, and insurance are $1000 a month, you’ve gotta have $6000 in the bank.
CAELI RIDGE: Right.
JASON HARTMAN: Okay? And what is the reserve requirement when you go over five loans?
CAELI RIDGE: On the 5-10, it’s six months on every property you have. But the good news is that it doesn’t have to be liquid. 401(k), retirement funds, are all acceptable means of showing that reserve requirement.
AARON CHAPMAN: Now, another thing too, and that does not include your primary. It’s only on investment properties and second homes. So, the primary is not included in that mix. So, you get a lot of lenders out there that will try and include that, but it’s not.
JASON HARTMAN: So, you don’t have to have the reserves on the primary residence.
AARON CHAPMAN: Absolutely correct. It’s only on your investment properties, or if you have a second home.
JASON HARTMAN: So, see what happens when you get up over five properties—remember that example. If it was $1000 a month cost of ownership, times now six months, which s $6000, times five—so you’ve gotta have $30,000 in some form of what they qualify as a liquid account.
CAELI RIDGE: Non-liquid. It doesn’t have to be liquid.
JASON HARTMAN: Well, it can’t be equity. But it could be 401(k).
AARON CHAPMAN: It has to be verifiable. It can’t be, I’ve got three tons of gold in my safe.
JASON HARTMAN: Which you probably do.
AARON CHAPMAN: Or, you know, all your ammunition that you know you’ll sell for three times more than you bought it for.
JASON HARTMAN: Aaron and I are both preppers. We listen to the Holistic Survival Show.
CAELI RIDGE: I’m a prepper.
JASON HARTMAN: Everybody should be a prepper. You’re not—
AARON CHAPMAN: What we mean by that is, I can’t verify where that gold came from. You could show me pictures of the gold. You could come to my office and break my desk by setting it on it. But I can’t guarantee where you got it from. So—because I don’t know that you didn’t rob a stagecoach or something, for all we know.
AARON CHAPMAN: So ultimately, it has to be something that we can verify—
JASON HARTMAN: One of those Wells Fargo stage coaches?
AARON CHAPMAN: That’s what popped into my head. Now, we have a gentleman over here in the black coat, that has had his hand—
STEVE: Let me jump in on the precious metals and that, because in my banking career, we used to deal with it.
JASON HARTMAN: You can also talk about Bitcoin.
STEVE: So what you can do with that, if you do have gold, and that, you have to produce a receipt of when you purchased it, and then you’ve gotta take it back into the bank, and then have it valued at that point in time. Because I’ve got clients that do that—
JASON HARTMAN: You mean like, show it to the banker?
STEVE: Well, you’ve gotta be able to take it in and show that you’ve got it, and they’re gonna show documentation that you do have it.
AARON CHAPMAN: We’ve dealt with that in the past, but it’s not very common.
STEVE: No, it’s not.
JASON HARTMAN: Well, it’s not common, because a lot of people that own those metals want to hide their wealth. They want it to be private, so they don’t want to use it for a loan application, okay? So, yeah. Okay. One thing—you know, I just—please, ask a question if you have one, because you know, some of the stuff they’re saying is kind of technical, and everybody’s at a different stage. But if you think it’s a question, I’ll bet you another 15% of the room has the same question in their head, okay, and doesn’t know it. And one of those is probably depreciation. Does everybody really understand how depreciation works? Because it’s such an awesome thing. I mean it’s—someone earlier was talking about how wealthy people don’t pay taxes. Well, I think that was Mark Kohler talking about that. So—I mean, can I just explain that to you? It takes a second. But you know, from the Creating Wealth seminar, my little simple illustration. And just get your smart phones out with your calculator, so you can help me with this, okay? Is this. When you buy a property, you have to divide it up into two component parts. The land, okay—so, here’s the land, you know. It’s not just one thing. It’s the land, and the improvement, or the house, or the apartment building, or whatever, sitting on the land. Right? And they’re valued differently.
So, you know, in a typical example, let’s take a $150,000 property. So, the land plus improvement is worth $150,000. Okay? And let’s say it’s, you know, one of our markets. A lot of our markets are—the land is basically free, right? Because you buy below the cost of construction. So you don’t even—the land is just free. But no one’s going to assess it that way. The three places they assess this stuff is the appraisal, the county tax assessor, and your insurance company, okay? Because the insurance company doesn’t insure land; they only insure the structure; the land won’t burn down, right? And so, in a typical property you might buy through our network, it would look something like this. The land would be worth $20,000. And the house sitting on the land would be worth $130,000. And this is why this is the most phenomenal thing ever. If you can take advantage of these tax write offs—and Mark kind of glossed over it, and I wanted to almost make him explain it then.
It’s the whole real estate professional thing. If you can be designated by the IRS—it doesn’t mean you sell real estate, it doesn’t mean you have a real estate license—although that may help you qualify, but it’s not required—you get unlimited depreciation write offs, or passive loss write offs. Okay? I am a real estate professional because of the number of properties I own, right? And you want to get to this point. It’s very important, because you can literally zero out your taxes. So, what they say here is, you can’t depreciate the land, because it will always be there. But the IRS knows some day, you know, the house is gonna fall to the ground, and it’s gonna have no economic value. Eventually it will just collapse, right? And decay, and be worth nothing. So, if you take in this equation, with your calculators, $130,000, the IRS, instead of taking this deduction all at one time, they allow you to take it gradually, okay? So, who’s got the calculators? Right? Everybody got them? 130,000, plug that in. And they allow you to take this over a 27.5 year depreciation schedule, alright? 27½ years. So divide 130,000 times 27.5. What’s that number? What?
JASON HARTMAN: $4,727? Okay. So—yeah. Don’t worry about the change. I’ll keep the change, and I’ll keep the hope.
JASON HARTMAN: [LAUGHTER] And I’ll keep the healthcare I have, thank you very much. So, so what happens here is, even if this property is, you know, it doubles in value—even if it produces positive cash flow every month, and it looks like, you know, you’re Charlie Sheen and you’re winning! Right? What happened to him? He was going to be such a big deal, he said. Then he’s nowhere. Anyway. So, the IRS allows you to still deduct $4,727 every year if you qualify for this deduction. Now. That’s a long discussion that you can ask Mike Murphy, my CPA, who’s speaking here tomorrow—and you could have asked Mark Kohler. But, there are ways you can get yourself potentially to qualify for this, alright? And this is brilliant, because one year, like in the Creating Wealth seminar, I actually show my Schedule E, and they talked a lot about Schedule E’s. And on the front page of all my Schedule E’s, it shows that I got tax deductions in this particular of $524,742. And the beauty of this is, I did not write anybody a check for $524,742. It was just my properties that were actually increasing in value and producing cash flow, yet the IRS thought I was losing money! This is fuzzy math at its best, right? It’s the most beautiful thing ever. So, you can, you know, you could make a billion dollars a year, and if you qualify as a real estate professional, and if you own enough properties to generate enough depreciation, you could just zero out your taxes.
CAELI RIDGE: That’s where you want to be.
JASON HARTMAN: Taxes are the single largest expense in anybody’s life. As boring as they may seem, you’ve got to get interested in taxation, because it’s your biggest—
CAELI RIDGE: It’s a gray area.
JASON HARTMAN: To qualify as a real estate professional there’s no specific number.
AUDIENCE MEMBER: It depends on the state?
JASON HARTMAN: No, it doesn’t depend on the state. It’s a federal law, okay? So it’s IRS, it’s not state-by-state. But, you have to spend 750 total hours every year engaged in real estate—the real estate business of investing, in your case, right? And 500 of those hours need to be active, material participation. So that’s hours in material participation. So, this means, you can’t be a passive investor and say, yeah, you went to Jason’s seminar, and that was, you know, a certain number of hours, and you listened to his podcasts, and that’s a certain number of hours—and by the way, 358 episodes, 358 hours—you know, you could pretty much pull that off, right? But, some of it has to be material participation. So, there’s 250 that don’t have to be material. But 500 that have to be material, where you have to be actively engaged in managing your portfolio. And there are some other problems. If you have a full time day job, and you earn most of your money from your full time job, it’s not gonna work. But, this is where it may make sense to get married! Even though marriage usually isn’t a winning financial proposition, okay? Divorce is definitely not a winning financial proposition. But if your spouse can qualify—only one of the two needs to qualify. So, if your spouse only works part time, or doesn’t work at all, could be great. In fact, it could be better for your spouse to give up their salary—depending on how much real estate you own, and if you can qualify in every other way, okay? And again, I’m not an accountant. It’s a complicated discussion. But we have—I have interviewed several on the podcast, on some older episodes. Okay? So, you can just type in, go to www.jasonhartman.com, in the search bar type in real estate professional. It’s been talked about a zillion times. Listen to all of those, okay?
CAELI RIDGE: Just one quick thing about the 750 hours. Do yourselves a favor. I know you’re gonna hate this. Keep a log.
JASON HARTMAN: Oh, of course. You gotta keep a log.
CAELI RIDGE: Keep a log.
JASON HARTMAN: Definitely. Keep records. That’s what the IRS really wants you to do. Yeah. You really—I mean, are you passive if you manage your—
JASON HARTMAN: Well, there have been some secondary things proposed, and you should ask Mike Murphy about this tomorrow, okay? But, like, one is, if you have your own business and you—I can’t remember exactly how this whole ploy worked, or if it actually will work. But if you have your own business, and you—it’s an S corporation, and like, this corporation, Platinum Properties Investor Network, is an S corporation. So, all of the income flows right to my personal tax return, right? An S corporation generates passive income, I guess, when it flows, but it’s active if you manage it, which I do. And then, there’s something about how passive income, and passive income could cancel each other out, and then you could—I don’t really know. I can’t remember how that all worked. It sounded a little far-fetched to me. But one CPA came in and spoke at one of our meetings, and came on my podcast and talked about that. And you can listen to her interview; it’s up there.
CAELI RIDGE: I don’t know that I can answer the second part. But I can tell you that on the secondary market, in 2005, there were investors galore, right? I mean, they were all over the place. The only one that’s purchasing the mortgage-backed securities on the secondary is Fannie and Freddie. That’s it.
CAELI RIDGE: Right? Has that changed?
AARON CHAPMAN: There still would be other sources—we’re still able to watch the mortgage-backed securities market every day. It’s supposed to be Wall Street investment capital coming in from various different directions that, you know, it could be—it used to be 401(k)s, IRAs, have pieces of it in their—
CAELI RIDGE: Lehman Brothers—
AARON CHAPMAN: It’s all public money that’s coming from—it could be yours. In some of you guys’ investment portfolios. But to say now that that’s where the majority is coming, it’s kind of hard to say anymore. They’ve done so much—so much has happened in the securities market, and all those things that have gone on as far as the money moving around where it’s being planted. Who knows? I mean, there’s just a lot of smoke and mirrors anymore, so to answer that fully, we believe that there’s a lot of stuff coming from different investors all over the planet. But could easily be getting—be from those sources that you’re referencing too. They’re all pulling you from those that—those—the—that same channel. It’s not coming from Wells Fargo. None of those banks use their own money.
STEVE: Well, again, and that’s the first thing, is that’s why you come to somebody like the three of us up here, okay? Because that should not happen. So basically in that, the investment properties—so if I’m hearing this correctly, you own the investment properties, she wasn’t—she was not on title, okay, then that was just the lender in that just doing a horrible job. Because really in all actuality, the way it should have been is if she’s not on title, she’s not on the loan, they are not her liabilities. They are yours.
AARON CHAPMAN: Some lenders are just trying to do absolute worst case scenario, so they don’t have to fight any battles.
CAELI RIDGE: That’s called an overlay. And we work with investors where we don’t have to subscribe to the overlays that some of the bigger banks might put in play. But, in any case, let’s say—I mean, but keep in mind, you were talking about the taxes and insurance—they’re gonna use that as part of the expense to offset the income, no matter what. That’s gonna happen. But not for her, if she’s not on title.
AARON CHAPMAN: The question is, do we have a prediction—or, does Steve have predictions—
AARON CHAPMAN: As to where the interest rates are going in the next 12 months. Take it away, Steve.
STEVE: I think you can answer the question. All you have to do is go back and listen. Look at historic rates, and at springtime, when everybody starts buying houses, the rates always go up. They will always—you know, a quarter, half a percent, you’ll absolutely see an increase in rates. No justification for it. I just consider it greed. You know, they’ll always do it. This is when everybody wants to move and buy houses.
AARON CHAPMAN: And it’s a supply and demand thing.
AARON CHAPMAN: The demand went up, so let’s go ahead and increase the cost, because we can stick it to a person when they want it. You know, it’s much like going to the grocery store and buying milk, and the truck pulled up and filled every aisle with milk. Well, it’s gonna be really cheap. But if a pickup pulled up with four gallons, you’re gonna be fighting a bunch of people for milk. You’ll be paying 200 bucks a gallon.
JASON HARTMAN: Interest rates are extremely hard to predict. There’s one guy that writes a very high-end newsletter, Grant’s Interest Rate Observer, I think it’s called. And you can Google it, and there’s a lot of information just free on the website. But it’s anybody’s guess. But overall, I’d say the trend is definitely gonna be up. It’s gotta be.
AARON CHAPMAN: I’m sure you can’t stay on this track—
JASON HARTMAN: They just increase the money supply every month, the creation of new money, by 12%, right? Like we talked about this morning. so, that’s a sign of tightening.
CAELI RIDGE: So, there’s two options there. There’s delayed financing, or just conventional cash out refi. Did you pay cash?
AUDIENCE MEMBER: No, I [unintelligible].
CAELI RIDGE: Okay. Then delayed financing is out. That’s something we should probably touch on though at some point. For me, and this is different from place to place—you need three months on title before you can do a cash out refinance. But if you’ve got more than four finance properties, you don’t have any option except for delayed financing for cash out refi. So, do you have more than four financed properties?
AUDIENCE MEMBER: [unintelligible].
CAELI RIDGE: Are they residential homes?
AUDIENCE MEMBER: Yeah.
CAELI RIDGE: Are they on Schedule E?
AUDIENCE MEMBER: [unintelligible]
CAELI RIDGE: Yeah, you’re not cashing those properties out if there’s loans on them. Delayed financing is the only option for that, and it requires that you have paid cash. Your seasoned funds, acquisition money, and then you’ve got six months in which to do it. We can, somebody can—
CAELI RIDGE: Okay. Delayed financing—this was intended for those spots 5-10, but you can do it in any one of the 10 spots. It requires that you pay cash. You can’t have a loan on the property. It’s gonna be your verified funds. You can leverage to 70% loan-to-value. And you literally have 180 days from the acquisition date on the HUD to the closing and funding date to leverage that money back out. If you miss it by a day, and you’ve got more than four financed properties, you will not access cash on that—you will not get your cash back on that property until they change the guidelines. And that’s a moving target anyway, so who knows. Yeah.
JASON HARTMAN: One of the best deals in real estate, though, is the old deal of, acquire the property, have the property, create cash flow, and tax benefits. And then, get your cash out of the property, but still control the property. I mean—and that’s what’s—that’s been an incredible wealth creator. Hard to do now, as they will say. But you know, those guidelines are a moving target, and the pendulum is always swinging back and forth.
STEVE: And one question I do get asked on the delayed financing, because right now, probably about 25% of my business is just that. Investors paying cash for their property. So the common question they ask, I paid 50 for the property, I put 10 into rehab. Can I get my $10,000 in rehab back? Unless it’s included in the purchase price, the answer is no.
CAELI RIDGE: Wait. Actually, check on those. If they’re both on the HUD—if you can get the purchase price and the renovation cost on the HUD, I’m doing this right now—I don’t know if it’s a loophole or what, but it is working—
JASON HARTMAN: The HUD is the closing statement.
CAELI RIDGE: Yes. The settlement statement, when you’re closing, you’re signing loan documents, there’s a two or three or four page document that details all of the costs, and all of the transaction specifics. If the purchase of the home and the renovation cost is on the HUD, the only way this will work, you can get your renovation costs back out. Now think about this, you guys. Depending on what the value of the property is—that’s the other thing about delayed financing. So, you maybe take a note of this—you can go off of the appraised value the day after you close. So, if you’ve got 50,000 into it—that’s the purchase price, and you’ve got 20,000 of renovation, right? There’s $70,000. If this property appraises for 100 grand, and you can leverage to 70% loan-to-value, what did you just do? That’s 100% financing. And that works under delayed financing. That’s a pretty slick tool, if you can—if you’ve got the means to pay cash for something, and you’re looking at something that needs renovation, you’re just gonna have to deal with escrow. Escrow’s gonna have to put it on there. You’re gonna have to pay the contractor in advance. They’re gonna have to distribute, or disperse the funds at closing, to whatever contractor is chosen. You may end up overpaying them, or even underpaying them a little bit. You get a credit back after the fact, or end up paying more, but you just—they’re gonna have to distribute those funds at closing.
CAELI RIDGE: Yeah, you’re gonna have to trust your agent and the team and the contractors they’re working with.
CAELI RIDGE: Yeah, that’s how—yeah.
STEVE: Once you get past the four financed properties, cash out is no longer an option, except through the delayed financing.
CAELI RIDGE: So, let’s say one of those properties was purchased eight months ago. You missed your window. Definitely years ago, it’s not an option today.
AUDIENCE MEMBER: So, even using hard money?
STEVE: Hard money’s a different story.
AARON CHAPMAN: That’s a whole different animal, the hard money thing. We’re talking Fannie Mae’s guideline is if you have four financed properties, there’s no more pulling cash.
JASON HARTMAN: Well, refi till you die is a [unintelligible]
AARON CHAPMAN: Do it if you can.
JASON HARTMAN: I’m just kidding. I’m not hiding behind that. But my concept of the refi till you die concept is that in 7-12 years, refi your portfolio—I don’t know what the guidelines will be then. Who knows. But the pendulum’s always swinging. It’ll swing back. Americans have an incredibly short memory.
STEVE: You know, the general at the—you’re talking about the houses that you have free and clear after that. You could have put private financing on that. It would have to be an exchange of money, and then do a rate in term, because there’s no seasoning on a rate in term.
AARON CHAPMAN: You’re asking, could you move into the property, and then pull your cash out?
JASON HARTMAN: Yeah, you could do that. Sure. Well, you’d probably have to live there a decent amount of time, you know.
AARON CHAPMAN: It’s definitely plausible.
JASON HARTMAN: It’s probably the intent, I assume.
AARON CHAPMAN: I think if you move in, and you can prove on paper—here’s your pay stubs, here’s you bank statements, here’s utility—I mean, if you prove that that’s where you live, then it seems plausible, yeah. You could refinance at that point, pull some cash out of it. And you’re doing under the owner occupied rates. It’s just a better situation all the way around.
STEVE: But you still have to be on title for six months before you can do it.
AARON CHAPMAN: Correct.
JASON HARTMAN: So you’ve owned it for eight months, and then you decide, I was gonna make it a rental, then I decided I am gonna move in. Blah, blah, blah. Yeah. Okay. Let’s adjourn the lender panel now. Will you guys be at dinner with us, I hope?
AARON CHAPMAN: Yes we will.
JASON HARTMAN: Okay, alright, so, ask them more questions, and then tomorrow morning they’ll be on again for 45 minutes. Give them a big hand. Thank you.
ANNOUNCER: This show is produced by the Hartman Media Company. All rights reserved. For distribution or publication rights and media interviews, please visit www.HartmanMedia.com, or email [email protected] Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate, or business professional for any individualized advice. Opinions of guests are their own, and the host is acting on behalf of Empowered Investor, LLC. exclusively.
Transcribed by David
The Jason Hartman Team