Jason Hartman starts the show by discussing the significance and the need to question authority and to not take things at face value especially when reported by mainstream media. In the interview segment of the show, he finishes up a two-part conversation with lender Shannon. They look at new financing options and discuss how lenders approach debt-to-income ratios. Then they discuss how any market shift will likely only affect cyclical real estate markets.
Announcer 0:00
This show is produced by the Hartman media company. For more information and links to all our great podcasts, visit Hartman media.com.
Announcer 0:13
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it on now. here’s your host, Jason Hartman with the company leet solution for real estate investors.
Jason Hartman 1:03
Welcome to the creating wealth Show episode number 895 895. This is your host, Jason Hartman, thank you so much for joining me today, as we witness the craziness of the craziness, out of the tragic event that happened just over a week ago here in Las Vegas. The theories are flying. I don’t know if any of you have become interested in this as, as have I since I was there since I’ve witnessed it. And I tell ya, I don’t know. Something like that ever goes away. I mean, it’s just such a horrific thing to have witnessed that it’s just crazy. And again, as most of you know, most of you have seen my video by now either on Twitter. It was in our email newsletter. It’s now on our YouTube channel as well. And that video has been viewed probably over 100,000 times by now. You know, I wasn’t even that close to it. I was just above, you know, at the Mandalay Bay hotel. And I mean, how much of a coincidence is it that you walk out onto the balcony, at the foundation room 25 floors above the legend. And I say alleged shooter, because there are a lot of questions about this event. And you do that, at the exact time the shooting starts pretty much that’s just absolutely crazy. I mean, I mean, that’s such an amazing coincidence, I can’t even believe it. It’s a terrible coincidence. But as we have part two of our financing discussion today, and we talked about some fantastic programs that are available now for investors to purchase income properties. Just before that, I want to just ask you a couple of questions as you’re looking at the news of this event, which I still believe at some level, and I’m not exactly sure what level that was a terrorist attack. Now it depends how you find define terrorist attack. There all kinds of theories, call them conspiracy theories, if you will, conspiracy theory usually that statement is used to marginalize people who are healthy skeptics who asked good questions who question authority, which is the history of change in the world? Okay, it really is. So I think those questions are healthy, and I want them out there, even if some of them are nutty, and some are not at all be the first two are great. Some are pretty nutty. Why, why I was talking to someone who used to work in security at Mandalay Bay this morning, who happens to live in my building here in Las Vegas? And he and I were talking all about this and, you know, I was I was asking the question that everybody should be asking where are the videos of the allegedly shooter unloading this massive amount of guns and ammunition from his car. His car that was filled with explosives By the way, who you know what was what was he planning to do was he gonna drive his car into the crowd and blow it up? You know what, what were the other plans here that you know he had all this all this equipment for, but I don’t know if people really realize how heavy these guns are, how heavy that ammunition is. This stuff is heavy to move. It’s not like you put it in a backpack and just, you know, walking through the lobby of the Mandalay Bay hotel and up into the elevator and through the parking garage. You know, this is big stuff. It’s heavy. Yeah, he had a few days to move it. You know, one of my theories and my friend’s theory is that it would have been a golf bag on wheels would have been a pretty good way to move. All this gear, but even then, you know, it’s very heavy, this stuff weighs a lot. Okay? And where are the videos of him walking through the lobby of him in the elevators, there are cameras everywhere, in the Mandalay Bay and all of these casino hotels, we all know that. The fact that we have not seen any of those videos just blows my mind. And I will remain incredibly skeptical of the mainstream story, the mainstream media story until we see the videos. There’s all kinds of theories about all kinds of stuff. Some are nuts, some are probably not nuts, and some are probably accurate. So please, as you are consuming the news, go to some alternative sources. Don’t just watch the mainstream narrative. There’s probably a lot more to it than that. Every theory in the worlds out there, but all I’ll say where Are the videos of of him moving this gear? I mean that would seem obvious that they would release that to the media that the police department would have released that and why after the SWAT team breached the door all that audio was released to the public right the audio of all the different police in different areas and locations saying there were multiple shooters etc. And I don’t know if those are true by the way I you know, I’m not saying they are I’m just saying their questions. But why is it that the audio of the SWAT team that audio that was released and you probably all heard it, why is it that it ends within breaching the door the last thing you hear is breach breach breach, and they explode the door. You don’t hear them you know, I’m sure it was out there. Coming into the room and finding the alleged shooter dead. Right where is where’s that audio? Why would we heard that? Did I miss it? You know if i I missed it, please send me a link. I would love to hear it, because that’s the end of the audio so far as I can tell. So please question everything. question authority question the mainstream media. This is healthy, it is a good thing to do. So, some speaker announcements for meet the masters. So of course, we have john burns, john Byrne’s real estate consulting speaking, we just got an agreement with Danielle DiMartino booth, who used to work for the Federal Reserve. You’ve heard her on the show twice now. She will be speaking and meet the masters. We are working on some other big big names that I think you’ll be very impressed with. So go to Jason hartman.com. Click on the events section and get your tickets for our meet the masters of income property event coming up in January in La Jolla, California. It’s going to be an awesome event at a beautiful, beautiful property. That’ll be three days and we still have early bird pricing on the day. tickets. So be sure you do that. Check out the properties at Jason Hartman calm in the Properties section, be sure to take advantage of the software, property tracker and the other apps for iPad and iPhone that are available. And you can click the link on the front page of Jason Hartman calm for that info. And let’s get back to the financing discussion, part two of what we started on Monday’s episode. And let’s go ahead and dive in and discuss more income property financing and look for some awesome shows coming up. Of course, we’ve got flashback Friday coming up in two days here. But next week, we’ve got some more great episodes yesterday I interviewed the economist for Myers research, and she had all sorts of interesting insights into the real estate market, where it’s going, why it’s going in that direction, etc, etc. So just a whole bunch of great shows coming up for you as well. So here we go. Part Two with real estate income property financing. Okay, what else? You’ve got a third program you want to discuss, right?
Shannon 9:16
Well, I do have quite a few options. So I have the regular Fannie Mae loans, you know, up to 10 per borrower have financed properties, but I do have a lot of options that are outside of Fannie Mae. So once the investors hit that 10 property limit with Fannie Mae where the rates are really great, I can handle those loans as well. But I do have a lot of places to go to once once we’ve hit that maximum, and they will do as many loans as I asked them to do as long as it makes sense. So if the investor is buying a property that cash flows, and then we add that to the portfolio, the next loan this lender looks at, they’re going to say, Okay, we’ll do another loan. So we’re not lending Did you know to five or to another 10, we can just keep building on top of loan on top of loan to the investor can buy as many as they would like, but that’s
Jason Hartman 10:11
not Fannie Mae, Freddie Mac interest rates. That’s not, that’s great, but they can just keep buying in what does that program look like rates and terms wise. So
Shannon 10:22
the rates are in the sixes and sevens, the loan to value is, is again 75%. But helping us qualify, we can use the rental income that they’re receiving on the property right away. So So for example, if they bought one property, and then they closed on another the next month, we can use that rental income from that previous property. So it offsets that mortgage. So we can just kind of stair step our way up using that extra income to qualify the borrower for more properties, one after another.
Jason Hartman 10:57
That’s fantastic. I mean, this is Just the lending terms are fake finally feels like the pendulum is swinging back to or there are some decent loan programs out there that people can take advantage of. I mean, it’s really, really exciting. I’m just so happy to hear this, the biggest challenge for everybody listening, we’ll be finding property inventory. That’s the discouraging part right now, you know, I mean, if you want to, if you want to get sloppy and buy bad quality properties, well, that’s easy. But if you want to buy good quality properties, that’s a little harder. We are constantly vetting properties for our clients and the relationships the vendor selling that property or that property to our client. Unfortunately, we really, we really limit ourselves because we just really want to sell quality properties and you know, quality from quality vendors. You know, it’s it’s not perfect by any means, but that’s the hard part. You know, you screen stuff and you say, well, we’re not going to do this, we’re not going to do that. And you think, gosh, you know, we could make more money, if we just got a little more sloppy and we weren’t so picky. But I don’t think that’s a good business plan in the long run. So, you know, we’re going to continue to be picky. So just work with your investment counselor, and, you know, they’ll, they’ll get your properties may take a little time, but they’ll get them for you. You really want to just stick with with quality. Shannon, you know, I’m kind of curious. I want to ask you a general question. Of course, we’ve got a new we’ve got a new president in the White House, very much attacked and vilified by the media. But you know, on the good side, he is our first real estate president. And, and, and I think he likes real estate and I think he likes business, his tax plan. Of course, I’m talking about our reality show host Donald Trump and his tax plan, and he treats the White House like a little bit of reality show unfortunately. So real drama, you know, his tax plan is going to it I mean, if he gets any of that through That’s gonna put so much more money into people’s hands into the economy. I think it’s going to improve employment. I mean, love them or hate them, but I think fiscally it’s gonna, Trump is going to be good. Okay, if he can even last? No. We’ll see how long he lasts. But the other part is Dodd Frank Wright, this very restrictive bill that has restricted real estate lending for so many years. You know, of course, one of the names on it is good old barney frank who doesn’t know anything about the real world or banking or anything, you know, what do is crazy the people we have running government sometimes, but you know, you know, the Trump wants to repeal Dodd Frank. He wants to soften Dodd Frank, maybe not even specifically about Dodd Frank. But do you see and I think we’ve already seen that from just the three programs. You already talked about Shannon, do you see more money flowing in into real estate financing?
Shannon 13:55
Yes, yes. And And to your point, I really am Hope that Dodd Frank gets rolled back to some extent. It would open up doors for small businesses, for investors for just the regular person that wants to buy a house and make things a lot easier for them. So yes, I do. And I’m, I’m hopeful that we can we can get some of that done in the next, you know, four years or so. sooner, the better.
Jason Hartman 14:25
Yes. So, I mean, you know, any comments on how Dodd Frank has restricted you? Or, you know, just I mean, you know, how restrictive the lending environment has been, and you know, we see it it’s softening pay, like I said, the pendulum is swinging back. And some people were talking about the business cycle and, you know, the market is overheated and yeah, I’m gonna wait for the crash. And I think that’s absolutely stupid thinking. Because you just can’t time the market. Nobody can. But the banks have been really conservative. I mean, say Do what you want about the business cycle, or any part of the economy in general. But I don’t think the lending has been stupid at all in the past six, eight years. I mean, it’s been really tight, hasn’t it?
Shannon 15:14
That’s right. And to your point on, you know, waiting for the next crash, I don’t believe that will crash like we did before. If if we do have a slight downturn, it will be slight, in my opinion, because I
Jason Hartman 15:25
think I think that’ll be limited to I think it might be I think it’ll be more pronounced in the cyclical markets, the high flying markets, like where you are in Seattle? Yes. And you know, any anything on the West Coast or the whole West Coast? Most of the East Coast? South Florida, certainly. I mean, these markets are very overheated. No one can deny that. But even in those overheated markets, I mean, people are putting real money down. They’ve got skin in the game. Yes. And those loans have been underwritten pretty carefully. I mean, I remember the old days back in, you know 2001 2000 to 2003 I mean, 2001 it was pretty tight at post 911. But as it loosened, I mean that the the level of fraud in the mortgage business and even if there wasn’t fraud, just the level of stupid loans I mean that, you know, the, you know, fog the mirror and get alone. I it’s crazy I mean that just hasn’t happened this time around how’s
Shannon 16:23
the subprime lenders were huge in 2000 345 until they couldn’t do anymore and the loans started to go bad. So yes, I I this time around, those loans don’t exist and the borrowers do have cash that they’re putting on these properties and they have, you know, credit to qualify an income to qualify. So finally we started seeing in this past year, the bank statement loans coming back. So we do have those available as well.
Jason Hartman 16:52
For what do you mean when you say bank statement loans Tell us about that.
Shannon 16:55
So, a self employed borrower may not always show all of their names income that they receive on their income taxes. So we can use 12 to 24 months of their bank statements, and sometimes business bank statements to help them qualify for a loan. And we’ll just look at the deposits that they have. Hmm.
Jason Hartman 17:17
Interesting. You know, it’s just so funny, Shannon, it just begs the question. If they were audited, the IRS would look that same thing, you know, but but the difference is, you know, when you have a business, one of the and remember, your real estate portfolio is a business too. So you can take a lot more of the normal expenses that you’re going to have in your life anyway, become business expenses. So as Robert Kiyosaki explains when he shows the examples of how the income flows, and you know, he just made that so simple for people, the highest tax people And it’s so unfair our employees, right. And then business owners get a little bit of a break for sure, because they get to pay taxes on post expenses, right. And independent contractors get a little bit of a break, because they can put some expenses, shovel them into the business. And they’d have those expenses anyway in their normal life, but they can call them business expenses, and then they pay tax on the net. And so so that’s a much better deal, obviously. And you can do that also with your real estate, because you have some things that you can call business expenses, and you know, they can go right into your schedule he and your real estate portfolio. And then if you get bigger in the real estate, you know, you can always open a real estate, quote unquote, business, and you can do even more. So there are great opportunities there. So that so that’s great. So bank statement loans, but the interesting thing you said is it’s not two or three months of bank statements. It’s 12 to 24 months. So you You’re still doing good underwriting? I mean, that is that is not that that loan is unlikely to go bad and end up in foreclosure isn’t it?
Shannon 19:09
That is correct. There is income coming in for these borrowers and and the underwriters are making sure of that. So definitely doing their due diligence,
Jason Hartman 19:18
good stuff. Yeah, folks, if you’re sitting there waiting for some big crash to happen, ask yourself compare this to the last time around the lending has not been stupid. By any measure. The lending has been pretty darn conservative. The loans are solid. And you know that that was really the the crux of the great recession was first the mortgage meltdown. And then what was going on behind that on wall street that only the insiders really knew about? And you know, y’all probably saw our read The Big Short by Michael Lewis. And, and you know, the story from that. Okay, good. So Shannon, talked to us a little bit, just generally before we wrap it up about investor financing in general. Why I wanted to make this last rather than first, just because some of our investors have heard some of this stuff before. But you know, we haven’t had a lender on the show in a long time. So it’s good review. But you know what, what happens? And how does it differ from underwriting alone for a traditional homebuyer just speak to that for a few minutes?
Shannon 20:19
Well, they’re gonna look at the property. And they’re going to make sure that there’s income to qualify for when we’re just doing a regular basic loan, you know, maybe your first or second investment property, we’re going to look at all of your income, and make sure that you do qualify to pay that mortgage for the investment property, if you don’t have a tenant in the property. And then once you get, you know, your first couple of investment properties, we can use that rental income to help you qualify for the next property. And we can use 75% of that income. So we do have to have that income piece from the borrower as well when they’re buying An investment property rather than just their own primary residence. So we’re looking at the whole complete picture of, you know, their credit, their income plus the property.
Jason Hartman 21:10
You know, what drives me nuts is when people use acronyms and abbreviations when they talk. So one of the common ones that lenders will use is dti debt to income ratio dti. Okay, so can you just kind of go through a little bit of an example and explain debt to income ratio? It’s not really as simple as it sounds on the surface because, you know, the question is, is it the gross Is it the net? You know, what, what goes into that, you know, when you talk about car leases and car payments, and so forth, and then with a rental properties that adds like a another layer of complexity to it. So give us a little education on that, if you would.
Shannon 21:52
Sure. So when we look at at your income, we’re looking at gross income and usually we look at it on a monthly basis, so that we can take Your complete monthly expenses from your primary residence home, whether it’s a rental or someplace that you own, and we look at that payment, we also look at everything that shows up on your credit, whether it is those car leases or credit card payments, we look at what the minimum payment is each month. And so we take all of that debt, and we kind of divide it by your gross income. And we want the the debt to income ratio to be half or 50%. Of what your your total debt to be half of what your gross income is. And that’s kind of a general rule. There’s also so can
Jason Hartman 22:41
we can we do a real example of that just real quickly, you know, if your income is, you know, let’s for round numbers, we’ll just say $10,000 per month, okay. So, you know, that’s your household income. It’s 120,000 per year, right? What go through the example
Shannon 22:58
if you would, so we don’t want you total debt that would show up on your credit plus your housing to be more than $5,000 per month.
Jason Hartman 23:08
Okay, so wait a sec. So that means if you’ve got a car payment, and then you’ve got a mortgage or rent, rent, too, I mean rents not gonna be on your credit report, but the mortgage, well,
Shannon 23:20
maybe we would, we would include rent, okay, so,
Jason Hartman 23:24
okay, so say you make $10,000 a month and say your rent or housing expenses $4,000 per month, or it’s probably gonna be like 3500. Hopefully, it’s not gonna be too over the top. Let’s say it’s 30 $500 per month, and then you’ve got a $500 a month car payment. And let’s throw in hopefully, you don’t have those, but you got one of those rip off student loans, and that’s $300 a month. So now you’ve got 40 $300 a month in expenses that actually show up on a credit report or through or through rent, you know, the rent part doesn’t but you have to declare what it is. And so with that, Your dti is less than 50%. Right? It’s 40 $300 out of $10,000 monthly. That’s correct, right? Yes. Okay, so what does that mean? What can I buy now,
Shannon 24:10
so then you have an extra 7% in your income to qualify for a property. So usually most most buyers that I see that are investing in, in properties are usually closer to 30%. So their total say their total debt is about $3,000 per month, if they have that $10,000 a month paycheck. Okay. And so that gives them 20% wiggle room to find a property or two or three to get qualified for. And then once they purchase those properties, we can add that rental income into their income, we can use, of course
Jason Hartman 24:53
75% of it, right? Yes. Okay. So in other words, understand that your lender and this has been around For years, I mean I’m remember this 20 years ago, okay? It was always that 75% number, right? And, and I remember in the old days, world savings, does anybody remember world savings? I remember I gave a speech to them once years ago when I was a young kid. And world savings was the only lender that did not ding you for that 25% they would count 100% of rental income and they were the only one that did that, you know, maybe maybe that’s why they’re not around
Shannon 25:30
anymore.
Jason Hartman 25:32
Hey, Point taken, no, they were probably acquired by someone or something. But anyway. So so basically if the if the ret to understand it this way, if the rental income is $1,000 per month, and the total cost of you know, the principal interest, taxes and insurance pie is 1000 per month, just to make it simple. Obviously, in real life, you would not buy that deal. It would be better than that, but Just to make it simple, then the lender is going to assume you’re only receiving $750 per month.
Shannon 26:07
Yes. Although vacancy rate, right, yeah,
Jason Hartman 26:11
the day they impute 25%, which is unrealistic, hopefully nobody has a vacancy rate that high. But there are a few cases out there. I know, some of you may be listening or you’ve had some problems over the years. But, you know, this is not consistent. I mean, problems are hopefully a one or a two time occurrence and not a regular occurrence. So you average that out over the years, and you know, it’s a lot better on that example. Basically, you can apply the debt income ratio that’s leftover, if you will, like in my example, it was $700 per month, you know, you could go up to 50% dti, right? Yes. Okay. So you have that $700 per month that you can allocate toward buying more properties. So could you buy a property that after the imputed vacancy rate had now you wouldn’t do this, but I’m just for sake of example, that had a $700 month negative cash flow. And could you buy
Shannon 27:06
that property? Well, when you’re initially qualifying for a property, and it’s in the Fannie Mae loan, we are going to count that entire payment against you for that, that qualification. We don’t use the future rental income. But then
Jason Hartman 27:19
on a new property you acquire, you don’t buy the properties you already own in your portfolio. Yes, you do. Count it out. 75%.
Shannon 27:28
Right. Yes. Good. Okay. So we need you to qualify for that initial payment. And then the next property that you qualify, you should have that $700 available again, in your debt ratio, because you’ve got rental income already. on that. Is
Jason Hartman 27:42
there any, is there any seasoning requirement on that? I mean, you know, we have a lot of clients that come in, you know, they listen to the podcast for a year, and now they’re totally into it. They’re sold on the idea of being becoming a landlord, you know, mogul, real estate mogul. And, you know, and they’ve got money. So they’re just buying up properties as quick as they can and and you know, they they they’re just acquiring one after another a few at a time. Is there any seasoning requirement for that or seasoning meaning you know length of time over which it has to happen? Or did is it just counted like if you bought that property a month ago? Does that count
Shannon 28:22
it counts and we use the we look at the lease agreement to to count that rental income once you have the property through a tax cycle then we start using what shows up on your income taxes on your on your schedule ease, okay,
Jason Hartman 28:36
good. Yeah, great. Good stuff. Good stuff. Shannon. This has been very educational. These programs you talked about are very exciting. And I think everybody listening should be incredibly excited about what we talked about today because even any the program number two, even if you’re not a foreign national, that matters to you because that means lots more money flowing into the market. Around the world, it just seems like everybody wants to get their hands on American real estate. And I don’t blame them. Because the market here is, as I say, when people always ask me about international investing, I mean, I’ve been to 81 countries now some of the many times over, you know, I look at deals all over, I meet with brokers all over the world, and I can’t find any market that is as good as the good old us of a more efficient supply chains, availability of data, much more perfected market, it’s very transparent here, you can find out what the comps are, what the prices are, you can really know what the value is, you know, rule of law is obviously quite good in the US. I’m not saying it’s perfect, it’s just better than most other places. Certainly Kirk’s here now, but less than elsewhere, I would say. And so yeah, there’s just so many good things going for the American real estate market. So yeah, that’s that’s super exciting. If you Want to get in touch with Shannon just reach out to any of our investment counselors. If you’re working with one already, obviously just reach out and they will connect you with Shannon. If not just go to Jason Hartman calm and we can get you connected. Shannon I look forward to seeing you at meet the masters of income property in San Diego in January.
Shannon 30:16
I’m excited to be there.
Jason Hartman 30:18
Yeah, and thanks so much for coming on today.
Shannon 30:20
Thank you for having me.
Jason Hartman 30:23
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