How to Find the Right Lender for Your Next Rental

Ashley:
This is Real Estate Rookie episode 408. Today we are actually starting a three part mini series that is going to be discussing the fundamentals of funding. And these are going to include the different things that you need to know as a rookie investor to find funding on your first or your next deal. My name is Ashley Care and I’m here with Tony j Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And today we’re going to get into some of the misconceptions and issues that Ricky’s face when trying to fund a purchase. We’ll talk about why lenders might give you conflicting information. When is the right time to even engage with that lender and so much more. And today we’ve got none other than Joe Coleman joining us on the Rookie podcast today. Joe, thanks so much for hopping on with this brother. Hey,

Joe:
Tony and Ashley, it is an honor to be here. I’ve learned so much from both of you and looking forward to getting to the show here.

Ashley:
Joe, kind of tell us a little bit of your experience with lending and why you’re on the show today. Yeah,

Joe:
In my job at BiggerPockets, I’ve spent the last three years really making sure that we have the best featured lenders to go on BiggerPockets, find a lender tool, which you can find on BiggerPockets. Just at the very top it says Find a lender. So I have been managing the relationships with all of those lenders, spent a lot of phone calls with lenders, go to a lot of conferences. I actually just got back from a private lender conference in Newport Beach, California. And I also manage our concierge service where we connect investors directly with lenders on the phone and through text as well. So really have spent a lot of time talking with both lenders and investors to help them find the best possible lender on BiggerPockets.

Tony:
Joe, before we go on, you got to tell me what is this private lender conference? I think that’s what every Ricky’s going to want to know about. What is that? Anybody’s

Joe:
Welcome to go, actually, they encourage investors to go. GII is one of the biggest law firms in private lending and they put on two different shows. One of them is in Newport, the other one is in Vegas. The one that I went to happens in April every year. There’s actually a lot of BiggerPockets folks who go, a lot of lenders who are on BiggerPockets who go to that conference. And it’s really for any type of private lender, you get a lot of even family offices. So folks who may be lending their private capital all the way to the very large private equity style of private lender. And I can get into kind of the differences there. So it’s a lot of fun. I’ve been going to them for years.

Ashley:
My God, what a great way to solicit a private lender. Go and wear a shirt. I have a deal. You want to lend,

Tony:
What’s the name of the event, Gerald? Yeah,

Joe:
It’s called Innovate and it’s by Gisi and they’ve been really helpful working with us and definitely recommend people to check it out.

Ashley:
Okay. So Joe, why do you think this episode today is going to be great for rookies? What are we going to be discussing that can help a rookie actually get funding for their deal?

Joe:
Yeah, so I would say in my job, we talk with rookie investors all the time and they reach out to us and they ask a lot of the same common questions. Sometimes they don’t want to ask questions to lenders because maybe they feel like they don’t want to share that maybe they’re competing lenders or something like that. And so I think that there’s just a lot of roadblocks that come up in a rookie’s journey related to lending. So I’d love to help walk them through how lending works, some of the basics that they can understand how to get the best funding possible.

Ashley:
Okay, so let’s start off with talking about analyzing and finding deals. For a rookie, when should they actually start the conversation of talking to a lender through the whole life cycle of starting investing and wanting to find a deal?

Joe:
I would say if you listen to this episode by the end, you should be ready to talk with a lender.

Ashley:
I like that answer,

Joe:
But I do think it’s an iterative process. So the loan will inform your deal, but the deal will also inform the loan. And so the earlier that you can get an idea of your maximum purchase price or your expected cash to close or your partnership strategy, the better because then that’ll help to inform your property search. And then vice versa. You’re not going to really know if a deal’s going to work until you have the financing piece and the lender is not going to be able to have enough information to work off of until you give them some example properties. So I really think it’s an iterative process, but if you haven’t talked with the lender, I would do so as soon as possible and also talk with the types of lenders that we’re going to walk through. It’s really important that you’re talking with the right types of lenders.

Ashley:
Thank you for kind of clarifying that, Joe, because I didn’t want anyone listening to think, well, I don’t even have a deal yet. This episode isn’t for me. I’m not ready to get a deal funded. And Tony, I want to ask for you as to your first deal. What came first, the chicken or the egg? Did you find a lender or did you find the deal first?

Tony:
So my first deal, I actually found the lender first, and it was kind of happenstance, but my parents had bought my whole Shreveport store. If you guys go back in the catalog, you hear all about my excavates in Shreveport. But I found a lender out there that would fund the entire purchase and the rehab of my property, and then they gave me kind of the criteria that I needed to meet when it came to that specific property and that gave me my buy box. I just had to go out there and find the right property. But for me, it was the lender first. But I think even just in general, Ash, rookie investors should almost always with their purchasing power, they have to know what that is before they start looking at cities or potential properties because say you find the world’s greatest deal and it’s a $700,000 purchase price, but maybe only you can get approved for three 50, well you’ve got a problem there, right? So you shouldn’t waste your time looking at cities until you understand how much capital you have to deploy and what kind of loan you can get approved for because that’s going to give you your buy box. What about for you Ash? What came first for you?

Ashley:
Well, I actually had a private money lender who ended up partnering on the deal, so we didn’t use any bank financing. I actually had this limited mindset that you had to pay cash for a property. I didn’t even know about bank financing on investment property at that time, but it was still the lender first because I had that private money coming in, the capital partner that ended up lending on the deal.

Joe:
How did you find that lender, Ashley?

Ashley:
He was actually the investor that I was working for was his son and we were childhood friends. So the biggest point that I did there was just constantly talking about it and I was able to, I had an advantage and I saw an opportunity, so I would literally just continuously talk to him about investing. And the biggest thing was, your dad is doing it, why aren’t you doing it? Look at this success he has had. And that kind of was the pivotal moment where he was like, yeah, you’re right. I don’t have the time. And that’s where I could bring that in. And

Tony:
I think we’ll have Henry Washington coming on on part three of this funding fundamentals or fundamentals of funding series were going on, and he’s going to talk a lot about the private money lending aspect as well. But Joan, I’m curious brother, what are maybe some misconceptions you see a lot of new investors falling victim to when it comes to lending funding, getting the money they need to buy these real estate deals?

Joe:
So there are a lot. So number one I would say is just having an idea of what the different types of lenders are and what the different types of loans are. So in terms of the types of lenders, I would really break it down into business purpose loans and then consumer purpose loans. So some lenders will focus more on the business purpose, others will do consumer purpose and some will do both, and they’re very different. So under the consumer purpose, that’s where you have your conventional lenders, your va, FHA, and pretty much any lender that is licensed to do those types of loans can do any type of consumer purpose loan for the most part. Then the other type, the business purpose loan side of things, that’s where you get into your interesting DSER debt service coverage ratio, loans and fix and flip loans and things like that, your bank loans.
And so really lenders think differently about those types of loans. So they’re investing in you more as a business and they’re typically based on the asset value and the income of the property versus consumer purpose, which always comes down to your debt to income ratio. So a couple of things I do want to point out that I think is helpful is that I like to think about finding a lender in terms of when you start out, you might be working on a house hack, and there’s a lot of advantages to working with a conventional loan because the interest rates tend to be lower. You tend to get higher leverage, so you might be able to put down 0% if it’s a VA loan or 3% down if it’s a conventional and you’re a first time home buyer, and that’s a really great place to start, and then you do max out your ability to use conventional loans at 10 properties and then you have to look at other options.
But I do think it’s interesting looking at going to the business purpose side of things. I just want to point out that they look at a deal in a very unique way and they look at it very different than the consumer purpose side. It’s interesting that both of you started out working with a business purpose lender. I am curious why you started out that way. Most people, they’ll go like, I wanted house hack a triplex or something. So I’m curious for both of you why you went ahead and jumped to working with business purpose lenders?

Tony:
For me, it was just necessity. I live in Southern California at the time, even now still buying long-term rentals, single families just doesn’t make a ton of sense where I live. So I don’t know if house hacking made sense for me. There’s not a lot of small multifamily where I live. It’s mostly single family homes and subdivisions, so there just wasn’t a big pool of opportunities here. So I wouldn’t where the opportunity was and I found a lender, a bank that was going to give me all of the purchase price, all of the rehab. So why the heck wouldn’t I do it? It was really the opportunity to pull me into it. What about for you, Ash?

Ashley:
Yeah, for me, I guess in a sense I did kind of house hack years later. We lived on a dairy farm and we ended up purchasing the dairy farm after we started real estate investing. And so we were just tied to the dairy farm where if we would’ve moved to house hack, we would’ve had to drive to go milk the cows every morning. So it just wasn’t feasible in that sense. But then when we ended up purchasing the property, there was two houses on it that rented out, and then we ended up building a house on the property too, so there was that rental income coming in from the rental.

Joe:
It’s interesting how different scenarios can be. One of the things that I’ve noticed is we hear from people all the time who have very unique scenarios, and so I just point out that can be a strength in a lot of ways, being stuck in California, I know what that feels like, Tony, and in a way maybe that was a strength.

Ashley:
We are going to take a short ad break. Thank you guys so much for taking the time to check out our show sponsors. We really appreciate it. But when we get back, we’re going to figure out why a lender may tell you conflicting information and how many lenders you actually should be talking to before you get your loan with one lender. And make sure to give us a follow for the Rookie podcast so you can check out our next episode because this mini series is going to have three full episodes. Okay, welcome back from our short break. We are here with Joe who explained to us on biggerpockets.com. You can go to Lender Finder, which is basically a matchmaking service for investors, for lender friendly loan officers that they will connect you with. And we’re talking about why a rookie investor needs to understand lending along with should they speak with the lender first or get their first deal. Joe, I want to go into having those conversations with lenders. What are some of the conflicting information that you may hear from one lender to the next when

Joe:
You’re reaching out to a lender? It’s helpful to know that there are different types of lenders. So you have your direct non-bank lenders, so these are the big lending companies that you think of. I don’t want to name names that if you Google to find a lender, you’d probably find, and then you have your banks, which are called depository institutions, is your banks and your credit unions, and they have a little bit more say as far as what types of loans they lend on. And then you also have your brokers and your brokers essentially help investors shop lenders and find the best one for them. So to give a few examples, it’s really common that somebody would reach out to a bank and they may say, Hey, we have specialized loans for doctors where we can get you a special type of loan, and that’s because they control their capital for the most part, which is another important question that’s important to know is where the funding source is coming from, and that will dictate oftentimes what types of loans that banks can do.
So I’ll give you a few examples. So if you reach out to a bank and you say, Hey, I’m looking for owner occupied loan, they may say that your debt to income ratio maximum is 50%, so 0.5, and then you could talk with another lender that would say that they can only do 0.4 and the difference between the two, assuming that they ran all of the same information could be what they call an overlay. An overlay is an additional requirement on top of the requirements or the general guidelines that are provided, and those are really up to the lender to determine. The other thing could be the product. So if you reached out to a lender that only does consumer purpose loans and you asked about a debt service coverage ratio loan, then they may say that they don’t provide this. Lenders are not really incentivized to send you to another lender.
So in my realization, yeah, so oftentimes if you’re talking with a lender, they may go, oh, well we can’t do that. They don’t do that, and they may make it seem like, and it’s not necessarily, I don’t blame them for this because oftentimes they’re only familiar with the products that they have. So they may say, we can’t do that, or they don’t do that. You have to do this. When in reality they just don’t have access to that product. The way that I think about lenders is that they’re really like a store for lending products, and that’s something that’s kind of unique. Typically people don’t think of a loan as a product, but it really is, it’s a financial product, so you just need to make sure that the lender you’re talking with has the product that you’re looking for. So those are the main reasons. The other reason could be that they’re just ignorant. They don’t know, so they might not, if you ask about A-U-S-D-A loan, that’s a common one where people may give you wrong information on it just because they don’t know about how the loan works.

Tony:
So there’s a few different types of lenders that you mentioned. There’s the direct, you said there’s the banks themselves and then there’s the brokers, so direct banks, brokers.

Joe:
So I think that the questions you ask are, well, what I would start with is you want to be able to provide the information that the lender needs in order for them to really act as an advisor to help guide you. So you need to have a goal, I’m trying to purchase this property, here’s my financial situation, and then just in getting to talking with them about your situation, you should get a sense for if they’re going to have the products that you need, you could also just ask them. So if you already know that you want A-D-S-E-R loan, you could just say, do you do DSER? And I would ask them where their source of capital is, especially if it’s on the private money or hard money set of things. Does that make sense?

Ashley:
One thing that I’ve learned in my experience to ask is if they have experience lending in my state. So I sat through this experience where we were closing on a property with a lender. I think they were out of Florida maybe, but they were a nationwide lender, and so they asked me for a reference for an attorney to use. My attorney gave them a referral of someone they could use to do the closing, and that probably should have been a red flag right there. If they’ve done so many deals in New York before then they should already have an attorney that they’ve used before that they could reach out to. And so they ended up using my attorney’s referral and on closing day we show up to the closing table to sign, and they are on the phone almost in an argument, the attorney they hired and the person that’s working on the deal about how the title is supposed to be issued or some kind of title issue.
I can’t even remember what it was, but we had to sit there. We sat there for about two hours, they called a title attorney and tried to get him involved in the situation. He ended up being close by apparently, and he ended up coming into there and trying to figure this out. But what happened was they were requesting for the title to be recorded a certain way or something to be done a certain way where it was actually illegal in New York state to do it that way. And so we ended up not closing that day. We had to wait the weekend, and by Monday they finally agreed to do it the way that all three attorneys were telling them you have to do in the state. So it delayed our closing. We have contractors lined up ready to get into the property because we think we’re closing that day. So asking questions like that too, there’s so many things you wouldn’t think of, but learn from my mistake and actually ask them for some references, referrals or what is their experience working in that state? So some of those things don’t happen because so many states had very different requirements as far as closing on a loan or closing on a property.

Tony:
One thing I’ll add to that, Ash, is that I have found though that for a lot of the lenders that I work with that none of them do business in New York State, they’re like, Hey, we’re in all states. Except yeah, but it’s true. It’s like I’ve met a few lenders who’re like, yeah, we’re everywhere except Alaska and New York and for I don’t know what it is about New York, that makes it a little bit more challenging in that state specifically.

Ashley:
And when we get to our private money episode too, I’m going to tell you about a story too when we do get into the mini series, part three of what it’s like actually doing a private money and recording a lien on the property too. It’s definitely not as easy as other states too.

Joe:
Yeah. So one thing that I think is helpful on the licensing side of things, you called out that it’s hard to do loans in New York. You can go to Lender Finder and search in New York and find lenders, but it tends to be a specialty thing. So on the conventional FHA VA consumer purpose side of things, they have to have an N ML S number, which is tied to a state license. So you can go to consumer access, I would just google this NMLS consumer access, and you can search the n MLS number for your lender and make sure that it all checks out and you have to have a license On the consumer side, on the private money side of things, it’s interesting because some states require it. Some states, if you Google, if they require a license, it’ll come up right away and you should be able to find out. It’s kind of nuanced, but California does, Arizona does Utah, there’s a few others. New York can get kind of tricky and a few other states. So when you’re vetting a private money lender, I would definitely check and just make sure that they’re licensed in your state.

Tony:
One follow up question. Joe, I’ve actually never asked this question to a lender before, so it kind of caught my attention, but you said we should be asking them what’s the source of their capital? What do you even mean by that? What is the source? Are you worried that it’s the cartel of Mexico that’s funding these deals or what?

Ashley/Tony:
Tony’s laundering money, not unknowingly, he’s getting

Tony:
Cartel money, he’s washing it for them. It’s like the Ozarks in here or something. So why ask that question, Joe, why is that an important question to ask?

Joe:
Yeah, so this is kind of like when I’m at conferences and talking with lenders, this is one of the first questions that I ask, what’s your source of capital? The reason I ask it is because it really gets down to how is your lender going to be underwriting your deal? Is it according to their requirements? Personally, in the case of an individual private money lender, or in the case of a large company that’s a private money lender, it might be determined by the guidelines from their private equity firm. A lot of private money lenders people don’t know are owned by large institutions like BlackRock owns one of the lenders that is on BiggerPockets, actually great lender. So they determine the requirements and then the lender who’s originating loan has to conform with those requirements. Or here’s the big one to be aware of is if you’re working with a broker, they have very little control over what the guidelines are, but they can help you shop.
So if you are underwriting a loan with a broker, if they immediately go, Hey, we can help you. This deal looks perfect, we got you, we’ll get this going. It is a red flag because they really are not the person who’s going to be determining whether the loan gets approved or not. And so if you’re working with a broker, brokers can be great. The one brokerage is David Green’s company, for example, and they have fantastic reviews on BiggerPockets. So with some brokers, they are going to be upfront about what the requirements from the lender are and they’ll give you a really good idea of that upfront. And so you don’t have to worry about this, but for other brokers who are just trying to get the deal done, they may, whether they mean to or not, mislead you as to whether you’re going to qualify for the loan or the timing because they’re really somebody who is in between you and the lender. And so that’s just something to be aware of. So that is why it’s so important to ask where the source of capital

Tony:
Is. Yeah, what a great nuance question, Joe, because again, I’ve never thought to ask that before. So once you get a good sense of, okay, I think this might be a good lender for me, I guess when we already answered this question a little bit, but it’s like before you find the deal, we should already maybe be having that conversation, but I guess what’s the sequence, right? Because say I don’t have a deal yet. I guess what should I be asking for from this lender to give me a sense of how much I can actually get approved for?

Joe:
You should come prepared with the questions you need to get answered in order to help with your deal search. So I just list out the questions that are important to you, but it’s probably going to have to do with maximum purchase price cash to close. What are my options for partnering? Maybe what are the general requirements for different loan products? That is also something that I think is really important to have a sense of before going into the conversation. So you should know that VA loans require 0% down and an FHA owner occupied, it’s going to be 3.5% down and most private money or hard money lenders are going to require 20% down. Maybe they can maybe push that a little bit. They’re going to use the term loan to value, which is just, it’s another way of indicating the down payment. So 20% down would be an 80% loan to value, assuming the value is the same as the cost.
So having a general idea I think is really important and you can search all of this online. One website that is really helpful is if you go to the Consumer Financial Protection Bureau, CFPB, if you go to their website, they have a lot of great resources for anything on the consumer side of things. And then I would reference BiggerPockets for anything that’s on the business purpose side of things. So having a good understanding before talking with the lender is helpful, but they’re going to want to know things like your credit, your assets, your income, and they’re going to want to know what your goals are going into that conversation so that way they can advise you on what the best product is for you.

Ashley:
I think kind of a follow-up question to that is what should you have ready or prepared before you even go and start these conversations with a lender?

Joe:
So helpful. It’s helpful to do a financial, almost like a personal financial audit before hopping on with a lender. You want to know how much liquid capital do you have access to. You want to be prepared to discuss your income and your assets and your credit and all of that. It doesn’t hurt to get a credit report before hopping on with a lender. One thing I do want to point out that is a common misconception is folks oftentimes like, Hey, don’t my credit. I have to be careful. I want to make sure I don’t get pinged. And that’s a valid concern, but once you apply for let’s say a standard conventional loan, they’re going to run your credit and you have period of time. So CFPB says it’s 45 days before an inquiry is going to count as two inquiries, so you could apply with many different lenders. There’s very few downsides to it except for that it might be hard to manage relationships with 10 different lenders.

Ashley:
That’s a lot of loan applications to fill out.

Joe:
How many do you apply with Ashley? I’m curious, how many lenders do you apply with at one time?

Ashley:
I actually don’t even apply. I send an email with the deal and ask what options they have available for me, and then from there I select the best one and then I apply with them. But I just copy and paste the same email with the information on the property and email it out to the banks that I’ve worked with. And then occasionally that I’m working with the one brokerage this time I’ll find a new lender and I’ll try them out and send them the same email too and see who can give me the best terms. But also something that’s been really important to me is the process too of actually getting the loan. I work with this one small local bank and I just had to refinance because it was commercial loan. It was just a five-year term on it. And so I emailed him, I said, I got my notice that this is up in 60 days.
Can I go ahead and refinance? He’s like, yeah, I just need your business partner’s tax return for this year. I got yours, got all this. And then I think it was like two weeks later, he emailed me. He is like, okay, you’re all set. Here’s the new refinance terms. I just need you to sign some documents if you’re good with it. And that was it. So that was amazing. But yeah, I think that whole process is really important to me. So I work more with banks that already have a lot of my information so I don’t have to give them a boatload more and that I know the process works well. That’s more important to me sometimes if the interest rate or the terms are a little bit different.

Tony:
Yeah, I’d agree. I’m not shopping around a ton at this point anymore either. Actually, the last deal we did was a seller finance deal in the motel, so there was no loan docs on that one really. And the one before that, it was a refinance for a rehab that we did back in and Sam, it was actually with Jeff who’s going to be on part two of this funding series. But he had all my information, majority of it already as well. This was a pretty easy lift for me as well.

Ashley:
We’re going to take a short break and when we come back, we’re going to be comparing lenders. We’re going to figure out what qualities actually take more weight when deciding what lender to use for your property. We’ll be right back. Okay. Thank you for joining us back here on the show. We are here with Joe talking about all things lending for rookie investors and even experienced investors. And towards the end of the show, stick around because we’re going to be talking about the one question that you’re lender doesn’t want you to ask and the information they don’t want you to know. So Joe, we’re going to be comparing lenders here. What are some of the things that we actually should be taking into consideration when comparing one lender to another?

Joe:
So I would break this down really in terms of the two categories outlined before the consumer purpose and the business purpose side of things. So the government has done actually a really great job of helping consumers to navigate the lending side of things on the consumer purpose side of things. And again, consumer Financial Protection Bureau, if you just Google that, they have some really great resources for folks as well as Fannie Mae publishes a lot of great resources for what to look for in a lender, how to compare lenders. And so I’ll walk through it at high level. If you use Lender Finder, one of the best things that you can do, and what I always recommend to people, whether you’re finding a lender on lender Finder or not, is to look for a lender who has done business with somebody who is similar to you and has experience working with investors like you, right?
So if you’re looking for a short-term rental loan, make sure you work with a lender that has experience in that area. So I think that’s the first part is establishing trust and credibility because you’re going to be sharing a lot of personal financial statements. People say that in a lot of ways lenders know your financial situation better than you, and so you definitely want to work with somebody that you really trust that you’re going to be able to work with in a very, it’s a very intimate process. You share everything with this lender, and I’ll bring it back to walk through how to compare for both of these. So let’s focus on consumer purpose. So there is a process for the consumer side where they will provide a loan estimate, which is a standardized document that is actually designed to allow you to compare lenders, which is really cool that the government has done this.
And you can go to page three, there’s a comparison summary and you’re going to want to get a loan estimate from every lender, which will allow you to compare apples to apples. So adding things like points can complicate it, which we should also touch on a point is just short percentage point. And what that allows you to do sometimes is to buy down the rate on a loan. And so you’re going to want to make sure that if they’re applying a buydown that those buy downs are equal or just to remove it so you can compare apples to apples. You’re going to want to run all of these loan estimates, you’re going to want to get them on the same day because the rates change quite a bit from day to day. So I would look at when you get to this stage of the process, really getting a loan estimate from at least three lenders so that way you can compare. And a great lender will actually walk you through how to compare their loan estimate to another loan estimate. My lender who’s helped a lot of folks on BiggerPockets, Mike Stone from Megastar has actually done a great job of, he actually brought up the loan estimates from each lender and we walked through them one by one, and that was really helpful.

Tony:
I love that idea, Joe, of using the loan estimate to kind of shop around. But I guess at the end of the day, what is it really that rookies should be focused on when they’re looking at that? Is it the overall amount paid over the life of the loan? Is it the monthly payment out of pocket? Is it the cash that they’re paying to close on the deal? Which metric do you think is maybe most important? And actually, lemme start with you first. Ashley, I’ll point that question to you and then we’ll let Joe answer. But if you’re shopping around from your perspective, is it the overall interest paid? Is it the monthly payment, is it the cash out of pocket? What would be most important to you?

Ashley:
Yeah, I would definitely say at first the first five years, it’s what my payment is going to be that affects my cashflow on the property. But also it hard, it’s hard to say because it depends as to what my plan is for the property. So if I’m just going to sell the property in five years, then I just want some cashflow for five years and then I make expecting appreciation from this property and I’m just going to sell it at the end of five years and I don’t really care. But if it’s something I’m going to be holding longer, I do care more about what the actual interest rate is. So when it comes to points, I have actually never paid points ever in any of the deals I’ve ever done. I’ve never done it. But what I will do is I will actually compute as to five years, how much interest have I paid 10 years, how much interest have I paid? And I’ll also look at down the road as to what are my chances of ref refinancing this property too, especially because I do a lot of commercial loans I’m going to have to refinance anyways, and they’re usually a five-year term before I have to go and refinance before they go variable too.

Tony:
Yeah, I think you bring up a good point though, Ashley, of it being like it depends on what your motivations are and what the game plan, what the business plan is for that specific deal. Because like you said, if you’re really focused on the cashflow, then maybe, yeah, that number is what’s most important to you at the end of the day, but maybe you’re a little strapped on liquid capital, but you still want to get into this deal. So maybe for you it’s more important to say, Hey, I want to reduce my cash out of pocket to take this deal down, even if it means I’m spending maybe a little bit more on a monthly basis. So it probably comes down to an individual person’s position. But Joe, from your perspective,

Ashley:
Just to add a real life story to that, a deal that I just am refinancing right now, our plan is to hold it in five years. It’s in an area of growth, seeing appreciation, but it’s just not there yet. It’s not at its potential. So we bought it, we fixed it up, and we planned to hold it for five years and then to sell it. So we got options of doing points and we could eliminate the actual prepayment penalty with buying points, and we decided not to because we don’t want to refinance within the five years because it’s just not worth it to us to do, first of all, do the work of having to refinance and then also to pay closing costs again on the refinance, paying the commitment fee and paying the attorney fees and everything there is to actually close on the loan again where the numbers still worked.
So we actually took the higher interest rates and took that. We have a five-year prepayment penalty to actually get it lower than if we got rid of the prepayment penalty, but that was all based on the fact that we plan to sell it in five years. So we don’t care if there’s a five-year prepayment penalty on it right now, and we don’t care about being locked into an amazing interest rate for 30 years because honestly, rates aren’t that great right now anyways. So if they do get better after five years and we decide to keep the property, we will refinance at that point, but if not, the numbers still work on the deal with what it’s at

Tony:
Now. And Joe, what about from your perspective? What are you seeing as maybe what rookies should be looking at when they’re comparing, if you have anything to add to that? Well, I

Joe:
Think you guys touched on the most important thing, which is it depends on your situation. So a great lender, great investor, friendly lender, like the ones we have in BiggerPockets are going to be able to really act as more of a debt consultant to look at your personal financial situation and really use that to determine what the best loan is for you because maybe you actually should be getting an equity loan like a heloc, or perhaps you should be refinancing one of your existing properties or using another creative strategy. So I really think it just depends on your situation. I don’t think I have anything more to add there. But one other thing would be I think it’s important to look at the opportunity cost whenever you’re comparing loans or comparing putting down cash or not doing a deal. So for example, if you’re doing a fix and flip deal and you are paying a very high interest rate, you might look at that and go, I don’t want to pay 15% plus points, which is one quick thing points just for the rookies here, I think it’s important to note all it means is a percentage point, so it could mean multiple things.
In this case, if we say, when I refer to points, I’m referring to an additional fee that’s transaction based on the loan. So earlier we were talking about using points for a buy down to buy down the interest rate. Those are two different things. I just want to point that out. I was really confused about that when I was first learning about lending. So I think opportunity cost is important. Compare one loan to another in terms of opportunity cost. Also, if you want to close very quickly, you might be able to go with a lender that has fewer requirements on let’s say the private money side of things and they can close really quick, but you pay a higher interest rate. And that may well be worth it if you’re very confident that you can close with them and it’s going to just make it your life a whole lot easier than maybe that’s better than going with the lender where there’s going to be a more long drawn out process.

Ashley:
Joe, this has been great, and I think this is a wonderful start as to what you need to know before you actually decide what route you’re going to go when selecting a lender. And I’m really excited for part two of our mini series where we actually have Tony’s lender on that he uses, what is it, Tony, for pretty much most of your deals right now, isn’t it? So we’re actually going to be talking to him about going the conventional route and working with banks to get lending, and then we’re going to have the part three series where we will have Henry Washington on and he’s going to talk about using private money and also building relationships with small regional banks. So make sure you guys stay tuned and watch out for those episodes to be released. Okay. So Joe, you’ve held us in a suspense this whole episode of what is the one question that lenders don’t want you to know and what should I actually be asking them?

Joe:
So I would say it’s not a secret, but not everybody knows this. You can actually lock your rate. Some lenders will do this for free for a period of time, or they may charge you a fee to lock your rate. And that can be helpful if you’re really concerned that rates are going to go up between now and closing. And I really think this is important, especially more on the business purpose side of things, but also on the can be on the consumer side. So I actually did this. There’s a large lender that I was able to lock my rate in with for around a 45 day period, and it can go longer as well, but the fees increase the longer you go. And then I floated my rate with my other lender, and I ended up working with my lender, Mike Stone, actually from megastar, who I floated my rate with.
But the advantage of that is that if your rate or if rates go up, then you still have this locked in rate at a lower rate. So you can kind of guarantee that you’re going to close with the deal that you underwrote initially with the financing that’s going to work. And so that can just take a lot of the pressure off whether or not you go with that lender that you’ve locked the rate with. And if rates go down, then you can use the lender that you have floated your rate with. One more thing I wanted to call out that I wanted to share with folks on this show is that if you’re looking for today’s rates and just trying to get a ballpark of what today’s rates are, you can use a tool called Optimal Blue, and this is actually the pricing engine that loan officers use. And oftentimes a source for rates out there in the internet references Optimal Blue. So this is going directly to the source. So Google Optimal Blue, today’s rates, and you’ll get today’s rates for all of your consumer purpose loans. So conventional, FHA, va, et cetera.

Ashley:
So Joe, any parting words for the rookie community? Where can they find out about the matchmaking with a lender?

Joe:
So at BiggerPockets, we wanted to make it easy for people to find lenders. So if you want to find a lender, just go to biggerpockets.com/lender Finder. And we also have a lot of resources on that page. So lots of the top questions to ask your lender when you are interviewing them. And you can also see reviews from other investors on BiggerPockets, which is really important. You can even click in to those investors and see their BiggerPockets profiles, reach out to them, ask for references. So all of that I think will be really helpful for folks listening to this show.

Ashley:
Well, Joe, thank you so much. We really appreciate you taking the time to come on here and educate us in the rookie community on what we need to know about finding a lender. I am Ashley, and he’s Tony. Thank you so much for joining us on the Real Estate Rookie Podcast, and we’ll see you guys for our next episode. Don’t forget to like us on YouTube and to follow us on your favorite podcast platform. And we’ll see you guys again for part two and part three of this Lender Finder mini series.