Money Rehab with Nicole Lapin - Real Estate Financing Hacks with Dave Meyer, Head of Real Estate Investing & Podcast Host at BiggerPockets

Episode Date: August 28, 2024

There are a whole lot of options for financing when you’re buying a house, but not all options are created equal. So today, Nicole talks to Dave Meyer (Head of Real Estate Investing & Podcast Host at BiggerPockets), about five real estate moves that get billed as savvy ways to make homeownership more affordable: FHA Loans, Seller Financing, Foreclosed Homes, HELOCs and DSCRs. Nicole and Dave first decode those terms and then they talk through whether these moves really are as savvy as they seem, and what to be wary of if you pursue one of these strategies.  All investing involves the risk of loss, including loss of principal. Brokerage services for US-listed, registered securities, options and bonds in a self-directed account are offered by Public Investing, Inc., member FINRA & SIPC. Public Investing offers a High-Yield Cash Account where funds from this account are automatically deposited into partner banks where they earn interest and are eligible for FDIC insurance; Public Investing is not a bank. Brokerage services for alternative assets are offered by Dalmore Group, LLC, member FINRA & SIPC. Brokerage services for treasury accounts offering 6-month T-Bills are offered by Jiko Securities, Inc., member FINRA & SIPC. Banking services are offered by Jiko Bank, a division of Mid-Central National Bank. Securities investments: Not FDIC Insured; No Bank Guarantee; May Lose Value.  Brokerage services for Regulation A securities are offered through Dalmore Group, LLC, member FINRA & SIPC. Risks at public.com/disclosures/alts-risk-and-conflict-of-interest-disclosure See public.com/#disclosures-main for more information.

One of the most stressful periods of my life was when I was in credit card debt. I got to a point where I just knew that I had to get it under control for my financial future and also for my mental health. We've all hit a point where we've realized it was time to make some serious money moves. So take control of your finances by using a Chime checking account with features like no maintenance fees, fee-free overdraft up to $200, or getting paid up to two days early with direct deposit. Learn more at Chime.com slash MNN. When you check out Chime, you'll see that you can overdraft up to $200 with no fees.

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limits apply. Boosts are available to eligible Chime members enrolled in SpotMe and are subject to monthly limits. Terms and conditions apply. Go to Chime.com slash disclosures for details. I love hosting on Airbnb. It's a great way to bring in some extra cash. But I totally get it that it might sound overwhelming to start or even too complicated if, say, you want to put your summer home in Maine on Airbnb, but you live full time in San Francisco and you can't go to Maine every time you need to change sheets for your guests or something like that. If thoughts like these have been holding you back, I have great news for you. Airbnb has launched a co-host network, which is a network of high quality local co-hosts with

Airbnb experience that can take care of your home and your guests. Co-hosts can do what you don't have time for, like managing your reservations, messaging your guests, giving support at the property, or even create your listing for you. I always want to line up a reservation for my house when I'm traveling for work, but sometimes I just don't get around to it because getting ready to travel always feels like a scramble, so I don't end up making time to make my house look guest-friendly. I guess that's the best way to put it. But I'm matching with a co-host so I can still make that extra cash while also making it easy on myself. Find a co-host at Airbnb.com slash host. I'm Nicole Lappin, the only financial expert you

don't need a dictionary to understand. It's time for some money rehab. There are a whole lot of options for financing when you're buying a house, but not all options are created equal. So today I'm talking to Dave Meyer, who is the head of real estate investing and podcast host at BiggerPockets. It's a platform for educational resources for real estate investors. In this conversation, we talk about five real estate moves that get billed all the time as savvy ways to make homeownership more affordable. FHA loans, seller financing, foreclosed homes, HELOCs, and DSCRs. If these are new to you, I got you. We define these terms first, and then we talk through whether or not these moves are really as savvy as they seem and what to be wary of if you do pursue one of these strategies. Dave Meyer, welcome to Money Rehab.

Thank you so much for having me. All right. Houses are so freaking expensive. We thought prices were going to come down when interest rates went up. Didn't happen. So let's figure out some hacks, I guess, or ways around this or other options that people can use to get into a home. Let's start with FHA loans. First, what does FHA stand for for those who don't know and who would benefit most from this type of financing or who should start thinking about it if they're looking for a home right now? FHA loans are a great option. It stands for a federal housing authority, and it's basically a government program that

is designed to encourage homeownership. So its existence is basically around this idea that homeownership is very challenging for certain people. And so the government provides mortgage options with lower interest rates and lower down payment requirements to help more Americans get into housing. And it's a great option for really anyone who can qualify for them. There are requirements based on the size of the loan. So basically, it's based on how expensive an individual property is, and it varies from city to city, town to town. But they are rather generous. A lot of homes will qualify

for FHA loans. So it is really a strong option for anyone who's looking to buy a primary residence. So it's first time, but it's under a million bucks, right? Are there any income requirements? There aren't specifically, no, but it's actually not just first time. You can get more than one FHA loan. You just can't have more than one at a time. And so you can't like invest using multiple FHA loans, but it does depend on the area. So you have to look up what the requirements are for your specific market. Gotcha. But generally, you're not going to get a McMansion with an FHA loan. No, no. The government is not in the business of trying to help finance luxury homes. But you could still, in most markets, get at least the average or even slightly above average home in terms of quality and location using an FHA loan.

And you say when it comes to FHA loans that homebuyers should watch out for PMI. We're dealing with so much alphabet soup here. First, what does PMI stand for? So PMI is private mortgage insurance. And this applies when an FHA loan has less than 20% down. And I should mention that's one of the great benefits of an FHA loan is you can put as little as 3.5% down on a home. The tradeoff with putting less down is that you are riskier to the lender. And the way that the lenders compensate for that additional risk is they tack on an additional monthly fee in the form of this private mortgage insurance. And so that will increase your monthly payments. So as a homebuyer, you sort of have to ask yourself the question, like, is it worth it to you to pay more on a monthly basis to lower

your down payment requirement? And it's something that a lot of people get at first. And then as the home appreciates, you can actually pay off and get your equity up to 20% and get rid of the PMI, which is a popular strategy. But PMI is basically insurance for the lender. This is not going toward the equity of your home. It's not going toward anything else. That's right. Normally, when you pay a mortgage, you are paying principal, which is basically paying back the amount that you borrowed. You're

paying interest, which is the bank's profit. And when you have an FHA loan, you're basically adding a third layer to it, the PMI. It doesn't pay off any of your mortgage. It's just basically additional profit for the bank. So who would you recommend looking to FHA loans? And what are some of the rules to keep in mind with loan limits and things like that? The profile of the home buyer who should consider FHA loans are people who don't want to put 20% down. I think that's the main thing. Because if you can put 20% down,

you're usually better off just getting a private mortgage because then you're not gonna have that PMI that we were just talking about and you'll have lower monthly payments. The other thing that I think you need to keep in mind is that you are need to kind of find a property that has very specific requirements by the government. The government wants the certain condition standards to be met. So these things can be like being up to building code,

which of course everyone wants. But there are also some smaller things that you might not think about like having the drain in your laundry room in the right place. And so you need to be able to find properties that are going to be FHA compliant. place. And so you need to be able to find properties that are going to be FHA compliant. That is something that you need to think about, particularly if you're in a very competitive market. Because if you are in somewhere, let's say in the Northeast or the Midwest, super popular housing markets right now, a lot of sellers would, you know, if you were looking at two equal offers on your property, they may choose the non FHA option because with FHA loans, there are more hurdles to jump through and there's more chance that the loan might get denied. So that's just something to think about

additionally, if you're in a really competitive market. But the market is slowing down a little bit. That's a little bit less competitive. So I think that will make FHA loans a bit more popular in the near future. Like there's additional inspection or something like that? Yeah, it's basically like in the bank when they have the inspection, they will have more requirements than a normal bank. So if you can afford 20% down, there's no real benefit to an FHA loan. I would check for rates because sometimes FHA loans can be lower as well. And so like as of right now, the average private mortgage insurance as of this recording at

the end of July is about 6.8 and it's about 6.25 for FHA loans. So there is a benefit, but it's really person to person specific. So when you hear these quotes about the average rate, it's not it doesn't apply to everyone. But it is, I think, worth considering for people, even if you put 20 percent down, you might as well ask to see if you can get a benefit in an interest rate. Totally. And you're basically saying it's up to your credit score. If you have shitty credit, it's going to be worse. Yeah. Yeah.

That's generally true. All right. Next up, seller financing. What is it and who is that a fit for? Seller financing is basically when a property owner owns their home or property free and clear so they don't have a mortgage on it. And when they go to sell it, rather than just selling you the property outright, they decide to act as the bank.

So they are basically going to give you a mortgage on a property that they already own. And I can get into the details of why the seller would want to do that. But the benefits to the buyer can be huge here because when the seller is the bank, they can set whatever requirements they want. They can say you can put 0% down. They can also say you need to put 50% down. It's really up to them. When you go into FHA loans or private mortgages, these are huge companies. And in order to streamline their business, they have to set really strict standards of who can lend on what types of properties. None of that exists in seller financing. And so in addition to specific

terms about the financials, it also means that it opens up people who may traditionally have a harder time getting a conventional mortgage. So those are people like gig workers or people who work on a 1099 or on commissions instead of W-2 jobs or people who have bad credit. All of those folks tend to have a harder time with just walking into a bank and getting approved. But if you can work it out with a seller, it's usually possible. Should you be worried that the seller might screw you over? Is there more due diligence that you should do if the seller is offering some kind of financing? It's usually developers, right?

Yes, it is very often developers, especially in today's market. It is becoming a more popular way for developers to move inventory because they can, you know, offer a lower interest rate than what banks are offering. offer a lower interest rate than what banks are offering. But there are a lot of what we would say like retiring landlords who also do this option. Most primary homeowners won't do it because they need the money to go and buy another home. But an investor who's trying to sell off their portfolio and retire might be willing to do this. That's actually becoming more popular. But to your point, you absolutely need to do due diligence and you need to hire a lawyer. This is not something you should be doing on the back of an envelope. In almost every state, it depends on the state, the exact order of

operations that you need to do things and how you file deeds versus and create title company, title insurances. So what I would recommend is just hiring an attorney. This isn't the most common strategy in real estate, but it's common enough that you can find attorneys who will have experience with this. You say it's not so easy to find this kind of financing. Why is that? I had a friend recently who was looking at a house. I think it was like a $3 million house. And she went through the process. And it didn't list like seller financing in the description on Zillow or MLS or whatever. And then she found out later that the developer would have offered a million bucks at four and a half percent or something like that. But then if she put 20% down, she would still need over a million dollar loan from

a conventional bank. It got very like complicated, but potentially advantageous if she took advantage of it. But she didn't find out until much later in the process. Is that typical? I'd say that it depends on whether you're buying from a developer or from a private individual. With a private individual, I would think that most people just don't even know it's an option. Most sellers don't even know it's an option. And I've heard from many other investors that they just ask. And once they explain the benefits, and there are a lot of benefits to the seller, that they're open to it. From a developer perspective, I would think they would be advertising that like crazy right now, because that seems like such a good deal.

And they're trying to move inventory. So I'm surprised to hear that they weren't making that a focal point of their marketing. So why then would sellers or developers be into this strategy? Obviously, they're not doing it just for funsies. They're making money here. No, lenders rarely do things out of the kindness of their own heart. But I think there's two primary benefits. One is that oftentimes people who can't get traditional loans are willing to pay more for a seller financing so they can increase the sales price because they are offering this buyer the convenience of still being able to buy a home with financing that they wouldn't normally be able to do without a seller financing situation. So they might add 5% to the sale price or 10% to the sale price. The other part is cashflow management. A lot of developers, it's very feast or famine, and they only make money when they sell properties and there's a complicated life cycle there.

And so they might want to even out their cash flow and have more steady, regular sort of passive income coming in just to manage their cash flow better. And that's the same of private individuals. We see a lot of landlords retiring and doing seller financing because they want to quote unquote retire, but they'd still appreciate some income. So by doing seller financing, they get rid of the operational challenges of owning a rental property, but they still can make six, seven or 8% on their money just by lending on the property they already know. Well, probably less than that, because the seller financing will probably have to be less than what you would get at a traditional bank. Otherwise,

why would a buyer do it? Right? Oh, I actually with private landlords, it's usually more, at least that's in my experience, because it's it's often to people who can't qualify for a normal mortgage. I see. Okay. So with a with a with a developer, you're absolutely right. Yeah. So in the example I was giving you of a friend, another thing that surprised me was this idea of balloon payments. So it was the developer would take on a million bucks at four and a half percent, figure out like another mortgage, but only do it for five years. So if you couldn't pay off that million bucks, then will you tell us what happens? Yeah. So this is something you really need to watch out for when

you do anything other than conventional loans. A balloon payment is basically just another form of mortgage. A traditional mortgage, when you get a 30-year fixed rate mortgage, the payment stays the same for 30 years. With a lot of commercial loans, and there's something called the DSCR loan, there's all sorts of options that have it. It's basically like, we're going to give you a loan, and we're going to amortize it and make payments as if it was for 30 years. But then after five years or after 10 years, we're actually going to make you pay the rest off. And most people don't actually pay the rest off. They're banking on that fact that they can refinance.

So they'll think, you know, I'm not going to actually work out 500 grand in five years. I'm going to just in the next four and a half years, I'm going to get another mortgage. That can work really well. But of course, if interest rate or credit markets change, there is certainly risk in that. I think anyone who had a balloon payment coming up in the last two or three years is having a real challenge. That's been a major problem in the commercial real estate space. And often there are prepayment penalties for this. And so there's a lot of layers that you need to look at. It's again, why you need to talk to an attorney, but there is certainly risk with the balloon payment and some additional fees that might not

make it as good of a deal as it might appear at first glance. Yeah. So essentially in that example that I was thinking about, if I remember correctly, and tell me if this is something you see often, it was that the million bucks at four and a half percent was going to last for five years. But during those five years that you were paying four and a half percent, it would be interest only. You're right. Yeah, that's a common way of doing it. So then after that, you still have that loan that you were paying four and a half percent, it would be interest only. You're right. Yeah, that's a common way of doing it. So then after that, you still have that loan that you would probably have to then find a bank to take over if you couldn't pay down whatever the seller financing would be. Exactly. That's a good easy example to talk about because an interest only loan,

we talked earlier about having interest and principal. You're not paying principal. So it really does reduce your monthly costs, which is very attractive. But interest-only means you're not paying back any of that million dollars. So in five years, you owe the bank a million dollars. And so you either need to come up with that cash, which for most people is not feasible, or refinance before that and get either a traditional mortgage or you can just get another balloon mortgage and figure it out five years

further into the future. The can, the road. Yeah, yeah, exactly. It's so long. Another thing you say you have some feelings about are foreclosed homes. You don't think they're a good option for homebuyers or individual homebuyers? Why is that? I don't. It's like so tempting to think that there's this like secret way of getting. I love it. I look at like foreclosed home porn all the time. It definitely is this like guilty pleasure and it's like fun to look at. There's a couple like it can work. There are certainly instances and individuals that it can work for. I would say that, number one, these are usually complicated situations. And if this is your

first time buying a home, it can be really complex to navigate how to buy these properties just from a legal standpoint. The second thing is you rarely can use financing. You need to actually go and buy these things for pure cash. You often can't view these properties ahead of time. So you're using cash before you've even seen anything. And so for homebuyers, it's really not a very attractive option. Foreclosures are better for house flippers, right? Because they're going to flip 20 homes and they're going to buy it for cash. And, you know, five of them might be really bad situations that they lose money on, but they do it enough to have the odds even out. And then they turn a profit on it. But if you're banking all of your money, savings,

your home on an individual foreclosure, it can be relatively risky. And you can't do when you say cash. I recently was having this conversation that cash offers can also be the result of a 1031 exchange, which is where you sell your house and then you buy another similar house very quickly. That's a super, super abridged way to describe it. But that wouldn't work for a foreclosed home, I assume, because that would technically be all cash. I've never heard of that. And with a 1031, you do need to have a similar debt load to the previous property. So I'm not sure you could probably buy for cash and then refinance it. But I've never heard of someone buying a foreclosure with a 1031. So I'm not sure if that would work.

From everyone I know who's done it, you either buy cash or there are like specialty banks that will give you cash in order to buy this. But those are going to be really high interest rates. So probably somewhere in the 10% to 15% interest rate, maybe even higher than that. So that obviously comes at a hefty price. And then there are other varieties too. There's sheriff sales and all sorts of weird stuff. I mean, once you get into this world, it's a little spooky. To me, I thought the EBGBs where I was like, who died? Who died in this house? Or what the fuck happened?

Why are like the family selling it so quickly? Why do you have to get court approval? Like I have a thousand questions and it doesn't feel like good juju. Oh, it's, you know what I mean? If you want to like, I am not a house flipper, so I've never done it, but I have a lot of friends who do it. They will tell you some crazy stories. Dead bodies in there.

Oh no. Are you serious? Yeah, like yeah like oh yeah like actual dead my a friend of mine said he's seen three dead bodies three it's not that uncommon not just i heard of the like tape thing like around where like a body was in one sketchy house that's spooky but not the actual no there there's all sorts of stuff. A lot of hoarder houses. And I think that the main thing here is like, the reason I don't recommend it is like people think it's this like untouched part of the market.

But there are very sophisticated players in foreclosure space. Like there are hedge funds. There are private equity firms that are doing this and they know what they're doing. And so this idea that you're gonna just like waltz in and just cause it's foreclosed, find like a great deal. I don't think that's accurate. The other thing that's worth mentioning

is that there are not a lot of foreclosures right now. The aftermath of the great financial crisis was a very unique time in history where there were a lot of foreclosures. And even though you might see some really scary headlines that are like foreclosure doubled last year, that is true. But they've doubled from like all time lows to still being really close to all time lows. We have about one ninth of the amount of foreclosures right now that we had in 2010. So it's not like there's even that much of it out there. And the stuff that

is out there is probably that's worth anything is probably getting bought by someone who really knows what they're doing. Damn it, Dave. I know. I'm sorry. We want a deal. I know. This is not where to find it. By the way, I like I agree with you. I think it's it's too much cuckoo chaos for what it's worth, but it is very tempting to think about it. Also, you have to remember that there's no inspections. You take it as is, right? If you're looking for a deal- Dead body and all. Yes. Honestly, no one likes this answer because it takes a little bit more work. But if you're

looking for a deal, the best way to network and find a great deal in real estate is just by talking to people and telling people that you buy houses. Like if you just walk around and tell everyone, you know, you're like, Hey, I'm always looking. People will come to you with these crazy things like my aunt passed away or, you know, like all these situations, like people will come to you if they find something. It takes six months or a year to have that bear fruit, but that is actually the best way to find deals. Like who are we talking to? People we know, people on the street. Honestly, people that you know. Yeah. People that you know, if you have contractors that are working on your current home or people that you meet, property managers, if you're renting and

you have a landlord, ask them. Or if you talk to a service provider who comes to your house, even just telling your friends bears fruit over a long period of time. People love talking about real estate. And so if you tell them that you're interested, they'll hear from a friend that someone's trying to sell. And if you do that for long enough, that's the way to find great deals. But it does take time and effort. Like off market deals, you're saying? Yeah, exactly. All right. If you're not a first time home buyer, you could also take out a HELOC, which I would

love to explain because it's more alphabet soup. First, can you tell us what a HELOC is and then how you get one? Sure. A HELOC stands for Home Equity Line of Credit. And basically what it is, is taking out an additional loan against the equity that you have in your home. And I'll explain that a little bit more. So basically when you, let's say you go out and buy a property that's worth $500,000 and you put down 20%, which would be a hundred thousand dollars, that a hundred thousand dollars is your quote

unquote equity. That's how much you own without any encumbrance from the bank. And over time, hopefully that grows. It will grow hopefully from appreciation, from paying down your mortgage. Maybe you add value to the property and banks will often let you borrow against that because that's a sizable chunk of money. And so if that grows to $150,000, your bank might offer you a loan and say, hey, you know, we'll let you borrow up to $50,000 and we're going to use your home as collateral. But you have access to this $50,000 as a line of credit. Now, a line of credit in itself is a little bit different from a mortgage.

When you take out a mortgage, it is a fixed amount that you're borrowing. The principal stays the same. a mortgage. When you take out a mortgage, it is a fixed amount that you're borrowing. The principle stays the same. You're using the same example. You take out $400,000 in that original loan, and you're paying on it until you pay off the house. What's cool about a home equity line of credit is that you have access to this money, but you don't have to use it, and you only pay on it when you actually go and use it. So you can get a home equity line of credit. Say you want to do a renovation for your home and you have $10,000 due up front, but not, you don't have to pay the, you know, 30,006 months from now. So you can pay

that $10,000 up front. Then you start making payments on that $10,000 loan, but you don't have to make payments on the other $30,000 until you actually go and use it. And this can be a really good cost-saving strategy for people who need money to use elsewhere in their life, whether it's from a renovation like this example, or you could take out a HELOC and use it to buy another property as an investment. Or some people use it as just daily living expenses. Absolutely. It was getting very popular to use it as living expenses when mortgage rates were super low. Because like if you could pay, you know, if you could tap your home equity and pay 2% on it, like why wouldn't you?

But now, you know, it's 7, 8%. It's, you know, the math has changed a little bit. Yeah. So when you said 50,000, was that an arbitrary number? Or like what's an example of if I say bought a 500K house, I paid off half, I have 250K in equity, I wanted to take out a HELOC. Like what approximately do you think I would get? I would, most banks usually want you to keep that at least that 20%.

And so it really depends because like, obviously, they're not going to lend more than what you owe the bank. So you're going to have to have at least that amount of equity still in so at least 20% like 100k, like you leave that you can't touch the 100k. And then the, you know, and then they're going to leave some wiggle room. So let's say if you had, you know, if you had a hundred to $500,000 house, and you had $200 thousand dollars in equity, so 40 percent equity in it, you would probably be able to borrow, I would say, at least fifty thousand dollars, if not seventy five thousand dollars, roughly on that kind of math. Like 25 percent of the equity that you have on top of the 20 percent.

Yes, even even more. It really depends on the credit. It's hard to generalize, but I've heard of people being able to borrow almost all the equity other than what they put as a down payment, but those were during better credit conditions. And I don't know off the top of my head, but I've heard that key locks are getting a little bit tighter. So I don't know exactly what the ratios are right now. I don't know, Dave. Back in the 80s, we had 20% rates. So we're like crying about these 7%, but. I know. It's been worse. But in the 80s, like everything was cheaper, right? So like, I know it's like super expensive mortgage rates, but insurance and taxes and all that good stuff.

It's still, it's still worse than it was in recent memory, for sure. So if someone's thinking about taking out a HELOC, what should they be wary of, cautious of? What should they watch out for? I think my policy and my attitude towards debt is always the same. Like, take it out if you're going to use it to make more money than it costs you. So if you're going to use it to make more money than

it costs you. So if you're going to take out a HELOC to use for everyday expenses, I would only do that on a short term basis because any amount of interest you're paying is hurting you financially unless you're taking that money to start a business or to finance your education because that is an investment in yourself or to buy a rental property. So that is my personal belief. If you were talking about homeownership, HELOC is a great option if you're buying a second home, but you obviously can't. Or like investment property.

Yeah, or an investment. It's a great option. I think particularly for down payment assistance. So I wouldn't, you know, there are times and it depends on the lender that you can use a HELOC to cover your whole mortgage. I think the more common way to do it is to use the HELOC to cover your down payment for a second property. But just keep in mind, then you would have two loans on that property because you're borrowing for your down payment and then you're financing the rest of it with a second mortgage. And also your house is collateral.

Yes. Yes. That is also something to remember. Hold on to your wallets. Money Rehab will be right back. One of the most stressful periods of my life was when I was in credit card debt. I got to a point where I just knew that I had to get it under control for my financial future and also for my mental health. We've all hit a point where we've realized it was time to make some serious money moves. So take control of your finances by using a Chime checking account with features like no maintenance fees, fee-free overdraft up to $200, or getting paid up to two days early with direct deposit. Learn more at Chime.com slash MNN. When you check out Chime, you'll see that you can overdraft up to $200 with no fees. If you're an

OG listener, you know about my infamous $35 overdraft fee that I got from buying a $7 latte and how I am still very fired up about it. If I had Chime back then, that wouldn't even be a story. Make your fall finances a little greener by working toward your financial goals with Chime. Open your account in just two minutes at chime.com slash MNN. That's chime.com slash MNN. Chime feels like progress. Banking services and debit card provided by the Bank Corp Bank N.A. or Stride Bank N.A. Members FDIC. Spot me eligibility requirements I love hosting on Airbnb. It's a great way to bring in some extra cash. But I totally get it

that it might sound overwhelming to start or even too complicated if, say, you want to put your summer home in Maine on Airbnb, but you live full time in San Francisco and you can't go to Maine every time you need to change sheets for your guests or something like that. If thoughts like these have been holding you back, I have great news for you. Airbnb has launched a co-host network, which is a network of high quality local co-hosts with Airbnb experience that can take care of your home and your guests. Co-hosts can do what you don't have time for, like managing your reservations, messaging your guests, giving support at the property, or even create your listing for you. I always want to line up a reservation for my

house when I'm traveling for work, but sometimes I just don't get around to it because getting ready to travel always feels like a scramble, so I don't end up making time to make my house when I'm traveling for work. But sometimes I just don't get around to it because getting ready to travel always feels like a scramble. So I don't end up making time to make my house look guest friendly. I guess that's the best way to put it. But I'm matching with a co-host so I can still make that extra cash while also making it easy on myself. Find a co-host at Airbnb.com slash host. And now for some more money rehab. And now for some more money rehab. All right. I want to throw another one at you. You mentioned this super briefly, but it's a DSCR loan. I know this isn't for primary residents. It sometimes gets lumped into this conversation as like alternate ways to buy a home. I think the confusion is real on this one. So can you can you try to untangle it and break down what a D and I was like, miss mess it up. It's DSCR.

That's right. Yeah. So it stands for debt service coverage ratio. And it's basically it is a residential loan. So that means that you can use it to buy a single family home, a duplex, triplex. But it mimics the underwriting of a commercial loan. And so what that means is basically if you were to go out and wanted to buy a multifamily building or an office space, the bank is not going to underwrite that deal and consider that loan based on the borrower as an individual. They're going to underwrite it based on the quality of the real estate asset and deal that they're purchasing. So that's the same thing with the DSCR loan. So if I, Dave, wanted to go out and buy a duplex with a DSCR loan, when I went to the lender, they wouldn't be saying, hey, Dave, what's your credit score? What's your income? What's your whole financial life? If you've ever

applied for a mortgage, you know how deep they dig into your... It's a financial... Yeah, exactly. It's a very invasive financial checkup. That doesn't happen with a DSCR loan because what they're going to look at is say, hey, here's a property that costs 500 grand. The payment is going to be, let's say, $2,000 a month, but it's generating $3,000 a month in rent. So we'll lend to you because at the end of the day, worse comes to worse. If they have to foreclose on that home, they know that they can rent it out for a profit. And so this has become an increasingly popular strategy for real estate investors because one, you don't have to have all the paperwork in order to again, for people who don't

have great credit, or maybe are running up against order known as DTI limits, which are debt to income ratios. This is another way to get around it. They also can work relatively quickly. So there's a lot of benefits to them. There are risks, which I can discuss as well. But that's why it's gotten so popular. Discuss them. I mean, who should be looking at these to begin with? So this is really for investors because they're not DSCR loans that I know of for primary residences. The interest rates do tend to be a little bit higher than conventional loans. So that's something obviously you want to consider as a risk. And then the second and the other risks are similar to that that we talked about with seller financing are one, a lot of

them come with balloon payments. So you do want to keep an eye out for that. And the other is that they have these things called prepayment penalties. So this sort of gets into the business. It's so annoying that they do that because like, wouldn't that be a good thing? You would think so. They're banking into the business. It's so annoying that they do that because like, wouldn't that be a good thing? You would think so. They're banking on the interest. They're banking on the interest. And their business model is that they have considerable upfront costs to underwrite a deal.

If you're a lender, all the effort and expense from their business is like talking to you, having a loan officer review your deals, analyzing your deals. And so if they go through all that work, fund the deal, and then you pay it off a month later, they're losing, you know, they're losing money. And so they don't want to do that. And so they often have prepayment penalties. Hopefully, if you're looking into this, you can get one that's, you know, anytime you can sell it anytime after three years or five years, but you know, which is a little bit more reasonable. But that is definitely something you want to keep an eye out for.

So so for when you when you say real estate investors, is this also a financing option if you want to be a real estate investor? Let's say you have your primary house. You listen to all the BiggerPockets shows all the time, and you want to start dabbling into like a rental property. Can you apply for a DSCR loan? Oh, yeah, that that's exactly what I meant. When I'm saying real estate investors, I'm talking about people like me who own, you know, a handful of properties. This is a very popular good strategy for people to do it. Of course,

it's hard to give blanket advice on loans because it really depends on the individual, but it is a sound loan product and can work really well for people who are aspiring to buy a rental property. Even short-term rentals can do this as well. But basically, the gist of this is that it's looking at the potential of what the property can rent out for and not focused as heavily on your current assets and situation. That's right. And I think that's what's so appealing about using this as an investor is because as an investor, whether you own one unit or 10, like your job is to find great deals. And so it really aligns interests in a way that I think is

very compelling, where if you can go out and find great deals, might not be a foreclosure, but hopefully you can go out and find a great deal and you can show it to your bank. They're going to be super interested in it because that reduces their risk. And you've also found a great deal for yourself. So it seems doubly worthwhile. Any other things to watch out for besides the prepayment penalties and the balloon payment issue? Just the interest rate. And again, I also think with all these things, seller financing and DSCR loans, a lot of the institutions that you'll be dealing with are not Chase. It's not

Wells Fargo who's offering these. So do your due diligence on the people who are actually behind the company, whether that's talking to other people who've gotten loans from them, hiring an attorney. Some of these are smaller institutions. That doesn't mean they're bad. It doesn't mean they're scammers or anything like that. But you might want to check their balance sheet and make sure that they're going to be around and do a little bit of due diligence on the lender. They're certainly going to be doing it on you. So you might want to make sure it goes both ways. That's right.

It's only fair. Yeah, exactly. What are some ways that people can do that? Like if they're just getting into this world, like how can you do due diligence on your own besides just like regular searches? Yeah. Like regular searches. In real estate. Or whatever is readily available. Yeah. In real estate investing, a lot of it is sort of a black box and that's a lot of what

BiggerPockets exists to alleviate. So, you know, if it were me, I would go and talk to other investors I know to see if they've gotten loans from them. Some of them will share financial statements, you know, history of loan performance with you. I would at least ask and see how they react to those questions at the very least. But the best way to do it is to talk to other lenders or excuse me, other borrowers who have worked with these lenders. Is there like a better business bureau, but for real estate? I don't know. Not that I know in terms of lenders. Yeah, that's a great idea. Thank you. Well, we do that on BiggerPockets for a couple of, not specifically for loans. We do it for syndications, you know, different types of investments, but not for credit.

That's a good idea. But like sellers or developers, like developers are really the ones that are doing this seller financing. You would want to know their overall reputation or, you know, I don't know, like a Yelp for them. Yeah, absolutely. It's frustrating that it doesn't exist. Like, of course, the developers were publicly traded. You know, you can go and look at what they're doing. But the vast majority of real estate is done by people who have relatively small portfolios. And that's why it's such a it really is like very much a relationship business still. It's knowing other investors in your market that have worked with these people is, to my knowledge, the best way to still try and vet people. So net-net, some of these are good options, except the foreclosure one, which you...

Yeah, I think there absolutely are great options. If you're just looking to buy a primary residence, an FHA, or just a good old fashioned, boring conventional loan, all can be good. Seller financing, if you can find it, can be a really great option for those who don't have the means to qualify for a traditional mortgage. And if you want to invest, HELOCs and DSCR loans can definitely be your friend. All right, Dave, we end our episodes by asking all of our guests for one tip that listeners can take straight to the bank. You've given us so many already. Do you have anything else that can be anything? Just a tip on buying a home right now, how to get the best financing options, hacks for finding affordable houses, anything? My favorite tip for buying a home in

this market is to do something we call house hacking. Not sure if you've heard of this term before, but it's basically a hybrid of buying a home and investing. You buy, let's say, a duplex, live in one side and lease out the other side. And there's a ton of different benefits. It's a very low risk, high reward way to get into investing. But given our conversation today, what's so valuable about house hacking is actually the financing. Because the way the government treats loans is that anything that has four units or fewer can be your primary residence. So you can actually get an FHA loan like what we were talking about and put as little as 3.5% down and buy four units. So this is like an incredible way not just to reduce your own housing costs because you have other people contributing to your costs, but it's a great

way to get started in real estate and learn the business and see if you perhaps want to be an investor in the future. Anything you should be aware of? I love house hacking. I think the most common complaint people get is, you know, you're sharing a wall with your tenants. I have done it myself. It's really not that big a deal. But you should know that real estate investing is a business and it does take time. You know, people call it passive income. It's not. It's more passive than your job probably is. But you do have to put in work to make your business operate and if you're going to rent out a unit you have an obligation to make that a safe comfortable quality place to live for your tenants and make sure that you're willing to put

in that work before you do it yeah and and take their calls of like clogged toilets and whatever else absolutely being a landlord is like any other business. Your tenants are your clients, and it's your obligation to give them a good experience. When Scott came on the show, I think he said he started that way, but also that real estate investors are overnight successes, like 20 years in the making or something like that. Is that what you guys say? That's a good one. I'm going to steal that from him. But yeah, it is. I mean, I think for real estate investing, a lot of the social media is like, oh, you can quit your job in two or three years. That's just not, it's possible.

But I think the value of real estate is that if you just start right now and you do 15, 20 years, you can absolutely be retired. And that's what's super cool about it. And it's relatively low risk compared to a lot of different asset classes. And it's very predictable. It's very stable. So I agree with the sentiment that if you just are consistent about it, you can have a lot of success. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Levoy. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to

potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at Money News and TikTok at Money News Network for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.