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- [00:00]
David Green
Welcome to Real Talk Real Estate, the show where we cover how to build wealth in real estate with no fluff, no BS and no sales pitches. I'm David Green and I've been doing this for over 10 years. I've seen the ups, the downs and everything in between. This is the show where we pull back the curtain and show it to you too. So if you want to build wealth through real estate or you just love learning about it, you found your home. What's going on, everyone? I am David Green, host of the David Green show, joined today by Big Brain himself, the Lone Ranger, Christian Bashelder. This is Mortgage Monday, the show where we bring you mortgage updates, news about what's going on in the real estate industry and relevant highlights throughout the week that we think will affect your wealth building. Today, Christian and I are going to be talking about misconceptions with the DSCR loan. A couple years ago the DSCR loan really kind of flooded the real estate investing industry. And everyone was talking about it, but nobody really knew what it was. At the one brokerage I think we were probably, it's probably safe to say we were the top DSCR lender for a good period of time there, doing more than anyone in the country. Christian was one of the front runners at putting it together. We funded a lot of these and Now I'd say DSCRs are probably, I mean conventional loans are still in most cases the better option for someone unless they're like me and their files, really complicated. But once you hit a limit on how many conventional loans you can get or if you make your income in non traditional ways, the dscr, which stands for Debt Service Coverage Ratio Loan, can be really good. They are loans that basically take commercial lending fundamentals and apply them to residential properties. And at the one brokerage we have been able to come up with some really creative ways to do it. So for instance, Christian started a program where we could take short term rental income projections, not even income that the rental was already making, but comparable projections and use that to fund fund people buying short term rental properties. And when you're able to combine a DSCR loan and a short term rental property and the short term rental loophole to be able to qualify as a full time real estate investment, professional people were getting massive tax advantages and they were getting real estate that they couldn't have normally bought and they were being able to fund it with specific programs that worked and a lot of DSCR loans were done. Now fast forward a couple years, they're common. A lot of Other lenders are doing them. We're not the only people that do them. We're still the best people that do them. But other people do do them. And we have been receiving questions from clients about differences between DSCR loans and maybe some common misconceptions and conventional loans. And so Christian has joined us today and he's going to break this down for all the rest of us. So, Christian, thanks for being here.
- [02:35]
Christian Batchelor
Absolutely. Yeah, it's gonna be a fun one because I get these questions on my intro calls almost daily. So hopefully putting this out, you know, we're gonna try to name it some really fun on the title to make sure this gets in front of the right people. Maybe like you don't know the DSCR loan. Right. Something like that. We'll see what it ends up as. But yeah, I think this will be good. If you or anybody, you know, has questions about the DSCR loan, direct them to this video. Everybody knows it's a cash flow loan. You know, they know the basics at this point. But this is going to debunk a lot of myths and maybe improper advice that you may be getting by listening to people that don't do loans. That's, that's the biggest thing. Make sure you're following somebody that actually does these things, not somebody who says they get a lot of them. Right.
- [03:18]
David Green
All right, so what is the first misconception with the DSCR loan?
- [03:22]
Christian Batchelor
Yeah, so one of the biggest reasons, obviously the lack of income, you know, needed, you know, that's, that's huge. But one of the biggest reasons why people like the DSCR loan is that you can close in an entity that can be an llc, that can be a corporation, a partnership, whatever. But you can take title of the property in an LLC at closing without any need for what's known as a quick claim transfer. Right. But it's what you have to do when you have to close in your own name and then transfer it to your llc. It's a huge benefit. Why? A lot of people like it. However, there's a misconception. Many people think that because my LLC is on title, that makes this a LLC loan.
- [04:00]
David Green
Right.
- [04:01]
Christian Batchelor
That your LLC is getting the loan. So they think they need like corporate credit and you don't actually have to fill out the application and all these things. The LLC has to be vested for a specific period of time. None of that's true. I would say probably 80 plus percent of DSCR loans are what are known in the industry as recourse. Now, let me break this down and Explain it. The two options are obviously recourse and obviously non recourse. A recourse loan means there is essentially a personal guarantee on the loan. That means the loan is to you. So David, you have an llc. You bought a property under your llc. We'll pick Pinnacle. Right. That's the property that David and I own together. We bought the property with an LLC on title. However, David and I qualified for the loan with our credit, not some corporate credit. We qualified with a down payment coming from us. It was a brand new LLC when we bought it. So all of those are debunked right away. But we also signed what is called a personal guarantee. What that means is that me, the individual have a guarantee to repay that mortgage. That means the lender can put it on my credit report. That means the letter can. Lender can hold me accountable should the payments not be made me as an individual. Okay. A non recourse loan is similar to how like commercial loans are structured. When you buy a 150 unit apartment complex or a hotel or a gas station, typically those are non recourse, which means the lender cannot come after you personally if you don't repay it. They can go after the asset and they can go after the LLC's assets. Now there are DSER non recourse loans out there. They are the vast minority of them. We have access to them. So if you are talking to me and you specifically want a non recourse loan where you are not the borrower, you can help, you can help me understand that that's what you're looking for and I can line you up with that. Typically the interest rates in the terms of the loan are not as good. So if you just come and why is that?
- [06:08]
David Green
Why are the rates not as good?
- [06:10]
Christian Batchelor
It's more risky to the lender. Right. If they can't hold an individual accountable. David, you and I right now could bankrupt. I forgot what the LLC that we made, that whatever. The llc. Right. DC Invest. That's not what it was, but whatever. Yeah.
- [06:24]
David Green
This is how I got my property stolen from me the last time. So we're not going to say the name of the llc.
- [06:28]
Christian Batchelor
Yeah, we're not saying it out loud.
- [06:30]
David Green
The one we have.
- [06:31]
Christian Batchelor
Yeah, the ones that we have. Right, whatever. You know, David and Christian there, we can just bankrupt that company and the lender can't come after us. Right. They can take the property. But hey, okay, cool buy. Right. Recourse loans do not operate that way. Recourse loans, they could hold David Green and Christian Batchelor. They're responsible for repaying that loan. Right. That is the vast, vast majority. And like David asked, why are the terms worse? Ultimately it means there's less risk to the lender. They can go after a person, not some fluff entity that you just created on LegalZoom two weeks before closing. Right. Which is why most DSCR loans have a recourse clause in them. So you can still put your LLC on title. But a big why we're discussing about this misconception is that title and the loan are separate. Those who know the technical terms, the note and the deed are separated. You can have people on the note and not on the deed, or vice versa, depending on the loan product you utilize. The recourse nature is what you guys are mainly making a mistake on. The more and more I talk to people not familiar with this, most dscr, DSCR loans are going to be recourse in nature even if they're done with your LLC on title.
- [07:43]
David Green
And now that is obviously in contrast to conventional loans that are often non recourse.
- [07:48]
Christian Batchelor
Conventional loans are always recourse. Recourse means they go on your credit. So the lender has you personal, accountable. And conventional loans you can't close. With an LLC on title, you can do a quick claim transfer after closing and that opens up a whole can.
- [08:01]
David Green
Of worms roll the dice there. Yeah. Well, another thing about recourse loans that's worth mentioning is it's not just that it goes against your credit. If you borrow $500,000, you buy a house for $600,000, you go into foreclosure and the lender sells that house on the courthouse steps for $400,000. Under most recourse loans, they can now come after that the person who owned it for the extra 100,000 that they were short. So that's something else to think about. If you do this in the name of a company and you bankrupt your company and they come after the company for that hundred grand, well, that company has filed bankruptcy. But if it's done under your own name, they can come after you for other assets that you have and force you to sell those assets to make up the difference. And that has not really been something of concern for the last decade because prices kept going up. But now that we're seeing that prices are stopping and we might be slipping in a recession, this is something to think about.
- [08:57]
Christian Batchelor
Absolutely. 100. That's, that's a big thing that people forget about. When, you know, you can look at any real estate Investor, the last 10 years and chances are they, they made out pretty well, right through Covid and through even before then. Things have been looking up for quite some time. People forget about these things, right? They forget that house prices can go down. I can be underwater. I haven't talked to somebody who's been underwater on a mortgage in probably eight years. It hasn't been something that's really, you know, front and center on the, on the, in the economy, but it is something that you have to defend upon. You have to make sure that you're investing confidently and that you know the loan products that you're utilizing.
- [09:36]
David Green
There you go. So first thing there, we have recourse and non recourse options with the DSCR loan. What's next?
- [09:45]
Christian Batchelor
Second one is how all these lenders can vary. Specifically, I'll draw attention to the down payment. But here, let me, let me just explain this clearly so everybody can understand. Coming from the conventional realm, if you guys bought like your primary residence, right, you most likely got a conventional loan. Maybe you got an fha. That's still a conforming loan, right? Very, very, very defined rule sets. Fannie Mae, Freddie Mac, Ginny Mae, they, they establish a rule set that qualifies a loan as a conforming loan. What debt to income you can go up to, what down payments required, how many units you're allowed to get, etc. The issue when you go from that realm over to the DSCR realm is that these are individual investors. What that means is that lender A sets their guidelines. You can put 15% down 100, we have a 15 down DSCR lender, lender B requires 20, but they allow for short term rentals. So where you can get into a tricky thing is that you see DSCR loans that allow for 15% down. You also see DSCR loans that require that allow for short term rentals. From the public standpoint, it's very easy to combine those two. Oh, DSCR loans allow you to put 15% down on short term rentals. That's not true.
- [10:59]
David Green
Right?
- [10:59]
Christian Batchelor
That's not true.
- [11:01]
David Green
It's kind of like saying, hey, we sell Chevrolet. Well, that dealer over there might sell a Chevrolet just like this one. That doesn't mean they're selling them for the same price.
- [11:09]
Christian Batchelor
That's right. Or we may not have them on the lot. Right. Maybe we'll sell them if we can sell, if we get one. But there's none in stock, Right. We have upwards of probably 200 DSCR lenders. Yikes. Imagine how confusing it is for you as a As a client, imagine me having to stay on the forefront every time all these lenders change their down payments and their rates and their terms and their guidelines, Right?
- [11:31]
David Green
But that's why they want to go to you. Because you know which of those lenders needs more DSCR loads to sell, you know which one's just got a scream and deal with a buyer that wants to get a chunk of them. And you know which ones are like, man, we can't give you a good rate because we got nothing to do with this thing. So you can steer the borrower into where their best opportunity is, both in terms of rates and costs as well as the speed of which those underwriters are getting things done. You know which ones are selling lemons and pieces of junk and you know which ones are selling really good cars. And that's what I think, that's just a misconception in the mortgage industry is people think they have to go talk to a bunch of people and say, what's your rate versus going to one person you trust and saying, what rates can you find? Me?
- [12:12]
Christian Batchelor
Absolutely. And that's. I'll, I'll even do you one better. On top of that, we can go to these lenders and because the volume and the reputation that we've been fortunate enough to create, we can impact those programs. So if I tell people like David, when we first kind of invented, so to speak, the short term rental loan, I went to one of our really flexible investors, said, hey guys, this property that David and I bought, It'll rent for 20,000amonth. You're giving me credit for three grand on the long term rental income. You got to have some flexibility here. I can help you build out how I analyze these properties. How do I do my due diligence? How do I have confidence for what it will rent for? Because I underwrite this when I buy during my due diligence period. We need to create a loan product that is more flexible and allowed for these things. Right now everybody can do short term rentals, right? Five years ago, nobody could, you know, so working with somebody that's. That not only, you know, yes, we can go shop, we can find the best terms, but we may not take the absolute lowest because like David said, we know which underwriters can actually close the deal. Right? But we also have a capacity of being able to influence. That's. I think the most important thing by far is if you need something, can we work on going and get it? For instance, right now we're creating options for midterm Rentals. No DSCR lender can do that. Right now how do you underwrite a midterm rental? I don't know, it's hard, right? So usually we have to have a fall between one of the long term rental or short term rentals. But we're addressing that need because there is such a growing desire for people to get rent by the rooms and pad splits and all the different mid, you know, all the different slogans that midterm rental, you know, furnish, finder, whatever. There's a huge need for it.
- [13:47]
David Green
So, all right, let's talk about that. What options are there and what are the misconceptions with medium term rentals?
- [13:53]
Christian Batchelor
Yeah, 100%. So a lot of people think, oh, if I go get five or 10 leases from my three bedroom house, I can use them because somebody's in the living room, somebody's in the bathroom. You know, depending on how you chop shop the house up. Right now we have options if you are refinancing and you have proof of rent received. But what I would tell you guys is if you are midterm renting, you should talk to me first because all of the solutions are very different. We need to find the one that best fits for you. Okay, we have one option for a master lease where you get all those people to sign one big lease. Give us that with one person, you know, give the person in the master bedroom 100 bucks off their rent to collect everybody's payment and submit it to you. Right. You kind of have like a little built in property manager there, Right? Number two on projecting income. Now this is not out yet, right. So I'm kind of putting the cart before the horse a little bit here. But we're building a program very similar to what we built with short term rentals to give you projected rental income on midterm rentals that is not available yet. So as of right now, you need to have the property work as a short term rental and you could just operate it as a midterm after the fact. But if you are working in the midterm rental space, the pad split space, the furnace finder space, you should definitely set up a consultation with me and I can guide you towards a DSCR loan that is actually closable. Instead of you going getting all these quotes or people can tell you 15 down, no problem and nobody can close them. That's the tricky part because they're combining a little bit of what this investor says, a little bit of what this investor says, a little bit of what this one says, and they're saying it's all one product. It's not. It's not. I promise you guys. We work with every short term rental lender out there. I know all their guidelines. Unfortunately, like the back of my hand. And I say unfortunately because it's a hell of a lot of work to stay up to date with all these guys. But that's my job, not your guys job. That's why I'm the one sitting here telling you guys, please come talk to me because I would rather save your deal day one than save your deal when you give me three days left in escrow after your previous lender failed. Right? Which we do all the time. And I wish we could stop doing that somehow by just coming to us day one. Right.
- [16:06]
David Green
Okay. So we've covered some misconceptions with recourse versus non recourse loan to person or to an llc. Down payment options and short term rentals versus long term rentals as well as medium term rental options and misconceptions. What is next?
- [16:22]
Christian Batchelor
This is the one that most people miss. And this is where the property has something that makes it unique. Now we did our old mortgage Monday episode about the funny the tree house, right? If any of you guys watch that, it's, it's a fun one. And I'm not talking about unique properties that are like crazy. We're doing one right now. It's a single family that has an adu. But the ADU is a manufactured home. Nothing else weird. It's just a manufactured home they plopped on the side of their lot. They use it as a rental. It's just a little ADU that invalidates 95% of DSCR lenders. We didn't know about it until we ordered the appraisal. Now that's on me. Honestly, I should have asked him, hey, what's on the property?
- [17:08]
David Green
Right? You just, you heard adu, you thought.
- [17:11]
Christian Batchelor
It'S a single family with an adu. We do them all the time.
- [17:13]
David Green
I'm curious. You might not know, but just for my own curiosity, is the lenders concerned that because it's a manufactured home, if the person foreclosed, they could just pick up the house and take off with it and there's no ADU on the land.
- [17:24]
Christian Batchelor
I'm sure. Now I can't speak for the investor, I'm sure that's part of it. You know, it's, it's really. If I know that it can be on like a fixed permanent foundation, it's not, you know, it's manufactured For a reason. You could get it out. But ultimately that's probably part of what goes into it. The second part though is it's not the same style of asset as a stick built house. Stick built houses appreciate better. It's the same thing with condos, right? They don't appreciate as well. There's, you know, condos have HOAs and all the headaches that can come with that. But you know, manufactured homes, they, they're not viewed as the same asset class. Right. It's like lending on a. You know, it's like a, you know those motorized tricycles, right? Those, those trikes, the tri, the three wheeled bikes. That's like calling that a car.
- [18:08]
David Green
It's kind of a motorcycle. Yeah.
- [18:10]
Christian Batchelor
Or is it more of a motorcycle? Right. It's kind of like one of those things in the middle. It's not a mobile home on wheels, but it's not like a true house either. It's kind of one of those. We don't know.
- [18:18]
David Green
Yeah, that's funny.
- [18:18]
Christian Batchelor
I guess manufactured homes are the trikes of real estate, right?
- [18:22]
David Green
Some people are gonna upgraded mobile home, but it's a downgraded regular house. It's the, the redheaded stepchild of the industry.
- [18:30]
Christian Batchelor
That's right. That's right. Something. I'm sorry if all, everybody, we do a lot of lending on them. I don't mean to, I don't mean to, to hate there. What I mean to, you know, reiterate here though is that lenders likes assets that are clearly defined. Typically when you get more unique manufactured or a single family with a manufactured on it, number one, it's harder to comp because you need to find another property that's like that as well. How much value is that manufactured home adding? Well, is there any other manufactured ADUs in the area? No. Oh, what's it worth? Right. That's number one. Number two, if a lender creates a whole book of underwriting guidelines of here's what we want, here's how we look at it, here's how we credit you with rental income. And they don't write requirements for manufactured homes, is it easier for them to just say we don't want them or to go rewrite an entire book for manufactured homes? Most of them just say we don't want them.
- [19:20]
David Green
Right.
- [19:21]
Christian Batchelor
And that's. Unfortunately, that's the truth of the industry. It's easy.
- [19:24]
David Green
It's too much work for somebody to do and sometimes they don't.
- [19:27]
Christian Batchelor
Absolutely.
- [19:27]
David Green
Yeah, that makes sense.
- [19:28]
Christian Batchelor
Now we have lenders that do manufactured homes, but now we need a lender that it's almost like mixed use, you know those retail with an apartment up top. You know, in a lot of big cities you see like a retail, like a yoga center downstairs and has an apartment on top. That's called a mixed use building. There's loan products that facilitate for that. It's not most loan products though. Right. That's where people get confused. Oh, I'll just go buy that with a DSCR loan. Well, no, you got a yoga studio downstairs. That's not what we talked about. Right, right. I get calls all the time for mixed use DSCRs. Once again we have them. But if you're out there looking at all of the advice and guidance of DSCR loans and applying it to a unique property, you're going to miss, you're shooting to another target. Right? So just like I said with midterm rentals, if you have a property that's rural, that is a unique asset type that has some commercial component that has something like a manufactured home. Talk to me first. Bring that up please, because I don't want to find out about it on the appraisal now. Then we have to pivot and switch investors and do all this mess. Bring that up. That is very, very, very vital information. And if you guys are online looking at information on DCR loans, don't think that applies to you. You need to talk to a loan officer to get your specific situation accounted for. And this happens all, all, all, all the time.
- [20:50]
David Green
Okay? So misconceptions with DSCR loan number five, they are not all the same. You need to talk to the lender and disclose as much as possible so they can avoid problems coming up in escrow when your earnest money is at risk. And you've already put a bunch of your blood, sweat and tears into that deal. All right, we have one more misconception about DSCR loans to clear up for all of y'all that we love so much. And what's that, Christian?
- [21:13]
Christian Batchelor
Yeah, I threw this on the end. This is more so a misconception about bridge loans. But we talked about this on our, on our brrrr episode and this is where you get a bridge loan. That's your hard money loan, your fix and flip loan. That's how you finance the renovation of a beat up property. Right? You get it nice and pretty and then typically you would exit. And by exit I mean, you know that what 3rd R& Burr. Right, David.
- [21:34]
David Green
Refinance, refinance.
- [21:36]
Christian Batchelor
Whichever one it is, that, that, that second loan is a refinance typically into a DSCR loan. That's usually how people exit bridge loans. The big misconception is make sure you look at that exit before you get in. Right. Your DSCR loan may not be approvable. And you just went and got this big expensive 11% hard money loan. What if you never looked at the dser? What if it doesn't work? What do you do? Now you're stuck with a loan that has a big interest rate, a big maturity date coming up where it's due in full and you can't get a loan out of it. Your only option is to sell or get another bridge loan and then you just keep recycling hard money, which definitely don't do. Right. So if you're doing the brrrr, work with a lender. Please, please, please, please work with a lender that does DSCR loans. It's super important. I've, I've got so many applications that hey Christian, we have a bridge loan that's maturing. Our current lender can't help us. Yeah, it's because they were only a hard money lender. They only do bridge loans. That's it. Right? Oh but yeah, now we want a dscr. This property doesn't cash flow. I can't.
- [22:42]
David Green
That is a solid, solid point. It's not hard to get into the loan, but it's hard to get out. And if your lender doesn't have ways to get out and only ways to get in, they're just going to be like, yeah, yeah man, come on in, come on, we'll give you the money, we'll give you the money. By the way, we're going to collect that really big points up front and closing costs and we're going to hype you on the rate but not tell you that we're actually hammering you on the points up front. So you think you won because you got an 8 or 9% rate, but you paid 4 points when you could have had a 12% rate and it would have been a minimal difference and had less points. But that's neither here nor there. Now you're stuck and you can't get out of the loan because you don't know what it takes to get out of it versus if you use the same broker, they can put you into a bridge loan, a hard money loan. The cost for the rehab as well as multiple exit strategies, conventional FHA, VA DSCR. Your odds of getting stuck are way lower.
- [23:34]
Christian Batchelor
So important and obviously things can still happen. Markets can change. You can under appraise, obviously but giving it a thought and having somebody who can have the prem, you know, the premonition to look ahead and say, oh, this property isn't going to cash flow. What's your plan to exit? Oh, I'm just going to sell it. What if it doesn't sell? Oh, I'll just refinance it. What options do you think you have to refinance? Right, because I'm looking ahead at this and you're collecting two grand a month in rent, but your payment's four grand. What are you. How are you going to make that up? Right. Oh, well, I'll build an adu. Have you considered that in the cost of your renovation? No, but. Yeah. Okay, well, these are good questions, you know, and then your. Your broker could save you money by not doing a deal for you. I can't tell you guys how many deals I've saved people from by not funding them. Right. Which you would think you want your lender to always fund your deals, but trust me, sometimes you don't. If your lender's saving you a bunch of money by doing the proper due diligence, looking forward for it, you. That's my last one for you guys. Definitely. Probably my top five or six questions I get asked for DSCR loans. Hopefully that helps a lot of people before we have to get to the point where we have a point of no return happening. Right.
- [24:44]
David Green
That's really good stuff, especially with the economy kind of turning around like it was before. The margin for error is getting smaller as the market gets tighter. So these are things you want to be paying more attention to than people got away with in the past. So great points there. Christian. Thanks again for being such a great partner and being here with us today and bringing such great knowledge to our clients and customers. If people would like to reach out to you and talk with you about financing options for themselves or a loved one that they want, someone that they can trust and not be taken advantage of. Where can they go?
- [25:15]
Christian Batchelor
Absolutely. Website. Any information just about the company in general. The One brokerage dot com. If you guys want to find me, I'm on Instagram @the1 broker. Don't send me crypto. I don't play with crypto. But make sure you're talking to me. You know, you'll see David Green on my post. That's our whole post history. The One Broker on Instagram is the best way to get me.
- [25:35]
David Green
All right, you can find me at davidgreen24 on Instagram. You can check out davidgreen24.com or realtalkrealestate.com check out the new website and let me know what you think. If you're not subscribed to the show, make sure you subscribe right now. You don't want to miss notifications when a new episode of Mortgage Monday comes out so you can stay on top of what's going on in the world of lending, mortgages, real estate investing and the economy that affects it all. Thanks, everybody for being here. We'll see you next week on Mortgage Monday.