\n
Ashley Kehr:
This is Real Estate Rookie, episode 288.<\/p>\n
Tony Robinson:
Ash, outside of credit score, what other factors do you typically look at when screening for long-term tenants?<\/p>\n
Ashley Kehr:
Yeah. Let me give this disclaimer first is that make sure you know what you can and cannot screen for with your state laws. I mean, every state has different rules on this as to what you can screen for. So screening also cost money, so you have to pay if you\u2019re doing a background check to make sure no violent crimes have been committed. If you have a multi-family unit, your tenants are not going to be wanting to live next to someone who is convicted of murder and just out of jail. My name is Ashley Kehr, and I am here with my co-host, Tony Robinson.<\/p>\n
Tony Robinson:
Welcome to the Real Estate Rookie podcast where every week, twice a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. We\u2019re back with another Rookie Reply episode. We\u2019ve got some great questions today. We\u2019re going to talk about why Ashley\u2019s first eviction had her in tears and what you can learn from that process to make sure you don\u2019t end up the same way. We\u2019re going to answer the questions, \u201cDo evictions and bad credit scores always lead to bad tenants, or is there a silver lining in there somewhere?\u201d Last, we\u2019re going to talk about what a DSCR loan product is and how you can use to fuel your funding for your real estate business.<\/p>\n
Ashley Kehr:
You forgot to add in the part where a tenant leaves a note as to why she\u2019s leaving the unit that also leaves you in tears.<\/p>\n
Tony Robinson:
Yeah, but those are good tears. Those are good tears.<\/p>\n
Ashley Kehr:
I know, I know.<\/p>\n
Tony Robinson:
Yeah.<\/p>\n
Ashley Kehr:
Yeah. So, today\u2019s episode, we go through these questions. As always, Rookie Reply is your chance as our listener to send in your questions for us to answer. You can send your questions to the Real Estate Rookie Facebook group. You can send a DM to Tony or I, or you can leave some questions onto our YouTube videos. Just search \u201cReal Estate Rookie\u201d and make sure you are subscribed. Okay. So our first question today is from Dan Rodriguez. I took a look at this question, and I said, \u201cOh, great. Another opportunity for me to talk about how I cried on the podcast.\u201d So today\u2019s question is, \u201cFor those of you that have gone through the eviction process, did you go to loan in small claims court, or did you hire a lawyer? Local court has advised me of the steps needed. I\u2019m just wondering if I should spend the extra money despite already being at a loss with a problem tenant. The guy already has a bench warrant for repeated failure to show for driving with suspended license, so I\u2019m pretty sure judgment is paper value, and I\u2019ll never recover nothing from it.\u201d<\/p>\n
Tony Robinson:
I just want to ask before you answer that, Ashley, because I wonder if Dan\u2019s question\u2026 It seems like he\u2019s just more so worried about trying to recover maybe lost rental revenue and not necessarily evicting him because\u2026 I mean, he said, \u201cWondering if I should spend the extra money despite already being at a loss with a problem tenant.\u201d But if that tenant is still in the house, then you should definitely spend the money. I don\u2019t know. How are you reading that question?<\/p>\n
Ashley Kehr:
So you could go\u2026 and this probably varies from state. So I\u2019ve done New York evictions, so I\u2019ll speak on terms of that, but it has been a while since I\u2019ve actually done one myself. So I think right here are two different questions that he\u2019s asking or two different scenarios. So the first one is the eviction process, and then the second one is filing a judgment against someone. So these can be done simultaneously, or they can be done separately. So let\u2019s take the scenario that the person is still living in the house, and they want to do the eviction plus file a judgment against the person, or you could just file the eviction and not even go with the judgment. But with the eviction process, you can do it yourself, but you just have to be so diligent.
I did two evictions. My first ever that I did, the investor I was working for said, \u201cWe don\u2019t need to hire an attorney. You learn everything. You can learn how to do this process.\u201d So, at court, judge made me cry because I didn\u2019t file at the timeline, said I messed up the\u2026 or like when you serve the person, it has to be a third-party. You have to have them sign an affidavit. Then, you have this much time before you can file the next one, but the next thing to them has to be filed within three days or whatever. It\u2019s a very time-stricken process, and if you don\u2019t know what those time periods are that you need to hit, the judge can throw the case out of court.
Luckily, it was in a very small town. There was nobody else in the courtroom, except for me and the tenant. For the next case, she excused the first tenant and was like, \u201cPlease go ahead and go. She\u2019ll have redo the eviction or whatever.\u201d So she tells the bailiff or whoever is the only other person in the room is like, \u201cDon\u2019t bring the next person in yet,\u201d and she says to me, \u201cI\u2019m just going to dismiss this for you. I\u2019m not going to say the reasons why so you don\u2019t have to go through the embarrassment a second time.\u201d Something along those lines. I don\u2019t remember the exact words. Basically, that, but\u2026 Yeah. So, I was like, \u201cPlease let me hire an attorney to the investor.\u201d So, since then, I haven\u2019t done any evictions myself, and always hire an attorney to do it because they know the process, and they can do it so much faster than you can.
There\u2019s also certain language that has to be appropriate in the documents that are filed. So, for example, in New York, you have to give a 10-day notice for them to pay rent or to vacate the premise that they do not do either of those. Then, that\u2019s when you can file the petition for eviction. You send it to the court, they give you a court date, and then you have to serve it to the tenant by a third-party, get the affidavit of service, all these things. Then, once you actually go to court, it can vary vastly as to how your court experience is. So I\u2019ve gone with my attorney to different evictions, and sometimes I just sit there. I don\u2019t have to say anything. Other times, the judge wants to ask me a million questions. Sometimes the tenant doesn\u2019t even show up, and they make you wait 45 minutes to see if they are going to show up. So I think having an attorney is definitely a huge advantage. Plus, they can file the judgment for you.
The judgment is a lot easier to take care of than it is the eviction. You can go to small claims court. Well, you go to the court clerk, go to their office, and you will ask for the small claims form. You can fill out the form right there, and then they\u2019ll give you a court date, and then they\u2019ll have the marshal serve the person, and then you have your court date to do the judgment against the person. I\u2019ve only done one judgment myself personally against someone because in the same scenario, it\u2019s not going to really recoup anything, but one of the first tenets of my own that I had to evict, I did a judgment. It\u2019s probably been seven years now, and I think it was a 10-year judgment. So, in 10 years, that judgment will expire. I\u2019ve never seen a penny from it, and maybe someday I\u2019ll get a check in the mail. Yay. But until then, it\u2019s just a waiting game.
I think if you\u2019re going to do the judgment, it\u2019s fairly easy process, at least in New York, to do the that through small claims court. But as far as the eviction process, if you don\u2019t know what that process is, then I would definitely hire an attorney, and for an eviction that goes smoothly, I would say on average, I\u2019ve paid $1,000 to have that eviction done. But if that means that tenant is out quicker and I\u2019m not losing two more months of rent because I messed up or I did something wrong, that is $1,000 well spent. Then, another option is you can do cash for keys. Offer the tenant like, \u201cHey, I\u2019m going to give you $400 if you\u2019re out by next Friday. I will come here, you have everything out, I\u2019ll give you $400. That\u2019s enough to help you towards a new security deposit,\u201d or whatever that amount may be that would be cheaper than going another month or two waiting for the eviction to process, hiring an attorney, things like that.<\/p>\n
Tony Robinson:
Yeah. One of the benefits, obviously, of investing in a short-term rentals is that you don\u2019t have to worry about evictions. I can\u2019t speak to all states, and this is not legal advice. So if this information is incorrect, please don\u2019t come back, and try, and hold me liable, but I\u2019ve been told that in California, as long as the stay is less than seven days, they never obtain tenant rights. The majority of our properties in California, they turn about every two days or so, so we never have to really worry about someone potentially needing to be evicted.
Honestly, we had one situation where we had to call the local sheriffs, and they were more than happy to show up at the property to help escort that guest off of the property. So it\u2019s super easy with the short-term rental to get a tenant out if you need to, but obviously, every state is going to vary, and make sure you understand the laws in your local state as well. I actually looked it up, and it says that not only is it seven nights, but if a guest stays 14 days within a six-month period, then they also get tenant rights. So if someone booked two or three six-day stays, or something, whatever, whatever the math adds up to in a six-month period, then they get tenant rights, and I actually didn\u2019t know that, so that\u2019s good to know as well. If we see the same name popping up, that could be a cause for concern as well.<\/p>\n
Ashley Kehr:
Okay. Let\u2019s move on to our next question. This is from Tam Vo. \u201cWhen tenant screening, I know credit score isn\u2019t the only thing that matters and pulling credit helps to see their payment history. What credit score range would you accept for B neighborhood, C neighborhood? What else do you look for?\u201d So I think a big consideration on this, and I think you\u2019re definitely on the right track, Tam, is knowing what kind of class neighborhood you are in. If you are renting an apartment in a C neighborhood and you\u2019re requiring a 700 credit score, you\u2019re most likely not going to get that.
Where if you\u2019re doing high-end luxury units, you\u2019re more able to get the tenant that has that high credit score that is choosing to rent instead of purchasing a property because a majority, and not all renters, of course, are renting because they can\u2019t afford or don\u2019t have the credit to actually purchase a property. So that is a part of your tenant pool that you don\u2019t want to, I guess or say, leave out because you\u2019re setting your standard so high as for the tenant that you\u2019re going to let occupy the property. So as far as the range to accept for a B and C neighborhood, I really don\u2019t have a good answer. I will say that a lot of the units I have are in B neighborhoods, and we accept a 600 or above credit score for those areas.<\/p>\n
Tony Robinson:
Yeah. Ash, outside of credit score, what other factors do you typically look at when screening for long-term tenants?<\/p>\n
Ashley Kehr:
Yeah. Let me give this disclaimer first is that make sure you know what you can and cannot screen for with your state laws. So, in New York state, I think it was June 2019, they passed a law that you cannot deny someone because of their eviction history. So you can find out if they were evicted, but you cannot deny them for that reason.<\/p>\n
Tony Robinson:
I did not know that.<\/p>\n
Ashley Kehr:
Ridiculous. Yeah. I mean, every state has different rules on this as to what you can screen for. So screening also cost money, so you have to pay if you\u2019re doing a background check to make sure no violent crimes have been committed. If you have a multi-family unit, your tenants are not going to be wanting to live next to someone who is convicted of murder and just out of jail. So there are things that you can screen for. The biggest thing is make sure you are consistent with your screening. Build out what your criteria is. What do you require of every single tenant so you don\u2019t get yourself in trouble with fair housing laws?
Another thing. So doing the credit check, the background check, that is a big thing. Some states, doing the eviction check. Having references. So with references, it\u2019s very easy for somebody to put their friend on the application and say, \u201cYes, they were my previous landlord.\u201d So that\u2019s where, as real estate investors, it can come in handy that we have access to finding who owns certain properties. So if you really want to go the extra mile and screening your tenant, wherever they put their previous address, go on PropStream, the GIS mapping, and see who actually owns that property that they\u2019re saying was their landlord, or if they have a\u2026 Ask for the property management company that managed it and get that number directly, or you can Google it to verify that is the number if they give you a property management company.<\/p>\n
Tony Robinson:
I guess, Ashley, have you ever had an experience where on paper, a tenant was probably someone that you shouldn\u2019t have rented to, but maybe they had\u2026 Not a sob story, but they had a story for you as to why they were deserving and how their past isn\u2019t indicative of their future, and you end up renting to that person, and it ends up being a nightmare. Has that happened to you before?<\/p>\n
Ashley Kehr:
I\u2019ve actually had it go both ways. So I had one tenant. It was the first property I ever bought on my own without a partner, and this was the first\u2026 I had just closed on it. It was rent-ready, ready to go, and I didn\u2019t have a ton of people that came to showings. Instead of waiting to find the right tenant, I became desperate, and I rented to a young girl and her boyfriend, and her boyfriend didn\u2019t pass the screening requirements, so she had somebody else co-sign for her. It went great until COVID hit, and so since March 2020 until they were just evicted, October of 2022, they did not pay rent at all. They would get\u2026 It\u2019s called ERAP. It\u2019s a government assistance program that started during COVID where you could apply for rent payments.
Well, this would only\u2026 You would apply for it, but then it would take up to four months for it to get approved. So then, they would be behind again another four months. When they were finally evicted, the place was trashed. It looked like\u2026 They had had a child since they had first moved in. Definitely looked like signs of domestic dispute like whole punches in doors like somebody had went in and locked the door, and somebody punching trying to get through, and just trashed the place. I had to spend $10 grand to remodel it after they moved out. So that right there was\u2026 I still think back to showing them that unit even though that was in 2017. So they paid from 2017 to 2020, and then after that, it just went downhill.
I had another scenario where it was a mom, and then her two teenage kids, and she really didn\u2019t have\u2026 She met the credit requirements, her income was just barely at the level, but she asked for her kids\u2019 income to be included saying they would be pitching into rent. So that was how we got around approving her was that she was including her teenage kids who had jobs, that they would be pitching in for rent. So we did that, and she had told me that she was leaving her boyfriend that was not nice to her and things like that, and she really gave me a sob story.
That time, I learned that\u2019s sometimes a red flag is when they immediately are telling you, \u201cHere\u2019s why I am moving in and reasons I might not pay rent because I\u2019m starting all over. Blah, blah, blah.\u201d She paid late a couple times. She lived there two years, and then she put in her notice. It was the nicest notice, \u201cI\u2019m leaving your apartment,\u201d I\u2019ve ever received. Just the biggest thank you for giving them a chance. She had saved enough money. She had started this first-time home buyer program, and she actually had put a down payment on her first house that she was going to own on her own. That right there was like\u2026 That was a success story. That was one time where giving someone a chance really did work out, and I\u2019ll never forget that tenant because of that thank-you note that she wrote me when she was moving out.<\/p>\n
Tony Robinson:
As real estate investors, we get so much heat on social for destroying communities and just being awful, terrible people, but we need to share more stories like that where you gave someone a second chance, and they were able to use that to pretty much restart their life. We do some good as real estate investors as well, so kudos to you, Ash, for that one. Cool. So, before we jump off of this question, I just want to read another review that came in. This is a five-star review on Apple Podcasts by someone by the username of McNeil2712, and McNeil says, \u201cMy brother and I have talked about getting into real estate for years. After struggling financially for years, I recently paid off all of my debt, credit cards, loans, everything, except my car loan. So now that I see that it\u2019s soon possible to take this seriously and my brother told me about BiggerPockets last week, I\u2019ve listened to two episodes a day every single day. You guys are awesome.\u201d McNeil, we appreciate that. For all of our rookies that are listening, if you haven\u2019t yet left us a five-star review or an honest review whatever platform it is you\u2019re listening to, please do. The more reviews we get, the more folks we can reach. The more folks who can reach, the more folks we can help.<\/p>\n
Ashley Kehr:
Okay. So let\u2019s go on to our next question from Zane Clark. \u201cHello. Has anyone structured a deal with seller financing in which you take over the mortgage for the seller? How does the seller benefit or recoup any of the equity they\u2019ve already put into the house? Thank you for your time.\u201d Are they asking about seller financing or subject to?<\/p>\n
Tony Robinson:
Yeah. I mean, he said seller finance, but maybe just trade financing in general is what Zane is referring to.<\/p>\n
Ashley Kehr:
Okay. Yeah, because he says, \u201cTake over the mortgage for the seller.\u201d So, in the sense that you\u2019re taking over the mortgage for the seller, it\u2019s not really considered seller financing. Seller financing is when you are actually paying your monthly mortgage payment or however you\u2019re paying to the seller. They\u2019re actually holding the mortgage on it instead of the bank. But in this case, if you\u2019re taking over the seller\u2019s mortgage, then you are still paying a bank a mortgage, and it\u2019s not technically seller financing. So, in this scenario, the second part of the question was, \u201cHow does the seller benefit or recoup any of the equity?\u201d Tony, have you ever done a subject to deal before?<\/p>\n
Tony Robinson:
I have not. We\u2019ve had a couple under contract, but they didn\u2019t quite work out. But if you are doing a seller finance deal or maybe more so a subject to, you can still have the\u2026 between you and the seller, negotiate a down payment. So if the seller says, \u201cHey, I want 20% down,\u201d then that\u2019s them tapping into some of that equity that they have. So, yeah. There are ways to structure it, but if you guys want a full breakdown, I actually still have the book right here, Wealth Without Cash, one of the newer BiggerPockets books by our buddy Pace Morby. He was on episode 280 recently of the Real Estate Rookie Show and talked about all things subject to and seller finance, and really just gave a world-class breakdown of what that looks like. Then, if you guys go to biggerpockets.com\/bookstore, you can pick up a copy of Pace\u2019s book, Wealth Without Cash, as well.<\/p>\n
Ashley Kehr:
Yeah, and I guess to give a quick answer to Zane\u2019s question is how do they\u2026 the equity, maybe they don\u2019t have any equity, and that is also part of the advantage to them is the reason they can\u2019t sell it is because nobody is willing to pay that price for it, that market price, or they just don\u2019t think that it would sell for that or they\u2026 For whatever reason, they don\u2019t have any equity in the property, and maybe they listed it with a real estate agent. Pace talks about how he really goes after expired listings. So people tried to sell it, it didn\u2019t sell, and now you are the one coming in and solving their problem by retaking over their mortgage, you\u2019re purchasing the property from them, they can get out of the house, and they can move on and do their next thing. So that\u2019s the benefit is that maybe they got a new job somewhere else, and they have to move, so it\u2019s better than them having to pay money to pay their mortgage off.
So if you went, and say, their property for easy math is\u2026 They have a mortgage for $100,000. They try to sell it on MLS for $120,000. They get offers at $80,000. So that would mean they would have to come up with $20,000 to pay their mortgage, and then the proceeds from the sale, the $80,000 would go to pay off the other $80,000. But what you can do with subject to is you can go and offer to pay that $100,000. You may be thinking, \u201cBut wait, why would I pay $20,000 more than someone else is paying?\u201d Because right now, interest rates have increased. So somebody else who\u2019s buying that same property, their mortgage might be 6%. But if that person bought the property, say, in 2020, 2021, and their interest rate is only 3.5%, your payment is going to be a lot lower and more affordable than that person who can pay the $80,000. So that\u2019s one huge advantage that Pace talks about too in his episode. So that\u2019s just a couple of the reasons why someone might sell it, why you might be able to purchase the property at that purchase price of what their mortgage is.<\/p>\n
Tony Robinson:
Yeah. The levers you can pull are your down payment, right? A lot of people can get into subject to or create a finance with zero money out of pocket. It\u2019s the term of the deal. Maybe it\u2019s a shorter note where it\u2019s like five years. Maybe it\u2019s long-term debt where it\u2019s 30 years. Right? It all depends on what that person wants. Interest rate, like Ashley talked about, is another lever you can pull. Then, the overall purchase price. For a lot of sellers, they\u2019re going to have different motivations or not motivations per se, but each one of those is going to be important or more important to one person than the other. So it\u2019s up to you to figure out what\u2019s really driving that person, and then leveraging that to create the best deal. I mean, yeah, we know people that are crushing it with creative finance and subject to, so it\u2019s about understanding that seller\u2019s problems, and then presenting some solutions that make it a win-win for everybody.<\/p>\n
Ashley Kehr:
Yeah. Another example I give is I\u2019ve done one subject to deal, and it was to purchase a farm. They had back taxes that they couldn\u2019t afford to pay, and they were also starting to fall behind on their mortgage payment. So the property was going to be foreclosed on if they didn\u2019t come up with the cash to pay off the back taxes. So what we did was we worked out an arrangement with them where we took over their mortgage payments, we caught their mortgage payments up, so they were no longer in risk of foreclosure, but now they still had the back taxes where they\u2019re at risk of the county coming in and taking the property. We paid off the back taxes. Paying off the back taxes, catching them up on their mortgage, that was less money than we would\u2019ve needed as a down payment. Plus, this was this person\u2019s primary residence. So their mortgage terms were a lot better. The payment was a lot lower than what we would\u2019ve had to pay if we went and got our own financing.
The benefit to the seller was they weren\u2019t going to lose the property to a foreclosure where that would be on their record. Also, we let them front the house. So they live in the house and pay rent to us, so we didn\u2019t have to go find a tenant. They live there. They pay rent. So they got to stay in their house even, and we just use the farmland, and then there\u2019s two other rental properties on there too that are rented out. So there\u2019s always different ways that you can make it a win-win scenario for each buyer and seller. Okay. Next up, we have a question from Jared Sutherland. \u201cWhat are the advantages\/disadvantages of getting a buy-and-hold in a historic district? Thanks.\u201d<\/p>\n
Tony Robinson:
Have you ever bought in historic districts?<\/p>\n
Ashley Kehr:
No, I haven\u2019t. There is this church that bought the movie theater in a small town near me, and they bought two buildings adjacent to it. They were going to tear the one building down to make a larger parking lot for the movie\u2026 Actually, a parking lot. There is only street parking from the movie theater now, and they got stopped by the historic district and said, \u201cNo, you can\u2019t tear this building down.\u201d I had toured that building probably five years ago when it was first up for sale. There was a three-unit. In one of the units there, it was a two-bedroom unit, and there was eight people living in it. Mattresses on the floor in the living room. The other two units were vacant. One just needed a lot of repairs. The other unit had\u2026 In the bathroom above the bathtub were pieces of plywood with chains and hooks so that you could fold the plywood down like bunk beds. This was all through the house, graffiti, needles, and had been a drug house basically where people would go in, and do drugs, and stay over on one of the plywood bunk beds.
Yeah. So it was definitely in need of a ton of repair and just like\u2026 The building just sits there now. It hasn\u2019t been demolished. It hasn\u2019t been fixed up or anything. To me, it\u2019s very controversial as to how do they decide what\u2019s historic, how do they decide\u2026 So I honestly don\u2019t know a lot about purchasing in a historic district or the board members, so my advice would be to look at if there are any tax advantages, if there are any grants or funds that the historic board will help you get because there are tons of funding out there and grants that you can get for all types of things, but you have to, most likely, to be really successful at getting them, and hire a grant writer, which can cost a lot of money. I used to be on the board for a Boys and Girls Club for about 10 years, and we would always go do these grants. Finally, we just got a grant writer to join our board because we weren\u2019t having any luck. But once we had a grant writer, and we\u2019re investing in that to come and make it, we are getting a lot more grants coming in. So that, I could see, is one advantage of doing up iron hold in a historic district.<\/p>\n
Tony Robinson:
Yeah. It\u2019s a great call-out, and I haven\u2019t purchased anything in a historic district either, but a friend of mine, her name is Katie Neason, K-A-T-I-E Neason. You guys should follow her on Instagram. She\u2019s @KatieDevelops. She lives in Bryan, Texas, and she\u2019s basically on this mission to restore downtown Bryan, Texas. She\u2019s buying old beat-up buildings and repurposing them into mixed-use commercial facilities, and she\u2019s doing a really great job. So I know she knows a lot about buying in historic districts and what the benefits are. But like you said, Ashley, when I was investing in Shreveport, their local government was also encouraging people to buy homes in downtown and renovate them as well. Like you said, they were giving tax incentives to people who were buying and renovating properties in that downtown area, assuming that you were using it for whatever purposes that they had approved it for. So there\u2019s a lot of potential benefits of doing that, and it\u2019s cool.
I think my short-term rental hat, putting that on, if you\u2019re able to buy whatever, like a historic bed and breakfast, or like you said, Ash, like an old movie theater, who would\u2019ve thought that you could buy a movie theater? But being able to buy some of these properties in these historic parts of town, there\u2019s a marketability to that. So if you bought that old thing and turned it into this really cool Airbnb, now you\u2019ve got someone that\u2019s going to stand out in that neighborhood. So I\u2019ve talked about Katie Neason. If you guys want to hear more from Katie, she was on episode 538 of the BiggerPockets Real Estate Podcast. Like I said, she\u2019s a really amazing person, funny as heck, and she does redevelopment in Bryan, Texas, all in the downtown historic area. So episode 538 if you want to hear more from Katie.<\/p>\n
Ashley Kehr:
Okay, and our last question today is from Brandy Joe Krum, a BRRRR refinance question, \u201cHave you recently refinanced based on the asset itself and the rental income, and what kind of rates and discount points are you paying? Is this a portfolio loan, or are you refinancing where they take into account all your personal income and debt, and qualify based on that?\u201d So, Tony, I don\u2019t know if we talked about this in this episode or the last episode, but you haven\u2019t done any refinances lately. When was the last time that you did one?<\/p>\n
Tony Robinson:
Yeah. It was a while ago, but I\u2019m actually working on one right now. I think it plays in perfectly to this question because I\u2019m working with two lenders, and one is called an investor loan. Even though it\u2019s called an investor loan, it\u2019s still in my personal name, and they are looking at DTI, and my tax returns and all these other stuff to make sure that I can qualify. Then, I\u2019m working with a second lender that\u2019s using a DSCR product. So it\u2019s called the debt Service Coverage Ratio product. Obviously, I told both lenders that I\u2019m working with both of them. Then, I\u2019m just going to go with whoever gives me the best deal here, but you can go either route branding, which is the beauty of investing in real estate.
So your first question is, \u201cCan you do it based on the asset itself and the rental income?\u201d So, yes, you can totally do that. That\u2019s what the DSCR loan product is, and a lot of lenders will underwrite that property and say, \u201cHow much rental income do we think this property will generate, and does the rental income meet or exceed the debt obligations or the mortgage payment of that property?\u201d If it does, then the chances of you getting approved for that DSCR product, it\u2019s better. Right? You have a better chance of getting approved.
Now, typically, their interest rates are higher. So on the DSCR product, right now, I\u2019m getting quoted like a nine. On the investor product, I\u2019m getting quoted like a seven. So you are going to pay more for the product. But again, if your ability to get approved for a traditional loan, just looking at your DTI, your income and all that stuff is limited, then going the DSCR route tends to be a little bit better. I\u2019d say that the LCVs are about the same. I think both of them are around 75%, I want to say. So that doesn\u2019t change too much, but you are paying more upfront with the DSCR products than you are with the traditional investor loans.<\/p>\n
Ashley Kehr:
So I\u2019m doing two refinances right now, or I just finished the one, and that was a short-term rental. We did that on the commercial side, but they did not take into account what our short-term rental income would be because we hadn\u2019t had it active. At the time that we started the refinance, we were still finishing up the rehab. So, Tony, in your experience for doing them for short-term rentals, are you going to specific lenders that understand short-term rental income, or what should I do differently going forward? Because when they sent the appraiser out, the appraiser was just there to appraise the property and not do any kind of income approach.<\/p>\n
Tony Robinson:
So there\u2019s two options. So your first option is to hold onto the property for at least about six months and show that you have short-term rental income on that property. Most lenders I\u2019ve talked to said that if they can see at least six months of documented income, then they can use that to project out what that property would do on a year. If you had it for a year and it shows up on your tax return, then that\u2019s the easiest way because then they can just look at that tax return and say, \u201cHow much money did this property generate?\u201d So even if the lender doesn\u2019t really understand short-term rentals, if you have a long enough paper trail to show how that property is actually performing, lenders that I\u2019ve talken to or spoken with have said that that\u2019s a decent route to go down. The other option is to work with a lender that actually understands and offers DSCR products specific to the short-term rental industry and who have the ability to underwrite the property not just as a long-term rental, but as a short-term rental as well. That\u2019s the kind of lender that I\u2019m working with right now is someone who specializes in the short-term rental space for DSCR products.<\/p>\n
Ashley Kehr:
Okay. Awesome. That\u2019s why I love that we get to be co-hosts of the show because I always get to pick your brain on everything short-term rentals that I don\u2019t know.<\/p>\n
Tony Robinson:
So you got options out there.<\/p>\n
Ashley Kehr:
Yeah. I\u2019ll have another one that I\u2019ll be doing this fall. So, yeah, I\u2019ll have to consider which would be the best.<\/p>\n
Tony Robinson:
Look at you turn into a little short-term Airbnb queen over here, huh?<\/p>\n
Ashley Kehr:
You would be so proud of me. I just hired an operations manager, someone to handle the day-to-day.<\/p>\n
Tony Robinson:
There you go. I love that.<\/p>\n
Ashley Kehr:
Yeah. Her third day, I have the septic pumped at one of the properties, and it was so relaxing for me. I had to do nothing.<\/p>\n
Tony Robinson:
Yeah. Yeah, and that\u2019s so funny because we\u2019re actually on the inverse where our operations manager, actually, her last day was last Friday, so she moved on to another role somewhere else. So, now, me and Sarah having to step back into the operations at least in the short-term while we try and source someone else, so it\u2019s like\u2026 I actually have my ops calls right after this with our VAs to try and keep everything moving. So I\u2019m glad you\u2019re enjoying that process, and hopefully, I can get back there soon enough.<\/p>\n
Ashley Kehr:
What a great way for you to come back to vacation, having to work more.<\/p>\n
Tony Robinson:
Totally. Yeah, having more work to do. Yeah.<\/p>\n
Ashley Kehr:
Okay. Well, thank you guys so much for joining us for this week\u2019s Rookie Reply. I\u2019m Ashley, @wealthfromrentals, and he\u2019s Tony, @tonyjrobinson on Instagram. Don\u2019t forget to check out the Real Estate Rookie YouTube, and we will see you guys on Wednesday where we will have a guest.<\/p>\n
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