DSCR, Acronyms And Successful Investors | Paul Garwol

We’re covering two major things in this episode today. One is the overall pulse of the nationwide short-term rental market and the second thing is the availability of a DSCR loan and how it can help you make some phenomenal moves.

Without affecting your personal credit. DSCR stands for debt service coverage ratio when it’s a loan that you don’t need your income to qualify for. There’s a lot to it, but to help me with this conversation, I’ve brought in one of the top minds in the DSCR space. A guy who does these loans for investors all over the country, Paul Garwol, with Garwol financial.

Paul’s a rare find. I have conversations with lenders nearly every week, but very few of them who get it, which means that they understand the loan process from the investor’s perspective – the ones who are not just slinging loans for volume and a bonus. They become someone that you can’t do business without, an advisor, someone who’s watching your back to make sure that your loan is going to go through.

Paul is very smart and he cares deeply for his clients. He advises at times to give you an edge when negotiating and he’ll cover some specific examples of this and insights on which markets around the country are very hot for the short-term rental deals.

Lastly, we talk about what Paul calls deal killers. These are things that may come up in the property that will stop a deal dead in its tracks before it even goes to an underwriter. These things are good to know before you start shopping with the real estate agent.

So listen closely, I know you’ll learn.

Link to Special Guest:

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https://youtube.com/@worleyrealestatenetwork

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For a free trial to the best investment grade Short Term Rental Data tool for locating the best deals out there and to help Investors and Agents achieve mastery in their real estate business:

https://vrolio.typeform.com/cocktailndreams

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DSCR, Acronyms And Successful Investors | Paul Garwol

We’re going to cover two major things in this episode. One is the overall pulse of the nationwide short-term rental market. The second thing is the availability of a DSCR loan and how it can help you make some phenomenal moves without affecting your personal credit. DSCR stands for Debt Service Coverage Ratio. It’s a loan that you don’t need your income to qualify for. There’s a lot to it, but to help with this conversation I brought in one of the top minds in the DSCR space and a guy who does these loans for investors all over the country, Paul Garwol with Garwol Financial and he’s a rare find.

I have conversations with lenders nearly every week but very few of them get it, which means that they understand the loan process from the investor’s perspective. They’re not just slinging loans for volume and a bonus. They become someone that you can’t do business without. An advisor, someone who’s watching your back to make sure that your loan is going to go through.

Paul is very smart and he cares deeply for his valued clients. He can help give you an edge when negotiating and he’ll cover some specific examples of this and insights on which markets around the country are very hot for short-term rental deals. Now, finally, read to what Paul calls deal killers. These are things that may come up in the property that will stop a deal dead in its tracks before it even goes to an underwriter. Now, these things are good to know before you start shopping with a real estate agent. Read closely and I know you’ll learn. Now, Paul Garwol.

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Paul, how are you?

I’m well. How are you?

How are things in Washington, DC?

Excellent. The weather’s pretty nice. How about you?

Good. Any additional buzz with all the craziness going on with the elections and everything?

What’s funny about living here is that everybody asks me that all the time, but we don’t see any of it. When you watch the news and they show you that shot from the White House or the monument. We go down there all the time to have lunch and coffee or go for a bike ride. You don’t see any of that. It’s like two different worlds watching the news and living here.

That’s so funny. It was the same when I lived in Los Angeles. You see all these iconic locations in movies that are breathtaking and awe-inspiring then when you drive through them, it’s just like driving through any town. It’s not even a big deal. I’m so glad you’re joining us because we can help a lot of people.

Paul’s Background

I want to talk about what you do, which is loans for investors. I was very impressed with you when we met a few months ago because not only did you have an expert knowledge of loans for investors, especially DSCR loans. It’s because you are a nationwide lender and deal with very high intelligence investor clients all over the country. You have an insight into certain markets. I was very fascinated to learn which markets were popping and which ones had interesting and unique opportunities. Let’s give our audience a chance to get to know you a little bit. Tell us a little bit how you got into lending, especially working with investors.

I’ve been in the mortgage business since 2007. In 2017, I ramped it up a lot more. I was in it for a long time on a small level. I dug deep into it and decided that’s what I wanted to do. For a couple of years, I was just doing Fannie, Freddie, and FHA loans. The regular stuff, then I bumped into a couple of investors that wanted to get some deals done. I started researching, what’s the best way to get this done? This is probably pre-COVID, then I learned about DSCR loans and investment lending.

I doubled down on that information and got those couple files closed for that investor, then he sent me some more people. From referral basis and doing more of those loans. I wasn’t an expert on it but I started to know it inside and out because once you dig in and you realize how they work. There’s not that much to them. I just became an expert in the loans and more in the areas too because I started doing them in pools.

I would do multiple deals in certain areas of the country that I’m not even familiar with. That’s how I got started in that end of the business. I liked it. I like doing those deals and working with investors. That was my favorite part of being a mortgage broker. I went in that direction and once you get into that community, it just grows.

I agree 100% but my experience has been from the real estate agent side. It was 2008 when I started to dial into working with investors and they are a very loyal group. If you do a great job for them, there’s not many people that understand what an investor needs. They stick to somebody that sets out to serve them. It sounds like you’re doing that at a pretty high level. Help me understand and maybe any other real estate agent out there who’s reading or even a mortgage lender. What do you think it is about investors that you like? What was it that made you gravitate towards them?

Number one, it’s a different atmosphere in lending. It’s cut and dry. An investor is either going to buy it or not. They move on quickly. It’s not an emotional decision. It’s business. They look at multiple properties. They look in multiple areas and everything is numbers. I like that way more. Not that I don’t like doing the regular loans or helping somebody get into a house. I do like that too, but the investment side is way more interesting.

I have all these deals come across my desk every day that I get to see behind the scenes on what the numbers look like, what these areas of the country look like, how profitable they are, or how not profitable one area is an investor might be looking in because I’ve seen other areas that others investors are looking. I’ll give them a little bit of a nudge and a direction also from what I’ve seen. I have seen so many deals.

That’s a value-add when somebody works with you. In addition to serving them on the deal they want, you might be able to introduce them to other areas profitable to their portfolio.

I look at everything every day. Now that I have this pool of investors, I have somebody sending me something several times throughout the day to do a value report on, take a look at it and see what . Sometimes, they pass on it then I’ll maybe send it to somebody else and say, “What do you folks think?” I see a lot of the areas of the country where it’s highly saturated for short-term rentals and the areas that are way more profitable than others. There’s a conception that one area where everyone thinks that’s the place to buy the house, but not necessarily the truth.

That’s one of the things that I’m trying to get the overall world to change their mind on because everybody listens to macro news now. We know that the short-term rental industry and overall real estate industry is at its peak. Interest rates are making it relatively harder for people to find profit. The short -term rental asset class is one that a lot of people have rushed to in months just to try to make money, but nobody realizes that you have to work, become a host, and run a hospitality business.

What people don’t understand is that once you know these markets in more detail, we can discover emerging markets. We can find opportunities that didn’t exist. While people are throwing their hands up and saying, “We can’t find a good deal here.” Those people who are digging in and learning markets can profit, regardless of what the overall market looks like because these individual pockets completely operate separately.

Even though the overall market trend may be one way. If Dallas is a growing area and there’s an area an hour and a half outside of Dallas that just pops in like Broken Bow, Oklahoma. Years ago, you couldn’t even rent a house in Broken Bow. Now it may be overbuilt. I’m not sure, but that’s what I’m talking about. These opportunities that people don’t know exist and they need a real professional on their power team to help them understand where they can make money. Are you seeing that? Are you finding these markets popping up?

You made a great point there when you said micro news. The news is the news of what comes across your Facebook page or Instagram or LinkedIn or what you’re watching on. Everyone’s like, “Airbnb is good.” If Airbnb is bad, Airbnb means bad. Short-term rental has been going on forever before it was called Airbnb. Every area is a place where you should own an Airbnb. It doesn’t work in every place in the United States. Not every house, condo, or city. Only because you live there and you like that city, you go, “I want to buy a house and I’m going to turn it into a short-term rental.” It doesn’t necessarily mean it’s going to work.

In vacation areas since the ‘70s, people go there to rent a condo because there’s not a lot of hotels. They go to those areas all the time. Those have already been proven short-term rental areas. They just weren’t called Airbnb. In Florida in the ‘90s, there were condos on the ocean that people would buy as their second home but they would list them with the management company. That management company would rent them out on a daily basis all summer long or whatever they weren’t in. That was Airbnb before Airbnb decided to manage it.

That’s the only difference. To the point, you have to be open to the pockets. Let’s say you live in Texas and you want to own a house down the street because you’re close to it. It doesn’t necessarily mean you’re going to make any money. You could furnish it and turn it into an Airbnb. You might not make any money, but if you talk to a realtor that understands that market or a lender like me that I know where the other pockets are.

I would say, “Why don’t you take a look at those listings in Oklahoma or Tucson or the Poconos or Gulf Shores? Those areas do well. The people who buy there don’t live there.” You just need to know what market you want to be in, then pick that market and do your research on if it’s profitable. If it’s not, move to another market.

I used to have a shot from the hit formula. We’re looking to invest in places where they have a relatively high guest count per year. Usually, you can call the Chamber of Commerce and find out if there are 10 million or 15 million people coming to a certain vacation destination area as you said, since the ‘70s. Also, we want to be sure that the average home price is relatively low compared to the metric of that average daily rate.

If we’ve got a relatively low home price and a relatively high average daily rate in an area where there’s a lot of attractions for families. We overlay that with a lot of peak season nights in a particular area like an extremely long rental season. In my opinion, those shoot from the hip metrics that are going to help you pinpoint a certain area then you can narrow it down from there. What’s your experience or what do you think of that overall shoot from the hip metric strategy?

 that you should pick an area then dig deep into it and be ready to move on just because you like the area and you want to own one there so bad. It depends on what you’re looking for. If you’re looking to go stay in it for a couple weeks when you have a vacation and you love that area. As long as it covers the cost and you make a couple bucks. That’s a different investor. When you’re putting 7, 8, 9, or 10 of them, you can’t look at it like that. You have to have a point where you cut it off.

If it does not gross this much, I can’t even be in it because it is a lot of work and to grow those high amounts, it has to be a five star experience. That’s the ones that I find. The investors that give the five-star experience do the research into how the house is furnished. They don’t furnish it the way they think it should be. They hire somebody to do it. They take great pictures.

If everybody in that area has bikes and a hot tub. They get bikes and hot tubs. They do these things. They research the area of what attractions are there then what are the people wanting? What Airbnb’s lease out the most and what are the amenities in that Airbnb. That’s the difference between the 20% of people that are making money in it, but it’s still over.

When you say five-star experience in addition to all the things that you just mentioned by having all of the amenities, the competitive amenities that everybody else has. What else do you think contributes to a five-star experience?

I would say outside of the amenities, just what’s in the house like the furniture, the comfort of the beds, or the cappuccino maker. Those types of things. The ones that do high volume have nice stuff. It’s like staying at a five-star hotel and it’s planned out. They use somebody that understands hospitality so they have the whole thing. They’re not just going, “I like this, so I’m going to put that in there.” They hire a designer to do the furniture, buy the right beds, and have nice towels. It’s all of it all the way down. You enjoy staying there when you go there and you’ll come back again. That’s how it works.

Top U.S. Markets For Easy Investor Profits Right Now

Let’s give people some instant nuggets. Let’s give them a spoonful of sugar right out of the gate here. In your experience, as you’re looking at the market and funding deals for investors. What are some pockets around the country that you’re finding are easy for investors to profit at the moment?

I say this all the time on every show I’m on, the Poconos. That is the number one place. With all the things that I’ve looked at and all the numbers I look at, if you take a 5 or 6-bedroom house there, you’ll easily do 175 in gross revenue no problem. If not into the $200,000 range. Nowhere else have I seen that. That’s a hot pocket because it’s close to New York City and Philly. All those people vacation there. There’s a lot of population. It’s year-round. There’s lakes, skiing, and nature. It’s summertime, people go there. In wintertime, people go there and in the Fall. It’s all the time. I only got turned on to it from investors buying there.

You have an inside scoop. You’ve got a pretty good sample set of data of people, especially if they’re coming to you. They’re ready to buy. They know exactly where they’re going to go. We noticed Upstate New York looking good when we got a network partner in Upstate New York in the Hudson Valley area. I noticed that even smaller properties were bringing in a thousand dollars a night in just income. As you said, you could take a train to New York or to another major city. We don’t have that in the Midwest. We don’t have the rail system that you have in the Northeast like that.

People take that for granted because a family could literally stay in the country then take one day and cruise into the city, catch a Broadway show, go have a slice, and come back. They get that city experience but they also get that country experience. You also mentioned that they could go skiing and things like that. Up there, you’ve got the fall. You’ve got people going to watch the leaves change, go skiing or hike in the summertime or as I said, have a city experience. I’ve never seen a place in the country with more peak season nights than Upstate New York. It’s phenomenal.

You also get the New York City people wanting to get out and have a weekend in nature. There are a lot of people that live in that New York- New Jersey area that’ll go to that area a lot. That’s why it’s always booked. Not all of them there, though. I’ve seen some that aren’t profitable. There’s other Airbnb philosophies, “I’ll just buy one a two bedroom. The cheapest one I can buy. I’ll throw some furniture in it and I’ll put it on Airbnb.” Good luck. That might work but probably not.

It used to work.

You’ll be selling it in a year to somebody who knows what they’re doing.

That strategy used to work but not anymore. You have to be a good host now in order to make that work. Where else are you finding that is worthy of taking a look at?

There are a lot of pockets in Florida, too. That Kissimmee area was like one of the number one Airbnb areas in the country. That’s where most of them were bought, but Disney’s right there. No matter what happens to the market. It might not be as easy to buy there now, or people are trying to get out because it’s a little bit saturated but it’s still a super busy area.

I’ve noticed that zip codes that are in established markets like Pigeon Forge in Orlando that draw international guests. When I was in Pigeon Forge hanging out, there were a ton of people there coming from India and from China just to hike the smoky mountains. You’ve got this national park that attracts international people. You’ve got gorgeous hikes and some attractions. It’s obviously a tourist destination and I often compare the Pigeon Forge area, Gatlinburg area to Branson because Branson gets about 10 million visitors per year. Pigeon Forge gets about 16 million per year.

That’s because you have that draw from the national park. What I’ve noticed is that Branson trends behind Pigeon Forge by about 18 to 24 months just in trends. When saturation occurs, we’ll start to see that happen in Branson in 24 months or as things begin to peak and prices begin to go or investors begin to land on that area. We can predict that in Branson, it’s going to happen because they’re very similar areas. Only one has an international draw and one has a national draw. It’s fascinating to me to see how the numbers change just by having that international thing that draws people. The extra 5 million or 6 million people per year makes a difference for an investor.

That is a huge point. Extra bookings, that’s all they’re looking for. How can they find a way to get some extra bookings? What area of the country can we bring more? It’s just not seasonal, where everyone’s trying to jam the six months into all their bookings then it’s empty the rest of the year. Those areas are different. In Outer Banks, I’ve seen profitability there. They’re different areas. Florida can be difficult but you can also still make a lot of money there, too. In Colorado, you can make a lot of money in that area as well.

I’ve noticed areas like Breckenridge where the average price of the property isn’t low. Those are high priced properties but as long as people are paying more to stay there then the metrics work. When saturation gets pretty high in established markets, it gets hard to make those work.

I’ve closed deals in this mountain in Virginia and the purchase price was over a million. Maybe $1.1 million but it did 220 in revenue. He netted 60. That’s not bad numbers and it’s a very nice house that’s getting paid for on the mountain. It was two years old. Not only is it profitable. The piece of real estate that he’s going to have is amazing. He bought it with the furniture in it. It was beautiful. That type of strategy, buying that million-dollar top of the chain type of property, if you can get it to be profitable and you’re getting ownership of this beautiful house. That will have the most appreciation probably in that whole area.

What other areas are looking good? You mentioned Arizona. How is it out there in the Southwest?

I’ve seen some things in that area that we’re pretty decent. Most of my investors are buying on the East Coast. That’s been the majority of what I’ve seen. I’ve seen some good deals in the Minnesota area. You introduced me to a realtor there. They were good deals there, too. The numbers are good in that area in Minneapolis. That was interesting to me. I live in DC. The numbers aren’t good in DC. This is probably not an area where you’d want to purchase an Airbnb even though people have them.

You would think that would be a good one because tons of people come there for vacations and see the capital and all that.

If you want to buy a three-story, they’re all three story houses like in Georgetown and areas like that. It’s a couple of million dollars and it’s three bedrooms. It’s not like you can put a lot of people in it. It doesn’t make out on the profitability side. There are some here but I don’t think they’re profitable compared to other areas. If you’re going to take that money, you could put it somewhere else and make much more money out of it.

It seems to me like there’s two main drivers for it to work for an investor. The purchase price of the property has to work and you’ve got to have a lot of people coming there per year. Otherwise, you’re stuck in this competitive battle. The average home price makes a difference because if you’re only getting 350 on a six-bedroom, you’re just not going to make it work no matter what.

It’s what you’re buying for occupancy. That’s like, what is the occupancy rate? Are you going to be at 60% occupancy? That’s low. The average Airbnb, I think most of them are looking at an angle. At 60%, this makes money then we can bump it up to 75%, which maybe you can. I see a lot of investors now that have their own websites. They named all their properties of specific experience then they put it on their website as well.

They pull their email information from when they connect on the Wi-Fi. Anyone that connects on the Wi-Fi in the house, they pull out the emails and market to them directly. Things like that can boost your revenue by sending them stuff all your long to come back and stay at their Airbnb. It’s interesting how you can do it.

An 8% revenue bump, which is the fee that a marketing platform might take is a huge revenue bump for you at the end of the year, especially if you’re doing over $100,000. That’s a lot of money you can improve the property or pay for a kid’s college or go on vacation yourself. It makes a difference. Are you seeing anything else like any other secret strategies that are helping to boost income for properties? Things such as overly themed properties or private amenities or private pools or pickleball courts or anything like that that’s just driving numbers up.

As I said before, they’ll go and research the area and see what others are doing at great volume. In certain areas, you have to have a hot tub. If you don’t have a hot tub and steam room and some bikes and some chairs. Some things that you can move around. Those things helped a lot. Parking is huge. All that, believe it or not, brings in more revenue. I haven’t seen pickleball courts. Probably not a bad idea. I’ve heard that was going to be one of the things that started happening.

I’m starting to see it.

Mountain houses. Anything on a mountain or in the country or with a view with a hot tub.

How Regulations Are Shaping Investment Trends

I love talking with national lenders like you because we get such a great insight into the overall macrotrend. How are you seeing regulation come down on some of these areas that you’re working in? Are you seeing it still putting a lot of downward pressure on it or are you starting to see governments and investors finding a way to work with each other moving forward?

I’m not on any boards and I’m not a realtor. I’m more in the financing part of it. What I’ve seen is because I have that conversation sometimes with some of these areas where the HOA is starting litigation against the Airbnbs. I’ve seen a big decision get overturned we’re it went to court. They were going to stop Airbnbs or short-term rentals in that area. The way that was written in the HOA Forum, they would have to stop all rentals. You couldn’t rent out anything in that neighborhood at that point because it’s all the same.

They lost that case and now, the people in their field can keep renting. They can keep advertising but I do see investors back away from any area. We always check if there’s any litigation with the HOA or any issue with the permit or any of those things because it’s not worth taking the chance that it won’t go to court or that you’ll win.

You have too much money tied up in it and you bought it as an investment that is a short-term rental. The next buyer would most likely be a short-term rental buyer then you cut out who would be your buyer if you want to sell. There’s no primary. Most of those saturated areas or high vacation areas, there’s not a lot of primary houses being purchased there. Even though people do live there, it’s on a minor scale. It’s probably 25%.

I would definitely say so. Is this a good practice that you’re checking to make sure that regulation is good, or is this a requirement by some of the lenders now prior to funding conditions to make sure that things are good?

I haven’t seen that prior to funding at all because they don’t read the HOA docs, but I always check because I don’t want to get close to closing when that comes up. We should know what we’re buying. We should when we’re making the offer that that’s what we’re up against. I’m involved in the offer a lot of times.

A lot of times, I’ll meet the investor sometimes from the agent if it’s a new investor to me but I’ll still be involved in making the offer, looking into if it’s profitable for the investor and all that stuff. We always check that first. If there’s any problem with any short-term rental rules in that neighborhood, the realtor should know that, too. Usually, they do. The good ones don’t steer anybody down a road. All of a sudden, that pops up at the end because nobody likes a surprise like that.

It would be hard for me to get all those kinds of calls. It was very difficult for me as a real estate agent to get the call two days after you close on the house and the grinder pump goes out or an air conditioner goes out. Those things just happen because properties are properties. You sell 1,000 properties a year and you’re going to see some of the worst-case scenarios. In short-term rentals from the very beginning, we were always very careful to be the source of the source. Anybody that we would talk to, we would always make sure that we would give that name a number, allow the investor to call the county official or whoever just to make sure that they could hear from the horse’s mouth so in case something did change and things do change from time to time.

We under wrote the deal appropriately and we shared those sources with our clients so they could underwrite the deal. In fact, even in running numbers. When I was running a small independent brokerage, I asked most of my agents to not run numbers for their clients but to provide a spreadsheet and to be available to help that person run numbers. At some point, you have to push the responsibility of somebody’s investment back to them and say, “I’ll help you source prices for insurance and taxes and get you accurate numbers. I’ll even provide you a good spreadsheet, but I need you to put the numbers in and do it yourself.”

Empowering Investors Builds Lasting Relationships

You’re training investors to do it themselves and to be good. We trained so many investors that way. Though in the beginning, they rely on you, the real estate professional, they need to do it. I’m applauding you for doing more than I would think that a lender would do by coming alongside them and making sure that the property works. To me, that’s why we get along is because we’re both very much education-based salespeople. We also care about the outcome of the client because the long game is when they become raving fans. They refer all their friends to you. It’s awesome that you’re sitting alongside them and running numbers and making sure things are working.

The investors I work with will do 7 or 8 deals a year. They’re always bringing me something. It’s just different than being a mortgage broker for a regular conventional financing because those people buy one house and maybe in five years, they buy another house or they refi. They have needs. Investment is a little bit different. It’s their business, even though they have other jobs. That’s the business that they’re in with their money. They’re always buying something to refying something.

Typically, when it comes to me, it’s funny because I have worked with a lot of them for a long time and we’re friends. It’ll be a text at 9:00 at night. That’s how it starts with all of them. “They got me a screenshot and the listing. I’m thinking of looking at this.” I’m like, “Let me pull up a value report.” I shot over a value report and told him what then I pulled the airDNA. They’re smart enough. They’ve done their research before they send one to me. They’re not just sending me anything, then we dig into it and see if it’s something that we want to do.

I’m like, “You need a letter.” I’ll send them an approval letter right then and there. I already have them in my program. I shoot out, put the address in and send them the letter if they need me to call their agent or the seller’s agent. A lot of times, they’ll have a new agent because it’s different areas of the country. It’s not like they can use the same person because they’re not licensed everywhere. I’ll call the new agent then I’ll set up a call with the seller’s agent and tell them how great my investor is. We’ll close quickly.

That’s how you have to be if you’re a lender at this end of the business. You’re more of a consultant. Plus, you get them the money every time. I have had others. It doesn’t always go perfectly. It’s a mortgage. I have had investors leave me and go to somebody else because it was a little cheaper or something else. I’m like, “There’s nothing I can do about that. I’d love to keep the file.” Sometimes, they end up coming back because it’s not that easy to get it all done. You have to be on top of it all the time and always pushing it along through every aspect of it.

Why Choose Garwol Financial

Let’s talk about that and your process and maybe what you would do differently that maybe a different lender wouldn’t do. Why would somebody go to Garwol Financial and work with you? What is it that you do that makes you stand out value-wise?

Value-wise now just from doing DSCR loans for so long. I was doing them before anybody else was doing it. Before anyone knew what they were. It is funny, I see other mortgage people. It’ll come up on my Instagram and I’m doing a video about DSCR. They say what it means and can’t even say exactly what those letters stand for. I’m like, “You don’t even know what it means.” I don’t know if I’m an expert but I became good at them from doing them over and over and having issues and having to overcome bad news or things that I was not aware of because you would not know that this would be an issue if you weren’t doing these loans.

In a normal atmosphere, some of the things would not be a dealer that conventional loan and vice versa. Some things in a DSCR loan are easy to get through but there are weird deal killers that you wouldn’t know unless you were working in that area. The advantage of coming to a firm like mine is, that’s all I do. I work with all the lenders. The majority of the lenders that lend out the most of the DSCR money every day, I work with. They’re familiar with all the areas of the country.

Some of them have issues with one thing where another won’t. I know if it has that, I don’t even bother. I just go right to where I know I can get that one because I’ve gotten five done. I know what to expect and there are no surprises in these loans if you see the package and you know the lender has guidelines that cover everything.

It’s a little bit different from conventional financing. Your credit card bill could all of a sudden pop up and your debt ratio goes down in a FHA loan because you charge a refrigerator. That’s not going to happen in a DSCR because they’re not looking at income documentation or debt ratio or any of that. All the surprises are the property. Anything that could kill the deal would be something wrong with the house. That’s the only thing. The appraisal, rent value, and a septic tank. I think I’ve said this before another show.

Septic tanks are a huge killer for DSCR lenders. They don’t like it. There’s like one or two that will close with it. If you didn’t ask that question. Why would a lender ask if it has a septic tank? They don’t usually know that that’s not something they would do. The appraisal comes in 3 weeks or 2 weeks later. You’re already halfway through the deal and it’s rural with a septic tank. The lenders like, “We don’t like to have that.”

Even if it’s common for the area and the area shows good numbers?

There are lenders that are guidelines for them. They’re like, “No.” There are lenders that do them. They’re few, but they do them. There are a lot of things that if you didn’t know that, you could have to go around again. You might salvage the deal and have to get another 30 days on the contract and take it somewhere else. At that point, you’re in this business. Everybody’s aggravated at that point. The seller is saying, “Is this going to close?” Every day, you’re getting a phone call. The investor is worried about his earnest money.

A lot of money is on the line in these deals so you have to take them somewhere where somebody knows how to get them done. I call the underwriters and the lender every day on my file. I wake up in the morning, I look at all my files that are in underwriting and I’m like, “What issues do we need to discuss?” I push on them to get them through even if I was given the information the day before. I follow up to make sure we can look at it so we know we’re signed up. I never let anything linger assuming it’s going to be signed up. I pushed the files and I thought through trial and error. I learned where to take them and we’re not to take them.

It’s such a fantastic analogy here because when I first started selling real estate, I never understood why people would sell their home on their own like a fizbo. I do now just because everybody deserves the right to try to sell something yourself. If you can save the bucks and you have the brain power to and the time to do that then go ahead and try. I wonder why people wouldn’t just contact somebody who basically lives in a minefield that can tell you where every mine is.

Rather than going and trying to walk through that minefield and not step on something. You follow the path of somebody who lives there and knows where everything is. There’s always something. Real estate is real estate and it’s one thing I love about it is that you’re always learning. Something new happens in real estate every single day and you’re going to learn something that you didn’t know no matter how many years you’ve been in the business. For the most part, for 99% of the people, you can easily guide them away from mines and to successful clothing.

One of the hardest parts in mortgages is that everyone’s taking advice from their neighbor or brother or cousin or somebody’s cousin’s uncle that one time said they did this and that’s how it works. Now, that’s how a mortgage works but they don’t take it from the professionals. Sometimes I don’t feel like they think there’s value because of things like, “The fees. What are all these fees?” There’s a big misconception that in mortgage there are a lot of fees. There’s not. That’s what it costs to do it. There’s an attorney, taxes, and insurance. That’s what the fees are. There’s a processing fee.

Those are just things that have to be taken care of to be able to buy the house. It’s not like just people go, “Let me just throw some fees on this sheet and you pay them.” It’s regulated. You can’t do that. It doesn’t work like that. Once people get more educated to buy more property, they realize that this is a cost of doing business. I don’t make up the numbers for the title company. I have nothing to do with that.

They get to choose whatever title company they want. I’ll suggest some. That’s where a lot of the closing costs are and the taxes. Those are all things that no matter where you take that property, it’s going to cost you the same. It is interesting at the end of it seeing people try to navigate. I also do a lot of fix and flip lending where you buy it, rehab it, resell it, or hold it. I do a lot of that business. I have investors that do like 3 or 4 or 5 of them a year. They try to turn it around every three months. A lot of times, it rolls into five months.

I did a lot of that business in the Atlanta area. That’s a great area for it. In those deals, I’m like an extra realtor there because usually, they have to get the property at the price. That’s where they make their money. It’s how they bought the property. It’s not through the flip. If they pay too much for it, they’ll never recover. If they pay too much at the acquisition. They can’t skip on the rehab, so they’ll never recover the profit margin.

Some of the investors I work for are houses that are 40 or 50 years old. Somebody’s living that long and now, for whatever reason, the family owns the house and it’s empty. The big houses with old floor plans and mid-century modern, but in this ZIP code where everybody wants to live. If you build a house there, it costs a million to buy it. A house that’s been there for 50 years, you could probably buy for $575,000 but nobody would move in it because it’s so out of date. It would cost you $200,000 to make it look like a house anybody wants to live in.

That’s what these investors buy. Usually, in that negotiation, the realtor will put in the offer and it’s usually a lot less than what they’re asking. It’s offensive a lot of times. You’re in real estate. Sometimes if it’s too low, you’re offended. I’ll call the agent prior. I’ll call the seller’s agent prior and say, “My investor just finished A, B, and C in the same neighborhood. She likes her house and wants to buy it. She does not want to insult the owner or you with the low offer but here’s her thought process behind this offer. It’s going to cost this much to rehab it and here’s what they’re worth after.”

There’s not that much margin. Anyone else that’s going to buy it, it’s most likely going to be an investor. This is what you’re looking at and it works. It doesn’t always work. Sometimes, they counter and they don’t like it. We have to go back a few times but when I am in there talking, I’m not a realtor. I’m the lender. I’m talking more about how much the lenders look at, what the value of this is and that’s all the lend on it. It gives it a little bit of a different mindset to the realtor when they’re downloading that information to the seller.

DSCR Loans

Multiple channels of communication. To the same point, you’re like an extra advocate trying to get the deal done there. That’s phenomenal. I love that. Let’s get into the nitty-gritty of the DSCR loan just to provide some education for people. Let’s talk to people as if they’ve never heard of them before. The debt service coverage ratio loan is a loan where you don’t even need to provide your own income, if that’s correct. You’re just relying on the income of the property to produce a new loan for it. What would you teach me if I was brand new to the market and didn’t know anything? Let’s say I’m an investor and I’m like, “I didn’t even know this loan product existed.” Tell me about it. What’s it good for?

Basically, you’re buying a business when you buy a rental house with a DSR loan. You’re not buying a house. They look at it as you’re buying a business. It’s like a business purpose loan. In those loans, the bank is saying, “We’ll lend you this money on this property based on the profitability.” They’re saying, “If we get it back, it’s still going to make money. Our investment is safe.” It’s rentable. It’s making this much over the monthly payment. That business works. It’s a profitable business.

For the investor, it’s a lot simpler because you don’t have your debt ratio tied up in it or your mortgages or car payment or school loans or any of that. They don’t even look at it. We don’t need your income tax returns. You don’t need two years income tax returns where if you’re in business, maybe you took deductions. Your income looks lower. You and your income are set aside. You’re a guarantee, so you still have to be creditworthy. Your credit has to be good. 660 is the minimum, so that’s pretty liberal.

After that, they don’t look at the borrower anymore. Now, it’s just the house. They want to know where the money is going to come from. You could pull in an equity line off of your personal house. They’ll accept that as funds to close. Retirement funds, stock account funds, or just checking. Whatever’s in your checking or the sale of a house. You can fund the deal. They don’t source it if they can. They source it but it can come from a lot of different areas.

That makes it way easier to fund these deals without your personal income getting involved in it. The more important thing is you can close the LLC which is huge in this transaction. It’s not going to report on your credit, so now it’s not on your credit when you want to buy a new house or a car or something else. It’s giving you more of protection from any lawsuit because even if your house is closed in an LLC and it reports on your personal credit. If there was a lawsuit, they’ll pierce the LLC by finding it on your credit report saying, “It’s not his personal credit. I’m going to assume personally, too.” Having that disconnect between your personal life and the LLC is huge.

Personal guaranteed doesn’t automatically make it go to your personal credit report if you close in an LLC?

Some lenders do. That’s where you have to be careful. That’s why I don’t take it anywhere that they report on the credit. For personal guarantee, you’re just signing for the LLC as the officers you personally that this company is going to pay back this loan.

That’s good to know. What about terms? What do terms look like on some of these loans like down payments, amortization rates and things like that?

Some will purchase 20% down. There are some lenders that will do it with 15% down but whenever you do the calculations on those deals, the rent has to cover the loan payment. With 15% down almost in any market doesn’t seem to work. Anytime you ever do the numbers with 15% down, there’s always a deficiency in the income and it doesn’t cover the payments. You have to back off the LTV till it starts to cover. Eighty percent is the rule of thumb. Most lenders are 80% down.

Rates are not that bad. For short-term rental, they’re probably in the mid sevens to below. The long-term rental, I’ve just closed two in the sixes, 6-9 or 6-7.

That’s great. For posterity purposes, this show is being recorded in the summer of 2024. Those are fantastic loans now when most residential rates are close to 78% where we’re at.

There’s another misconception that these rates are so high. It’s not. Quoting seven and a half. The thing about the rate, it doesn’t matter what rates are. Everyone thinks it should be lower. When rates are 3.75. I got 3.5, I’m like, “It just doesn’t matter.” It doesn’t matter what they are. They always should be lower from the consumer side. No matter how low the rates are, it is still not easy for us in that conversation.

You can’t complain about not much higher of a rate when it’s basically a loan that has no documentation and you’re closing it in a business. They’re not looking into your personal finances. If you took that same property to any bank or down the conventional road, which I could do. I did those loans as well. I could take all these investments conventional. All the conventional lenders want them. They all want to do them, but it would never get done. It would cost more. The rate would end up costing you to get to that rate. You’d have to put more money down. They’re not easier to do. It’s just like a mindset where they think it is.

You could close in an LLC if it was a Fannie.

If it’s conventional. No, they’re not going to close it. They’re not going to do short-term rental and all that stuff. If you haven’t had that income on your tax returns for a couple years, you can’t even recognize it. It’s very difficult to get those loans done. You can do them, but you wish you didn’t.

One of the things I love about this DSCR loan is that it seems like it’s almost like another layer of checking balance on your underwriting because the lenders are not going to give you the loan if it’s not a profitable property.

That’s exactly what they’re looking at. They dig deep into that. Nothing else. They dig deep into the airDNA or if it’s a long-term rental, the least that you already have, they order a 1007, which is like an appraisal of the rent net area. They know those numbers. They’re very conscious of that. If it’s not profitable, they’re not going to lend the money. If it is, it’s closed. That’s it. It goes to closing and it’s done. That’s how easy it is.

That’s great. I love that. as I said, we’ve talked about the Vrolio software and we’ve shown you that a little bit. We still want to ramp that up and get that presented to the DSCR lenders probably at the end of 2024 at some point. I like the way that the Vrolio normalizes the data. It’s an underwriting tool and it’s underwritten specifically for those investors’ specific needs. The more underwriting tools that we can give investors, especially those that are searching. They don’t know where to place their money yet. They know they like the asset class, but they don’t know exactly where they want to invest yet. Tools like that can help.

That’s probably one of the best ones I’ve seen, by far. If it could get into where lenders take that or start using that, it would be fantastic. I don’t know how easy it is. There’s only a few lenders that will use airDNA. There’s not many that will do that. That’s a big consideration when you’re doing these loans. If an experienced loan officer would take a loan somewhere thinking the 1007 is going to cover it and it won’t then the lender doesn’t accept the airDNA. They just assumed now the deal is dead.

What happens when the lender doesn’t accept the airDNA? Is there any other strategy there?

That’s why you should know that up front. If it’s an airDNA situation where there’s no history and it’s in an area where the 1007 wouldn’t cover. If you didn’t take it somewhere and use the airDNA right off the bat. You made a mistake. That does happen a lot. I’ll get a lot of these deals after they fall out somewhere else because everyone’s frustrated, “It’s been 30 days. It got turned down. Nobody knows why. It’s because only 2 or 3 lenders will allow airDNA into the picture.

Unless you know that, you wouldn’t know where to take it but that part is huge because that’s a total deal killer. The only other way is they try to get the airDNA information on the 1007 but appraisers still don’t want to do that. That’s what the report is so they don’t do it. They’ll put notes in there, but it’s not their favorite thing to do.

What other deal killers have you seen that people should be aware of if they’re going for a loan like these?

AirDNA is number one. The long-term rental not covering is huge. Septic tanks and rural areas are huge deal killers. Ninety percent of the lenders will not touch rural areas. Those things are enormous. Those are the main dealer killers septic tank, rural and long-term rental that doesn’t cover. Those will kill every deal but you can navigate them because there’s a letter that doesn’t have a problem with all of that. You have to know which one that doesn’t care about all those things. One might be fine with the rural but doesn’t like the short-term rental. One might be fine with the septic but doesn’t like the rural area. You have to know where to go. Usually, from trial and errors where you find out how that works.

Rural Vs. Tourist Hotspot

Let’s talk about rural for a second because for example, Branson, Missouri. There’s 10 million or 11 million people a year that come there for tourism. If you look at like a USDA or VA program or something like that, the entire zip code, the entire counties out here are considered rural just because of the number of people and the local population. How do you reconcile trying to do a loan on a place that’s been a massive tourist destination since the ‘70s then it’s still “rural?”

I take it to a lender that will accept the rural. I’ve used other lenders with us to say, “If you can switch it to suburban, we’ll take it.” My point is that rural this area is less than a quarter acre of the property. It’s three miles from the center of the city and two miles from the fire department. The schools here and the shopping is there. I’ll send that to the appraiser. In the past, I’ve done that and they’ll switch it to suburban, but that doesn’t mean it’s going to happen.

It still has to go to review. The lenders heavily review the appraisal. They review it, too. If they don’t believe that it’s suburban and what they’re looking into, they won’t do it either. If it’s rural, I have a lender that does rural and septic and airDNA. That’s where all those go. They all go there no matter what. They don’t go anywhere else. If I’m losing one of those deals to another lender and I’m like, “Where are they putting it?” They tell me like they’ll be calling me back because it’s not going to close. They’re like, “They said 100% it’s going to close.” I’m like, “They don’t know that deal killers lingering out there. They have no idea what it is.”

Let’s talk about this for just a quick sec. Let’s say it’s not on a septic but there’s a community treatment. There’s 50 homes and has their own community treatment plan, but it’s not like a city water or sewer. It’s just on a community plan. Does that still fall under like septic?

I don’t know how they would look or what box would be checked on the appraisal. Would it be city water? Usually, its own septic or own sewer, those little check boxes on the appraisals where it would show up.

The community sewer, basically.

Community sewer is not a septic tank. I would imagine that community sewers go into some public waste section somewhere.

Not all the time. They’re open discharge plans.

Are they collectively paying for it somehow?

They are.

It could come up. For a lender that didn’t allow septic, they might have an issue. It’s funny that small things can just hold up a deal or kill it.

The more information you can provide your lender up front, the better your chances of not getting into a situation halfway through the contract process.

Even the ones that I think are slam dunks, I send the whole scenario to a lender before I submit it. Before it even went under contract. I’m like, “Let me see if they like it.” They’ll pull it up. Those lenders are different. I can get the underwriter to look right at it. Look at the whole thing and say, “We’ll take this deal.” That’s huge.

Having access to underwriters is huge because otherwise, you’re in this like man in the hollow tree concept where you’re trying to get an answer from a loan officer that’s talking to the underwriter who is unnamed and has opinions. It’s like, “Can we just be able to talk to somebody that is talking to the actual underwriter that knows their name?” It’s such an advantage to work with somebody like you that has relationships with underwriters.

A couple of lenders that I use all the time where I always have 5 to 10 deals all the time. I use them every day, so I’m talking to them every single day. I’m talking to 2 or 3 DSCR lenders every single day and fix and flip lenders every single day, so I know that. I’m used to them. I know what to expect, what they’ll take, and what they won’t take. I have clear communication with them all the time. They respond to me or answer my call. I answer their call.

The other thing that’s huge in my business is I answer my phone. When the investors call or realtor calls, I answer. If I’m at dinner, I answer the phone. Wherever I am, if it’s 9:00 at night and they’re texting me. I text them back. Nothing good happens to them over six hours if they don’t get an answer and that’s the business we’re in. That’s the business we should be in. That’s how it works.

How do you reconcile? How do you find work-life balance and integration and all that? How do you find peace with that schedule?

It is work-life balance because this type of business affords me to be at all my kid’s things at school. I can drive them to school, pick them up with my wife, and go to lunch with her. I just might have to answer my phone but I do all those things. If I’m just somewhere at a job where I have to be there all the time, my body has to be there and I can’t go because I have to be there from 8:00 to until 5:00. I can’t go to those things.

I work from home so I can go to whatever I want, but I also have to work. I have my laptop. I will hop right in and go to work if I’m at something because everything we deal with is so time sensitive. It’s a lot of money on the line for everybody. Everyone wants their answers right away. They don’t want eight hours to go by and not have an answer to the situation. That’s my business practice. It’s to give good or bad news right away. Answer my phone and discuss everything openly all the time. It just seems to work. It’s because I do that, I get more business.

Any other thing that maybe we haven’t talked about that you would want to share or do you feel like we covered everything?

I think we covered it pretty well. It was an interesting conversation for sure.

How does somebody get a hold of you then, Paul, if they want to work with you?

My email is Paul@GarwolFinancial.com. I’m on LinkedIn. My LinkedIn page is pretty full. I blog on there all the time. I always have articles that have to do with investing there or you can call me, (404) 721-9098 and I will answer or text me. I was almost late for this show because twenty minutes before, I had a realtor send me somebody and they wanted to talk to me. I talked to the realtor and talked to them. It was fresh in my mind, so I called the underwriter right away and I asked them what they thought. I squeezed that all in before we headed up on the call. I didn’t want to miss those calls because it was important to those people who were calling.

I put off until after lunch which you can do immediately. I love that. I enjoy talking to you, Paul. I always do and I’m going to be sending you some of my personal business just because it’s very rare for me to be able to find somebody like you that knows what they’re talking about and has the relationships that you have which are so very important.

Thank you for taking some time out of your day to help educate our audience. Again, if you’re reading this, please reach out to Paul. After nearly two decades in this business, I can tell you that there are very few people like Paul out there that have the value that he can add to your business. He needs to be a person on your power team for sure. Thanks again, Paul. I appreciate you.

It’s my pleasure. I enjoyed it.

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A big thank you for reading our episode. I know your time is valuable and I hope you got a few takeaways that are going to help you get a greater return on that time. I know you will. If you did enjoy it, I’d sure appreciate a share or a comment. Feel free to subscribe for instant access to new episodes and offers. There’s also a ton of free content and ways to learn more and engage more at WorleyRealEstateNetwork.com. Until then, we’ll continue to bring you recipes for success and real story from real people who like you are living out your divine purpose. God loves you no matter what happens. Don’t give up.

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