Come To Find Out
Welcome to Come To Find Out- your resource for all things real estate. You can come here to find out about the current market, terms that you see and hear during a transaction, things to do and not to do when you're in contract. The show will also feature interviews with industry partners and leading experts to help you choose who you want on your home buying journey with you. The home buying, selling and investing process can be so overwhelming, so this guide is meant to make it just "whelming."
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Come To Find Out
Unlocking Real Estate Investment Potential: Nathan Lindley on DSCR Loans in Florida's Market
Unlock the secrets of modern real estate financing with our latest episode of "Come to Find Out." This week, we're joined by Nathan Lindley from Gold Star Mortgage, who unveils the transformative potential of Debt Service Coverage Ratio (DSCR) loans in the ever-changing Florida property market. Discover how these loans offer a simplified, income-focused approach to securing financing, bypassing traditional roadblocks like personal income scrutiny and tax return requirements. Nathan shares insider knowledge on how DSCR loans adapt to both long-term and short-term rental income, providing a flexible and efficient solution for today's savvy investors.
Listen as we explore a compelling case study from California, illustrating how DSCR loans can breathe new life into underperforming properties. By refinancing a property rented below market value, one investor was able to refurbish and significantly increase rental income. Nathan addresses lingering concerns from the 2006-2009 financial crisis, assuring listeners of the rigorous and realistic assessments backing today's DSCR loans. With credit scores being a pivotal part of securing favorable terms, Nathan emphasizes the importance of maintaining a solid credit history to leverage the true power of DSCR loans.
Gain a deeper understanding of the current Florida real estate market dynamics with Nathan's firsthand perspective as a seasoned lender. He contrasts today's market with the speculative frenzy of the pre-2008 era, highlighting the robust demand and tight supply that characterize current conditions. Nathan offers expert advice on distinguishing between speculative and cash flow investing, urging listeners to adopt a long-term view for substantial returns. The episode also sheds light on closing costs and potential fees associated with DSCR loans, stressing the value of consulting with mortgage professionals to navigate these opportunities effectively.
To contact Nathan Lindley:
email: lindleyloanteam@goldstarfinancial.com
phone: 727.452.9868
https://www.instagram.com/thelindleyloanteam/
https://www.facebook.com/TheLindleyLoanTeam
Sarah Thress
614-893-5885
First Time Home Buyer course: https://sarahthress.graphy.com/
Instagram https://www.instagram.com/sarah_thress_realtor/
Facebook https://www.facebook.com/SarahThressRealtor/
https://www.youtube.com/@LIFEINCOLUMBUS
Hi and welcome to this week's episode of Come to Find Out. This week we have Nathan Lindley of Gold Star Mortgage. If you were listening, a few weeks ago he was on and talking about how Gold Star is different than other lenders. So if you haven't listened to that one, definitely make sure you go back and listen to that one. It's got some great information. Also gives us some great information and insight into the Florida real estate market. So, nathan, thank you so much for taking time out of your day to join me again.
Speaker 2:Thank you for having me again. I truly appreciate it.
Speaker 1:Yeah, absolutely. So after we recorded our last one, you and I got to talking about all the different things that you're very knowledgeable about and especially about the Florida market, so I really wanted to make sure that I had you back on to talk about stuff as we talked about before we started recording. We are kind of ramping up for the busy season in Florida and a lot of people are now coming to me and asking about like hey, if we wanted an investment property in Florida, what does that look like? And you know, is now the right time to buy, since everything is, you know, still a little bit like it's a little bit different down there than it is here in central Ohio with the market. So I would love for you to just kind of walk us through the investment market and, like a DSCR loan and you know, obviously explaining what that is, because not everybody knows our lingo.
Speaker 2:Absolutely.
Speaker 2:Thank you so much. Yeah, so let's start just real quick on. You know what the history was. You know so, as you go back prior to you know COVID and you know the increase in rates and things like that. The historical, normal way of doing an investment loan was. You know you provided your tax returns and you know you got credit for the rental income to help offset the payment, but you still had to calculate that difference into your monthly payment to calculate that difference into your monthly payment. So it was a very labor-intensive, document-intensive way of calculating the income. And that's still the way that Fannie Mae and Freddie Mac loans will do non-owner-occupied investment properties.
Speaker 2:But the thing that changed after the pandemic and the rise of interest rates that happened so quickly is that they've priced out the market by increasing the rate and by increasing what they call their loan level pricing adjustments so high on those products that are non-owner occupied and in. You know in that category that the loans became impossible to do, like they were actually illegal to do, because the fees were so high. So they knew what they were doing. They were basically saying we don't want these loans and so we're going to make them so expensive that they can't be done, and so the conventional, normal way of doing that. They can't be done, and so the conventional, normal way of doing investment properties kind of has been hibernating and sitting on the side and like has happened many, many, many, many times. You know, in the past, private loans, private equity, what we now refer to as non-qualified mortgage, non-qm mortgages, filled a hole and they stepped up and created a new way of doing mortgages. And this new way of doing these mortgages is a new income calculation process and it's called DSCR Debt Service Coverage Ratio. So it's an acronym for Debt Service Coverage Ratio, so it's an acronym for debt service coverage ratio.
Speaker 2:And so the underwriting of this loan is entirely based on the proposed PITI, which is principal interest taxes and insurance, the carrying costs of the property. So I'm going to buy this property. Here's what my loan is per month. Here's what my taxes are per month. Here's my insurance per month. If there's HOA, here's my HOA, so what it costs are per month. Here's my insurance per month.
Speaker 2:If there's HOA, here's my HOA, so what it costs you per month. And then we're going to compare that number to what either it is actually renting for or what the appraiser tells us it will rent for through a rent schedule and that's all the income calculation we do. So the individual's income W-2 pay stubs this, that the other debts, how much you have in credit cards, how much you have all of that is not factored into the income calculation for doing these debt, dscr loans. And so this new creation of this new methodology has opened up an entirely new avenue of being able to do investment homes and even some second homes. You know there's a bunch of lenders that are doing these, and when I mean that the brokerage relationships, you know, like what we talked about referring to our last conversation, where I can broker loans, there's a lot of brokered avenues that allow for these DSCR loans.
Speaker 1:Wow, I had never even heard of those, so you just completely blew my mind.
Speaker 2:And what's kind of neat with these types of loans is there's different subcategories. So you know, if you want to use what they call long-term rent some of these you know you check a box and say we're going to use long-term rent, which means leases of nine months or more, you can. There are some lenders that do these based on what's called short-term rent. If you check the box that you're going to use short-term rent, that's, you know, using Vrbo or you know any of those. You know Airbnb, any of those types of apps where you're just renting it out weekly. Some of them require you to have experience of owning you know, other investment properties. Some of them require you just to own a primary residence. Some of them say you don't have to have owned a property at all. You know it's a little bit higher risk, so it's a little bit higher interest rate, but there's a bunch of different categories there that kind of get into that and probably the next thing to talk about is down payment.
Speaker 1:Yeah, I was just going to ask about that because, you know, a lot of times people, you know, I'm still having people ask, like you know, on a primary residence, like you know, do we have to put 20% down? And I'm like, absolutely not. Like you know, do we have to put 20% down? And I'm like, absolutely not. Like you know, we've got it set up, you know.
Speaker 1:Well, not we, but the government, you know, the feds, they have it all, freddie, fannie, they have it all set up to where you can do 3% or 5%. You know, obviously, the more you put down the you know, the less your principal and interest are. I mean, there's all these different factors, but it's not 20% and and it's my understanding that with most investment properties it is at least 10% and sometimes 20%. So I'd love for you to kind of talk about that and, you know, give more insight into that. Like if they went the traditional route with their down payment was, if there is any difference with this, you know, this new creative loan, yeah, I'll let you tell us new creative loan?
Speaker 2:Yeah, I'll let you tell us. And again, so historically, you know any anybody that I was advising, that. I was talking to them. You know we could do an investment property with 20% down, but the break in interest rate if you put 25% down made it so much more affordable that it was over the top. Hey, I just told all of my clients plan on 25% down, you know, can't do. The guidelines say we can do it. 20%. Yes, is that really what is a good financial plan? No, so that was my old advice.
Speaker 2:Now, with this new loan product, I tell people, well, plan on somewhere between 20 and 25% down Because, again, the way that it's calculated, it's the ratio of what we're expecting for the rents to what the PITI is, what we refer to the total cost of ownership. So if we get the rent schedule back and it says, hey, you can rent this property out for twenty five hundred dollars a month, then we've got to get your loan to your payment being twenty five hundred dollars a month. So it may not be a 20 percent down payment, it might be, but it may be, but it may be more than or less than a 25 percent down payment. So if you put twenty, well, we can borrow more. We can borrow a little bit more and maybe only put down 22% to get that payment back to the $2,500. So you end up being much less like okay, you need this exact dollar amount and more like we have to see where the numbers are going to land. That obviously depends on you know where the interest rate is.
Speaker 2:I've used strategies where we bought the rate down to get the payment where we needed it to to be able to do a certain you know. You know. So rather than putting more money down, we just bought the rate down to get the payment down to where we need it. So you end up with some different strategies because of the difference of the way that the type of loan is. But as far as for someone who's beginning the conversation of like hey, I'm looking at properties, plan on 25. Plan on 25% down and it ends up being about the same number that I always told my clients in the past If there's an opportunity to save some of that capital and not put that full 25% down, absolutely take advantage of it, but plan on the same 25% down that I was always kind of advising.
Speaker 1:Yeah, I love that. And then, because I think that's great for people to be able to plan for, you know, if they have it in their mind that, hey, this season I'm adding a rental to my portfolio and so this is what I would need to save up, so I love that. And then you mentioned something about the rent schedule and you mentioned something about the appraisers. If someone is purchasing a property and they're purchasing it for the purposes of an investment property, but it has never been an investment property before, is that possible to still do the DSCR loan Like, how does that work? How do you figure all that out?
Speaker 2:Absolutely Great question. In fact, I almost prefer that scenario than when you're buying a property that's being currently rented. When you buy a property that is currently under lease, then the underwriters are going to take into account the actual lease amount that the property is under right now. And if the appraiser and what the appraiser does is what's called a rent schedule and a rent schedule is kind of the same way of an appraisal works, where the appraiser goes out into that local market and sees what other similar size properties are renting for in that market, so they use a lot of the same methodology that they do and, coming up with the value of the property, they just transfer it over to what the rent would be for that given property. And if the rent schedule is higher than what the property is actually renting for, then we've got some. We may have some finagling to do with the underwriting. There are certain DSCR lenders that will just use the rent schedule. There are others that say no, no, we're going to use whatever the actual rent is. You know. So the, the, the what, if it's not being rented, then we're going to get the full maximization of what that rent schedule is. So we'll be able to be in a better position.
Speaker 2:You know, overall I've got a kind of a neat story for you. You know we did a DSCR loan for somebody that lived in California that was buying or, I'm sorry, that was refinancing an investment property in our neighborhood. And he found our name and found us and, you know, contacted us and you know the property was his mother's. It was, you know, was 30 years old, the tenant had been in there for a year or two and he was charging way below market rent. I mean, this was a $5,000 a month neighborhood and he was charging $1,000. But the property was in that condition and so the refinance was to pull all the cash out to refurbish the house and get it back up to market condition so that he could start renting it for the real rent.
Speaker 2:And so we went through and of course, like I said, the rent schedule came in at $5,000. We were pulling out over $100,000 worth of equity. But we found a DSCR lender that said he had to write a letter of explanation that said, hey, yes, I'm renting it below market rate, this is what I'm using the money for, this is what we will be renting at market rate afterwards. And we were able to do the loan for them using that much higher number. So again, that's where some of the strategy kind of comes into it. But when you're just buying it and it's a non-rented property beforehand, then you're starting with a clean slate. It's much easier, it's much smoother. The only number that we have to use is the number that's coming from the appraiser, and that's probably going to be a higher number than what somebody who's had a three or four or five-year tenant in the property would have had anyway.
Speaker 1:Yeah, wow, okay. I love that because I have people that will ask me you know about investment properties, you know down in Florida, since obviously I'm licensed here and there and so people will ask about it, you know, and so I'll always like set them up with a search and it sends them stuff and then you know, so it would be so great to you know, be able to like let them know that, yeah, and now there's this new way that you can, you know, finance it and it's not just all the traditional stuff.
Speaker 2:Yeah, it really is. You know, in the Fannie and Freddie Mac will come back as rates start dropping, There'll probably be a little bit more appetite for loans. I tried to price one a couple of days ago and it still was really bad. I could technically do it but it was still pretty bad. So you know these types of products have really exploded in availability here in the last. You know really two years in availability here in the last. You know really two years. And now they've got enough of them and seeing how they're performing that you're starting to see more options open up, more guidance.
Speaker 2:You know, coming in more like we'll do it with this, we'll make this exception, we'll do these types of things and it really is going to end up being a very, very, very competitive model compared to you know, the traditional way of doing this and it's so much less. You know paperwork that's associated with it. Even if you can qualify through the old method, this is and this makes sense. You know this isn't a make up your own numbers loan that you know kind of got us in trouble back in 2006 through 2009. You know this isn't make it up and you're using the property, that is, the equity and the income that you can expect from that property to support what loan you're doing for that property and it just makes sense.
Speaker 2:You know, just on the big picture of things it's like, okay, yeah, what does it matter? I mean, as long as I've got a good credit score and I'm not being late on my payments, what does it matter, these other things? You know, what does it matter? If I've got a $2,000 car loan, it really shouldn't. It really should be the property you. It really shouldn't, it really should be the property. That kind of focuses, and credit score does play into this. You will get better loans at higher credit scores. If your credit score drops below a 620, this is going to get difficult for you. This is not going to be an easy loan to do with a lower credit score. 660, 680, it can happen. 700s things start getting better. Above 740, you're going to get the best options that are available.
Speaker 1:Yeah, I'm glad that you touched on that because about the 2006, 2008, this isn't that made up world that we lived in back then. You know. I'm glad that you brought that up because I'm certain that you know people listening are like, oh, that sounds like we're going to. You know this, it's all going to crash again and we're just going to have this huge, you know, like a crash and recession and you know just all, all the buzzwords that everyone wants to use. So I'm really glad you touched on that.
Speaker 2:Yes, yes. So here's my opinion on on that. And you know this is um. You know I was in the market, I was a lender during that timeframe, you know, and I worked at Bank of America, which once they purchased Countrywide you know they were an epicenter company then they purchased Merrill Lynch, you know, and then we were in, I was in the state of Florida, you know, epicenter company, epicenter market. You know we were in the thick of it here.
Speaker 2:And I know how loans were being done, even the conservative, fannie Mae, freddie Mac loans. Numbers were being made up, you know it was. It was fast, easy, quick, and there was this continual cycle of the appraiser and the investor, the loan officer, the title. Everybody had to kept checking off on it as things kept going round and round and round and round and there was no way to kind of get off of that and the documentation got less and less and less for even conventional loans. And so you know that was a crazy disaster and you could see it coming, and there was a tremendous amount of supply. The demand was way down and there is nothing similar in this market that we're in right now. You know, if you go back and you look at what the supply was back then versus what the demand was. We were headed for a cliff and it should have happened in 2006. But all these artificial loan programs kept propping things up and everybody was an investor, everybody was a flipper, everybody was doing loans. I'd say probably 40%, maybe 50% of my loans were for investors that year. And you know, in 2007, 2008, like as we were getting towards the end, and it was it just the train just kept rolling and it fell off the rails. You look at the market right now and now, demand is high, supply is low Basic economics 101, you cannot have, you know, a falling price when you have high demand and low supply. I can assure you loans are not being done by checking somebody's pulse, which is what it was like back then. It was really. Was that bad at times? Yeah, it was. You know that is not happening now, you know. So those two things alone and every loan that I'm doing now. You know I've done a few of these DSCR loans. You know I probably did 10 or 15 of them, you know, this year so far. But it's by far not the majority. You know it's a neat niche, it's a neat tool by far not the majority. You know it's a neat niche, it's a neat tool, but the majority of my clients I'd say 80, 90, you know 95% of my closings are primary residents, people that are out there buying right now. It's not investors speculating on that. The price is going to go up. These are people trying to buy the home that they're going to move into and this is my.
Speaker 2:I love listening to YouTube and Facebook and all these things and listening to you know why it's going to crash. But here's my advice as soon as the person who's presenting the information uses 2006 to 2009 as a reason or as a supporting case, or, as it happened before, it's going to happen again. They're done. They've lost all credibility with me because there are too many things that are fundamentally different in how and where we are right now in the market to compare it to that black swan event and what caused that and what caused that buildup. So if that's your case that that's why this is going to implode right now, then you've lost all credibility with me.
Speaker 2:You know, and I stopped listening. And you know there are other people that have other reasons. Okay, maybe you know, I'll listen to them and you know, maybe they've got some. You know, oh well, you know the rays from you know Mars are going to cause this and it's going to OK. Fine, I'll listen to that before I'll continue to listen to somebody say, oh well, it happened in 2009. So here we go again. That is the worst argument for what we think is going to happen in the market right now. Basic economics 101, supply versus demand. You can get a master's, you can get a PhD in economics and it always focuses on some little microcosm of either supply or demand. But the lesson always starts with supply versus demand and at least here in Florida, there's way too much demand and not enough supply. That's my opinion.
Speaker 1:Yeah, I love that and I feel like there's still a lot of areas that are still allowing rentals. Some of them are making it. Uh, you know, you have to have a minimum of three months or you know a minimum of nine months or a minimum of a year, things like that. So sometimes there are, but I feel like there's still so much opportunity, uh, there in Florida. You know, I'd love to hear, kind of your, your thoughts on that. That's just my, my take on it. Again, I don't have a crystal ball, I can't tell you what's going to happen, but in my opinion there's still so much opportunity to invest in Florida because they do have so many areas that still allow it.
Speaker 2:And I think that anybody who's looking to invest in real estate like this, they've got to have a realistic timeframe. You know, in most situations you know you're not, you're, you're barely going to cashflow the first year or two. And if you're positive in the first year or two, you found a great property. You know realistically right now. You know there's not a lot of cheap properties or you bought an inexpensive property and you did a lot of really great work. But if you're cash flowing positive early on, then you're doing fantastic. But the part that you have to keep locked into your brain is like OK, you're locking in the cost of your loan. Right now, regardless of what type of loan you do, you're doing a 30-year fixed. You're locking in your cost and the only thing that it can do is go down. If we do a refinance for you and lower the rate. You know, but you're locking in your cost. Rents are going to continue to go up. I don't know how fast, I don't know how much, but in 10 years I think we can all agree that rents are going to be higher than they are right now. So if you're locking in your costs, you're locking in your cost basis. Your cash flow is going to improve as rents continue to go up, and that's where you should be looking at your model of whether or not the appreciation is the cherry on top at the end when you sell.
Speaker 2:That's not the investment. That's the kicker at the end that says thank you for playing the game. But that is the difference between speculation and a cash flow investor. If you're buying simply for the process of appreciation, that that's your only way that you're expecting to make money. You are speculating.
Speaker 2:There's plenty of people that do it that way. There's plenty of people that go to Vegas and make money. I'm not one of them. Every time I go to Vegas, I lose money. I don't need to speculate. You know, if I'm going to speculate, I'm at least going to try it in the stock market, which isn't much better, but you know. But cash flow and looking at you know where your return on investment is going to be like. Ok, here's my 20% down over 10 years. What's my ROI going to be? Return on investment over that period of time? That's how an investor buys. That's how an investor looks at their timeline and that's where you can do well. You're not going to get through the first year or two, and then it's just going to steadily build from that point forward. For you.
Speaker 1:Yeah, I love that. Now, as far as closing costs, when you're looking at a DSCR loan versus like a conventional, you know, or a Fannie Freddie, you know, normal way of doing it I use normal very loosely, but is there any difference in the closing costs? Or you know anything additional that they would have to pay, since it is kind of an outside of the box thing?
Speaker 2:Um, that's a great question and I there's, as always, there's more, there's multiple answers, but let me, you know the, the, the title company, the doc stamps, the intangible fees, you know all. All the other costs are going to be the same. You know, regardless, because a DSCR is a non-qualified mortgage, you're typically getting that through a loan officer such as myself that works for a non-depository bank or an independent broker and we're brokering that product through, you know, a non-QM lender. It is very common in those types of loans for you to pay a, you know, origination broker's fee. You know. So there's always that balance of paying points versus the interest rate and that we talked about a little bit. You know last, where you know the more you pay, the rate goes, you know, but it's directly tied to the rate.
Speaker 2:A broker fee is straight compensation to the loan officer and their company, you know so. Now, sometimes and this is where it gets a little wonky you can, we can, work that into the to the interest rate if you want. When I typically run again ROI, you know return on investment, it typically works out better to just pay it as a flat fee and get the lower rate rather than it being worked into the rate. But that's an in-depth conversation for you to have with your mortgage professional of. Should I pay this broker's fee as a fee or should I pay this broker fee as an adjustment to the interest rate? You know where it's being worked into that. So, yes, you're going to pay a little bit more for this loan is the broad answer, and the rate's going to be a smidge higher because you know these are private.
Speaker 2:You know non-qualified mortgages that are not being backed by Freddie and Fannie, so you know there's a little bit more risk associated with doing them. So those investors want a little bit higher, you know, return on their money. But when Fannie and Freddie aren't doing loans, you're comparing it to what was two years ago, not what is right now. You know saying this is a more expensive loan than oh wait, we can't do this loan. You know that's not more expensive, that's just there's nothing to compare it to when it gets back to. If they start doing them again, then there'll be a little bit of a comparison to look at. But as it is right now, we're not comparing it to something that doesn't exist.
Speaker 1:Yeah, I love that. Well, thank you so much for taking time out to kind of explain this. I think that you know you answered a lot of really great questions for you know the listeners so that they can fully understand, kind of how they can jump in that investment market. Cause you know, you hear all the time like you know, buy real estate, buy real estate, invest in real estate, and you know so. Then people are like, okay, well, where do we purchase it? And you know so people are looking at Florida. So I appreciate you kind of breaking it down and helping people understand you know all their options that they have. Obviously it's all a very unique situation. There is no one size fits all. So you know, I can only assume that your process is the same. Whenever someone calls you for an investment property versus a primary residence, you're still gonna have that conversation. You're still gonna talk to them, find out their goals, find out their like, look at their finances and figure out the best route for them.
Speaker 2:Always starts with a discovery. Call. We find out what your goals are, find out your information and then we start presenting options options customized to fit your scenario. You know and this is just one more option and pathway that we can choose if your goals are to purchase investment properties or second homes that you plan on, you know, renting out on Airbnb when you're not there, you know that line is a little grayer in this world than it is to Fannie and Freddie, so there's different options and various options that we can put together there for you. So please call, speak to a loan officer. I'd love it if I had the opportunity to work with you, but even if it's not me, talk to your loan officer. I'd love it if I had the opportunity to work with you, but even if it's not me, talk to your loan officer. Make sure that they understand this in detail. If they're not giving you high quality, detailed information, find another loan officer. This is not something you want to do with somebody who asks if you want fries with that when you finish.
Speaker 1:I love that. I love that. Well, thank you so much, and I know we're going to have you back on for a few more discussions, because the information that you're providing is invaluable. So, thank you.
Speaker 2:Thank you.
Speaker 1:Yeah, absolutely. As always, I will have all of Nathan's information in the show notes. So if you want to reach out to him to have, you know, a discovery call to figure out if it makes sense to work with Goldstar, work with Nathan and his team, and also, you know, whether it makes sense to invest now or later or purchase a you know a second home or your first home always, you know, just give him a call Again, all that information will be in the show notes. But thank you so much for joining us today. Always leave a review, because that is feedback, is the greatest gift that you can give me. Please make sure you're sharing this with others, because that is the greatest compliment that you can give Nathan and I, and make sure that you're following the show so you never miss an episode. Thanks so much and we'll see you next time on, come to find out.