The Best Real Estate Loans You DON’T Know About

0:00To buy rental properties, you need money. That's just the way it is, but it doesn't have to be your money. And that's why almost all of us get mortgages and loans to grow our real estate portfolios. But what if you only have limited savings, a poor credit score, an existing mortgage, or high debt to income? Can you still finance your first or next rental? The answer is absolutely yes. Today, I'm sharing the many ways that you can get financing for your investment property, no matter what situation you're in or the money you have in the bank. Plus, I'll even share a little trick that allows you to improve your cash flow.

0:37And this is a strategy I just used on my most recent purchase 15 years into my investing career, and you can use it too.

0:49Hey everyone, I'm Dave Meyer, head of real estate investing at BiggerPockets. I've been buying rental properties for more than 15 years, and on this podcast, we help you achieve financial freedom with real estate. Today on the show, we're joined by Jeff Welgen. Jeff is a lender based in Los Angeles who specializes in working with real estate investors. Jeff was last on the show in April 2024, but the housing market is in a very different place now from where it was a year and a half ago. And as an investor, that means you need to adjust your strategy when it comes to leverage and financing. So Jeff is going to tell us about some options you may not have heard about that may be the difference between making a deal pencil and walking away.

1:32Jeff, welcome back to the BiggerPockets podcast. Thanks for being here. Yeah, thanks for having me back, dude. It's a pleasure to have you here. Well, this is a really interesting time to look for financing in the housing market. So maybe you could just start by giving us an overview of the landscape for financing right now.

1:49Jeff Welgan:I'll tell you, a lot has changed since last time I was on, and it's been a fast few years. So the total mortgage market is the landscape has been changing quite a bit. And so, you know, just recently in the past week or so, we've seen rates come down pretty significantly with everything that's been going on. And over the course of the past year or so, we've seen some programs open back up that have been great for real estate investors. So let's just start with the challenges. Is it just rates right now? Is that what's basically slowing people down or people having trouble qualifying? Or is it just, you know, the mortgage rates are just too high?

2:23Jeff Welgan:It's a great question. I mean, there are some strategies that we are using to beat these high rates, but it is causing a lot of investors to wait it out on the sidelines. But what we've seen here this year, and I know you've talked quite a bit about it, is we've seen property values coming down in some markets, which has really helped the numbers work a little better for a lot of our investors. And so when we're looking at particular programs and strategies to beat these high rates, there's a couple in particular that we're doing a lot of nowadays. One of them is a 30-year fix with a 10-year interest-only option that allows investors basically to make an interest-only payment.

2:57Jeff Welgan:So with this program, it's a true 30-year fixed. So it's advertised over 30 years. But for the first 10 years, you have the ability to make an interest-only payment. And so it's good for two different reasons. The first one is if your goal is to maximize cash flow, you can just make the minimum payment and do the interest only payment for the first 10 years. And you can obviously increase your cash flow that way. The other alternative and where a lot of investors utilize this program, where they like it so much is because it gives you the ability to manage your cash flow. And actually look at it more as a cash flow management tool where that first 10 year period, you have the ability to either make an interest only payment or a principal and interest payment.

3:37Jeff Welgan:So let's just say if you are making the principal and interest payment every month and you have a tenant or two that moves out or a capital expenditure, you have the ability of making an interest-only payment without being late. We're on a 30-year fixed principal and interest loan. You don't have that same ability. You have to continue to make that full payment or else you fall behind. And I want to dig into this because this might be a great option for a lot of our listeners here. I do want to take a step back, though, and just kind of explain some of the elements of what we're talking about here.

4:06In a traditional mortgage, when you go out and apply for a conventional 30-year fixed mortgage, there's something called an amortization schedule. And an amortization schedule basically just details how much of your payment goes towards principal each month and how much goes towards interest. And I know the payment stays the same every single month, but actually what's going on behind the scenes in those mortgage payments changes. At the beginning of a traditional mortgage, you're actually paying a lot more interest than principal. And as an investor, we want to pay down principal. That's what gets us that loan pay down.

4:44That's paying off your mortgage so you owe the bank less money every month. When you're paying interest, of course, that's an important part of a loan, but it doesn't really help you at all. All it is is the bank's profit. And so traditionally, what you look at and what you want is to pay down that principal. But what Jeff's saying here is that there are new loan products out there where instead of paying any principal at all, all you do is pay that interest for the first 10 years. So, Jeff, if what as investors we want to pay down principal, why would an interest only loan for the first 10 years of a mortgage be beneficial?

5:18Jeff Welgan:Depends on what your primary objective is. I mean, if the objective is to maximize cash flow, this tool allows you to do that. I don't recommend just making the interest-only payment for the life of the loan because if you, let's say, the full 30 years, you have a 10-year interest-only period there. If you're only making that interest-only payment at the end of the 10 years, it's basically, for all intents and purposes, going to turn into a 20-year fixed principal and interest loan, and that payment's going to go up at that point. So this is a consideration where, you know, with rates being as high as they are right now and with how difficult and challenging it is to get the math to math on a lot of deals that we're looking at, this is a useful tool to help in the short term with the goal eventually of refinancing the loan before that interest only period is up.

6:01Jeff Welgan:And it also, like I mentioned, gives that flexibility to where you don't have to just make the interest-only payment. You have the option of paying more and anything that you apply up and above that interest-only payment is going to go toward principal, but you don't have to only make the principal and interest payment. It gives you that cash flow management and the ability to make a decision on what your primary objective is going to be when you're running deal analysis and you're looking at your pro formas. And so the trade-off here for everyone, just to make clear, is that if you do an interest-only option, you're going to have better cash flow because you're not paying that principal part of the payment.

6:37But the trade-off there is then you still, at the end of 10 years, assuming, like Jeff said, assuming you never opt to make the principal payment, you still owe the bank the same amount of money. And so you're not building the same amount of equity at that time. But as Jeff said, I mean, Jeff, I haven't actually heard of that where you do this option. That seems like the best of both worlds, where if you need a couple months, you need the cash, you just choose to do interest only. And normally, if things are going well, then you might want to just pay down that principal. Is this becoming a popular option among investors?

7:08Jeff Welgan:We're doing a lot of them. Yeah. And it's not necessarily a new program. This is one that we used to do years ago, but it's just now we're doing a lot more of them given where the market currently is, because the rate difference on these is only about an eighth difference from a 30-year fix. So you take about an eighth higher rate, but then you have this flexibility and have the option to do this. So it's just becoming more prevalent and more and more investors are doing it while rates are staying elevated. I'm just trying to think of a strategy here because I personally don't know if I would buy a deal where the cash flow only worked if you were paying interest only.

7:44To me, that seems like a kind of a thin deal. But it's the idea here that maybe it gets you interest-only payments for a couple of years while you stabilize the property or you get rents up or you do a renovation and sort of you lower your monthly costs while you're stabilizing and then hopefully you can start making those principal payments?

8:02Jeff Welgan:That's it. Or while we're waiting for rates to come down. This is just one of the creative solutions, kind of like the rate buy-down strategies that you've seen over the last few years where we're buying the rate down through a seller credit. We're building into the offers and then the 2-1 buy-down option that I know you guys have talked about before. These are the same kind of creative strategies that we're using to beat these higher rates while they stay elevated. And really, the goal with this is to buy time between now and when rates eventually do come down. OK. And yeah, I mean, you seem very confident rates are going to come down.

8:34Jeff Welgan:Yeah, I read your article here recently, and I agree with you. I mean, I think that rates have the potential of staying elevated for a little bit longer here. But I think looking at the way that we're headed, the direction that we're headed, you know, keeping politics out of this with the current administration, with all of the information that they're putting out as far as trying to unfreeze the housing market and the direction that we're headed as a country right now. I think there's a lot of momentum going into the tail end of this year where we should theoretically start seeing lower rates.

9:05Jeff Welgan:And I'm a little more bullish and a little more optimistic than you are, but just barely. I mean, I think we're going to land probably somewhere in the low sixes. looking at it objectively. And I think there's a good argument for it. But I also think, like I said, I read your article. I think there's also an equally solid argument that we may see an uptick in inflation here in a bit with tariffs. And that may cause some, the rates to stay a little bit higher for the foreseeable future. So we'll see what happens. We shall see. My whole point in this article, I said that I think we're going to remain around the mid-sixes for the rest of the year.

9:38I don't think it's going to change that much. I could be wrong. There's so much going on, but that's my highest probability outcome. My point in this is no one knows. And so you want to make your investing decisions based on the numbers you have today. And so I like that this particular mortgage option gives you flexibility. That to me is pretty cool. Are there any other creative loan products people are using right now to navigate what are really relatively high rates compared to where we've been?

10:08Jeff Welgan:I think there's a good argument for utilizing programs like this with a 10-year interest only, along with some other programs like the ARM products. So that's another one that we've been doing quite a few of. It's important to know that with these adjustable rate mortgages, they're more and more prevalent nowadays. These are the same programs that caused a lot of the issues in the past. And I mean, coming out of 2008, this caused a lot of issues, but it doesn't mean that that's going to happen again. I mean, these programs are a lot different than they used to be. And I think it's if you can find a rate on these that is low enough here to where it offsets the risk difference, the longer term risk versus a 30 year fixed, there is a strong case for taking out an adjustable rate mortgage with lower rates potentially on the horizon.

10:53Jeff Welgan:I did it. First time ever. Taking a few too. I was able to get a 52571 one arm because part of that half a point of that is because I have a relationship with a bank. It's through where I have my stock portfolio. And if this is actually something great you could do, if you happen to have a stock portfolio, places like Fidelity or Charles Schwab will give you a discount if you keep your stock portfolio with them. So, but even without that relationship, it would have been five, seven, five. And like you said, you know, it was going to be seven otherwise, and there's risk in that. But I like the idea, a 7-1 arm, that means I have seven years to figure out a different financing option if I need it.

11:37And even after that, the increases are capped at half a point increases. And so essentially, that gives me three rate increases until I would have been at my normal rate anyway. So that gives me 10 years, essentially, to figure out what I'm going to do. And there is risk in that. But for me, personally, I felt like it was worth it. if you do it, just be aware that there is risk and you should probably have some plan to refinance it, especially if rates do come down. Absolutely.

12:08Jeff Welgan:Yeah. And to what you said, for full transparency, man, like the loan that you were able to get through your bank, check with local credit unions and regional banks. You're there offering some great arm products. And I always try to give everybody solid advice, even if it means that we're not doing the loan. There are some great ARM products out there. My only advice would be is if, you know, when you're looking at credit unions or regional banks like you went with, if you don't fit in their box, you better have a plan B and an alternative ready to go because it is a much stricter underwrite typically when, you know, you're going with some of these credit unions than it is with a broker or direct lenders.

12:44Jeff Welgan:So only caveat to that. But yeah, that was great advice. So Jeff, I want to ask you about another strategy I've been personally considering, but we do have to take a quick break. We'll be right back. Some listeners may wonder why their insurance quote only took 30 seconds. Some listeners may wonder why their insurance quote took 30 seconds. A better question is, how long will that policy actually hold up when you need it? At NREG, the goal isn't just getting coverage in place. It's making sure your investment property is properly protected when a real claim happens. That's why they take time to evaluate each property's unique risks and build coverage design for the realities investors face.

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16:31Welcome back to the BiggerPockets podcast. I'm here with lender Jeff Welgin. We're talking about different ways that investors are navigating high interest rates. We've talked about creative loan products like the interest only option Jeff shared with us, adjustable rate mortgages. I wanted to ask you about just putting more money down. Like, is that working right now? Because of course it's different for everyone. You know, some people are still getting started, trying to figure out how to get five or 10 % down. For those who are a little bit more advanced in their investing career, maybe have some more capital saved up.

17:05Should they consider putting 25, 30, maybe even more down just to make things cash flow?

17:11Jeff Welgan:Yeah, absolutely. I mean, it really just comes down to what your primary objective is. If it's to preserve capital and scale as quickly as possible, the lower down payment options are going to be your best direction. And so for our clients that have limited capital and are trying to buy as many properties as quickly as possible, then we typically advise some of, you know, anywhere between 15 and 20 % down or 10 % on short-term rentals. For our clients that don't have the same capital constraints and have more money to work with, when you put 20 or 25 or even 30 % down, that's going to maximize cashflow.

17:42Jeff Welgan:I mean, you're going to get a much better rate, lower cost options open up. And we've seen, you know, on the DSCR and the conventional side, rates improve significantly at that level between about 20 % and 30 % down. On the higher end, at 15 % and even 10%, the rates have stayed relatively high in comparison. Yeah, that makes a lot of sense to me. And the other benefit I've been thinking about, and this is just a different approach, but something I've been thinking about is if I go out and buy a rental property right now, I'm just going to use round numbers to make this easy. Let's say I buy a fourplex for$400 ,000 and I put 50 % down.

18:18So I take$200 ,000 and I put that in. That would make almost any deal cash flow right now if you put 50 % down, right? Then if rates do come down and I'm making an argument that they're probably going to stay the same for this year, I think at some point they'll probably come down. So if at some point they do come down, two things will happen. One, I'll have the option to refinance and I could take that down to 25%. And so I can pull half of my equity out and I'll another$100 ,000 to buy at a time where rates are lower. So it's going to be more advantageous for me to buy. And so it's almost like this combination of like buying a rental property and a little bit of a savings account at the same time that allows you to essentially earn your mortgage rate.

19:00Because if you put that equity in, you're not paying 7 % on that second$100 ,000. And so you're in essence earning that every single month. So you're saving extra money and that will put you in a position to buy more deals later on if rates get better and buying conditions can do.

19:18Jeff Welgan:Parade of way of looking at it. Yeah, no, I love that. That's a great idea. And, you know, thinking about it too, looking later down the road, you know, when rates do eventually come down, fingers crossed, the money to take it back out, even with the cash out hit, in theory, should be a lot less than what you'd be paying, you know, up front. So yeah, no, I love it. Great strategy. I mean, it's not for everyone, but it's just something to consider. And I know the logic in the real estate investing community for the last decade has been just like leverage, leverage, leverage. That did make sense for a lot of time.

19:48You know, when property prices were going up or rates were going up, taking out max leverage did make sense. But we're just in a different era right now. And we've got to get a little bit more creative, as Jeff has said. So Jeff, talk to me a little bit about the other side of the equation, because I just said, you know, people are a little bit further in their career, you know, maybe put more money down. What about for people just getting started? Are there any particular considerations they should be thinking through right now?

20:11Jeff Welgan:Yeah, I mean, it's the same strategies apply on the primary residence side. So if you're just getting started, the easiest way to get your foot in the door is to do a very low down or even a no down payment option as a primary residence. Then you can live in it for a year and then buy your next one. And this is the way that most investors get started is by buying that primary and doing the primary residence move up and buying a new one every year. I have one client that's done this eight times over the last 10, 11 years. Yeah. And I finally got married and his new wife put her foot down and they're not moving anymore.

20:44Jeff Welgan:But it's a great way to scale slowly and minimize the capital requirement in each one. And again, politics aside, but the down payment assistance programs that the Biden administration rolled out are still available. So they are trailing into the current administration. we have seen a shift where some of the, you know, quote unquote, free money they were giving away is no longer being funded. But the down payment assistance programs nationwide for primary residences are still available to where we can do up to 101 % financing up to two units on primary residences. So one to two, you don't have to put anything down.

21:20Jeff Welgan:And then there are programs throughout the US in different parts of the US, depending on the state and county, because everybody's a little different, that can go all the way up to 105 % financing. So for any of the people listening that don't necessarily have a down payment or have very limited money, don't let that stop you. Start the conversation as early as possible, put a plan together, because you're going to find out it's not as difficult as you think. I mean, it may seem like, you know, the barrier to entry is a mile high, but it's not once you start that conversation and figure out what your options are.