How to Structure Seller Financing (Get a 5% Interest Rate!) (Rookie Reply)

0:00Ashley Kehr:What if the bank says your equity doesn't exist? Your Airbnb turns into a money pit and your very first investment deal needs seller financing at 5 % all at once.

0:11Tony J. Robinson:Today, we're solving three rookie dilemmas that could unlock six-figure upside or sink your savings if you guess wrong.

0:23Ashley Kehr:This is the Real Estate Rookie Podcast, and I'm Ashley Kehr.

0:27Tony J. Robinson:And I'm Tony J. Robinson. And with that, let's jump into today's first question. So this question comes from Jonathan and he says, I recently purchased a home with a hard money loan and I'm nearly finished with the renovations. I plan to live in the house. The value of the house has gone up significantly due to partially cash invested and primarily due to sweat equity. I'm being told by my mortgage broker that the only valuation that would be looked at is the original purchase price of the house because I haven't owned it for more than a year. Is this a quote-unquote find a different lender type of issue or are there laws about this?

1:02Tony J. Robinson:I basically want to make sure I can access my equity. I'd like to take as much as I can without paying a penalty in the form of PMI or a much higher interest rate. Are equity lines different? Can I take a regular mortgage and get a new equity line immediately after for 85 % of the new value. Just trying to understand options here. And while I'm not new to home renovations, the financing part is new to me. All right. So a couple of things here, and we recently talked about this in a different episode, but there's something called a seasoning period on a home purchase and different banks, depending on how they operate, have different seasoning periods.

1:38Tony J. Robinson:But typically what you see is somewhere in the six-month to 12-month range. Now, I'm not sure if Fannie and Freddie have guidelines on this. I would assume that they do, and theirs are probably more strict. But oftentimes, you'll see that a lot of banks or credit unions, local banks, can do it within six months. If you attempt to refinance or tap into that new value in less than six months, then yes, oftentimes, they'll only appraise it at the purchase price or sometimes purchase price plus cost, right? So you can't really tap into the equity that you've built up. Ash, have you seen anything different in your investing experience?

2:16Ashley Kehr:Actually, the live and flip that I'm doing now, I bought it with private money. I used my line of credit to do some rehab to the property to make it livable and get it somewhat up to my standards. And I actually refinanced after 30 days. So we at least got the appraisal after 30 days. of the renovations things being done. So I'd only owned it that 30 day period. And the bank did the refinance with me and they took the appraised value of the property. This was a very small local bank. And I can't remember for sure, but I'm pretty sure I ended up choosing the portfolio loan option where it's actually an in-house loan with that local bank where it's not a government-backed loan.

3:03Ashley Kehr:So that could make a difference on it. And I don't know, it didn't say in this question if this was going to be a primary home or if it's a rental property, but you could also go to the commercial side of lending for a bank and refinance that way. You're not going to get as great of terms, but could be some kind of financing you hold onto property for a couple of years where they usually do not have a seasoning period. And they could also do like an appraisal off the income-based approach. A DSCR loan too, I've also done that where I've refinanced in a short period of time to pay back hard money and there was no seasoning period there.

3:43Ashley Kehr:So I think the problem might be just looking at traditional loan types and, you know, expand more into other loan products.

3:52Tony J. Robinson:Yeah. And Ash, you mentioned a term that I think is worth just defining a little bit further, but you said portfolio loans. So oftentimes when you get a mortgage, that mortgage is not actually staying with the person who you signed all of those documents with. Many times it's getting resold on what's called the secondary market. And sometimes those get resold to institutions like Fannie Mae and Freddie Mac that are kind of like quasi-government agencies, and they buy up a lot of mortgages, right? Like lots and lots and lots of mortgages. But they also have very strict guidelines because there's this government aspect to them.

4:33Tony J. Robinson:So you think about like an FHA loan, right? Or a lot of conventional loans get resold to Fannie and Freddie. The other kind of pool that buys these are like institutional investors, right? I think like the big private equity firms or insurance companies or things like that. They'll buy up a lot of these loans as well. But then sometimes you'll see banks not resell those loans and they simply keep those loans on their own books. And they're the ones who are servicing the debt. They're collecting the interest and they're just going to hold it for 30 years because they want to make their money work.

5:03Tony J. Robinson:And when you see banks that have this portfolio loan option, they typically have more flexibility because they're not worried about making it fit the box that it needs to fit to be able to be sold to Fannie or Freddie or some of these other institutions who have their own rules and guidelines, they get to make up the guidelines themselves. So he asked a question of, is this a, you know, just go find a different lender type situation. And seems like maybe the answer is yes.

5:31Ashley Kehr:Yeah. I think another thing too, that he called out here was, should he just get that mortgage for whatever amount they'll give him 80 % of the purchase price and then get a equity line of credit immediately after. So this was also kind of another question we answered on a rookie reply was about getting a line of credit when you already have a mortgage in place. So he did say he's going to plan to live in the house so he'd be able to get a home equity line of credit. But that bank may also, if they already have the seasoning period on the mortgage, they might also have a seasoning period to get a line of credit on the property too.

6:07Ashley Kehr:So you might want to ask that question. And then he did say 85 % of the new value. Can I get a new equity line immediately after for 85 % of the new value? And I just wanted to clarify that as in say the property is worth $100 ,000. We're going to do this for easy math for me. And say that he had a mortgage on the property of$80 ,000, okay, for that 80 % he got,$80 ,000. So that 80 ,000, that 85 % would only be another$5 ,000 that he would be able to get in a line of credit, okay, because you're increasing, you already have 80 % of that is your mortgage. So that means there's 5 % left of the new value.

6:54Ashley Kehr:So that would be$5 ,000. Obviously, he had gave us different numbers, so it'd be more than$5 ,000 he could get. But I just wanted to make it clear that you weren't getting$85 ,000 on top of the actual mortgage you have on the property, too. It's that difference between the mortgage and that 85 % that you'd have. And I've seen people, my one partner got one for up to 90 % of his home equity. The mortgage and then the line of credit combined was 90%, too. So I think there are different percentages that banks will offer to to get those lines of credit.

7:29Tony J. Robinson:I think the next step if I'm in this person's situation is I'm just going to find, you know, 100 local banks and credit unions and just call them all and say, here's what I did. Here's what I'm looking to accomplish. Here's the timeline that I'm looking to do it in. Do you have any options that might fit this? And chances are, if you call around to enough banks, Maybe instead of you waiting 12 months, maybe it's six. Maybe instead of six months, it's 90 days. Maybe they say, yes, we'd love to give you a loan today. But I do think that there's value, probably a tremendous amount of value in getting this deal in front of enough people.

8:05Because especially if you've forced a lot of appreciation, if your all-in cost was$200 ,000

8:14Tony J. Robinson:and the property is now worth$215 ,000, it's a small margin, right? So maybe there's less banks interested in that. But if you are all in at 200K, but the property is now worth 500K, right? There's a lot of equity there that I think a lot of banks would love to partner with you on. So probably is a case of maybe go talk to some more lenders and see if there's someone that's maybe more flexible. And I think the last thing I'll add, Ash, and let me know if you've ever seen this. But again, depending on how much equity you have, you could also go to someone from a private money perspective. Like if your plan is to, we're not sure how long you plan to live there, but maybe if it's a shorter term plan for you, maybe you only plan to be there for 24 months, then maybe getting a private money note from someone makes more sense.

8:59Tony J. Robinson:And yeah, maybe the interest rate is a little bit higher, but you're able to tap into that equity today and you get a nice big check. And then you can either sell the property in two years or refinance or whatever you wanted to get the cash out. So other options, I think are on the table for you.

9:11Ashley Kehr:Yeah, and that's a great point too, because like if you got that private money loan and even though if you didn't want to sell, After two years, depending on what your closing costs would be, if you have the opportunity to tap into that equity again, you'd be able to pay off that lender. Think about what you could do with that money over the course of two years, and that may greatly offset the closing costs and things like that too. Up next, your Airbnb isn't printing cash, so should you pivot to midterm travel nurses or lock in a 12-month tenant? We'll dive into that after a quick word from our sponsors.

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12:21Ashley Kehr:Okay, welcome back. Our next question comes from Erica in the BP forums. Hey, everyone. We've been renting our fully furnished four bedroom to bath home as a short-term rental near Park Hill. which is close to hospitals, but it hasn't been as profitable as we hoped. We're now exploring other options. We were planning to switch to a long-term rental, but someone recently suggested trying midterm rentals since the house is already furnished. Before making a decision, I'd love honest insight from anyone with midterm experience in Denver. Is midterm actually a good choice right now for this area? What's a realistic monthly income we could expect for a four-bedroom with two bathrooms in this location.

13:01Ashley Kehr:Which platforms or companies offer the best commission rates for furnished midterm rentals in Denver? I'd really appreciate any advice or numbers from folks who've done this. Thank you. Right away, I'm going to say yes, I would try midterm rentals before I tried doing short or do a long-term rental. And the reasoning because it's already furnished. So I I feel like to go from short-term rental to long-term rental and then switch gears again to try mid-term rental because long-term, I think you should try out mid-term rental too. But also the first thing is really to check your laws and regulations and what the rules are and make sure there's no restrictions or different certifications you need.

13:49Ashley Kehr:And usually this goes more on the short-term rental side, but just to double check because Denver does have a lot of rules and laws and regulations around the city limits for renting properties. But the thing I think that I would actually do in this situation is offer all of them. So I would keep my short-term rental listing open for a period of time. I would market it on a place like Furnish Finder, and I would put it up as a midterm rental. So like say I have a couple of Airbnb bookings through October and then nothing, I would put the available date for November 1st, put it up there as a midterm rental.

14:33And then I would also list it as a long-term rental

14:37Ashley Kehr:for a pretty ridiculously high rent and have that available as of November 1st. And I would see which bookings I got. And if I got short-term rental bookings further into November, further on, then I would cut out the, I would, you know, change the date when available. But if you don't want to do the short-term rentals, you could do this just midterm and long-term. And if you get someone for a long-term that's willing to pay that high amount, then I would just shut off the midterm rentals. The only thing is you got to keep like your dates updated when the place is available or not. But I think that is the route that I would go.

15:17Tony J. Robinson:Before I even talk about switching gears, I think my first question would be, why isn't this property performing well? Is it internally driven or is it externally driven? Internally driven could be, are you getting a lot of bad reviews, right? Or are you as the manager not equipped, which is totally fine if you're not, because not everyone is. but are you, as the person managing this, not equipped to actually deliver a good experience to your guests? And is it the review scores that are pulling down your property's performance? Is it pricing? There are a lot of folks who don't understand the nuances of accurately pricing your Airbnb.

15:59Tony J. Robinson:So it could be that maybe your prices are too high, and because of that, you're not getting enough nights booked. Or it could be the inverse, where maybe you're priced in a way that you're fully booked, but you're not making any money because you're giving the property away too cheaply. So is it pricing? That's the issue. And if it's either of those, what's the second layer behind that? Are your prices too low because maybe you've poorly designed the place and the only way you can get someone to book it is by dropping your prices so low that that's the only way people book it. If you're 50 % lower than all the other properties in that area.

16:34Tony J. Robinson:So is it a scenario where maybe if you reinvested a little bit back into your design and your amenities, that you could get to where you want to go. So those are all of the internal forces. And maybe one more to add as well is what were your initial projections and how did you land on those? Did you actually underwrite this deal as a short-term rental? And did you have data points to back up how much money you thought you would generate, both in terms of top-line revenue and bottom line profit? Or did you just say, man, Denver's a great place. I know it. I like it here. This is a cute house. Let me turn this into an Airbnb.

17:12Tony J. Robinson:Because if there are no actual projections behind it, then how do you know if you're underperforming or overperforming? So those are the internal pieces I think I would try and answer first. And then the external factors are, well, what's happening in that Denver market that you're in? Is this a trend that's specific to your listing? Or is there something market-wide happening in that market where the majority of listings are seeing revenue dip? The majority of listings are seeing occupancy dip because then you know it's not necessarily that you're doing something wrong. It's just the market. And that might be a stronger signal to say, okay, let me transition away from short term because maybe it's not working here, but maybe I can do a better job with midterm or long term.

17:56Ashley Kehr:Yeah, I think that's a great point is really identifying what is going wrong with the property in the first place and then strategizing from there. And then also making sure that when you're going to your if you do decide to pivot to the other strategies is making sure you understand what's involved with operating because those operations are significantly different for each of those different strategies.

18:22Tony J. Robinson:I think the other thing that I'd add, actually, because I agree with your point of, hey, it's already furnished. Let's try the midterm rental out before we get rid of all the furniture and turn into a long-term rental. I think maybe one additional layer, you could probably market it simultaneously, but is doing furnished room rentals. So you could midterm rent the entire place, or you could just market each room individually already furnished and maybe charge a slight premium above that as well. Because if you've invested the money into designing and furnishing this place, I think it would be best if you could keep those things and not, you know, I mean, as soon as a couch sits inside of your home, it's probably lost more than 50 % of its value.

19:01Tony J. Robinson:So you reselling this, you're not going to be able to recoup what you spent on the furnishing. So if there is a way to still keep those in place while driving additional rental revenue, I think it's something to explore. So I would, I would list it as a midterm rental to actually point on Furnished Finder, but then also list each room individually as a furnished room rental.

19:19Ashley Kehr:And you could list it as a furnished long-term rental, the whole house. I mean, we just did an episode with someone who was buying houses from people getting divorced. So maybe you're one of those people that just got divorced. You know, maybe the other person took the house, took the furniture, you have nothing starting over. So like, I feel like there's also a lot of scenarios where someone could be looking for something that's already furnished, because like you said, it is very expensive to buy brand new furniture. And it is very time consuming to be on Facebook Marketplace to look for used furniture for each piece that you need and go and pick it up and bring it home.

19:55Ashley Kehr:So like I, and I guess in the example of the property that I have it, we have it listed with the photos from the short-term rental listing with all of the furniture in it. And we do not state that it is furnished or not furnished. And I think that leaves it very open-ended as if somebody was looking for a furnace, like loved the furniture, love the design, say yes, for another$150 a month or whatever it would be, we would happily leave the furniture in here. And worst case scenario, they say like, no, we don't want the furniture. We're going to sign a one-year lease, whatever, then we get rid of it.

20:35Ashley Kehr:Or we say, you know what, we were not going to charge extra, just take it so we don't have to move it.

20:40Tony J. Robinson:But it's convenience that people will pay for, right? I think that's the biggest thing. So you've already got that asset of the furniture, the amenities, the design. So see if you can leverage that first. All right, guys, we're going to take one quick break before our last question. But while we're gone, if you haven't yet, make sure to subscribe to the Real Estate Ricky YouTube channel. If you're listening to this on Apple Podcasts and you want to see mine and Ashley's beautiful faces, then you guys can find us on YouTube at Real Estate Ricky. And we'll be back with more right after this.