The Mark Perlberg CPA Podcast
The Mark Perlberg CPA Podcast
EP 006 - Partnering with the Right Bank for Success in Real Estate Investing
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An experienced banker can do much more to help your business than you'd think. Lots of great information from Mark Lewis of PeoplesBank, who is a tremendous asset to the investors he serves. Some topics we'll discuss are:
- How to find the right bank for your business
- What financial instruments are best for your investments
- How to qualify for financing
Make sure I'm recording. We are live. Okay, beautiful. Okay. Welcome everybody to this beautiful Tuesday afternoon. My name is Mark Probert, CPA. In case you haven't uh talked to me yet and we haven't discussed in person, what I do is I run a CPA practice and consulting firm focused on real estate and business tax strategy, where we are thinking proactively to best navigate the world of taxes and accounting so we can minimize your taxes and make the most smart and sound decisions with your taxes and your finances to help you in reducing your taxes, freeing up capital, to reinvest in your portfolio, in your businesses, to grow as effectively as possible and see financial freedom. Now, for this discussion, I chose my guest, Mark Lewis, because he's been a fantastic resource for a lot of my clients here in North Carolina and Charlotte. And he works with tons of real estate investors and he really knows the business. And with his specialization, uh he as a baker has been able to provide a lot of value. And especially when you consider, when you compare him to maybe some of the generalists, he's able to provide a lot more flexibility and value and insight to the people that he serves. And he has helped my clients with building their businesses. And I've sent a lot of my clients to his way. Now I get lots of questions how to best finance and how to best work with the banks to uh to finance your project. And a lot of times I'll just say, talk to Mark, right? And uh, you know, being a CPA, I want to be able to provide as much value. So Mark's been a great resource, and we talk all the time, and I'm always taking notes. And I thought it would be great. We go live now so he can answer some of your questions in person and help all of you guys out. Even if you aren't in the North Carolina region, we're gonna have an understanding of how to best navigate the world of partnering with your bank for success in real estate. So um we're gonna start off with some questions. And then what I want you all to do, as I'm asking these questions, look in the QA section of this chat. And if you have any questions based on your personal situations, I want you to type them in. If we have time, we might be able to go live and do some back and forth. We're gonna, after we do some basic questions I prepared for Mark, we're gonna get to the audience and the audience's questions to help you guys better understand how to interface with your bank and how to optimize the opportunities when you are working with the right banker and taking advantage of all the different financial packages and opportunities. So, first question, Mark, can you please introduce us to the audience and give us a brief description of who you are and what you're about?
SPEAKER_01I'm a 35-year commercial bank and veteran. That's what I am. I've worked at Old Blue Wacobia all the way up into the corporate office and worked for smaller organizations, Bank of North Carolina, Fidelity Bank. I've been working with People's Bank, it's based in Newton, North Carolina. It's one of the largest community banks in in the Charlotte region, but that's mostly because most of the other community banks are not community banks anymore. They've been bought. Um, this bank has been in uh is has been in existence since 1912, um, and it's been owned that had the same ownership since that time. So we are truly a local community bank and operate that way. Uh, and that's one of the advantages when we get in and start talking about how how do you meet a banker and how do you meet how do you pick a bank that I can certainly give some direction there. But for the for the most part, I'm a commercial real estate um uh manager.
SPEAKER_00Great. So we're gonna start off with the first question is for some of my audience here is when we think about you know, there's all different kinds of banks. Um, and you know, you can you there's a there's so many different options. Um, when it comes to the first step, how do you recommend uh some of my clients and my audience go about finding the right bank slash banker to work with to help them with out with their investment portfolio and their goals?
SPEAKER_01Well, I think the best way is networking, of course, uh as you are talking to other people who are doing the same thing you are, ask them who their banker is and what they do like and dislike about them. Because when you start talking about banks, you want to find a bank that has the right culture to support what you're trying to accomplish. Uh, giving an example, um, the large banks, you know, the national banks are gonna have great automation when it comes to being able to do online banking and everything that you want to do can be online. But if you want to sit down and you want to talk to an experienced banker and it's not a million and a half dollar deal, uh you're gonna have a hard time finding one, quite honestly, because that's just the way the industry has changed over time. But you will be able to find these small niche banks because even though we've had a lot of community banks that have been purchased in North Carolina and are now regional banks, behind them are brand new banks, you know, that have been chartered in the last five to 10 years. And they they will hire an experienced commercial banker who will still be able to do$50,000 loans like me. Uh, most folks who've been in the business for 35 years, they're tasked with finding you know 10 and 15 and 20 million dollar loans. So the trick here is to find a banker that has the ability to interact with what your needs are gonna be. And don't get confused by all the different names. A business banker, a commercial banker, they're all kind of the same. There's consumer bankers, there's mortgage bankers, and there's business bankers. Those are the three general banking. So you want to make sure that you can hook up with a business banker that also works with their mortgage banker because you need both if you're gonna be in the real estate investment world.
SPEAKER_00Okay, great. Um, and some thoughts are also consider. So if you're thinking about networking, some sources, uh meetup.com, any city, you're gonna find a real estate group there where you can get connected and find out, ask doing that right. Some other ways, Facebook, you find some local forums, you can just type whatever Charlotte Real Estate Investors, you can type whatever Minnesota Real Estate Investors. You'll there's gonna be a group, you think of it, it exists. Uh, and also Bigger Pockets has uh people are posting their meetups on the Bigger Pocket site as well. Um, so you those are some ways that you can connect with other investors and find out who's helping them out.
SPEAKER_01And sometimes a bank website's gonna work too. If you just go and find look for community banks around Charlotte and you know, put that in or wherever you're at, Al Paso or whatever, and um you know go to their website and see. Of course, right now with the pandemic, you know, some of the banks that said they would do this sort of lending are not doing it. So that's just a that's just a one-off for this time period, we hope.
SPEAKER_00Gotcha. So what do you think? So that kind of lends to the next question. You kind of touched on it. So your community bank, we talked about community banks, and then there's also gigantic banks, there's Wells Fargo and some of the bigger names. Uh, can you can you give the audience an idea of what's the difference between working with a local community bank compared to one of the larger banks and um maybe deciding what's best for them?
SPEAKER_01Well, you know, it's astonishing to me the number of people I talk to. We start talking about buying rental houses and financing rental houses, for instance, that have never talked to a commercial or a business banker. The only people they're ever talked to are are mortgage bankers. And, you know, the the one to four family residential investment product is a consumer loan, but it's a consumer mortgage. And that's a great product because typically in the in the old days, it was put your 20% down, uh, get a 30-year fixed rate, they're usually priced at about a half percent over what your uh primary residence might be. And that's a very, very good loan for a rental property because that'll help your cash flow. When you flip over to the commercial side of the bank, uh, we don't have 30-year fixed interest rates because we when you get when a mortgage banker makes a mortgage loan, they're lending you investors' money. That money, when they after that loan closes, that transaction is over, it's gone. So that that lender and that originating team is not at risk in any way. When I lend money on my side of the bank, I'm lending you my depositors' money, which means that I not only have to make the loan, I got to follow it for its life. Now, granted, if you've got a$30,000 rental house loan, it's not like I'm gonna be looking you up every week to find out that you're making your payments, uh, but you get the point. Uh when you multiply that times$500, all of a sudden you've got a pretty big, you know, pretty big portfolio. So uh that's the primary difference. So, what you were gonna experience on the commercial side of the bank is gonna be more with the infamous balloon. So you'll see a five-year or a seven-year balloon, and payments will be based typically on a 20-year amortization. So, what does that mean? That means it's a seven-year it comes due. Your payments, however, we will be based on a 20-year term. Banks do that for this reason and this reason only. It's a rate call. It's not because we're concerned about being in the deal 20 years. We hope to be in the deal 20 years, we wouldn't be doing to begin with. But we'll give you a seven-year fixed rate because you know, banks don't make money on the interest rate, they make money on the spread between this is what our cost of funds is, this is how much we charge you. We make this is what we make, the net interest margin. So if our cost of funds go up and you see you, you know, we're still making the same amount of money, but if we fix your interest rate here and our cost of funds start doing this, you know, we're the one who's not making money, and that's what causes banks to go under, quite frankly. So be expecting that when you go to a commercial bank or a business banker and they'll be talking to you about what type of programs they have for term financing. Now we've got construction financing for fix and flips and new vertical construction and that sort of thing that we can talk about if that's of interest.
SPEAKER_00Okay, so you know, when it when trying to decide between, you know, the larger the larger banks and then the smaller banks, it sounds like the you know, the the decision making on the on the smaller banks side is going to be, you know, they have a greater r they're taking on greater risk with these, you know, with these financial these securities. So maybe some of the decision making and evaluations have to do with that.
SPEAKER_01No, I think I think what I'm what I'm trying to really get to is that you know, you can get a good mortgage banker at a at a Wells Fargo or a BA or even an independent. In fact, some of the best ones out there are true broke brokers, not mortgage bankers. They can get you into these products, okay? Um, don't know how much of a business advisor they're going to be. They might be, you know, because you can only get so many of those loans. In fact, you know, industry-wide, you can only have 10 of those loans, and you're including your primary and a secondary if you happen to have a vacation home, that takes two slots. So you only have eight slots. So if you've got somebody that does a lot of rental property loans, I always try to advise them to use those on your most important, most not important, your most expensive properties. And then on your smaller properties, take the use the uh business banking side of it. So what what'll happen is if you go to if you go to Wells Fargo and say, you know, you want to you want to buy a one to four family residential and you want to put 20% down, they're gonna send you to a to a mortgage banker. And that's fine because they'll do a good job for you. I hope. Hopefully it won't be the same that we do, but you know how that goes. Um, but if my customers come to me and we talk about it, and I say, well, what are you trying to accomplish? How long are you gonna hold it? You know, what's your interest rate risk? Because obviously, if you get a 30-year fixed interest rate, you have no interest rate risk over 30 years, or even if you've got a 15-year fixed interest rate, no interest rate risk. So that's why you want to save those. If you're gonna be doing a lot of them, uh, then you start weighing the issue of interest rate and risk and and then liability. Because at some point in time, uh the most of my customers end up getting out of the mortgage banking world and getting into the commercial banking world strictly because they can put all their assets in LLCs and S corporations, and they they literally can build a business, develop a relationship. But my loans are not transactional, mortgage loans are transactional. My loans are relationships. And so I not only do I want loans, I want deposits, I want equity lines, I want your consumer loan deposits. The bigger the relationship, um, the better. And and a lot of folks who, you know, wouldn't, you know, about a year ago or less than a year ago, it's been so long, um, didn't understand the how important it was to be able to have a banker you can call by name and a cell phone. They found out real quick real quick when the PPP program came out. You were just a number in some of these large banks in my bank, you can call me and say, I want this, and will you help me do it? And I helped every single one of them get their PPP loan, for instance. So relationships are important and advice.
SPEAKER_00Yeah, there was um a lot of controversy when that came out on you know, a lot of manipulation of the systems by some of the big banks that um may have been mentioned, but I don't want to get sued for well, that's public information. They do there's some really unethical things done by these big banks um on how they manage their funds on that. Um and and a lot of us were hearing uh because you know, us CPAs were providing that that support, and we were uh we were advised to look at to some of the smaller banks that were doing things in a much more uh much more proper and ethical manner to serve their customers. Um now the um another thing that I wanted to talk about was the uh the business line of credit. Uh the business line of credit, I've seen some some of my clients been able, you know, the advantages of that are you know without you can get access to capital a little more quickly. Um and you know more quickly. Yeah, a lot more quickly, and you don't have to deal with the same new, you know, the same cumbersome nuisance of having to get through the appraisals and everything else. If you can just access that cash, you can make cash offers. And when you make cash offers on real estate, you can usually get a really good discount and you can close when you present to the seller that you can close in a couple of days with a cash offer from the business line of credit. I was hoping that you can uh even go maybe a little deeper and give some some insight on you know, you know, how how to go about thinking about a business line of credit, where the interest rates and and what what you know my audience can be thinking about um with it with using that as a way to financing purchases of real estate.
SPEAKER_01Yeah, so let's talk about lines of credit in general. Um, you know, the the types of of uh credit vehicles that we typically see in this arena are credit cards. You know, you get your$25,000 or$30,000 credit card with no interest for six months. I see that's used a lot. Don't like that as a banker, by the way, but you know, it is what it is. Then you can get unsecured lines of credit. Um, those typically can be an overdraft line on your business checking account for$10,000, for instance. You can get one at Capital One, which is nothing more than a giant credit card, but it's unsecured. Um, then and so then that's not what we're talking about, by the way. So we come over to this to the commercial banking side and say you want to get a commercial line of credit, and yes, so you're talking usually lines of$25,000 plus. Um, I will tell you that when I'm making loans and uh making credit decisions on lines of credit for real estate people, they are always going to be secured by real estate. Because, you know, in the old 80-20 day where the bank provides 80 and and you provide 20, well, if I'm providing the 80 and I'm providing the 20, then then I'm not making any, I'm not making the profit, I'm taking all the risk. So we'll you know, we'll kind of do the 80, so to speak. And that is what we typically do. We will loan on 80% of cost, not on appraisal. Key difference here. Okay, but uh that being said, so you know, I got a builder that wants to buy a bunch of lots right now, and he has two residential townhomes that are worth about$180,000 each. And so, you know, I got a$360,000 worth of collateral. I can loan 75 or 80% of a line of credit against those two, as long as it underwrites, of course, got to be able to pay it back. And so now I've got, you know, what a$250,000 line of credit or whatever I've got that is there and it's available for him to use. And all he's got to do is call me and I'll move the money over. I don't ask him what it's for because that's not what we do when we do lines of credit. In fact, I think you probably can just move it over online yourself and pay it back. But the the trick here is remember, it needs to be a line of credit that goes up and down and up and down. It's not meant to take the place of a term loan. Now, if you're gonna buy something, you know, for if you're gonna do a fix and flip, you know, you buy it for$50,000, put 20 in it, and got 70 in it and sell it for 110, and you want to use the line of credit to do that, that is clearly the least expensive way of doing it. Whereas the bank, if you come into the bank, you're gonna have to get approved, we're gonna have to get an appraisal, you're gonna have to go back through and get all your, you're still gonna have to closing no matter what, but you get the idea, and then they're gonna monitor it. Whereas under uh and which has inspection fees typically, not at my bank, but at some banks. Uh, so on a regular operating line like that, uh, or a real estate secured line, uh, that is a great facility. Now, but I'll be honest with you, I don't have a lot of people coming up and saying, hey, I got these two pieces paid off pieces of property. Will you give me a line of credit against it? It's usually well, it's usually I've got these these uh these properties worth$400,000 and I owe$200 on them. Can I get an equity line or a line of credit for for the loanable equity? So, you know, and I'd say, well, yeah, but no. And they'd kind of look at me and I'd say, Yes, I can loan you, get your line of credit if you want to access that equity in there. I says, But your first mortgage is gonna have to be with me. So that's exactly what we did. You know, we had we had, I think we had uh, I don't know whether we had four individual loans or whether we had uh uh two loans with two two duplexes. But the point is that I made one new loan. Fortunately, the rates were lower, so it made sense to do it anyway. And we were able to put a first mortgage on there, and then the second mortgage was you know, I use I we don't like using the the term equity line, but that's effectively what it is, is that you're getting a line of credit on the equity. And so for our lines of credit, we can do them since they're secured by real estate, we could do them for two years. So we will commit to you for two years, and the end of two years, uh, we've got to look at how you handle the line of credit. If it, if again, if you have a$150,000 line of credit and it goes in$150 in three months and it never moves for the next two years, at the end of two years, you're gonna be starting to make the principal on interest payments, or you're gonna pay it off and go somewhere else, one or the other. Um, so that's why we want to be in a first position. And we underwrite the real estate because typically the real estates are rental house rental houses, and so we actually underwrite a full-term loan to the to the total of both the line of credit and the first and make sure that it can be repaid from the collateral. So, but that is a great credit facility, yeah.
SPEAKER_00You know, I think this is gonna be great for a lot of my clients who started off with maybe long-term buy and holds or fix and flips, and then when a lot of my clients are looking to go out to leave the W-2 world and into the world of being a full-time investor, a lot of them are still gonna be looking into flipping houses or maybe um, you know, maybe they're gonna have other sources of active income, like as real estate agents, but with you know, with the flipping, and that's you know, they've already built up a decent amount of equity and experience from from what they've started out with, and that can help with you know, with obtaining that capital uh to continue to have those, you know, that as a those additional sources of complementary income to coming in as they're building their passive income streams to uh to make sure that they can maintain a good quality of life as they they build their wealth.
SPEAKER_01And that is the key for us. You know, we we as a community bank love the guy that's got you know make$125,000 on a W-2 job and comes in and wants to borrow money for rental houses, you know, up to four, five, or six. And sometimes they end up and ultimately that conversation begins is how do I transition out of a W-2 job into working for myself as a real estate investor? And you know, and you hit the nail on the head when it comes to working capital and how much you know your own cash, when you do a fix and flip, you put your money in for a short period of time and you get it back out plus profit on a on a on a rental house, you put your money in and it's frozen. Unless you can figure out how to do the uh cash out refinance, which most community banks are not real excited about on the commercial banking side. Now, if you were getting money out because you were putting money down on a new deal, that's fine. I'm just talking about regular cash out. Uh, whereas the mortgage, the mortgage banking world, uh not right now, but in in general, would wouldn't ask any questions of what you're gonna do with the money. We're gonna want to know what the money where the money's going, and then we have to kind of approve of it. I not a lifestyle or judgment, but you know what I mean. So that's it. Yeah, and that is the hard part though, because it ultimately, if you're going to get into active real estate management, you the big thing here is to try and get away from uh is to get everything into an S corporation, probably an S corporation, it could be an LL. See the files as an S corporation, you know as well as I do. Because what when we underwrite, we underwrite a global cash flow. So we, you know, when you got your W-2 salary, we take all your W 2, we take all of your rental income, we take all of your uh, we don't take your capital gains or losses, so that's good or good or bad. And we put all that together, we put in all the payments and we analyze it. Well, is if if you're if your combined income minus your taxes is$100,000 while you got this W-2, and over three or four years you transition and you're over here and it's still a hundred thousand dollars, then you're fine. But they're getting from getting from here to here is not always as as easy as it sounds.
SPEAKER_00Right, right. And and you know, so um, you know, the S-corp is something that I've discussed with a lot of my clients when it comes to flipping houses. And also occasionally we will see the value of a C Corp, especially for some of my clients. Now with the with the Tax Cut and Jobs Act and the flat 21% income tax bracket, the C Corp becomes a little more popular, especially because that C Corp is an entirely separate entity now. And now we don't have to worry about that the with the income state tax, only being able to deduct ten thousand dollars. We can deduct as much as we want when it's in the C Corp. Uh and also um with AMT, uh alternative minimum tax becomes less of an issue with when we can ship some of our income into that C Corp, which is an entirely different taxable entity. Um tax planning there. Um very cool. Uh what do you think about um? So I know we we we touched on this. Is there anything else that that you know you can help us out with understanding the you think we should know about with understanding the difference between conventional and commercial mortgages?
SPEAKER_01Well, uh yeah, there are there are some reasons why you would want to you would want to go over to the commercial side versus the mortgage side. Mortgage side is pretty much you've got to fit in the box. I mean, your property's got to be one property, one house on the property. Uh, you've got to your borrowers have got to be individuals, okay. And again, you'll be limited by how many slots you have. Um, if you want and but the good news is you can buy a one-to-four family uh uh product that way too. So if you find a quadplex, you can still do it in the mortgage bank. But when you get over, when you get more than one prop one building on that property, uh, or if you get to a uh five plus situation, you know, a nice little uh group of five duplexes is a is a good 10-unit, you know, apartment complex. Those are the types of deals that you do over on the commercial side. We're much more flexible on what we can what we can do. We're not, you know, if you don't hit the credit score number on a mortgage, you're not getting, period. On my side, I can look at it, you know, I can set that credit score. I can say you got to have you know 720 to the next three I pull will be 718. You know how that goes. We we we have guidance, we don't have requirements. And so we're able to use our brains. And you know, sometimes, you know, the one of the hardest, the biggest challenges I have with uh with folks who are active rental uh property owners is their tax returns never seem to catch up with their current situation. I mean, your tax return, if you if you buy a house, you know, six months in, you know, you're only gonna get you're gonna get all your depreciation, and but then you can have your repairs and your closing costs, and everything's gonna be on there, but you're only getting a half year's worth of rent. So it's gonna produce a loss. Well, you know, I have to count that. Or do I go and do a pro form, take that one property out and do a pro form on it and say this is how much he's getting every month, take out 10% for vacancy and 20% for expense factor, give him 70% as his net operating income and drive on, which is what I typically do. So at some point in time, you know, your tax returns might catch up, but that's only when you've stopped uh adding properties into your portfolio. And so from uh those who are trying to make a living out of that, I do have a couple who you know who do active property management and they're out there, you know, they've got the good websites, and so they're getting 15% of the rent every month because they're doing all the placements and and tackling all the maintenance and all that sort of stuff, but they're also realtors and they also do their own thing, they also development. So when you hear me talk, uh, you know, we're kind of a dirt bank. Most small community banks are dirt banks. So what does that mean? I mean, we do everything from uh buying raw land, uh, buying lots in in subdivisions, uh letting you buy a big, bigger piece of property, putting a road in and creating 10 lots, development loans. And yeah, I've done you know 350 lot developments too, but I'm not at a bank now that wants to do those. That's that's too big of a risk for a small bank. But you know, if you've got a you got a uh you know five acres, you want to carve it up into you know five lots or ten lots, you know, and put a little road in there, yeah, that's possible. The fix and flips are nothing more than a construction loan uh that I do to for my builders that where instead of buying a lot, you're buying the lot with an with a house that needs to be repaired on it. And then you have a construction budget on top of that. We get an appraisal of what it's going to be worth when it's done. We loan you 80% of your costs, okay, all of your costs, not just your hard costs. And so you do have to have some of your own money in it. But the purpose of the pixel flip is to sell it. And in this market, if you can't sell a piece of real estate, you got a dollar because there's man, there's no real estate available. And so that that's been a very good product for us as well. But we do all of those. I mean, I even I even did a uh I had a a builder who had 10 lots that he wanted to build sub wanted to build duplexes on it. So I did one construction perm loan for him, gave him 12 months to build all the houses, and in month 13 it turned into a term loan. He didn't have to come back to the bank or anything, had a fixed rate for the whole seven years.
SPEAKER_02Right.
SPEAKER_00So, you know, it sounds so it sounds like um, you know, it's kind of this is a good lead into the next question that I was gonna ask. And kind of you kind of touched on it already. It sounds like once you go from the conventional mortgages to the commercial loans, the process by which you evaluate um whether or not someone will qualify is more of a instead of being a rigid uh quantitative, you know, type of analysis with credit scores and ratios, um, there's a little bit more of a qualitative interpretive element of this where you're building relationships and assessing the you know, assessing the whole picture um for how to how to lend to these people, correct?
SPEAKER_01Yeah, I think it that's there's a lot now. We still, you know, we're still doing all our ratios. I mean, we're still you know math peaks and we have to be. Uh, but there's a difference between consumer finance, because the reason consumer finance has all of those, uh, all that that box you have to fit into is because quite frankly, you have to treat everybody exactly the same. And I and I'm a big believer in that, by the way. But the fair lending laws require that. When you get over to the commercial side of the bank, those a lot of those regulations don't apply. And that doesn't mean we're out there treating some people different than others. That's not who our DNA is. We want to treat everybody the same. But what it gives us an opportunity to, you know, if a guy comes in and wants to borrow$100,000 and his debt ratios are too high, but he's got a half million dollars on deposit with me. Well, maybe I should lend him the money. You know, whereas the mortgage person can say no, you know, just so I mean there's there's reasons for to be able to justify it's called mitigating the risk. We identify the risk, we mitigate them. But on the business side, you know, we you know, in in the consumer world, you've got fixed debt ratios. Okay. The commercial is the exact opposite of that. You have debt coverage ratios. So we take all of your gross income, take away all your expenses, including your taxes, and this is how much money you have left. And this is it, you're here, you're here, and these are your payments when you add them all up, including the new debt. How does this compare to this? We want to see about a 1.25 coverage ratio or higher, the higher the better. So that's the cash flow is important to us. Liquidity, liquidity, liquidity is extremely important to us. Um, you know, it's it and it should be to everybody because cash is king. But if you if you've got you know$200,000 of cash sitting on the sidelines, you go in and buy a hundred thousand dollar piece of property, well, now you only have a hundred. Well, you know, 100's still pretty doggone good, but depending on how big your deal is, though, you know, if you're having to buy if you're doing a million-dollar deal and you got to put$250,000 in it, you give me a personal financial thing with a hundred on it, I'm gonna start scratching my head. You know, so liquidity is important. And then on the credit side, uh, again, I think I'm I might have we mentioned I mentioned this to you earlier. I did have one group who kind of came in and and wanted to do some rental houses with me. And and I pulled the credit report and there was$120,000 worth of credit card balances on there. There's no credit guy in the world that's gonna approve you for a loan if you got$120,000 worth of credit card balances. Just not gonna do it. And so, you know, we gotta, so what do we do? We try and find a way to get that onto a mortgage somewhere because usually what that is is stranded, either stranded cost or should I say, strand, stranded equity or lack of equity.
SPEAKER_00So okay, cool. So and and like to continue along that lines of that questioning. So, and I, you know, I have a lot of guests and clients who are uh you know who are working their W-2 jobs and they're you know, they're building up, they're building up their equities, they're finding success, and they're ready to leave their job pretty soon. Uh and you know, you know, I'm constantly being asked, um, how am I going to be able to qualify for these these loan vehicles after I no longer have my W-2 income? And also, you know, what are the things, you know, as we were talking about, how can we get the bankers to sign off? Um, what can we show them? How can we communicate with these bankers to sign off on lending on some maybe some of our flips or future purchases for long-term buy and holds after we've left our buy, you know, our W-2 jobs. And now, you know, we might have our you know, our income is gonna look entirely different on our 1040s. When you're working with me, we're doing some cost segregation and bringing your taxes totally down. Um, and uh, so how can we uh, you know, what can my audience think about on what's during this next phase, and even if, or even you know, while they're keeping the W-2s, what do we have to do to get you know the base to say yes?
SPEAKER_01Well, now ultimately you you've identified the big struggle. Okay, there's two things I would I would kind of talk about. First off, is all the builders that I've worked with in my career have all started with you know their first project. How did it get financed? Well, you know, you say you're collateral heavy on that. You either you either had a your your daddy was a builder and he's co-signed for you on your first loan, um, or maybe you instead of putting 20% in, you put 40% in to lessen the bank's risk, but you started, and then that generated some profit for you that you got to pay taxes on and showed on your on your tax return. And then you do did a second and third, maybe at the same time, and you did two or three, and ultimately tax you after tax year after tax year, you're building up your S corporation such that it in and of itself is going to generate uh a good income. I mean, I've got one right now that I'm pretty sure came from you that the the guy is is building. The guy is a realtor.
SPEAKER_00Oh, yeah, that's gonna be a good one.
SPEAKER_01So, you know, he he gets it on both sides and he's running an operating company as a reality company, he's building on the side, and I've got some other guys who aren't builders, they're they're just real estate investors who are hiring him to build the house. So he's doing fee building as well. So you pay him, you pay him you know, 10% over cost or 8% if you're lucky, or 15% if it's probably market-based, but then you get everything on top of that. You say he's a fee builder, he doesn't sign a guarantee or anything. You borrow the money, hire the contractor, build it, and then you sell it. Um, for instance, that's another one. But you've got your in order for the W-2 to completely go away and end up with you know being able to borrow money for fix-a-flips and everything, because fix-flip is nothing more than construction line. Just like one of my contractors coming in and saying, you know, I got a contract that's doing six houses a year, I had a contract that's doing two houses a year. It depends on how much money you have to make. It also depends on your spouse because, you know, quite honestly, you know, in the in the mortgage banking world, you know, they want they don't want your spouse on here if you can qualify for yourself because that's just more documents they've got to get. On our world, we want your spouse on there too. Be and we can't require it, by the way, but we want it because we can count any income they bring to the table. And we also count their expenses. But in the state of North Carolina, and I don't know all the other states you may work with, you know, the laws uh favor joint the right, you know, joint ownership of these things. So um it's important. So if if one of them is trying, if one of the spouses is trying to get more into real estate and the other one continues to grow in a W-2 job, you kind of have the best of both worlds. And um, but it can definitely then the other W-2 person can quit once this one gets uh gets going big enough.
SPEAKER_00Yeah. And and uh, you know, another thing to think about is for some of you who maybe you're um you are looking to build up more capital and are may not have you know uh all the capital to really do the projects they really want to do. Um, obviously, you know, you can start small if you're not gonna qualify for a multi-million dollar loan. But another great idea, coming back to networking, right? You're gonna find people who are really interested in investing in real estate and are really excited about it, but they don't have the time. Uh, if you network it, you're gonna, or maybe within your own network, you go to the meetups or you reach within your social circle or whatever, however, you're meeting people. There are lots of affluent people out there who would love to have a piece of real estate and don't have the time. And if you can offer your skills, your hustle, your expertise to partner with them, that's another great way to do these bigger deals and and help them qualify, you know, with them, we leverage their um, you know, their credentials to qualify. And also a little bit of the money. Yeah, but talk to me before you do it. And we likely will want to talk to an attorney because when we structure these partnerships, there are all sorts of things we can consider to make it more appealing that will make it more appealing to the borrower based on their circumstances and how they may want to utilize some of these passive activity losses. You also want to consider that this is becoming a regulated security, and we have to worry about ranking A and Reg D, most likely, and we may need to hire an attorney to write up this partnership agreement and follow certain standards and guidelines to make sure that we are compliant in the way we issue this partnership interest, which is now going to be treated as a regulated security. Uh, that's something a lot of people a lot of people kind of bypass that step. Um, so it's something like we like to think about. Um another um, and you know, we other other financial instruments are maybe more flexible, but we're gonna see a higher interest rate as we see with some of the hard money, the private money lenders are another option. But we are with those instruments, you're gonna see uh higher interest rates um than we will see with the banks.
SPEAKER_01But you know, when somebody's been working with a hard money lender and they and they've never worked with a commercial banker before, and they come in and say, Well, okay, well, what's your rate? And I said, Well, prime plus one. And they said, Well, what's that? And I said, Four and a quarter of their jaw drops. Now, of course, prime's historic low right now, but still, I mean, you know, a typical construction loan for me is prime plus one variable, and you only pay interest on the amount of money that's been advanced under the line on a daily basis and a one percent fee. I mean, the bank's happy with that return, and it's usually a pretty good deal for for the consumer as well, or I should say for the for the real estate investor.
SPEAKER_00Yeah, and I think that I think that so many people are you're looking at hard money uh and private lenders, but they've you know a lot of people you know don't realize that that some of these banks are also going to work with them and give them much more favorable terms.
SPEAKER_01So this has been and this has been a standard. Prime plus one or one percent fee has been a standard for 30 years that I've been doing this uh with for construction lending. And uh we, you know, I'm not saying we've never gone below that because in reality, if I'm doing a you know, a million and a half dollar house deal versus$150,000, it's the same amount of work, you know, it makes more sense to give the the million and a half a prime plus a half instead of a prime plus one kind of situation. But um right now, when you're talking about term finance, and by the way, all your lines of credit are going to be variable interest rates. That's just the way it is, because it's not a we can't forecast how much money is gonna be owed on that, so it's hard for us to fund our bank uh without using a variable interest rate. But you know, you can get variable interest rates on your term finance as well if you want them, but we're at historic lows, you should be getting fixed interest rates right now. And um, so like I said, the fixed interest rate for a for a commercial size on a on a reasonable size loan, uh, let's say$250,000, and that's between four and four and a quarter for seven years with payments on a 20-year amortization and maybe a half percent fee if you're buying or refinancing. So that kind of gives you a ballpark for what you might expect from a community bank right now, at least in our market around here, because competition does play into that as well.
SPEAKER_00Gotcha, gotcha. Okay, great. Um, I'm gonna get to the audience's questions, but before I do, I just want to clarify one more thing. So when we compare the um just to backtrack a little bit, so with the business line of credit, you know, we're securing it with the equity in the home, but I think the difference perhaps, and correct me if I'm wrong, but it sounds like the difference between that and a home equity line of credit is um it uh you know, or maybe you can help qual clarify the difference if I'm off, but it sounds like one's a consumer product, one's a business product.
SPEAKER_01Okay, consumer product is usually a 15-year equity line, up to 80 or 90 percent of the value of your primary residence. Okay, that is a very important distinction. It's your primary residence, and so everybody, all of your customers should have the biggest equity line they can get. Well, I don't need one, Mark. Well, tomorrow you might, and then the bank may say no because you lost your job. Well, if you lost your job, that's when you need the equity line to stay afloat until you get your new job. So go get your equity line now. That's consumer product. On the commercial side, we're talking about lending you the lendable equity in commercial real estate. And you know, if the it's unlikely you're if the tide doesn't go well for you on your in in life, uh, it's much less likely that you will walk away from your primary residence than you will an investment. And so that's that's why. And so so the the equity lines are 15 years, you get to use it as much as you want. The interest rates are usually even better than commercial lines. The commercial line still gives you a lot quick access to to capital. Um, and there's not a lot of you know, we a lot of supervision as to what you do with it, but it's only gonna be for two years at the most. And at the end of two years, we will, I'm happy to renew it every two years. Gotta get new property valuations. There's gonna be some expense involved with it, but the ability to go ahead and grab that eighty thousand dollars that you can buy this property for today versus a hundred if you have to wait 60 days, is it's worth it.
SPEAKER_00Okay, great. Okay, thanks for providing that clarity. Uh, so I'm gonna go through some of the questions now. Um first I see in the conversation, um, do you or any bankers, I think we already kind of answered this. Do you or any bankers lend money for raw land buying and selling, um, you know, to purchase, you know, uh i.e. a bulk dollar amount that has a fixed term and rate?
SPEAKER_01Well, I will tell you that if you're talking about buying just raw and raw lands, what exactly it is, the regulatory LTV on that is 65%. So you can be planning on putting down 35% minimum. Uh, what you will see, we will offer you potentially uh the same five to seven year interest rates at at what we would a regular term loan, uh, but the amortization would be held to 15 years.
SPEAKER_00So we're talking about the um when you say 35 percent, I'm sorry, I'm not sure if you said it, but 35% of the appraised value or the purchase price?
SPEAKER_01Everything is always based on purchase price and cost. Uh yeah, back back before the recession, you know, oftentimes it'd be based on appraised value and not on your cost, but they quickly found out how uh uh most banks adjust to that. We'll just put it that way. Usually they're blending on cost.
SPEAKER_00Okay, great. Okay, now what kind of financing is available and would you recommend for short-term rentals?
SPEAKER_01You I assume when you say short-term rentals, you mean Airbnb type uh financing.
SPEAKER_00Correct.
SPEAKER_01Look, there is no doubt that the community banking world is way behind in how figuring this one out. Okay, I can give you an example. Uh, we were asked to do a uh a million and a half dollar deal on Lake Norman. And So what we did was we said, Well, how much are you going to charge per night? And they gave us the gave us the numbers. So we hit it with a you know, with a I think a forty percent vacancy rate because you're not you're not gonna have every single night for the year rented, and then we hit them with a 30% expense ratio and then use that to compare it to the payments, and it worked just fine. Um another way of doing that is to is that we if we know what the market rents are in in there, then we can go ahead and say if you were if you were going to do this on a long-term rent basis, you know, what would you be able to charge? And we we we look at that, and hopefully that would be a good indication that it's it's a good property for cash flow. Um those are those are two things that uh observations I can make. Now, look, if you already have the property and you have and your schedulee shows that property and shows its its income, and and your accountant hadn't deducted everything that they possibly could, then we will use that to our to do our cash flow analysis. Uh, but if you're buying a new one and I've got plenty, this happens all the time. People want to buy it and they're gonna they're gonna Airbnb it and our short-term rental, what it call what you will, and we just have to kind of figure out you know, I know that those services will provide you a pro forma. So if you're a strong borrower, and then sometimes we can use those sorts of things. I look, we as it's hard to believe this, but bankers really look for reasons to make loans, not to turn them down, because that's how we make that's how we make a living. Uh credit guys, on the other hand, well, we'll talk about that. So we'll worry about those folks. I don't know how helpful that is, but in my world, it it there are a challenge, but I have a number of those properties financed, and none of them are any financial stress.
SPEAKER_00And what do you think what do you think about and so I know that you said looking at long-term rates, but some of these are going to be in areas like for instance, for instance, if we're in the mountains, we're in an area where there's lots of log capids, and all the properties there are no short-term rental log capids or clusters, so the most comparable properties are gonna be other short-term rentals. Uh, would you be able to consider that as a factor as well?
SPEAKER_01Well, yeah, yeah, I mean, and and we have to, again, our credit departments you know are just not used to this stuff yet. So, how do we how do we find that out? Well, oftentimes it's our borrower who's gonna educate us, but the appraiser, you know, is it's probably our best means of trying to do that. If we if we tell the appraiser it's gonna be an Airbnb, you know, and we we need to get an income approach, um, then he's gonna have to do some work to provide that. And when he gets it back, I can steal that put in my memo and my analysis. Um, but I like to say, yes, I'll do the loan before I cost you money on an appraisal, but sometimes you just gotta have to go ahead and fork up the money for appraisal just to see what we can get and see if it justifies it. Uh again, a challenge. And I am one of those old bankers and can't teach, you know, old dogs new tricks. I'm trying them. Uh, I've got some some good folks who do a lot of these short-term loans.
SPEAKER_00Awesome. Okay. Um, I think we we kind of touched on this um on the difference between a mortgage banker and a business banker. I think we we kind of covered that topic. Is there anything else you would like to mortgage banker?
SPEAKER_01It's a transaction, they're selling it, and it is a consumer transaction. Okay, it's consumer, the underwrites consumer. Uh, and so you can't have you know one property, individual name, it can be multiple individuals, don't get me wrong, but and it can it's a rental house, no problem. And whereas the other side is a business purpose loan. We make so if you're buying something for you know, this one to four family residential investment properties is kind of a quasi-business consumer loan, but it's underwritten consumer. All my stuff is we're letting you our our bank money. The little ladies who have deposits with us, it's their money and we're making spread. So that's why we're able to be a little more flexible, but we're not gonna go 30-year, 30-year uh terms on things because they don't give me 30-year deposits.
SPEAKER_00Gotcha. Okay. Great. Um, so you know, I think that um, so we're able to answer all the audiences' questions, and you know, I'm gonna post this and I might get some inquiry. Um, and uh so you know, I'll I'll be able to, you know, one thing I would like for you to provide to the guests and the the audience that will listen to the recorded version of this, can you uh give us the best way to reach out to you? And if you have any other what I always like to give to my guests is a call to action. So anything that you would like from the audience or you were offering to the to anyone who listens to you anything that you would like to request or provide for the audience?
SPEAKER_01Well, it's all about networking, make no mistake. I mean, that's been secret to my success. I mean, quite frankly, I'm at the point in my career where I'm not doing much call cold calling, they're calling me, and that's good because a lot of banks right now are not doing this. So, construction and or rental. So there's some of those banker friends are sending them my way. Uh, but I'm happy to provide my uh my email address and my cell phone number. I I mean, I don't have any problems giving those out at all, and you've got them. Uh, and I can call them out now or put them in the chat box, whatever you want to do.
SPEAKER_00Uh yeah, why don't you put them in the chat box and uh yeah, you know, I can put in the comments of the recording with that BRIC2?
SPEAKER_01Yeah, that's fine with me. I just want folks to know that, you know, uh from my perspective and what the type of deals that I'm the type of customers that I'm able to help is as a community bank, we strategically are in the Charlotte region up through the Raleigh region, okay? And we're actually skip over Greensboro and and uh for instance to the triad. So I can I can my primary lending is in the greater Charlotte region into upstate South Carolina, not a lot of that, but mostly on the northern side of Charlotte. So if if I got somebody who lives in in New York and wants to do a rental house in my market, I'm not gonna do it because they don't live here. Now, if if there's a partnership and one of them, I'm doing a doing one now for a partnership where one of them lives in in Monroe and the other three live somewhere in the country. Uh, but it's a rental house. So if there has to be a reason for me to make that loan. Um, the only time I'll be able to do stuff for people who are out of state and and don't have partners locally is if it's a uh it's an income-producing property and they're wanting to borrow about 50%. And so that's a possibility, but those are usually, you know, bojangles or wendy's or things of that nature rather than rather than rental houses. But for those folks who are in the greater Charlotte region, um, and I'm not the only commercial lender at the bank either. We've got another 14 of these. So um, and I hope they're all better than me at what we do.
SPEAKER_00Okay, great. And you know, I'll you know, for for you know, I always use you as a resource just for general banking. And so for some of my clients, you know, we're gonna be happy to help.
SPEAKER_01I anytime anybody oh, I love helping people. You just you got a question, you call me or email me, uh, or go through mark either way. I'm happy to assist.
SPEAKER_00Yeah, really appreciate your guidance so far. Um and uh so you know if you could type in your contact info in the chat for our current listeners, and you know, I can put your info in when I post this. Um, and and hopefully we you know we can connect you some great people as well. Um so uh you know, I hope you guys, you know, this will all be recorded and posted to my site and my YouTube channel. Um, also I want you guys to uh I want to give you guys an idea of some other things we have coming up. Um now my what I'm trying to do is to try to facilitate as many relationships and connections as I can. So if you are new and I don't have your in your information, obviously I'm gonna see this. If you register to attend the webinar, I will see your email, but I want you to tell me more about you and what you're doing, what you're looking for, what you can offer, uh, what kind of services are you providing so I can help you maybe if I can connect you with someone who can help you along your journey to reaching your goals, just let me know a little more about yourself. Um, now we're gonna keep this going and keep on bringing on webinar guests and people who I think can provide the most valuable to my clients and my audience. So what I will so here are some of the next topics that we're gonna talk about, and I'm gonna be bringing on other people who I really think you're gonna enjoy. Um we're gonna have a several panelists. I'm still solidifying the date, but I will tell you make sure you're on my emailing list and you follow me on Facebook and you get your invites. Uh, the next topics are gonna be investing out of state and in the southeast. So I'm gonna be bringing in some active real estate investors in uh North Carolina and Louisville, and maybe some uh some others in the Southeast. And we're gonna talk about the market of the Southeast and what kind of ratios and profitability and the development and what kind of uh what the future holds for the southeastern real estate market. Um and I'll be throwing in some tap tips and also we're gonna talk about that for those of you who are not from the southeast, some um some strategies for investing out of state for saving money on your taxes and also some business strategies. So if you are in California, New York, a lot of those people are eyeing the state, trying to buy it up, a lot of people, because it's just so much easier to get you to uh purchase your first properties there. Um so what you know, so tune in for that. Next, we're gonna talk about foreign investments. This is gonna be great for syndicators if you have uh potential business partners and investors out of your country who are interested in the United States market and you want to get financing. There's a lot and lots of things to just to consider. Uh so that we're I'm gonna bring an international tax attorney. We're gonna talk about um how to partner with and obtain financing and capital with foreign investors. Uh, we're gonna talk about investing in New York City. I got a lot of friends and connections in New York City. How can we make it possible? If you can make it there, you can make it anywhere. We're gonna uh get some people who actually do it and talk about some strategies there uh in New York City. Uh and uh also I am looking for suggestions. So either you're listening live or recorded, send me some suggestions of some webinar topics and I will consider them and maybe include them and uh give you some props for giving me some inspiration here and keeping this thing going. Um another thing I want to talk about is um tax discovery sessions. This is just this is my call to action is I provide a free tax discovery session. This is just a chance for me to look at where you're going, what your goals are, and to see how things are going, what missed opportunities we may have missed out on on prior years. What opportunities do we have in the future for our tax planning? A tax plan will always cost less than the savings it will generate. So we can assess whether it's time to invest in a tax plan or not. Um, so that's free. And you can, I'm gonna, you know, just email me or I'll email you, just contact me and block off a time on my calendar. Uh, I'm gonna post that link for a 30-minute session for the discovery session um in the chat and also on the Facebook page for this event. And I will email those of you who are attending live um more details on that. Um so thanks to everybody for attending. And that this should conclude the uh this webinar. One quick question um that came through. Uh, will you include uh Florida or do you have a couple of um a couple of Panama? So we're talking we we have investors in in in Panama City Beach. Uh do you think that you could possibly we could probably possibly get something going? Or maybe send if they have a local partner. Okay, if we have a local partner, we we can make it happen.
SPEAKER_01Yeah, I mean I I've I've got folks from all over the country that that are customers, but they're uh they're usually in a partnership, and so they're just a guarantor. And they're that's the issue. When you're a guarantor and you don't live in North Carolina, uh it's problematic to execute on judgments and things. Not that we ever want to talk about that, but you know, it's real life.
SPEAKER_00Okay, gotcha. Okay. So, but you know, another thing we can do is again, like we talked about how to find the right bankers. We will get in there, we'll network, we'll reach maybe you have some suggestions for that region as well. And you know, you when you're if you're to find someone local who who you know best fits you, you the networking is is crucial, it sounds like for lots of things with you know finding the right professionals and all that great stuff. Right. So, okay, great. So I hope everybody really enjoyed this and got a lot of value, and I hope this encourages you on and gives you some ideas on how to navigate the world of working with your banker and and financing your future investments. Uh stay tuned. We have lots of great stuff coming your way. Um, contact me if you want to learn anything more about some of these topics. I do provide business consulting as well. Um, happy to help you along with the way on your real estate journey. Um, until next time, thanks for attending. Uh thank you very much, and uh everybody have a great day. See you soon in the next webinar. Thank you, Mark. Thank you, thank you.