Ep. 6 | Lending Partners. Why Your 'Board of Directors' Needs Them.
Download MP3Welcome to the Teaching Tax Flow podcast, where the goal is to empower and educate you to legally and ethically minimize taxes paid over your lifetime.
Speaker 2:Welcome everybody back to teaching tax flow, the podcast. We're now on episode six. We're flying through these things. The topic for this show specifically, we're looking at lending and portfolio refinancing. So, obviously, I'm sure everybody knows what lending and portfolio refinancing is.
Speaker 2:If not, you're in the right place. Isn't that right, Chris?
Speaker 3:And yeah. Exactly. If you don't know or do know, you're gonna learn a lot today. I am so excited about our special guest, and, I learn a lot every time we speak, and I look at her resources that she brings to the table as an investor. I'm really excited about this podcast.
Speaker 3:Excellent. Excellent. Now speaking
Speaker 2:of that, of of verbing on this podcast. So let's put her on a pedestal. Let let's talk a little bit about her. Let's mention the company first. So the mortgage shop.
Speaker 2:So clearly, you know that we're talking to somebody that knows what they are talking about. So being resourceful, I think we got a good person here. So why don't you go ahead and I'll do the drum roll.
Speaker 3:Do the interd alright. That's our music for the night. So why why I stuck to accounting. Right. So Brenna Karls is with us from the mortgage shop.
Speaker 3:Brenna and her team do an amazing job, with investment property financing. One of the many reasons I wanted to have her on the show was that a lot of what they do fits into the teaching tax flow ecosystem. On the red diagnosis, what we call so for for those high marginal tax rate folks that really wanna have more cash. We talk about one of our laws of teaching tax flow is cash flow does not equal tax flow. So if someone's looking for some cash and they don't wanna liquidate or sell a property, but they do want access to some of the equity, portfolio refinance is a great opportunity to to pull some equity out of a property and not have to get hit with a tax burden at the time they pull that out.
Speaker 3:The other thing we like to talk about is our gold tax strategy, tax free income and growth. And one of the ways one of the strategies we teach is building a rental portfolio. And you obviously could build and scale a rental portfolio faster if you have a lending partner. Another thing, John, since you asked, we teach is building out your own board of directors. And part of your board of directors needs to be someone from a lending perspective that you have a relationship with, that you treat as a partner, not just a vendor.
Speaker 3:And that's why I'm really excited for Brenna to be here. So, Brenna, welcome to the Teaching Tax Flow Show.
Speaker 4:Great to be here. So excited to be here and nerd out on tax, all things tax, and all things mortgage.
Speaker 3:Well, they really go hand in hand. And, you know, I would say until we started really working with a lot of, the people that know what they're doing in the lending industry, The tax community, the CPAs, and the lenders always see I used to make a joke that World War three is gonna be the underwriters and the and the tax preparers, because our job is to legally and ethically reduce the taxes you pay in your lifetime. We teach that, but we also teach about the difference between lendability or taxability and lendability or bankability. So, speaking about that, I wanna dive in. Brenna, I know that The Mortgage Shop has a lot of different programs.
Speaker 3:Can you give us a 30,000 foot view for our listeners? Because a lot of the listeners have a primary residence, and they're starting to think about investment property or they're just getting started on their journey. What's some some of the bigger differences, 30,000 foot view, between applying for a primary residence mortgage versus an investment property?
Speaker 4:So primary residence mortgage is obviously that, right? You're not looking to make money from it initially. You know, you can live in it for a year, then rent it out and purchase another one. But the primary difference is investment. You're literally doing it to invest, to make money, whether it be short term rental income, long term rental income.
Speaker 4:If you want tenants in there with a lease agreement and things of that nature, and obviously file that rental income on your schedule E to create a little bit of a side income for you, starting to get that saved up in your checking account, for that property to build your portfolio, basically, to buy more properties and use that cash that you're getting from these properties as your leverage.
Speaker 3:Exactly. And we know that what we don't a lot of what we teach is where to report your rental income by default. If you're a single member LLC, which is a disregarded entity, of course, you should listen to that podcast, John. Of course. You were there.
Speaker 2:Oh, yeah. I guess I was.
Speaker 3:Yeah. You are. And and, or if you own a property personally, it will go on schedule e. If you're a partnership, then then there's or an s corp that goes on a different place at $88.25. So, yeah, exactly.
Speaker 3:Making sure that you are working with the right professionals to to report that rental income. And, a lot of times with the with the tax laws, the way they're written now, you would you could have a nice cash flow from a rental property but not necessarily trigger any tax to be paid. So, we won't dive into those tax strategies yet, but, Brenna, could you explain when you look from a lending perspective, when you're looking at a schedule e or when you're looking at rental property that it's reported on a a tax return, What are are there is there anything that gets added back, you know, to determine how a property is performing from a lending perspective?
Speaker 4:Yeah. So we can we look at things like mortgage interest, amortization, depreciation, take that all into account, look at what your rental income is per for the year. We also look, you know, the days that it shows fair rental days. A lot of people don't really know what what that is. And so we always look to see how long it was rented.
Speaker 4:If it's less than three sixty five days, I'd go in and I say, you know, I look in at their credit report and be like, okay, they just purchased this. That's why it shows less than three sixty five or $3.66 if it's a leap year. And then if not, I say, okay. Did you have many major repairs? Because that way we can annualize the income if we have one or the other proof of that.
Speaker 4:If they just sat down and didn't feel like renting it out, and that was the only reason, we couldn't annualize that income. And so it would show a lot less, And it would probably actually show a loss because we then have to deduct that monthly mortgage payment, to get that net rental income.
Speaker 3:That's a great point. I would like the the listeners, to take a peek at your tax return, something that's that I know our private practice looks at and a lot of the CPAs that I know in in the real estate space, they you have to be careful. There's some questions on that schedule e that says days, yeah, days rented, the property, days personal use. And they seem like really innocent questions, but they could be very a big factor when you're looking at that bankability. So that's something to consider when you're when you're, having your tax returns prepared.
Speaker 2:And, Chris, to to your point too, something that I don't wanna forget about. I know earlier on, you know, you talked about partnering with a good with a good lending partner. And, Brennon, as far as for the mortgage shop goes, what states do y'all operate in? Any specific? Or I I know y'all are in Tennessee.
Speaker 2:Do you focus mainly on Tennessee?
Speaker 4:Yeah. So we let me go down the list.
Speaker 3:So we can do
Speaker 2:If you got time,
Speaker 3:if you
Speaker 2:got time. We're good.
Speaker 4:Then we can do the DSCR debt service coverage ratio in those states, because that's non QM or non conformed, qualified mortgage. But for conforming, if you wanted to do take advantage of that, you know, 10% down second home or 15% down investment property, we are Tennessee, Florida, Georgia, Alabama, Texas, Oklahoma, Ohio, Wisconsin, Montana, and Nevada.
Speaker 3:Cool. And
Speaker 4:Not in Nevada. That one's the one that's really complicated. We are in, North Carolina. I don't know why I said Nevada.
Speaker 3:Hey. Maybe we're all just thinking about going to Vegas or something. I don't know. Sounds good. But it seems nice and warm climate wise.
Speaker 4:Yeah. It's a really complicated state to get, licensed in, so that's been on my mind for a while.
Speaker 3:Well and you mentioned, that term DSCR versus a conventional or conforming loan. Can you can you expand on what, I mean, what that what that acronym means and Yeah. For our listeners?
Speaker 4:Yeah. So a conforming loan is what's known as a full doc loan, which means we go off of your income, your assets and your debt that shows up on your credit report that's conforming. And then a non QM or a non qualified mortgage just means that we don't go off of that stuff. And there's not all of that truth in lending, things that we have to follow that Fannie Mae and the fed have put in place. And a DSCR loan is stands for debt service coverage ratio loan.
Speaker 4:It does not go off your personal debt or personal income. It goes off the property or purchasing's proposed monthly rental income and the proposed monthly mortgage payment. Usually, you want to see a one to one ratio, which means if your mortgage payment is $3,000 then that rental income needs to be $3,000 or more. Now the cool thing about that is, like, if you do have a let's say you went from self employed to w two. Obviously, we have to have a two year history of either.
Speaker 4:So DCR is good for that, and it doesn't go off your debt to income. So if you're trying to expand your portfolio as quickly as possible, that's a loan option for you.
Speaker 3:And that's a great point. I I've been a part of both both types of loans. On the DSCR, what's typically your range of down payment? Obviously, it's gonna depend on market and and a lot of factors. But just to give the listeners an idea, especially those that are really focusing on buying that first investment property, especially a short term rental property.
Speaker 4:Yeah. For DSCR, it's general rule of thumb across the board is 20%. So it's same if you So for conforming, let's say you wanted to do it off of your debt to income ratio. You can do 15% down up to what we are honoring as the 2023 conforming loan limit, which means not jumbo, is $715,000 So that's a loan amount. Of course, the purchase price will be higher.
Speaker 4:Then anything over that is considered jumbo, and it's 20% down. So if you're doing a jumbo conforming, then it's 20% down. If you're doing DSCR, it's still 20% down. So either way, you can use that as your leverage. You can also close a DSCR loan, directly into your LLC.
Speaker 3:That great segue because I know that, we have a lot of clients and myself personally at one one time was that we, engaged in a ten thirty one exchange, and we were actually able to use a, a DSCR loan to jump in, you know, get that ten thirty one exchange. And it was nice on the 10:31 exchange with as far as, not having to worry about seasoning, and we already know that down payment was at a qualified intermediary. So there's a lot of things to to consider. It sounds like my question would be is if someone's thinking about applying and working with you or one of the awesome people at the mortgage shop, when should they talk to you? Probably, you know, in that process of looking for a property.
Speaker 3:Just
Speaker 4:So I say general rule of thumb is three to four weeks before you're ready to offer because this is what happens. Have you guys ever, like, looked at a car that you wanna purchase and then you see that car everywhere when you're going somewhere? It's because it's in your mind. It's it's literally psychology. So if somebody is like, okay, in three to four weeks, I'm going to start offering on a property.
Speaker 4:Well, then they see this property that comes up that might be a unicorn to them. And they're like, oh, I really need to offer on that. Well, guess what? They haven't started their pre approval process. So by the time that they do that, that property may already be gone and have an accepted offer.
Speaker 4:So I say three or four weeks before you're ready to offer on a property. That way we can look at all of your loan options because we don't just put you in a box. Right? We say, okay, let's look at what your long term goals are. Let's see if you qualify for a conforming loan because they do have better terms.
Speaker 4:Or if you need to close in your LLC, let's look at the DSCR loan. If you're doing a ten thirty one, let's sit down with your CPA and make sure that you have all of that figured out so you can actually do that ten thirty one. So it's like a group a group effort.
Speaker 3:It is. Board Bill, your board of directors. Right?
Speaker 2:I was I was gonna say, I I almost have a two part response to that. The first one, Brett, that may be the best analogy I've heard in a while regarding seeing the same you know, seeing your favorite car, the one you want. This guy is standing next to me, on this side of the table is notorious for analogies. That one definitely, I think, takes the cake of the day.
Speaker 3:It does. It does. It's awesome.
Speaker 2:On top of that too, I mean, to really, really drive that home, I know we talk about building your your BODs, your board of directors. So I assume that it is more important than a lot of people realize to have, obviously, the partnership in place, say say with y'all or any lender, but then also on the CPA side. And so everybody really knows what's out there, what's really required, especially for somebody looking to, you know, jump into that first investment property as, Chris, you had mentioned a little bit earlier. So so there's really not as many surprises. And if there is, you have the people in place that can communicate together to hopefully get you the get you the closing table, get you moving instead of it, you know, getting getting three weeks in, two weeks in and your, you know, your world blows up and all your plans fall apart, and then you're starting over and over again.
Speaker 2:So, again, kinda driving that home on on building that board. Am I right, Chris? You know I love that, by the way. I know.
Speaker 3:I have one more question and, for Brenna. Just thinking about a lot of the experiences that we see out in the field, and a lot of questions that we get in the teaching tax flow ecosystem. When someone's partnering up to buy a property, let's say they have a multimember LLC and a lot and let's say it's a short term rental property and you have multiple members, and can we you know, is that how's that process different than just one person buying the property and and and let's say it's a DSCR situation. Is there
Speaker 4:So you're saying, like, closing it in the LLC's name?
Speaker 3:Yeah. And let's say John and I went wanted to buy a property together. We form an LLC. Do do both of us have to or do you know, who so both side
Speaker 2:on the more I know some
Speaker 3:of these answers, but I'm just I know the questions I always get. So I and and you could better answer them better than myself. But how would that work from a lending perspective?
Speaker 4:Both be on the loan. You don't have to both be on the loan. However, if you're a majority owner, so if it's a fifty fifty, then you're both majority owners. So we just need, like, the license of everybody that's a majority owner, and then they will have to sign a closing as well for title to be on the LLC because, again, you guys are majority owners. And then with that partnership thing, let's say you wanted to just test the waters and do it in a personal name first.
Speaker 4:You know, always have an agreement in place to protect you and your partner. I feel like I have to preface that, but let's say you want to do a conforming loan because it's a better interest rate. It's better terms. Make sure, try to make sure one of you qualifies for it by yourself and the other be on title. And then the next time the other partner go get the loan and you be on title.
Speaker 4:Because if you guys are on one mortgage together, that's gonna cap you for how many financed conforming properties you can have. And then if you two go your separate ways, that debt is going to 100% count against each of you on your next transaction.
Speaker 3:Right.
Speaker 4:Because let's say, unfortunately, if your partner passes away, that debt's yours. Like, you're not getting out of it. So lenders have to count that a % against you. So that's when we say, what's your long term goals? Do you wanna close it right in an LLC?
Speaker 4:Are you planning on just quick claiming it to an LLC? What are you wanting to do?
Speaker 3:Mhmm. And that's I I I always use the term, what if, you know, someone gets hit by a beer truck? Because I guess that's one way to go out. But but what's gonna happen? This is amazing.
Speaker 3:And and I know, there are a lot of other things that the teaching tax flow community would love to get some education on, such as that we we don't have time to talk about today. We're talking about due on sale clause and seasoning requirements and different options. Brenna, what type of education does the mortgage shop offer? And and, obviously, we're gonna link up all of all of that content into the the show notes.
Speaker 4:Yeah. So I actually every Wednesday, I do, what's called mortgage shop prep. And so I get all of the clients that want to learn. I, they join numerous times because there's different questions asked, but I go over all of the proper, the loans that can make you income essentially and go over the frequently asked questions around them. I do go over the due on sale.
Speaker 4:I go over quick claims, all of that. And then I open it up to everybody to ask their questions, so they can get better prepared and be better educated as a buyer. And that's mortgageshopprep.com. And that's what I do every week, and they're welcome to join. It's free.
Speaker 4:It's just laid back Zoom meeting. You know? So they're just continuously learning and growing as an investor.
Speaker 3:And that's why we really wanted you on the show. The mortgage shop does a great job of of educating, of consulting the business. The business is the business will come if you educate and consult in with with people because then they're gonna be they're gonna feel empowered to make decisions and feel confident with that team. So we'll definitely if you're listening to this podcast, I would encourage you to jump into one of Brenda's Wednesday sessions. Just educate yourself.
Speaker 3:This is something that not everyone has access to. So but now you do.
Speaker 2:The whole line of you don't know what you don't know.
Speaker 3:Right.
Speaker 2:It's perfect. Awesome, Brenda. Well, thank you again for for joining us as well. All the listeners on here, obviously, we will put in, obviously, the link to this podcast across our social platforms as well as, Brenda, we'll we'll drop the link to y'all's website in our show notes as well. Anything else that you'd wanna share about the mortgage shop with anybody on here?
Speaker 2:I mean, besides that you guys are fantastic. We already know that. You don't have to you don't have to go into that one. But
Speaker 4:We are also investors, so we know what it's like to go through. So I've actually hired and onboarded and trained my pre some of my previous clients that started out as investors and they know what cashflow is. They know what cash on cash return is. You know, rate of whatever you put into it. You, you have to have somebody that knows that because I can train.
Speaker 4:I can teach somebody guidelines. You can't teach people how to know about an investment property if they don't even own one. So we are seasoned investors. We know how exciting it is to get under contracts, and therefore we try to make every deal close for you guys in a great small amount of time.
Speaker 2:Excellent.
Speaker 3:Yeah. You've got to eat your own cooking. If I John, you know, I love that phrase, and that's why I love what the mortgage shop's doing. Thank you so much, and we are so excited to be part of, the same ecosystem with you. Absolutely.
Speaker 4:Awesome. Thanks for having me, guys.
Speaker 2:Absolutely. Well, thank you for joining us, Chris. Thank you as always for dealing with me, standing next to you, nudging you on the show. My pleasure. And as we keep moving forward, obviously, we'll have some guests on with us.
Speaker 2:I know, Chris, we have some fantastic topics that me and you are gonna be chatting through, just a little bit about the the content that is part of teaching tax flow as well as, you know, as we kinda truck into the new new year already. It's gonna be 2023 before we know it.
Speaker 3:Yep. Let's hit the ground running. Get prepared. Make sure that you plan for your acquisitions before you start making offers. Three to four weeks before you start seeing that car on the road.
Speaker 2:Excellent. That's a great mic drop. We're all day care. Take care. Thank you, everybody, and we will see you next week.
Speaker 2:Bye.
