And welcome back to The Lending Lab, everybody. This is sponsored by FACo Lending, or also known as Finance of America Commercial. My name is Trevor Javier Burns. I’m an account executive vice president over here.

This is my co-host, my colleague, Mr. Blake Orman himself. And this is your one-stop shop to learn a little bit, get the ins and outs of what real estate investing looks like, how to understand financing when we’re talking about breaking it down just a little bit more so it’s not as confusing. We’re not just throwing numbers at you.

And then just overall to inspire individuals to get into the real estate business and finding out how lucrative of a business this is. And then overall, we want you to understand that we want to build that relationship and become your one-stop shop. So Blake, let’s break into today’s episode. Today, we’re talking about real estate 101.

We are talking a little bit more about affordability, about interest rates, and about why the time is now for real estate investing. This is exit 101. Why invest now versus waiting on the sidelines? Mm-hmm.

A lot of people call you up and they say, “I’m not buying anything right now.” And you say, “Why not? The time is now.” The time is now. It’s also about patience. So when you speak to investors and they said they’re not buying anything right now, what are their first top three excuses they tell you why they’re not going to buy something right now?

Number one is the prices are too expensive. The price is too expensive. Okay. Number two, interest rates are too high.

Interest rates are too high. Number three, all my money’s tied up in other projects right now. Okay. Those are three very valid reasons.

Mm-hmm. But what we need to do is we need to reset the way we look at interest rates. Exactly. So break it down for me a little bit.

We’re talking about interest rates as a whole. People are looking at interest rates today versus where interest rates used to be in 2021, just right after the pandemic, and affordability. Exactly. How does that all play into where we are today in the current real estate cycle?

So when we’re thinking about interest rates back in 2020, 2021, they were at a low point because the economy wasn’t booming as much. It wasn’t flourishing as well. So to help boost the economy a little bit, what did the Fed have to do? What did the interest rates have to do?

They had to- Lower the interest rates. They had to lower the interest rates so people would be incentivized to buy more houses at a cheaper, or not even cheaper, more of a discounted rate. And influx capital into the economy. Exactly.

When you influx all that capital into the economy, the economy can also raise their bar a little bit, and then the interest rates can kindly follow. Capital keeps flowing in from a mixture of investment from the lower and also from a mixture of the lower interest rates, and that starts bolstering a healthier economy since nothing was really moving for a short period of time during the pandemic. Exactly. So you’ve seen a lot of the investors we work with, they’re like, “Oh, interest rates were so low in this time.

We had 2%, 3%, 4%.” And now when we’re fast-forwarding a little bit to 2025, 2026, and more of the current time period we’re in, we’re seeing a lot of rates in the sixes, the sevens, and the eights. And this is not like 2024, the highest was around eight and a half, 8.49. So that’s par plus 200 basis points above our lower- About 400. 400.

Yep. So at 8%, that was the highest that we’ve seen. Correct. But we still saw investors getting into the market.

Why is that? So what feels expensive at 6% to 7% is actually historically more normal. The 2% to 3% interest rate environment of that post-pandemic environment- Mm-hmm … is actually abnormal.

So that made housing affordability a lot higher. Now we’re looking at a higher interest rate environment, but also housing prices being a little bit higher as well. Mm-hmm. So how does that play into affordability?

So when we’re talking about the affordability of it all, let’s say you’re a first-time homebuyer, the end buyer for our investors. You want the lowest interest rate possible, but also at the same time, you want to buy your home. Correct. So you also have to have a debt-to-income ratio.

The interest rate also plays into consideration of how much income you make versus how much debt you’re taking on and what your monthly payment would be. So if your interest rates are 2%, 3%, that’s want to say like a seller’s market in almost, no? Sure. Yeah.

But at 6%, we’re in that buyer’s market because we want to make sure that the person that’s taking out the loan, the end buyer, can be able to pay this home loan on a monthly basis- And afford their monthly debt service … exactly, for the next 30 to 50 years, whatever type of loan they take. So we’re getting into an environment where the interest rates are a little bit higher. So we need to make sure that the investors can actually hold that note and make that debt service every single month.

Exactly. And then that also helps our investors as well, because let’s say at the end of their project, they’re doing a fix and flip, they’re doing the BRRRR strategy, they rehab the house, and they can’t find the exact price that they want, so they transition into a DSCR refinance, which we’ve spoken about before. And let’s say rates are at the high of 7.8% or 8%, just throwing numbers out there on the higher end. If an investor’s property can maintain a DSCR of a 1.05 or higher at an 8% or a 7.8% rate, just imagine what happens when the rates come down a little bit more to standard around 5% to 6%.

So we really need to monitor that exit and underwrite maybe to even a higher rate on that exit to make sure that there is still that cushion. For example, if you’re borrowing, and taking out a fix and flip loan where the rates are today, we’re always hoping that rates go down- Mm-hmm … but we need to be underwriting at that worst-case scenario in case rates go up. So typically, it’s best to underwrite to an interest rate that might be 100 bips higher than today’s current rate.

Mm-hmm. And banking that they go down, but they still might go up. Yeah, exactly. And then we alsoAre mentioning with that, we’re bringing it back to a little bit of the values.

If you’re waiting a year for a 1% decrease in rate to get into the market to buy your first rental property or buy your next rental property, you’re waiting for 1% decrease in rate. Appreciation happens no matter what. Right. At these values.

These houses are going to be sold no matter what. Somebody’s going to buy this house, especially if it’s in a hot market. So with that, you may end up paying 10 more percent on your total price, which is also a detrimental thing to your business if you’ve missed out on a good deal because the rate was at 7%. Rather, you can refinance later on after you purchase it.

And potentially lower your rate. Exactly. Because rates have been going down. As the Fed has announced over the past 12 months, we’ve had quarter point rate cuts over the past six, nine, 12 months.

Mm-hmm. We’ve seen a quarter point rate drops each time the Fed had a meeting in 2025. Exactly. So the strategy is not buy something and only if it works if rates fall.

The strategy is buy something that works now and becomes even better later. And as you said at the beginning of this call, we want to protect that exit and figure out that the rates today will still allow me to sell when I’m done with the renovation in 12 months. Mm-hmm. So is the exit going to be a sale?

Can somebody still afford my property when it’s done? Or can I refi at a better rate when the property’s completed and I want to BRRRR this into a DSCR loan? It’s always good to have those two exits anyway. You need to always have both exits.

You need to underwrite to both. Yep. And then having different prepayment penalties allows you a little bit more flexibility because- So our loans at Faco actually for the bridge loans don’t have any prepayment penalties. Mm-hmm.

So, if you are done with your renovation early and you do want to get into that DSCR loan, it always makes sense to refi at a lower rate and cash flow based on the rent that’s coming in. Exactly. So, and then we also have different options. If you believe, if you want to take an educated guess, think that the rates are going to be a lot less in five years, you can refinance with a five-year prepayment penalty, where your rate’s a lot more discounted than more of a premium rate at a zero-year prepay.

But that’s just kind of outweighing your options and taking a look at as an investor and understanding the long game rather than this is not a get rich quick system. This is not- No … something you could just throw your money into and let it grow, and you know it’s a for sure investment. It’s kind of easy to sniff out when you’re looking at a deal.

If someone’s looking for some sort of get rich quick scenario- Mm-hmm … it doesn’t really exist in real estate. No. Real estate is a long-term appreciation goal.

These properties don’t appreciate day over day, week over week. No. They typically appreciate on a month-by-month basis, or even year by year. So when we’re looking at Real Estate 101, we’re looking at real estate investing as a long-term investment, as a long-term goal.

Yeah. So it really is not a get rich quick scheme. And why the time is now is because, like we said, the property values are only going to increase, and you don’t necessarily know where the interest rates are going to be at. Right.

You want to underwrite to them being a little bit higher and hope that they go lower. So now you- So we’re seeing housing prices go up, and we’re seeing rates going down- Mm-hmm … presently. That does make that house a little bit more affordable for that specific investor.

Exactly, but why the time is now is because the money that you’re potentially saving on a 1% in interest rate, that you could be saving if you wait a year from now, if the rate drops, the money that you are saving, rather you’re going to be paying an extra 200, 100 grand, 250,000 on your purchase price. You can’t refinance a property you don’t have. So you’re saying you’re saving money by buying the property today. Almost buying the property today, because if it cash flows at a higher rate now, imagine in a year from now the rates are lower and your value has also increased.

So now you can pull out some equity- Right … with a lower monthly payment, and now you kind of just made a really strong investment within a year or two. So you’ve built up all this equity based on appreciation and holding this property for 12, 18, 24 months. Mm-hmm.

And you can pull out your equity, refinance at a lower rate, and let the property cash flow over a 30-year mortgage. Exactly. And that’s- A beautiful thing … and that’s some of what our seasoned investors work on, is even though they know they’re entering into an 8% rate market, they know in a year or two that rate could be 5%.

Right. And they have the flexibility to be able to refinance that, and they bought it at such a discounted price, not at a premium, so that now when the 5% interest rate is here, they don’t have to buy it at a premium price. Right. So it’s kind of understanding why the time is now to get into the real estate market so you can kind of play with the ups and downs and understand, I can’t foresee where the prices are going to be at in a year.

I can’t foresee what the interest rates are going to be at in a year. What if everything all goes south if you wait a year? Right. What if the interest rates, you’re saying, “Oh, the interest rates are going to be lower in a year.” It could be 2% higher in a year, and the prices could be also higher.

So the rates and the economy do have a direct correlation to purchase prices, real estate, and affordability. Exactly. So when the economy’s strong and purchase prices are strong, we want interest rates to be low- Mm-hmm … to sort of manage that affordability piece and how much you can really buy and how much money you can actually afford to borrow.

Yeah. Because with higher interest rates, it does make that property monthly debt service become a little bit more expensive. Mm-hmm. So you got to make sure that you’ve underwritten your risk tolerance, how much you can actually afford to borrow and pay every month.

Put together your list of expenses. Can you afford that mortgage? Can you afford that house? So when you’re looking at buying a house, put all that into the picture and put that all into one big puzzle and put together your level of risk and your level of affordability as well.

Yeah, and if you’re looking to get into the real estate market today, we’re not having this conversation here to… scare you guys. We’re here to forewarn you guys on the risk that you guys are taking in the real estate market as a seasoned investor, and as a first-time investor. These are the plans that you guys need to have in place in order to be an okay investor to a strong investor, to have multiple avenues to exit out of a bridge loan, or to not even take a bridge loan in the first place because you go straight to a rent-ready property.

So then, and even to how you’ve taught me, learning DSCR, learning interest rates, you’ve always said this, it’s very refreshing when a client or a borrower is taking a 50% LTV loan refinance with… And it’s a lower interest rate. So historically, how it works when we’re talking about loan-to-value with DSCR and interest rates, if the higher the LTV, the higher the loan amount that we give you, the more, the higher the interest rate that we’re also going to be able to provide for you. The more leverage, the more the interest rate is.

Exactly. So when the lower LTV- Lower the rate Lowers the- Because there’s less risk associated with that. Exactly. And then our clients that are taking these 50 LTV loans, they understand this risk, and they understand that, hey, if I take a lower, I take less cash back, I pay less on a monthly payment, but now I’m paying lower interest rates.

My rent’s still going to stay the same. I’m going to bring in, before I was making $200 a month, I’m now making $500 a month off this rental property. So in that exact same scenario, it actually is even more interesting. Say they’re taking a 50 LTV loan on a $1 million property, that’s a $500,000 loan.

Now in two years, that $1 million property’s worth $2 million. Mm-hmm. You’re not sitting on $500. You’ve now built another $1 million of equity, just over appreciation year over year.

So- And you’ve refinanced it again in that year or two … another 50 LTV loan, pay off the $500,000, now you’re at $1 million against a $2 million valuation. And that’s how these properties continue to appreciate year over year. And as rates change, you can see interest rates change, and values change, and people’s risk appetites change, and they want to refi.

Typically, the people stay in these loans from anywhere from two to five years- Mm-hmm … on average. Exactly. To bring up the risk tolerance, you want to kind of understand, how much tolerance does an investor need?

How much do I need to have as an investor to be able to stay in this loan and not be losing sleep at night? How long am I supposed to stay in this loan? How long should I– When should I refi? When’s the right time to refi?

Now the question is, don’t refi unless you need to. Unless you need to. Typically, these mortgages are 30 years. The interest rates typically have cycles, where the interest rate environment is drastically changing every two to four years, and you can start seeing differences that really are meaningful towards your real estate portfolio.

Exactly. And then when you’re also thinking about being a real estate investor, when you’re trying to exit out of a loan, you’re probably going to want as much cash out as possible. Everybody thinks, “Oh, I’m going to pull all-” Well, there’s two types. There’s sometimes they want all the cash out, sometimes they don’t.

Exactly. Because it’s kind of what your strategy is. And that’s when we talked about your avenues as an investor. You can do these light and fix and flips, and you can sell because you know they’re going to sell, or you can do these light or these heavy expansions, these ground ups.

But you need to have an exit plan. Or you can refinance these houses that you built or you’ve worked on, pull the equity out, use that equity to buy another house, and now build your portfolio like that. That’s called… We’ve seen that a lot.

But then you can- Very common That’s a very common one. But you can also sell that house or just have different exit plans. Just having different exit strategies allows you to become more seasoned, have more experience, and then understand the language a little bit more. Understand the name of the game.

The more transactions you do, the more you understand values, rates, and the market as a whole. So, you’re doing a flip, that was a purchase transaction with a loan, and an exit transaction where you see your profits come in. Mm-hmm. When you’re doing a DSCR, you’re doing an appraisal at the purchase, you’re doing an appraisal at the sale, at the refi.

So you… And then another transaction then as well. But if you’re staying in the deal, there could be another transaction coming up in two to three years, where you’re seeing more cash come out, pulling out your equity and refinancing at a lower rate in three years, depending on what your risk profile really is. It’s not about blind optimism, saying, “Oh, I’m going to get the best deal on my first one.” No, it’s all about patience- Mm-hmm …

in this game. Exactly. And we mentioned before, we want all of our investors to underwrite their own loans before we even underwrite it as well. A lot of times we both underwrite, we underwrite it and they underwrite it, but we want you guys to come to us with some sort of selling analysis to why we should make the loan.

Yeah. For example, don’t just send me an address and say, “Hey, make me this loan.” Yeah. We like to see the deals that’s a little bit, call it half-baked. Mm-hmm.

Is the property financeable, and why? And why we should finance it. So, when we’re looking at it from a lender perspective, you’re looking at it from an investor perspective. We appreciate your point of view, and you guys appreciate ours.

And that makes this beautiful partnership in order to make one loan together with the debt and the equity. Exactly. It’s not a one-person show. No.

You need the team. The team around you is going to help you understand some of your risks, and then understand where you’re winning. Exactly. That’s why this debt versus equity underwriting mindset is very helpful when underwriting a deal and when looking at the risk profile of that deal and looking at the interest rate as a whole.

Because sometimes they’re underwriting to the wrong rate overall. Mm-hmm. “Oh, your rate’s actually only going to be 6%. I was underwriting to an 8%.” So there are some savings that they can see when they’re looking at a refinance scenario and a takeout loan when buying a new property, when buying a house.

Yeah. It’s better to underwrite to a higher interest rate to see if the deal is profitableIn case the market is at its worst, at 8% to 9%. That’s very close to where bridge rates are at today. So if you underwrite to that current rate, imagine when the rates come down and they’re at 5%, your deal is that much more profitable.

And so that’s just underwriting conservatively as an investor. And then on top of all that, you don’t even know on some of these rental properties if the tenant will make the payment every month. Right. So you- So you lose the tenant, you lose all your income.

Exactly. So you want to be able to have not only a stable asset, so you want to underwrite your tenants, like we’ve mentioned before. You also want to have liquidity in the bank that just in case anything happens, the tenant loses their job in a bad economy as well. So being smart with the money, understanding finances is very crucial to getting into these DSCR loans or these fix-and-flip ground-up construction loans, because all of this can turn south if you make the wrong moves or if you’re thinking about it in the wrong way.

Us as a lender and you guys as the investor, we don’t want to invest in deals that aren’t profitable, and you guys don’t want to also invest in deals that aren’t profitable. So, you know- Exactly … you and I, we’ve seen deals come across our desk that aren’t profitable. It’s not a good fit for you, not a good fit for us.

A lot of times the borrower walks away. Mm-hmm. And that is the strongest part of being a real estate investor, walking away from a deal and knowing before you buy it that it’s not going to be a good hit. It’s not going to be a home run.

So there are a lot of factors that go into that. But as we’ve talked about, us and the borrower together can come up with reasons of why this is a good deal, why it’s not, and when to walk away. It’s all about building that skill. Like any other skill, it takes time, practice, patience.

Yeah. You see somebody do it first, and then you do it yourself, you’ve realized it’s not as easy, and then you kind of master it, and then you can pass that same skill that you’ve just learned on to the following people, say if it’s your friends, your network, your generations. But this is what the bigger picture we’re talking about is be patient with your projects. This is not at all a get rich quick.

And we have just overall managing your risk tolerance, looking at the cycle of interest rates, where they’re at. You don’t need a finance degree to know any of this. These are all public information. You can see the horror stories online of investors not making the right moves at the right times.

Right. Biting off more than they can chew. It’s not just for rehabs and fix and flips and ground-ups, it’s also for rental properties as well. If you get into a DSCR loan or buy a property, but you don’t have six to eight months of reserves in your bank account, that tenant stops paying for six to eight months.

In some states, tenant laws are completely against the landlord’s favor. So that tenant could be in there for a whole year without paying a single rent payment. And now you’re stuck with making that mortgage payment, but you’re not getting income coming in. It’s not a healthy scenario for the wellbeing of that property.

Exactly. So- So now you are, now that- You’re in the red … now you’re in the red and your property is bleeding. And so it’s kind of understanding, all right, I have to underwrite.

There’s a whole process to every single step in real estate. Yeah. You have to underwrite to a vacancy perspective. You have to underwrite to, if this property is vacant, can I sell it and still make a profit?

And these things take time and research and understanding your market, but all of these steps that we’re allowing you guys to learn right now are steps that are going to– The steps you learn today are the steps that are going to follow you guys for a lifetime. And when the tenant leaves, you have to get creative. You have to put in, you have to find a way to do some light renovation, make the property rent ready again. Mm-hmm.

Maybe you need to do a deep cleaning. Maybe you need some short-term income just to offset some of this renovations you have to do, but you got to get creative. You have to figure out a way to make this property rentable again, livable, and for somebody to move in right away and get it leased up. Exactly.

And we’re talking about the people on some of our audience, they say, “Oh, I’m never going to keep the property. I’m never going to keep the portfolio. I just want to keep the profit of what I can sell it for.” Take the money and run? Yeah.

What do you say- We hear that a lot … what do you say to those people? So primarily, if your exit strategy is to sell the property, I’d say go for it. Make this property sellable, put it on the market, test the market, and see if you get your number.

Fallback is to rent it. If you can’t sell it, then you got to rent it. But then how often do you see the property not selling? Not that often.

Not that often, right? No. Typically, it’s going to be sold for the number that the seller and the buyer agree upon, or maybe it’s a little bit less for the seller, a little bit more for the buyer. They agree upon a number, and the property sells.

How about you? How often do you see the property not sell? It really depends on the market and then the interest rates. That’s true.

So, if a first-time home buyer is buying a house, they want to try to get the lowest rate possible as well because they’re going to be locked into this loan for 30 years. Right. So they want to be able to make sure that they can make that monthly payment. They just want to be able to manage correctly and not go wrong with that sale.

And if they buy, they don’t want to get into a bad– Because overall, a house purchase is still- The biggest purchase that you usually make in your life. Exactly, because that’s still going to be where you live for the next 20 to 30 years sometimes. And with that, you want to be able to make sure that you can keep this asset and not go south at all. Right.

So that’s- Let’s drive back to why this market presently is actually a very favorable market to buy. We’re talking about properties are appreciating year over year- Yep … all across the nation. We’re talking about interest rates are at an affordable pace right now.

Historically, they’re still- They’re kind of at the average … at the average rates. So really, the time is now, and this market does favor seasoned investors to get into flipping. That kind of weeds out some of the people that aren’t as experienced- Mm-hmm …

because interest rates are sort of more expensive right now, butunderwriting to where they could be in two, three years. Mm-hmm. We’re not really sure where they’re going to go. No.

Nah. So like- What are the other reasons why someone should invest in a property today versus waiting on the sidelines? Because you don’t want to just let your life go by and you haven’t taken that step. At the end of 2025, we, me and you mentioned on one of the episodes- We got dreams …

we have dreams. The time is now. Yeah. There’s no better time to get into real estate by just doing it.

So just understanding, doing the research, buying smart now, understanding if you can buy something at a 7% rate, in two to three years, say the rates are at 5%, that loan still works. Makes sense for the buyer, makes sense to refi, it makes sense to own a home. Mm-hmm. So all those factors put in together, it helps build and increase the investors in the market and allowing people to buy more homes.

And it really is a good time to buy homes because of the appreciation we’ve seen year over year. And look- Let’s talk about the market as a whole, and we’ll talk about as reserves come up. How much money do you want to keep in reserves in order to make sure you have that debt service on hand? What’s the golden rule?

How much do you really want to see as a buyer, and as an investor, and also as the lender? How much do we really like to see? We like to see 6 to 12 months. 6 is usually- That’s a good number …

6 should be a minimum. Six months. Six should be a minimum, but the more, the better for everybody. Yeah.

Because the more- I think it’s important to keep at least 6 to 12 months of reserves on hand in order to make sure you can pay that debt service every single month. Exactly. Make sure you’re not biting off more than you can chew, and you’re not depleting all of your capital, making yourself cash poor and asset rich. Yep.

There needs to be an equal marriage between the two. There needs to be a balance. A balance, exactly. So make sure that you’re keeping enough money in equity to make your property not too over-leveraged, and enough money in the actual bank in order to pay debt service, pay your other life expenses, and even keep some extra cash on the side, too, if something else comes up, if you want to buy something else, and you want to invest in another real estate property.

Yeah. We’ve seen a lot of investors turn their lives around from making the right moves and the right decisions, taking that risk to get into the market when they can, when they have that idea light up in their head. And then we’ve seen them change their whole lives because they made the right decisions. And when it was COVID time, “Ooh, interest rates are low, I’m going to refinance now.

Now I’m making twice the income I am on that property, and I pulled out some equity from it.” And they don’t really have any of their own equity in the deal anymore in some of those cases, because they refi’d at a higher valuation than what they purchased it at. So we’ve seen a lot of those. The value stays strong, and the values go up year over year. Exactly.

So that is a really nice thing to see- Mm-hmm … from the investor seat. Yeah. And exactly.

We are running up out of time right here. If I have any closing takeaways, I will say the time is now. You can’t refinance what you don’t own, and use that to your advantage. If a deal works at 7.5, that deal will also work at 6%.

So I’ll also leave some closing remarks at stay disciplined, be patient, and the time is now. Get into that real estate transaction that you were trying to get into last year. Stay patient. Keep looking.

And if the transaction is not the right one right now, keep looking out there. Maybe you’ll find another one next week, next month. Mm-hmm. But don’t get discouraged because there’s a lot of competition out there, a lot of buyers.

So keep your head up, stay patient, and yeah, the time is now. Understand that this business can make you asset rich, it can make you liquidity rich. You have to be disciplined and creative enough to understand how the market works, how to understand your local market works, and then understand your long-term goals as well. This is not a get rich quick, this is not a 30-minute episode of HGTV.

This is how real estate finance actually works behind the scenes and how our investors are thinking about it day by day or year by year. So if you guys have any questions about anything we spoke about today, Blake’s always one call away. I’m always one call away to send us a text. Say, “Hey, I need help understanding what DSCR, how to calculate it.” We have calculators on- “I need help how much of a loan I can qualify for.” I get that question all the time.

Yeah. So it’s all about buying smart now, financing right. It’ll create strong opportunities and strong net worth later in life, later down the road. Exactly.

So buy smart now. You can get a little bit more creative later down the line. So about being patient, like every other skill, takes time, patience, and repetition. If you guys have any questions at all, it’s been an amazing episode here.

We’re very happy that you guys joined us. This was our most in-depth episode yet. We went into the deep financial markets of it. So if you guys have any other questions following this episode that you guys watched, go to the Fat Coal Lending website, the Instagram page, find our numbers, our emails.

We’re always one call, text, email away. If you have any questions, we’re always here. Once again, I’m Trevor Javier Burns. This is my colleague.

I’m Blake Orman. Mm-hmm. Thank you guys so much for your time today. Thank you for joining.

We’ll see you guys next time. Thank you, guys. See you next time.