Should You Max Out Your Conventional Loans?

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Many investors want to transition to full-time real estate entrepreneurship, but feel like they need to keep their day jobs so that they can continue to qualify for bank loans. They say, “I’ll quit my job after I’ve maxed out my conventional loans.” But is that a good way to think about it? Is the investor accidentally limiting themself with this mentality? In this episode, Jeff discusses two important considerations when deciding if you should be focused on maxing out your conventional loans, or not: First, don’t let the lender tail wag the investor dog, and second, don’t assume bank loans are better.

Episode Transcript

Conventional loans from banks, they can be great tools. There’s no doubt about that. But how hard should you work to make sure that you are maxing out your ability to get those conventional loans? before you turn your focus to learning other types of financing like seller financing and other forms of private financing? In this episode, we’re going to talk about how you can think about that important decision. I’m going to give you two thoughts and philosophies and perspectives to unpack this conversation for your thoughtful consideration. So let’s cue up the theme song jump right into it.

Welcome to Racking Up Rentals, a show about how regular people, those of us without huge war chest of capital or insider connections, can build lasting wealth acquiring a portfolio of buy and hold real estate. But we don’t just go mainstream looking at what’s on the market and asking banks for loans, nor are we posting We Buy Houses signs are just looking for “motivated sellers” to make lowball offers to. You see, we are people-oriented deal makers, we sit down directly with sellers to work out win-win deals without agents or any other obstacles, and buy properties nobody else even knows are for sale. I’m Jeff from the Thoughtful Real Estate Entrepreneur. If you’re the kind of real estate investor who wants long term wealth, not get rich quick gimmicks or pictures of yourself holding fat checks on social media, this show is for you. Join me and quietly become the wealthiest person on your block. Now let’s go rack up a rental portfolio.

Hey, thank you for joining me for another episode of Racking Up Rentals. This here is Episode 109, which means Show Notes for this episode can be found at www.thoughtfulre.com/e109. Please do us a big favor by hitting the subscribe button in your podcast app. It really, really helps other fellow thoughtful real estate entrepreneurs to find this show; onward with today’s episode.

And today’s topic is inspired by something that inspires a lot of my ideas and things I want to talk with you about the conversations I get to have with people who are in the investing space, especially online and in social media. And I have had several conversations with people in Facebook groups that have gone a little bit like this, they say something to the effect of I can’t wait to quit my job. And I will be able to do that. But only after I max out my 10 conventional bank loans that I can get. It’s really important to remain bankable with my w2 job income. And my w2 based tax returns. So when I hear that I often ask well, why wait until you know you’ve got all those 10? Why not learn other types of financing now? And oftentimes the answer that I get back is some form simply of those loans are better loans. And I know I can get commercial loans and whatnot after that. But those won’t be as good. So I want to max out the best ones first.

So I want to give you today, two different thoughts that you can chew on a bit as you think about that topic. And first, I just want to say there is absolutely no right or wrong perspective here. If you feel compelled to max out your conventional loans and really focus on doing that. There’s nothing wrong with that, a lot of people would definitely agree with that. But what I wanted to do today is provide a couple different thoughts for your consideration, kind of in the vein of mostly questioning assumptions and just making sure that we are all thinking for ourselves so we can come up with our own thoughts and our own philosophies that we can feel good about because we know that we’ve really thought them through and we’ve vetted them.

So here are the two things I want to share with you. The first one is this. When you are waiting to make a job change or otherwise conforming your life to continue to qualify for bank loans, you are letting the lender tail wag the investor dog. Okay, you’re letting the lender tail wag the investor dog. Let’s just talk about that. What does that mean? Here’s how I see it. You are the master in your life. You are the king You are the queen. You are the one that matters you are at the center of your own world. Okay. Now what role do rentals play in that world? Your rentals are there to serve you. They’re not there. It’s not the other way around. You are the master and your rentals are there to serve you. Okay, let’s go one level deeper. What role do the lenders play in your rentals, the lenders provide tools that you might choose to use for your rentals.

So in other words, let me put that all in one sentence, lenders are here to serve your rentals, which are here to serve you. To put that differently, you can say you are at the top of the food chain, the rentals are there to serve you, the lenders are there to serve the rentals. Yet, people who are conforming their whole life around, making themselves look good to a lender, they’re letting the lender be the master, rather than letting the lender be the one who services, the rentals and letting the rentals be the one who services you. So you’re really kind of letting all of the players get in the wrong order the wrong hierarchy, you’re letting the lowest party on the food chain actually be the highest party on the food chain, you’re letting the lender dictate your life and the decisions you’re making in your life, just to keep them happy, rather than putting them in their spot, which is for them to be the tool for you to get done what you want to get done. So that’s definitely how I see it a loan, and a lender is there to serve your rental and your rental is there to serve you.

But at the top of that food chain, at the top of that pyramid, is you and I don’t like the idea of seeing people conforming their lives and tried to be contortionists to fit into the little box that makes the lender happy when ultimately that lender is a tool, right? You would never walk into your garage and say, What do I need to do to keep this saw happy, so that it keeps working for me, none of the saw is there to cut the boards, the boards are there to help you build whatever the heck it is you are trying to build, not the other way around. So that’s a bit of a philosophical point. But I feel like it’s a very important philosophical point, we can’t let those that are here to serve us actually become the masters in themselves, and inadvertently put ourselves in a position where we are now working hard to please them and to serve them.

The second point that I wanted to make is based on a massive assumption. Now when I have these conversations, these people almost always say some form of the loans they get from a bank are better. And we’ve talked about this a little bit on this show. But I want to revisit this. So first question I guess we have to ask ourselves is what is better? And I think that it’s very easy for us to think that better is really just a reflection of loan pricing, like interest rate, for instance. So somebody says, oh, the interest rates on the bank loans are better. So first of all, there’s an assumption. And it’s an assumption that is certainly not universally true. Are there certain bank loans that are going to be at lower interest rates than certain seller financing loans, for instance? Yeah, of course. But not all seller financing loans are that way. And there’s a tremendous amount of variation and variety from deal to deal. So that’s definitely not a safe assumption.

But let’s take a look at a lot of other ways that you might evaluate, alone, and things upon which you might compare a bank loan to a different type of loan, like you might get from a private individual or from a seller. Let’s talk about flexibility and customization. Well, when you are working with a seller, and you are creating that loan, you are actually participating in creating that loan, right? The seller, in most cases, especially if you’re doing it the way that we do it here at the Thoughtful Real Estate Entrepreneur, the seller is not bringing a pre-determined offering of a loan to you and saying, Well, here it is, take it or leave it now you’re discussing every element with them, you’re discussing the interest rate, you’re discussing the length of the loan term you’re discussing, what if any type of amortization is happening or whether it’s an interest only loan you’re discussing? When interest starts accruing, you’re discussing when the payments are due? You’re discussing if there are other creative aspects of, you know, the phasing of principal payments or anything, there’s so many different things that we can customize and alone. And the important part of this is that you are participating in that customization.

Now, is that the case with a bank loan? No, not at all. That’s very much a take it or leave it type of prospect, there might be some option that says oh, well pay another point here and adjust your rate down, but it’s not a conversation. They are putting the menu of options in front of you. And all you get to do is say yes or no. How about what I lovingly refer to as the supercharged elements of a loan, like just for instance, how about when you’ve got a private loan that they’ve made on property a, you might be able to get rid of property A and move that loan on to property B, is that going to happen with a bank? No, that is definitely not going to happen with a bank. That bank loan is absolutely going to have a due on sale clause and if you decide to sell that property or refinance that property, you are getting rid of the bank loan. So that’s one simple example of what I would call the supercharged seller financing elements that make the terms that you can negotiate when you buy seller financing properties. So incredibly valuable. Is that possible with a bank loan? No, not at all. Not in a million years.

So is that bank loan better? Well, again, it depends on how you define better. But if you want flexibility, if you want creativity, then and that’s your definition of better than a bank loan is not going to be better. How about the application process or the underwriting process or standards for a bank loan versus a private loan and a seller financing loan? Well, the bank application process is pretty straightforward. It’s not easy, but they’ve pre planned the whole thing and you get to follow exactly their process, you have to meet exactly their underwriting standards, they’ve decided in advance who’s getting loans, and who’s not getting loans. And if you can meet those underwriting standards of debt coverage ratios and having enough income, and you’re the ratio of income to the mortgage payment, and the loans to value thresholds and all of that, then you can have a loan. But if you don’t, then you can’t add with a private loan with a non-bank loan with a seller loan. All of that is if it even exists, much different, much easier, much more streamlined. I’ve never ever, ever filled out a paper or digital application of any type for a loan with a seller. I’ve barely done that for other types of private loans at all. The underwriting is what they felt comfortable and what I felt comfortable with.

Again, you have a say in the process. How about this next one? comparing bank loans to private loans and seller loans? How about when a problem comes up? How about when say, Oh, I don’t know, a pandemic arises. And you are concerned that your rental income is dropping? And you’re concerned about your ability to make a payment? Well, it’s a very different proposition to call a bank and say, Hey, can we have a little flexibility? We’re having some trouble based on this pandemic thing, versus to call your regular people who you know, well, who’s living room you’ve sat in, and whose coffee mugs you’ve drank out of at their kitchen table and say, Hey, can I have a little bit of flexibility here? I’ve got a creative solution. We’re going to postpone this month’s payment, and the next one will be double. What do you think about that? If you want to compare bank loans to private loans, that’s something you need to think about as well. Where’s the flexibility if something were to go wrong? What about loan to value thresholds? I kind of mentioned this a moment ago with the underwriting standards, but a bank loan is going to have pretty, pretty, pretty strict limitations on exactly what they will accept in terms of maximum loan value. Does a seller loan have that? No, not at all. They individually might have thoughts on that. But there are no set standards at all, are you going to get a 97% bank loan? Probably not unless you’re using some very special one-time type of a program. But that’s very potentially possible with a private loan or a seller loan. So again, LTV thresholds, part of the underwriting standards, the point is, there’s no pre-determined box that you have to fit in, you actually have a say on what that loan is going to be about.

Here’s one last example. Sometimes I see people talking about PMI. Actually, I almost forgot what PMI was. Because it’s been so long, since it’s been a part of my life, you’re not going to have to go get private mortgage insurance on a seller loan, unless that’s some very, very unique and very special negotiation that was important to that seller. That’s not gonna happen, that’s never come up in my life never come up in my business. I’ve never then stuck, you know, nine months later thinking, How can I justify that by property value has increased or I’ve, I’ve improved the property enough, I’ve paid down enough principal or whatever, so that I can get rid of this pesky and expensive PMI component of my mortgage payment, you never have to worry about any of that.

So is a bank loan better? I actually don’t want to answer that question for you. I don’t want to tell you that a bank loan is worse than a seller loan, I simply want you to come to the conclusion that you for yourself, have to decide what better means to you. And then to really break it down and to fairly and accurately compare a bank loan to other types of loans that you might be able to get, so that you can make your own decision about what is better for you. And if you’re going to plan and define and strategize your whole life to fit into lending, I want you to make that decision very thoughtfully.

So here is the conclusion I have come to because I don’t want to tell you that one is better than the other. But here is what I want. I just want you to think for yourself. And I believe that saying I’m going to stick in this job that I don’t like or I’m going to otherwise design my life around continuing to qualify for loans. I think that that’s taking the easy way out. I think that letting yourself do that and conform to what the banks want is taking the easy way out, it’s a reason to avoid learning something new. And instead of learning something new, and going through that pain instead we say, that sounds like a lot of work. I think I’ll just continue to conform my life and dance when the bank says dance, to keep them happy, so that I don’t have to learn something new.

But here is the point I want to remind you of, there was a point in your life, in which the idea of getting a bank loan was itself very scary. It was very unfamiliar, there was a massive learning curve, and a lot of self-discovery and growth that you had to go through to get comfortable with understanding the logistics of buying a property and getting a bank loan, seeing all those numbers on all the closing documents and thinking oh my gosh, I’m gonna pay $700,000 worth of interest by the time these 30 years are over. And that whole journey that was new and scary to you at one point, but you got to the spot, where no longer is that new and scary, you’re very comfortable with that. And now you want to stay in that zone of comfort. And I suggest to you that it might be worth your effort, your energy, to go back out into the area of discomfort. And to learn something new with the idea that that new thing that you might learn, while a new scary Uncharted bit of territory for you might actually serve you as well if not better than the tools you already have in your tool belt with the conventional loans. Again, I’m not here to tell you that bank loans are bad, I’m not here to tell you that you should not max out your bank loans. I am simply here to say that I hope you think for yourself, process all of your options accurately and fairly and make the best decision for yourself.

And on that note that is it for today’s episode of Racking Up Rentals. So again, show notes are thoughtfulre.com/e109. Please do us a huge favor by hitting that subscribe button in your podcast app. And if you would be so kind just take a second to rate and review the show, I so appreciate that. I see each of them personally. Did you know that we have a Facebook group for Thoughtful Real Estate Entrepreneurs as well? It’s called Rental Portfolio Wealth Builders and we’d love to have you join us over there; just go to group.thoughtfulre.com and the magic of the internet will take you right to that page and you can hit that blue Join button. If you liked this episode, please take a screenshot of it post it to Instagram, tag us; we are @thoughtfulrealestate on Instagram. I will catch you in the next episode. Until then, this is Jeff from the Thoughtful Real Estate Entrepreneur signing off.

Thanks for listening to Racking Up Rentals where we build long term wealth by being win-win dealmakers. Remember: solve the person to unlock the deal and solve the financing to unlock the profits.

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