We had a great discussion about how to get money to buy your investment properties.
Make sure you listen into the interview where Darel explains that financing is just starting to loosen up a bit.
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Leave a comment, let us know what you think of the interview!
Transcription by SpeechPad
Damon: Welcome everybody to this interview on Eyes on Investors. Today we’re interviewing Darel Daik. He’s the owner of Noble Mortgage & Investments. In the research that I did on you Darel, you have a history of what? About eight years or so of investing in real estate, is that right?
Darel: Probably. Well, that actually might be a little bit more. I’m trying to think when I bought my first property. It’s probably closer to 12 years now when I actually purchased my first rental property or investment property.
Damon: Okay. Excellent. So I’m really looking forward to hearing what your experiences have been and everything. Let’s start by kind of getting an idea of what you currently own. What’s your current portfolio looking like?
Darel: Right now, I own eight single-family rental houses, and they’re all leased except for one right now. We just had a vacancy.
Damon: Okay. So eight single-family properties. Are these all in Houston?
Darel: Yes. They’re all in Houston.
Damon: Okay. And you’re company and you’re based out of Houston as well, right?
Damon: Okay. So these eight houses that you’ve got, let’s go back and talk about how did you get started in real estate investing?
Darel: Well, I got into the mortgage business, first off, in 1995, as a loan officer for a residential company. I started investing in real estate when I was approached by a gentleman who actually called me for a loan. He called me and wanted to borrow some money to pay some property taxes on three properties that he had in Spring Branch. So I was trying to make this gentleman a loan, and he was an older gentleman. He lived a couple hundred miles away, so he was kind of an absentee owner. He hadn’t paid property taxes in I think it was like eight years or something, a long time.
So I was trying to arrange this guy a loan and just couldn’t get a loan done. After working with me for a while, he approached me and said, “Would you like to buy these houses?” And at the time I never really had any experience with purchasing, and so it kind of took me by surprise. As I looked into it, it looked like well maybe this would make some sense. There were three houses. They were all in the same neighborhood. They were all rented, but there was a lot of work that needed to be done to them.
So that’s what really started my career in owning property was just a call and trying to get someone a loan, and I ended up buying these three houses.
Damon: I see. So you saw those three houses. You looked at them and realized that this was going to be a good purchase for you. Do you remember what the criteria was? How did you decide? What were you looking at to make that determination where kind of the light went on and said, “Hey, this would be a good thing to do”?
Darel: The houses were paid off, except for the taxes owed. So I knew there was some good equity in there. I had some experience in real estate about what values were. So I looked into the value and so forth, and just went out there to look at them first and saw that there was an opportunity.
This guy was in a distressed situation. He didn’t know what to do. He was either going to lose those properties or he had to sell them. When I went and looked at the properties, they were in pretty rough shape. Something just clicked that this was probably an opportunity for me to get my foot wet in real estate, as far as owning real estate. I took them on, and it was definitely a learning experience after not having . . . I was making loans on properties, but never actually owning them and having to fix them up and deal with tenants. So that’s kind of how it started I guess.
Damon: So you were having the experience that your clients had been having, now you were having that same experience.
Damon: Were you worried about doing the rehab work on those to get them fixed up?
Darel: Yeah. I didn’t have a lot of experience in fixing properties up. So that was a little bit of a concern, but I just tried to get a handle on what needed to be done immediately on the properties and get a contractor out there. I had done some home improvement projects at my own home from a contractor, so I had him come out and take a look at it and give an estimate. So it was a little bit . . .
That’s probably the most intimidating part for me at the time, because I knew how to do the financing. Leasing them I wasn’t too concerned about. The rehab was a little bit intimidating for me because I hadn’t done a project like this. We’d done a remodel on a bathroom at my house, but nothing to the extent that these houses needed.
Damon: Do you remember how much it cost you to rehab these properties? It sounds like they were in pretty bad shape.
Darel: Yeah, they were pretty banged up. I want to say I spent, on each house, anywhere from $15,000 to $25,000.
Damon: Okay. Yeah. So that was a big project to do all of them.
Darel: Yeah, it was a pretty big project. There were people living in these houses too, which was a little bit concerning. One of them was a lady with a young daughter, and her window was busted. She didn’t have a window. Another eye-opener was looking at how these people lived and realizing that some people were actually living in these houses so I wanted to get them fixed up to make them happy.
Damon: So when you bought these first three, they already had tenants in them? But on your other properties, I’m guessing on those two you probably had to re-lease them at some point in time. So you’ve had some experience leasing your properties to people. How do you go about leasing properties? What are you looking for? How do you do that?
Darel: Well, as far as filling them, it kind of depends on the market. I have my realtor’s license myself as well. I don’t use it. I don’t go out and list people’s properties for sale. I just use it for my own account. Normally my plan of attack is put them on HAR initially to try to get a tenant and obviously stick a sign in the yard and some signs in the neighborhood. Back then, we didn’t have Craigslist, but I use Craigslist now. I used to use Greensheet quite often and put an ad in there.
Darel: Those seem to be the techniques. The signs in the yard and the neighborhood always seem to pull the best because people were in the neighborhood or driving the neighborhood that they want to lease.
Darel: And I just handled it myself. I drew up the lease agreements myself and everything.
Damon: That’s great. So have you had any tenants that have not worked out? Is there anything you’ve learned from leasing properties that you can share with us?
Darel: Oh yeah. You have your run-ins, that’s for sure. In fact, with those three houses, I think I lost all three tenants because they were paying very low rents. The only thing was I didn’t want those houses in that condition. After putting a bunch of money in them, I had to raise the rent, and so I think we lost all three tenants and they really weighed in on their point of view, “I’ve been here for a while.” So we had this tug of war with they wanted their rent to stay low. I had to raise it up. It was definitely an experience to have to deal with them and one, I think, even got a little bit, I wouldn’t say hostile, but she was real . . .
Damon: She didn’t want you to raise the rents on her.
Darel: Yeah. She didn’t want to move. She didn’t want me raising the rent. She had one of these entitlement issues where she felt like I was doing her wrong and that I owed her something. So that was a big experience to go through all that. You’ve just got to plug ahead and keep doing what you think you need to do on the properties, which is what I did. We ended up getting new tenants and it worked out fine.
Damon: Right. So it’s worked out well. So let’s talk about the lending environment right now because in the last, probably, two years or so, things have really changed quite a bit. In your business you’re making loans to people. Actually, before we talk about the current lending environment, give me a description of what it is that you do day in and day out as you’re helping people buy houses.
Darel: Well, my company, we’re a full-service mortgage company. We specialize in hard money lending. That’s really where my passion is and I’ve been doing that for a while. Right now, we do hard money loans for investors that are buying and rehabbing single family or commercial properties, and then we also do conventional financing also for single family and commercial properties.
Right now, the play is buy and hold because of the way the market is, and so we have a program that enables people to buy properties. We loan them the money to buy them, and we loan the money to do the repairs and that’s through our hard money program. Then once that property is leased and completed, then we turn around and refinance it on a regular 30-year mortgage at a market rate, which is anywhere from about 5.5% right now.
So it’s a two-step process with most of our lending we’re involved with right now. Whereas, a few years ago, it was a lot more people flipping properties, now it’s mostly people that are buying and holding.
Damon: Buying and holding. Okay. So let’s talk about how the lending market has changed, well, and the market too has changed as you mentioned. A few years ago, people were flipping more. Now they’re buying and holding. So what have you changed? How can people . . . I’m sorry, I’m getting ahead of myself. What is it that you see has changed in the market and in the lending environment?
Darel: Everything’s changed in the lending environment. As a matter of fact, I was at a mortgage broker luncheon last week, and the lady that was leading the talk, she said that since the credit crisis, there has been over 4,000 changes in the mortgage industry, regulatory and legal changes.
Damon: Wow. And that’s in about a year and a half or so?
Darel: That’s about three years.
Damon: Or three years.
Darel: 2007 is kind of where the crisis started. So when investors get frustrated when they hear mortgage people telling them how there’s been so many changes, I mean, think about it. In three years over 4,000 changes. That’s a lot.
Damon: That is a lot.
Darel: So everything has changed and it’s not done changing yet. Before, it was very, very easy to get a loan regardless of your credit and regardless if you had income, regardless if you had assets, all those sorts of things, and now it’s completely the opposite. Now you have to have excellent credit. You have to have reserves in the bank. You have to qualify for a debt-to-income ratio. Before there were programs [inaudible 10:27], but now it’s you have to have credit, income, and assets on the conventional market and I’m not talking about the hard money or you just can’t get a loan. So if there’s investors looking to buy and hold, you’ve got to have strong credit or you’re just not going to get a loan right now. It’s completely different and they’re not done changing. There are more changes coming.
Damon: Right. So with hard money loans, you can make your own underwriting requirements, but because you’re converting those into conventional loans, then you do need to qualify buyers to make sure they’ll be able to get a conventional loan. Is that right?
Darel: That’s right. The way we look at it is, when we talk to someone who wants to purchase a property, if they want a hard money loan, our first question is, what’s your exit strategy? If your exit strategy is to refinance that property and hold it long term, then they have to be able to qualify for that conventional loan. If their exit strategy is just simply to sell it, then they don’t have to qualify for a long-term loan.
Damon: I see.
Darel: We still want to make sure they have some cash reserves to make sure they can pay the loan and so forth. Obviously we’re going to look at the property and make sure that it’s in a marketable condition and make sure that it’s in a marketable area, but qualifying for a long-term loan is not important because their exit strategy is simply to sell it. Because the hard money loans, they’re not made to be long-term loan. It’s made to be a short-term loan.
Damon: Okay. And the interest rates are higher on these hard money loans, and that’s part of the way that they work as well, right?
Darel: Yeah. On a hard money loan, you can expect to pay a double digit interest rate, typically anywhere from 12% to 18% depending on the lender. We’re at the low end of that. We charge 7% to 12% especially with our lifestyle investors [inaudible 12:26]
Damon: Right. Okay. So what would you recommend for somebody who is just getting started in real estate? Say they don’t have any experience because they haven’t purchased any houses yet. They have credit that’s pretty good. They’ve got some cash reserves in the bank. What do you recommend to them as far as getting started and getting their financing lined up?
Darel: Getting pre-approved is step one. Right now, you can’t even put an offer out on a piece of property without getting pre-approved by a mortgage lender. The first thing I would do is seek out a mortgage lender who can pre-approve you for a loan and make sure they . . . they’ll give you an idea of how much you can borrow, what the payment is going to be, how much down payment you’re going to need, so they have all that in order. Then when they get a pre-approval letter, then they’re ready and armed and ready to go out and start making offers on properties. Most sellers these days, because the credit crunch is so tight, they won’t even accept an offer unless they have a pre-approved buyer.
Damon: Right. Okay. So step one is go get pre-approved, which means go talk to a lender such as yourself or another company where you will kind of check them out, you’ll pull the credit report on them, look at their assets and liabilities, kind of their whole financial picture, and then you’ll let them know if they’re going to be able to qualify for a loan or not.
Darel: That’s correct.
Darel: They’re got to get pre-approved first. That was step one. And then after that, they obviously need to get with a realtor or realtors that they’re comfortable with and come up with a strategy as to where they want to buy. They really need to hone in and down in on exactly what they want as opposed to just going out there and using the shotgun approach. They need to narrow down what part of town they want to be in. They need to narrow down what price range they want to be in, how many bedrooms and baths, how much they expect to rent that property for.
They’ve got to really kind of scale it down to figure out exactly what their strategy is going to be. The more precise they can be, the more successful they’re going to be, especially with staying in the same part of town, somewhere close to your house because if you’re having to go look at properties and check on them from time to time and you live in Katy, you’re not going to want to drive to Baytown all the time to look at them.
Some of the more successful investors that we’ve seen, especially as of late, have really honed that down and they buy in generally the same area. They generally buy the same type of property and they’ve got a system down. And even first time investors after that first property, before you know it, they’re two, three, four, five, six into it because they’ve really honed down and got that experience to figure out what . . .
Damon: Right. That’s a recurring theme that the successful investors that I’ve been talking to and doing interviews with, I’ve heard that. Almost everybody has recommended that, just as you are, to make sure you hone into an area that’s close to where you are, understand that area inside and out, create systems so that you can just kind of repeat what works. It’s very good advice. I hope people listening really take that to heart.
Darel: Yeah, it makes a lot of sense, because, again, you don’t want to drive all the way across town, an hour across town, to have to go do something on the property if it comes up, because, if that happens, then initially you might be willing to do that when you’re bright eyed and bushy tailed. But a couple years down the road, you’re going to start putting it off more and more and more because the property’s far away, and then you become an absent owner. You don’t want to be an absent owner with a rental house because it’ll go away from you quickly.
Damon: Right. In fact, I was talking to somebody a couple weeks ago that has a house in Katy and they live on the east side of Houston. It’s about a 45 to 50 minute drive for them to get out to Katy, which is actually where I am, and they were interested in selling the house — it’s a rental property — because they’re just tired of driving over there. Even if it’s only every couple months, it’s just a big hassle to go over there. They were actually in between tenants, so they were re-leasing their property and they were like, “I think we just want to sell this instead of go re-lease it. It’s just too much work to do all this driving around.”
Darel: Yeah. It’ll wear you out. We have experience with that when we have foreclosures. When we lend our own money out on the hard money basis, we’ll get a foreclosure every once in a while. We’ll lend anywhere from Houston to Austin to Dallas to San Antonio, and at one point in 2008, when we had a handful of foreclosures, I had one in Baytown, one in Angleton, and one in Austin and I’m driving all . . .
Damon: All around.
Darel: And I’d go check on them all the time and it wears you out.
Damon: Yeah. So when somebody gets a hard money loan, how long do they usually have that loan before it converts into a conventional mortgage?
Darel: Anywhere from three to six months. It kind of depends. We always tell everybody six months just to be conservative, but we’ve been successful at getting them out as quick as three months.
Damon: So what happens . . . I haven’t done a hard money loan personally. I’ve either done conventional or cash purchases, but I know a lot of people are doing hard money loans now. One of the questions that I get asked is, what happens if I can’t get a conventional loan? What happens if I get stuck in the hard money loan? So have you actually had any customers or clients have that happen to them?
Darel: We have not, no, because we qualify them up front. So, again, the first question we ask is, what is your exit strategy? And if the answer is, “Well, we’re going to refinance it and we want to hold it long-term as a rental property,” then we qualify them for that loan up front to make sure that they’ve got the credit, they’ve got the debt-to-income ratio, they’ve got the assets and so forth. We don’t close that hard money loan unless we know we can get the loan.
Darel: We’ve never had an issue with being stuck with someone who just could not get a loan.
Darel: I suppose it could happen if you’re in an environment like we’re in now, where the regulations are constantly changing, but we’ve never had it happen here, thank goodness. Most of the time, when someone has good enough credit and financials to qualify, you can always find a loan.
Damon: Then it’ll be okay. So that’s really the key is having solid financials and good credit.
Darel: Yeah. Make sure you’re qualified up front before you do the hard money loan as opposed to later.
Damon: Right. So you won’t do the initial hard money loan unless you have a really good sense, by looking at the data, that they’re going to qualify for the conventional, and you haven’t had a problem with that.
Darel: That’s right, yeah. We qualify them exactly as if we were just doing a conventional loan for them right then.
Darel: Provided they qualify for that conventional loan, then we’ll close that hard money loan up front and then again, of course . . . unless they’re planning on selling and then we don’t really care as much.
Damon: I think you kind of addressed this in what you were saying, but I wanted to ask, with all of the regulations and how they keep changing, what’s the risk that during, say, that three to six month period of time, from when you get the hard money to when you actually refinance to conventional that some of the rules change and that . . . I know you haven’t had this experience, but what do you feel like is the risk there that that could happen?
Darel: Well, the risk . . . there is a risk there if something drastically changes on the Fannie Mae and how they underwrite and how many properties you own. That was an issue a couple years ago.
Damon: They went from like ten to four, or something like that.
Darel: Ten to four and now it’s back to ten.
Darel: So if they were to go back to four, would that be an issue? I mean, yes and no. If someone qualifies for a Fannie Mae loan right now and a couple months down the road they want to refi and for some reason Fannie Mae says, “Oh, you’ve got too many properties, we’re not going to do this now,” there are other sources of lending out there. It’s not going to be a Fannie Mae loan. It may not be quite as good of a loan as a Fannie Mae. A Fannie Mae loan is right now a 30-year fixed at 5.5%. If that’s not available, there are other sources of what we call portfolio lenders, but it may be a 20-year amortization and it may be more like 6.5% to 7.0% rate.
Damon: I see.
Darel: It’s still going to be a lot better than where you’re at on the hard money. So there are other sources.
Damon: Okay. That makes sense. So really what we’re talking about is the risk of being stuck in a hard money loan is really pretty low because even if things drastically change, there’s still going to be other ways to get the conventional financing, even if it’s not through a Fannie Mae type scenario. It may cost a little bit more and not be quite as ideal, but it’ll still be better than being stuck in a hard money loan.
Darel: Yeah. There are other sources. And we’re starting to see the market loosen up a little bit, not a lot, but it’s starting to thaw a little bit, if you will. And even when you get over ten properties, we use portfolio lenders now all the time for people that already have ten properties and Fannie Mae won’t lend to them. So we go to our portfolio lenders. So you have to make sure you align yourself with the mortgage lender or mortgage broker who has other contacts besides just strictly that Fannie Mae.
Damon: Okay. So what is a portfolio lender, for people that aren’t familiar with that term?
Darel: A portfolio lender is really just a bank. It’s bank that’s going to hold that loan in a portfolio as opposed to securitizing it to sell it. So when you make a Fannie Mae loan, you’re going through a lender that makes a loan and they immediately want to sell it off in the secondary market and make more loans. A portfolio lender is going to make that loan and keep that loan in-house and service it throughout the life. It could get sold later, but normally they’re held.
Damon: Okay. A portfolio lender won’t necessarily have a cap or a limit on how many investment properties you can own or how many you can borrow money on. Am I understanding that right?
Darel: Correct. Not typically. I’ve never seen a portfolio lender have a cap, but they will, depending on the borrower, they’re going to look at the strength of the borrower to determine how many properties or how many loans they want to have with them.
Darel: All of these portfolio lenders also have a lending limit to one borrower, so they may have a $2 million lending limit to any one borrower. So that is kind of a cap. But, again, it kind of depends on the borrower, how much money they have in the bank, their income and so [inaudible 22:35] different. Whereas, with Fannie Mae it’s pretty much a box you have to fit into. With a portfolio lender, it’s going to be different from lender to lender.
Damon: I see. Okay. So one more question on this lending thing. This is kind of a personal one because I’m going through an experience right now where I’m purchasing a Bank of America-owned foreclosure and I’m actually getting my loan through Bank of America. It’s a conventional 30-year fixed mortgage. They accepted my offer, what’s today? Thursday. I think they accepted my offer on Tuesday.
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But when I was working with the lender to do all the financials and he wanted to pre-qualify me, I own two other rental properties, and he said that my income-to-debt ratio was kind of skewed. What I found out is that they weren’t counting the income that I have from my rental properties. So I own probably about . . . or I owe about $100,000 with mortgages on these other two properties, and they were counting that against my income but not including the rental income as part of my income.
I have some other income beyond just my standard, basic stuff, and we had to throw those in there to make the ratios work. But I’m wondering for other people, is that an issue that sometimes they’re going to run across if they have multiple investment properties that the lender may not count their rental income as income against their debt-to-lending ratio?
Darel: Well, no. You should be able to count your rental income, but it also depends on how you report it and that’s another thing that’s changed with how the loans are underwritten. Before the current credit crunch that we’re in, if you had a property and it was rented for $1,200, you could list $1,200 as what you’re getting for that rent and they would count a percentage of that towards your income. Now what they do is they actually look at your tax return, so if you’re reporting $1,200 a month, at the end of the year you had expenses, repairs or whatever it was, $5,000 and interest of this, they actually look at how you report it on your Schedule E.
Damon: I see.
Darel: A lot of investors, what they do is they write off everything, and so they’ve got this rental property after all their expenses that they put in there on their tax return, it looks like they’re not making any money and it’s actually costing them. So that’s kind of a pitfall that a lot of investors are running into.
Damon: Okay. Okay, that makes sense. So, depending on how you report the income on your taxes and your expenses too could impact whether it’s getting counted as income or not.
Darel: Right. If you don’t count it as income on your tax returns, they are not going to count it as income for a loan.
Damon: Okay. All right.
Darel: A lot of people are running into that because a lot of investors simply write off as much as they can, and on black and white it doesn’t look good, even if they’re actually making a profitable investment.
Damon: Right. That makes sense. Okay. All right. Well, this has been really interesting, Darel, and I appreciate your time today in talking about your investments and talking about financing. I think people are going to find this very helpful. Is there anything that we haven’t covered that you feel like people should know about that you can share with them?
Darel: The only think I would say for first time investors is do what we talked about and get pre-approved and find a good realtor that you can work with and hone in on what it is you want to do but also be realistic. There are a lot of eager beavers out there that want to get into the market, and the real estate market is great. It’s a great business, but make some realistic goals as to what you want to accomplish. We get calls from people that say, “Oh, I want to start buying eight houses a month starting next month.” That’s not a realistic goal.
Take it one step at a time and get your traction underneath you before you go out there guns blazing trying to conquer the world in a day. So I would just say be realistic and also on your value when you’re estimating what the home’s going to rent for, what you think the values are. Don’t just look at the top of the market. Look at the whole scheme and make sure you know what you’re doing. A good realtor can shed a lot of light on that as well.
Damon: Right. Okay. So get a good realtor, get a good lender, ask the right questions and be realistic. You’re not going to be able to go out and conquer the world in one day.
Darel: No. You can’t conquer Rome in a day.
Damon: That’s right. Well, thank you again, Darel. Really appreciate it. It’ll probably take about a week or so to get our interview transcribed, and I’ll let you know once it’s up there and available. I think we’ll have lots of people watching it and, again, thank you for your time.
Darel: Thank you, Damon.
Damon: Take care. Bye-bye.