Don't Let 8% Rates Stop Your Rental Portfolio Growth

0:00Already folks, we are in a global environment of higher rates. We are also in a season of risk being reprised. What does that mean for housing? It means higher rates. It means potentially seven in heaven forbid, even 8% mortgage rates aren't out of the question. But here's the deal. If you are a savvy real estate investor, this kind of supply demand imbalance unlocks something that the season investors use as a specific tool to get deals done today. Beth, you and I both know what this is, but hint them with it. What is the thing that the savvy investor does in an environment like this? We look for opportunities for seller financing. Ah, tell me more. What is seller financing? Let's assume they don't know what it is, but what is seller financing? Yeah, so seller financing is where the seller is the mortgage holder rather than the bank. And the beauty of it is that you get to create whatever terms work for you.

1:04And one of that, so TYLG tie, one of the best things I take away as I had from him when we were chatting about this at one of the one rental out of time events, but he was one of his ways of explaining it to the seller is you become the, you go from being the landlord to the lean lord. And I like that term, lean lord. So what the best thing about seller financing is, again, you can find out what's important to you and what's important to the seller. And it's a mistake that a lot of investors make that they go straight into interest rate. Yeah. Interest rate is not usually the most important thing to the seller. So when you're meeting with a, this is almost always an off market thing where you're meeting with a seller or you know somebody who's thinking about selling potentially or the typical seller with seller financing is somebody who's a tired landlord, they're burnt out, they're

2:06tired of the tenants, they don't want to deal with vacancies. Somebody trash their house or unit. Again, they don't, it's costing too much. The taxes, yada yada, you know, if they're tired of it, they want to have the income, but they don't want to have the property and responsibilities that come along with that. Yeah. You brought up two things there that I think are really important. The second one is people get into being landlords because they see passive income. They're doing it for some reason. And yeah, you know, in my second book, 15 conversations with real estate millionaires, the most meaningful chapter to me was a 70 or 75 year old woman who was basically selling her units on seller financing. So she would maintain income. Also she would delay taxes. Let's not forget that. She'll delay taxes depreciation recapture and the like. But that's secondary. She wanted income. Actually the first thing you brought up, I want to hit again. And you said a lot of newbie investors hit the seller with interest rate first.

3:08I have said this many times. I never talk about interest rate. I actually talk about payment. Because again, I'm talking to a landlord very likely and I'm like, hey, you're your lease is three grand. Well, you know that you can't operate a building like this for less than 50% expenses. So I can't have my total payment, meaning mortgage interest in taxes more than 1500. Now these are just ballpark numbers. You need to learn your market, your buy box. But that's the conversation I have. And then once I get them to agree to the payment, then all we got to do is figure out purchase price and down and the down payment. And the payment's already set. And by doing that, you often get below market interest rates. Exactly. And so I have three properties that are finance or seller financing right now. And I've done probably I think five in my career. So not 10, but enough to know my way around it. But first you have to assume that the seller doesn't know what seller financing is.

4:11Yeah. Or their agent if they have any. The agent doesn't have any clue and they they're thinking like a mortgage company. It's like, no, no, this is not about that. Some are savvy and know it, you know, but most don't. And you can't expect them to know it. So you have to seek first to understand why does the seller want to do they have a mortgage on because if a mortgage on the property, you have to clear that lien. So you have to think about that somehow too. It's usually somebody that owns it outright is the best fit for that. And you can't assume that they know anything about it because everyone that I've ever talked, every seller I've ever talked with about seller financing, they're like, what is that? Why would I do that? They don't know what's a thing. And so it's amazing. Straight out is not the way to go. I find it so amazing. I must have had no lie 200 seller financing conversations. I've probably done 25 or 30 closed transactions and a couple on big portfolios. So I've done some significant seven figure seller financing.

5:11But I would tell you somewhere between 30 and 40% of the 200 conversations, the seller thinks it's illegal. The legal interest. Interesting. Yeah. I'm like, I don't know. They just think it's like you can't do that. There's always banks involved. I don't know. Maybe they're maybe their best friends and neighbors dog walkers telling them it's illegal. Who knows? But it's amazing how many people think seller financing is illegal. And of course, it's not. It's in California. It's right on the purchase agreement. It's seller financing is right in there. It's like box three or whatever it is. But so it's not illegal. The other thing that I find interesting is here you and I are talking about the seller being in first position. I'll let you know that probably six to ten of my deals seller financing, they were actually in second position. Actually, I think I talked about this in my first book, property number three. The third property I ever bought, I had to get the seller to take back 10% because I just didn't have the money.

6:11Right. I wanted the deal. They wanted me to buy it. I didn't have enough down payment. The bank said, we're only going to do 80. But if you can get the seller to kick in 10%, we'll close the deal. So the total loan ended up being 90% CLTV combined loan to value. So I've even done seller seconds. Now that's not as common today as it was back in whatever it was, 0304. But it's not impossible. Yeah, and isn't it more, you deal in more the commercial world. Yeah, very common. So I know in that world, it's very common. So the seller will often carry a contract for a period of time, usually while maybe rent stabilization or something is happening, you know, and you need some time. You know, just think too, as you can negotiate to payments, we'll start in the future. Like I did this on one that I was rehabbing. So I think I've got several months up front with no payment. And then after it was stabilized, then the payments began. Yeah, again, it's from certain anyway that makes sense for you. And you're cash flow. Yeah, I mean, the term, the beauty about seller financing is the terms are completely up

7:14to you and the seller to agree on. Like you, you can delay payments. I remember one of them like you, I took over a troubled property. So I didn't owe a single penny for 12 months, right? I was given 12 months to seize in the property and then payments started. I've done zero. I have had two loans at zero percent interest. So full principal payments with no interest. I've had as short as five years, which I'll never do again, but I did have a five year balloon that almost blew up on me. I'll only do 10. I have some 30 year full am loans seller financing. So again, I think the highest seller financing I have is 6%. I think it's the highest one I have. Yeah, mine are all below market. I do have one that's zero. And I have done the five year before and you're like five years goes faster than you think. And that's very stressful. Stressful. Yeah. I won't do that again. Never again. 10 years is good, but you can do 10 years and have it amortized over 30.

8:14Like you don't have to amortize it over 10 years. You know, just do a balloon. It's like it's a balloon. You have to do something within that. Before that, 10 years is up. So just think about it all those different ways and it always is working backward from a payment or like seller wants to get this much rent market rent is this much. Here's what can we have to figure the amortization to work with that. Yeah. And you can work at any other way you want. And the other thing I would say is like have it drawn up have the note indeed of trust drawn up by a professional whether it's attorney or the escrow company. However, it works in your state, but don't write it on a napkin and expect that to be sufficient. It needs to be done and protect yourself properly protect yourself protect the seller. Here's another thing that I've had come up because a lot of these people are senior citizens is sometimes they think, well, why would I want to do a 20 year term when I'm not going to be alive in 20 years? Right.

9:15I explain, sometimes they just need to understand that the note is an asset the same way that property is an asset. And so it transfers to the estate is the same way the property would and it has value. So yeah, it's funny. Some people actually think that if they were to pass the note goes to zero, I'm like, that's not how that's not the note is an asset. It's part of your state. It would be transferred to someone else and payments will always continue until it's paid off. Yeah. And also they don't typically do a full underwriting, you know, the way a bank would like it's it can be horrendous. They underwriting process for for some people, you know, investors to get bank financing, but it really up to the seller how much embedding they want to do. I mean, obviously you want to do right by them. And if you're a hot mess financially, like maybe you shouldn't be doing this, but they might still say yes, they might. Yeah, you know, they might you hear people doing that. And a lot of times it is a trust in a relationship situation where people want to help someone

10:16and think about what is a friend or protege or what have you. Yeah. Yeah. So a couple of things as we kind of wrap up this conversation, one of the things that I think is missing today with real estate agents, because you're right. I think I don't know, 10%, 15% of real estate agents understand seller financing. But that just means 85%. So one of the things that I would tell real estate agents today is if you have a listing that's getting old, call it 100 days. And you know because you're doing your job that the seller has a lot of equity, say greater than 50% equity and maybe 100%. I would tell you it's your job today to call up the seller and just ask the question. Because if you ask the question and they're open to it and then over the series of conversations, they say yes. I guarantee you, if you want more eyeballs, go to the description and say seller financing available. Big bold letters, first line, your phone will blow up.

11:18What do you think? Yes. There will be a stampede. No doubt. And I know in my Northwestern aless, there's actually a box you can check for financing options and one of them is seller finance. So if you're an agent, would you agree? You've got a listing that's old in the tooth and they got the equity. It's the real estate agents job because the sellers aren't going to say, hey, I'm open to it. It's not their job to know. You're the professional in this situation. So you should have that conversation. Is that fair? I agree. And explain it to them. It's an option that they should be aware of and see if it's something that fits for them. The other component I need to mention for the ideal seller is someone who doesn't need the funds immediately for something else. That's right. That's why you've got to go in and diagnose the situation first. It's not like you walk into the doctor's office and you say, I've got a headache. They're not going to say, oh, okay, we're scheduling you for brain surgery next week. Yeah. Or you're going to put a cast on your elbow because you got to figure out what the situation is first before you dive into that.

12:20So one of the questions is, what would you do with the proceeds? Yeah. And if they say, well, we've already bought another house. We got to, you know, there was one recently, like, well, we have a reverse mortgage. We have to pay off by X state. Okay. Well, I mean, like, yeah, you got to sell that has to be paid, you know, but, or we already bought our other house or, you know, something that they've rolling that. But if they're not, if it's like, well, we already got our house, we don't know what we're going to do with this money. We don't, a lot of people that invest in real estate, landlords, you know, they don't want to, yeah, they don't need a big pile of money for some people's ahead of them. They're scared of it. And they don't want to put it in the stock market because most of them don't trust the stock. I mean, a lot of them don't trust the stock market. Sure. That's why they're doing rentals, you know, and so they don't know what to do. But this is something they can understand. And so the other thing I would tell people is, again, agents, as I said earlier, you should do your job, but investors, it's really your job to skill up and have the conversations because you're right. It's a completely a trust based deal at the end of the day.

13:24Yeah, for, sorry, I need to talk about you. The other thing I would say is I know people like Cody, for example, like his whole thing, at least in the beginning was like just getting to know the people who own the buildings and they'd create that relationship. And then if they want to sell, then they call him, as a perfect example of that relationship building that loans itself from the well to seller financing. So it takes a little more work sometimes building your network and getting known out there. I mean, I like your advice also about agents should know how to spot that opportunity in their seller clients and communicate that to buyers because you are right. Like it would be a stampede. But it's also, you know, people are going to have to do the work getting to know sellers and investors in the community is a great way to get that. Yeah, the last thing I would tell investors is you need to be comfortable and you need to understand you need to study. You need to practice having the conversation about taxes because my number one strategy

14:29to get a yes answer to seller financing with somebody who owns a property free and clear and they've owned it for 20 plus years is ask one simple question, are you ready to cut a six figure check to the IRS? That's my leading question when the, when the bar or meets that criteria. And every time I ask that question, they're either pissed off or shocked because most of them don't know about depreciation recapture. Oh, yeah, that's the thing that will bite you more than anything. I'm more than capital gains. It can. It's tried. It's treated as income. It's not a capital gain. So again, so basically you have that conversation. You tell them about it. You show them rough numbers. And then you go, well, what if I could show you a way that you can say F you to the IRS? No, it's not F you forever. It's delayed F you, but still, you know, if, you know, your earlier example about doing a 30 year fully amortized loan and they think there'll be a live for 10 years, congratulations not only does the note transfer, but then it becomes a stepped up basis.

15:32Right? Again, check with your professional to make sure. Right. Right. That's just, that's a win win for everybody. Great excellent points. I love that about the tax strategy and the stepped up basis is brilliant. I never thought about that with a note, but I guess that gets stepped up basis to correct. I would, yeah, I would think so, but again, I'm not. Yeah, talk to your CPA. We don't get tax advice, but I love it. I love it. But nobody wants to pay a big check to the IRS, you know, so that's a huge motivator to post. So folks at the end of the day, folks rates are going higher worldwide, which means mortgage rates will go higher. Should we get a risk expansion in the spread going higher? 8% is not out of the question. Frankly, the only people that win in this environment are investors and your job as an investor is to figure out how many tools that you can leverage to create great or deals of a lifetime. Beth, if somebody wanted to reach out or get a referral, what do they do? Yeah, I can be found at my website, BethTroversoGroup.com.

16:34I'm also in the school community too and you can message me on there. So we're 10 people. We're amazing. Take care. Thank you.