Is it possible to start in real estate with zero money down?
Can you get additional cash to help cover your rehab costs?
Marcia Correll, a commercial lending expert who has been in the industry for over 30 years, answers these questions and more in this information packed interview.
Bank Loans for Rental Property
For some people, it’s a toss up on whether or not they want to rent out an investment property or flip it. A lot of times, for the real “do-it-yourselfers,” rehab and sweat equity is always in the equation. Buying a distressed property, putting blood, sweat, and tears into it can be very profitable. “I tend to look at rentals as a long term investment and a house that they’re going to flip as more of a short term investment,” says Marcia. Either way, the cash is available given the right scenario.
Let’s illustrate the example given by Marcia. Let’s say you purchase a distressed property for $45,000, put 25% cash into the project, and make improvements. Perhaps the property is assessed for $100,000 and you feel you can get $110,000. “You can generally borrow up to a certain percentage of what that future value will be,” said Marcia. “They’re not just going to turn that cash over to you. You’ll make the improvements, you’ll bring the invoices into the bank, and the bank will pay the bills.” The important part is to have that 25% cash available.
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What About “Zero Money Down Home Loans?”
This is a question that Marcia hears often. The “25% cash” principle is just not attractive to people who are just starting out and have little to no money to invest, but Marcia warns that the market is different now. “I think if I would’ve been asked that question 10 years ago, I might have answered it a little bit differently than I am now.” World economic crises, housing market failures, and stock market crashes have certainly changed the playing field, especially when it comes to regulatory agencies such as Fannie Mae and Freddie Mac.
“…look at the financial situation of your borrower and try to determine if that’s possible. Somehow in some way, shape, or form, we have to show [equity] … Sometimes, we can utilize equity that they have in other assets in order to get that down payment. It is possible, but then again it depends on what they’re personal balance sheet looks like and what we can utilize for that 25% cash down payment. I wouldn’t say yes, but I wouldn’t say no either.” – Marcia Correll
Your Team of Experts: The Importance of a Banker
Marcia, who is an executive at a community bank, knows the importance of having a strong team to support your real estate investing goals every step of the way. She firmly believes in “having the right people in your hip pocket to be successful.” Besides a banker, these key individuals are a real estate attorney, an insurance agent, and an accountant. Don’t go it alone!
Marcia addresses how to find a banker and stresses the importance of sharing your plan. “Generally, if you find a banker that you can work with, most of the time, the bank comes along with the banker. In terms of finding a good banker, I think asking your friends and family, asking someone in the business that you want to get into that has had success, ask them who their banker is,” says Marcia. An investor is going to be served differently than a regular homebuyer at a bank, so it’s important to lay that plan right on the table. “If someone’s buying a home for investment purposes, it’s truly considered a commercial loan. We don’t have a lot of the same types of disclosures,” continues Marcia.
We hope you enjoy this interview with Marcia Correll. The complete transcript is below!
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[00:05] Jeri: Hi, my name is Jeri Frank and I’m co-founder and CEO of AssetRover, and today I’m here with Marcia Correll. Hi Marcia! How are you?
[00:12] Marcia: Hi! I’m great, how are you?
[00:17] Jeri: Good! Well thank you so much for taking time to meet with us. We’re going to go through a series of questions and we’ll start now.
[00:22] Jeri: So, tell me a little bit about yourself and brought you to the banking industry.
[00:27] Marcia: Well, I actually went to school to become a music teacher, that was sort of my dream, and by the time I was ready to do my student teaching, I worked my way through college and started as a teller at a local savings and loan. By the time I was ready to do my student teaching, I would’ve taken a $10,000 pay cut to go into teaching vs. what I was making in banking–not that bankers make a lot of money, but at the time the starting salary, I remember, for school teacher was around $9,800 a year, so I wasn’t prepared to take a pay cut because I had student loans. So I stayed in the banking industry and I worked my way up in a variety of positions, started as teller, became a financial counselor, and just worked my way up into commercial lending and I love it!
[01:22] Jeri: Well, good, alright. So your entire career is banking.
[01:25] Marcia: My entire career…banking.
[01:29] Jeri: One of the things that we’re trying to do in this video series is help people align themselves with the group of people they want to surround themselves with. How would you recommend someone finds a banker to work with?
[01:44] Marcia: Well, I feel like this process goes hand in hand. You need to find a banker you can work well with. You also need to find a bank you can work with. Generally, if you find a banker that you can work with, most of the time, the bank comes along with the banker. In terms of finding a good banker, I think asking your friends and family, asking someone in the business that you want to get into that has had success, ask them who their banker is. Often times, asking questions will lead you to the right person and it’s not unheard of to meet with two or three different banks or lenders before you find somebody you can work with.
[02:28] Jeri: So do you recommend they just set up a meeting and lay it on the table, “I’m looking for a banker to work with?”
[02:34] Marcia: Yes, absolutely. Share your plan with them. Ask them to give input into your plan and what they might change. Ask if that’s a good plan. There might be some things you are missing from your plan and they might be able to help you set some bigger goals in terms of helping you become more successful.
[02:55] Jeri: So when they’re looking for this banker, do you recommend they start the process of looking for a banker before they find a property?
[03:04] Marcia: Absolutely. Anyone who comes to me will know there’s kind of a process to go through, but there’s also a team that you need to build. I use the term “having the right people in your hip pocket to be successful.” I believe having the right banker and there are three other key people that need to be in that hip pocket, and definitely the banker is one of them.
[03:32] Jeri: So who are those other three people?
[03:34] Marcia: Banker, a good attorney, a good insurance person, and a good accountant. If you have those key people in your hip pocket, it’s the recipe for success.
[03:45] Jeri: Yeah, I agree. How do you serve an investor differently than you serve a regular homebuyer?
[03:56] Marcia: When someone’s purchasing a home, there are a couple different ways that we serve them differently. Someone who’s purchasing a home personally, they’re looking to live in a home themselves. First of all, in terms of the application process and buying a home, the disclosure process for buying a home personally is much different than it is on a commercial basis. If someone’s buying a home for investment purposes, it’s truly considered a commercial loan. We don’t have a lot of the same types of disclosures. For products, generally when someone’s buying a home for themselves, they can go up to a 30 year fixed rate loan. When they’re buying it on a commercial basis, generally, the longest that the rate will be fixed for is a 5 year period because most of those loans are held in-house at the bank because they are in a commercial portfolio. You will generally run your projections for 5 years at a time as far as interest rates go and try to project out what they might be for the next 5 years.
[04:58] Jeri: Right, okay. How do you handle situations where an investor’s buying a property that could either be […] rehabbed where they are going to hold it, or rehabbed where they are going to flip it? Are there different things that you take into account?
[05:17] Marcia: If a new investor’s coming to me and they’re trying to determine, “Should I flip a house? Should I rent a house?” I think what I look at first is what kind of capital does that investor have? Do they have cash proceeds? If they have some cash to invest, they might want to look more long term. I tend to look at rentals as a long term investment and a house that they’re going to flip as more of a short term investment that they can continue rolling the equity that they’ve generated into another property. If someone has $20,000 that they want to start with, my recommendation is, let’s try to look at seeing what you need to have for long term. What’s your goal for the next two years? Maybe you flip a few properties so that you’re building some capital that you can inject into some rental properties for longer term.
[06:16] Jeri: If you’re getting a loan for a rehab or a flip, is it possible that you can get additional cash to help cover some of those rehab costs?
[06:31] Marcia: Yes. We’ll use an example. Let’s say you’re buying a property for $45,000. If you have 25% cash to put in, and you’re not sure at this time if you’re going to rent it or flip it, but you really want to build some capital, so possibly we’ll flip it. Put 25% cash into the project. If you’re making improvements and the assessed value of that property is $100,000. You’d think the end value may end up being $110,000…that’s what you’re going to list it for. You can generally borrow up to a certain percentage of what that future value will be. Now, when you do that, even though you put your cash down, the bank generally will control the proceeds of how those are paid out. They’re not just going to turn that cash over to you. You’ll make the improvements, you’ll bring the invoices into the bank, and the bank will pay the bills. There’s definitely room to borrow money for those improvements as long as you initially have your 25% cash down into that project.
[07:32] Jeri: Is it possible to start in real estate with zero money down?
[07:36] Marcia: Well…(laughs)…that’s a question that I have been asked before. I think if I would’ve been asked that question 10 years ago, I might have answered it a little bit differently than I am now. As you know, we’ve been through one of the worst economic crises since the great depression. From a regulatory perspective, many things have changed. I guess if I were asked that question now, the most important thing would be to look at the financial situation of your borrower and try to determine if that’s possible. Somehow in some way, shape, or form, we have to show [equity]. If they’re purchasing a property for $40,000, let’s say a foreclosure, we need to show 25% equity into that project. It is possible to borrow, as I mentioned before, for some of the improvements. I feel that is someone doesn’t have 25% on something small like that, they probably need to work to save that. Sometimes, we can utilize equity that they have in other assets in order to get that down payment. It is possible, but then again it depends on what they’re personal balance sheet looks like and what we can utilize
for that 25% cash down payment. I wouldn’t say yes, but I wouldn’t say no either.
[09:04] Jeri: Alright, thank you. Can you share some eye-opening experiences that you have had while working with investors?
[09:13] Marcia: Sure, I would say that probably the #1 eye-opening experience that I’ve been through in my 30 year banking career–I just told my age, didn’t I?–would be that economically, things can change over night and I think we all experienced that on 9/11. We lived it, we saw it, and from a banking perspective, it really changed our world. It changed the world that we live in [and] it changed our economic world. I spoke of some of those regulatory changes that have been made over the past decade or 15 years. I watched from the construction industry–and I do some construction loans too–some houses that were selling and were very hot [and in] the following day were no longer hot. You have to know what you’re buying in terms of the price range of home. You have to understand and have a plan for what will happen if these [homes] are no longer selling tomorrow.
[10:28] Marcia: In the investment world, if you’re planning to flip a property and tomorrow you wake up and that property is no longer selling, you have to go to your Plan B, which is generally renting that out. I’ve been working with this for a number of years. If you can’t sell a property, you can typically rent it. One area’s hot and one is not. You have to be aware of what’s going on around you and what the economic situation is. Another a-ha moment that we had here in Cedar Rapids was in 2008. We suffered a flood and we lost more than 4,000 single family homes. From a rental market perspective, it became HOT overnight. You just have to be aware that there are things economically that can change the entire industry in a heartbeat.
[11:32] Jeri: Yeah, I didn’t think about that. 2008 would’ve been quite profound.
[11:34] Marcia: Yeah, it changed Cedar Rapids.
[11:37] Jeri: Do you have any words of advice for new investors as they’re getting started?
[11:42] Marcia: Well, yes I do. Again, I go back to making sure that you have your four key people in your hip pocket. I also think it’s important, especially if you’re going to hold on to properties as a long term investment, that once you start to accumulate properties, you absolutely calculate into your cash flow coverage the use of a property manager. It’s so easy when you’re buying properties to think, “I can do this. I can do this.” If you haven’t done it before and you start getting those calls when the roof is leaking in the middle of the night, or whatever it might be, you’ll recognize very fast the importance of having a property manager. In reality, they will keep you on top of what the most current rents are and whatever fee that you’re paying for it will generally pay for itself. Your vacancy ratio will be lower. Secondly, time is money. If you’re making those improvements on a project I tell every investor, “time is money.” If you think it’s going to take you four months to get those improvements done, you need to try to revisit your plan and see if you can get those completed in 45 days because time is money. Those are probably my two biggest pieces of advice.
[13:12] Marcia: Third, go slow. I’ve watched very aggressive people who’ve had plenty of money, plenty of capital into projects fail. Not plenty, but I’ve watched a couple of them who wouldn’t listen to the advice of the experts around them and they went too fast, tried to manage properties on their own, and they failed or got overwhelmed and ended up selling at a loss. So, GO SLOW and make sure you understand what you’re getting into. When you’re looking at a property, make sure you take an expert with you if you don’t have the expertise to uncover any hidden secrets in that house that might cost you a lot of money.
[14:02] Marcia: Final piece of advice would be, if you’re making improvements on the property, most of the investors that I have seen that succeed do a lot of the work themselves. They’re not afraid to clean, pull out landscaping, [and] paint. If you don’t have the expertise doing it that’s one thing, but if you’re going to subcontract every piece of that out.. you’re going to build your business and your net worth a lot slower than you would if you have the ability to put some elbow grease in and paint/refinish some of the woodwork yourself. But again, if it’s going to take you four months and someone else can do it in two weeks, “time is money.”
[14:46] Jeri: Okay. Any last words?
[14:48] Marcia: Nope, thank you!
[14:49] Jeri: Thank you very much!