Episode Transcript
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Welcome back to the PaperTrail podcast where we follow the
numbers and uncover the realopportunities in mortgage note and
private lending investing.
In today's episode, we'regoing to jump over to a little bit
more on the investor side ofreal estate and private lending as
we're going to dive into theApril 2025 DSCR lending trends Report
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from Lightning Docs, whichgives us great look into the private
lending world, especially howDSCR loans are evolving.
And if you're a note investor,fund manager or someone looking to
pivot from rentals to privatelending, this data should be on the
radar.
So let's see what's happeningin the space and let's start breaking
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it down.
First, what is DSER lending?
Because this might be a termthat it's the first time you're hearing
this.
So before we go into numbers,let's discuss it.
DSCR is loans that arebusiness purpose loans made to real
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estate investors.
And instead of using personalincome to qualify, lenders use property
rental income.
So you don't need to use yourincome, it's more based off of the
property.
And DSCR stands for DebtService Coverage ratio and it's a
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very simple metric.
It equals the net operatingincome, which is the amount of money
the property makes minus thenormal expenses divided by the debt
payment.
So if a property brings in$2000 a month in rent and the mortgage
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is 1500, the DSCR is 1.33.
So simple math.
Typically they like to see theratios be above 1.2.
Some instances you can getloans at a 1.0 D are but just understand
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that interest rate on thatloan is going to be significantly
higher.
Now these loans are ideal forinvestors who have a lot of investment
property but maybe don't haveincons, maybe have some inconsistent
W2 foreign nationals.
Foreign nationals can getthese loans LLC based property ownership.
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A lot of these loans areissued to LLCs and really the main
focus of this is for buy andhold investors who seek cash flow.
And to be honest, these havebeen exploding in popularity over
the last few years.
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As an example, I want to gobuy an investment property for $200,000.
Typically you'll need to putat least 25% down.
So $50,000 down.
I'll get $150,000 mortgage andthat property based off of what that
mortgage payment andeverything will be got to make sure
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that the income can cover thatmortgage plus some.
So just understand that's theintent or the basis.
So again the lender looks morejust at the property they do of Course,
look at you and your creditwhich can have a significant and
huge impact.
But they're not looking atyour W2 income, they're looking at
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the property income.
Now that we've explained alittle bit about DSCR loans, let's
talk about what the numbers found.
According to this report, theymade up over 37% of all originations
generated through this platform.
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Now Lightning Docs is aplatform through a an attorney who
creates the all the loanpackages for you.
So if you're looking to have,you know, if you're a lender or private
lender, this company,Lightning Docs can go create the
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note, the mortgage, do theclosing for you.
Basically handle everything.
They handle a lot of the dealsthem in another company handle a
lot of the originations in theprivate lending space.
Now the 37% is a dip fromMarch which was just under 39% but
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still huge share of originations.
Where are people getting these loans?
No surprise, California,Florida and Texas.
Which is also where we'reseeing the largest increase in defaults
in Florida and Texas for loanspeople are getting a year or two
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ago and now getting hit withinsurance and taxes.
Think about it.
If you bought that house thatI mentioned earlier for say rental
income of 2,000 and mortgageand everything is 1,500.
But all of a sudden your taxesinsurance rise significantly and
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you have a vacancy or you needa repair, Insurance went up by 30
plus percent in many places.
Taxes have skyrocketed at$1,500 in expenses.
Now might be $1,900.
Then you have a vacancy orsome other factors influence it.
Now you're underwater.
Now you gotta come out of yourown pocket.
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Can you afford to come out ofyour own pocket?
Some of the top lenders out inthe Space Rock, 360 Sagemore, Templeview,
easy street, they've beenleading the charge.
Other companies, Turac, Kiaviand others also provide a lot of
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these types of loans.
We actually work with a thirdparty where if people are looking
for a DSCR loan, please reachout to us at 7einvestmentlending.com.
We actually can assist you ingetting a DSCR loan.
One trend I think that isworth noting is they were providing
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this data in regards to thesetypes of loans.
There are many options thatyou can get on these loans.
You can get 30 year principaland interest.
You can get a 30 year with 10year interest only.
Prepayment penalties typicallyalmost always apply.
So you can't get a loan and ifyou pay it off in a year, you're
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going to have a penalty.
The most effective, lowestinterest rate loans typically have
a five year prepayment penaltyand they can scale down like 5% year
one, 4% year two and scale down.
But just anticipate that thesearen't loans that you're going to
get and when rates dropanother half a point, refinance,
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you get that loan.
I would hold onto it becausethe penalties you most likely pay,
unless there is a huge drop inloans that justify paying it, you're
going to have this loan for a while.
Now we're seeing the interestonly options because I'm guessing
the numbers weren't working ifit's principal and interest.
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So they're going the interestonly option, they're paying more
for the loan, meaning you'regoing to get a higher interest rate
on the loan.
But you can get the loanbecause the numbers still work.
So something to consider andsomething to keep your eye on.
Thankfully It's I think 10years is typically what these interest
only is.
So there's time for theeconomy and the markets to recover
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and rents over time should gohigher during that time.
But again your expenses arealso ticking up over that time as
well.
Now people ask great if you'rein the private lending space, but
is this important for justnote investors in general now why
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should I care about DSCR loantrends as a note investor if I am
not doing the private lending space?
Here's a reason why more DSCRloans equal more paper on the secondary
market.
DSCR lenders originate at highvolume and eventually some of these
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loans will default.
And that's the future of theNPL inventory.
You want to understand thequality, the underwriting standards.
You want to know what's beingwritten today because that's tomorrow's
tape.
12 months.
You might see some of theseloans out there.
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And one thing to consider,many of these loans are written between
six and a half and eight and ahalf percent.
And the borrowers typicallyhave 25% equity.
They go in default, take thesame loan as a owner occupied at
3.5%.
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The discount needed to makethat numbers work on these types
of loans is much easier than asignificant greater discount on that
owner occupied that sellermight not want to liquidate.
So definitely something whereI envision you're gonna see more
of these on the markets.
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Now remember, these arebusiness purpose loans.
That means typically fewerregulatory hurdles.
We had an investor attempt tofile a complaint against us for an
FDCPA violation.
But investor loans don'tcomply with fdcpa, meaning now they're
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saying basically that oh, yousent me a statement, I told you not
to send statements or I toldyou not to call me or you're violated
in some way, shape or form.
It's a business loan.
Some instances they may bequicker to foreclose.
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Now I say that with hesitancyand the reason I say that is in judicial
states it might be a littlequicker because on owner occupied
there might be requiredmediation where in some of these
other deals they don't.
So caveat may is the keywordI'll put there.
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The other is there are moreflexible workout options, especially
if you've got personalguarantees on them and they own other
property.
You can be a little bit moreflexible with the workout options
and more likely you're goingto see less bankruptcies.
So if there's equity in theproperty and they can't pay, a lot
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of times they'll sell.
Compared to a homeowner whowill file bankruptcy to stay in that
house.
These investors, they don'thave the emotional equity tied to
these properties.
It's all about the dollar.
So if they can still sell itand make money versus the interest
that accrues on these.
And that's one other thingthat I'll mention.
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A lot of these loans havedefault interest rates that can be
15, 18 plus percent.
So as a note investor you seethose types of numbers now you're
licking your chops.
And from a node investorstandpoint, these loans are typically
written to be securitized.
That means they have veryclean collateral.
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So when you look to buy someof these loans, especially defaulted
ones, it's usually friendlierterms including interest rate defaults,
late fees and the paper istypically very clean, which again
can favor the investor.
And typically these loansaren't sold seven to 10 times like
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a potential homeowner mortgagecould be.
And as we also mentioned, manyare written with these prepayment
penalties and interest only periods.
And this can change thestructure of cash flow.
Especially if you were toinvest in a semi performing loan
or reperforming DSCR loansthat interest only can lead to principal
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and interest which canincrease that payment which may enhance
the yield.
So something to consider, Iwill say it's very rare to see these
performing loans on the markets.
Typically if you do, they'recalled scratch and dent, meaning
they couldn't be securitized.
Meaning the company at the endof the day viewed it as maybe it
was rural or the borrower'scredit, something happened or they
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took out additional loans atsome period of time.
So it's not often that you seepeople buying these performing loans.
And if you do, the discounttypically is not going to be where
you would want it to bebecause the institutions typically
chomp the stuff, stuff up.
One thing I want to add tothese types of loans is geography
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and trends matter.
Talk to California, Floridaand Texas dominating this lending
space.
But Florida and Texascurrently have volatile property
markets.
Foreclosure laws between thesethree states are very different.
But most people don't realizeif I had to prioritize the order
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of the foreclose, Texas 1,California 1B and Florida number
three.
California and Texas are nonjudicial states.
Now there's some regulatorynuances in California with licensing
and everything for theseloans, but California is a quick
foreclosure state.
Now evictions, whole nother animal.
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But when you're dealing withinvestor loans, it's not a homeowner
could be a tenant who actuallycould still be paying.
But just remember, if you'rebidding on notes in these states,
make sure your legal servicingteams, everybody understands all
these jurisdictional quirks.
Now let's talk aboutpositioning yourself.
So what can you do based offof some of these trends that I'm
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telling you?
One thing that we do is wetrack these originators.
We want to know who's lending,what their underwriting.
Right, sorry, we want to starttracking these originators.
You want to know who'slending, what their underwriting
looks like.
Many of these lenders willeventually sell off paper, especially
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if it's distressed.
In March I went to the NPLAconference, got to meet a lot of
these originators and I feltlike a rock star at this event a
little bit.
And I say that and there's ainvestor out there, Matt Kelly out
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in California who always tellsyou on his posts, besides note investing
conferences, there's a lot ofother conferences that can add so
much more significant value.
Opus hosts a bunch of eventsin these other ends but like this
NPLA conference I went to andI was one of the only people there
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that bought non performingloans and people are seeing more
on their books and they don'tknow what to do with them.
Now sudden I come across andsay yeah, we buy non performing,
we would love to take a lookat your inventory and somebody we
met at that conference inMarch, the end of April, we bought
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five and a half milliondollars in loans from them, I believe
just from meeting them atMarch to end of April.
So to me that conference paid off.
So understanding who they are,talking with them, talk to the aggregators
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Talk to the fund managers.
Some of these people aresitting on warehouse lines of credit.
And some of these aggregators,if the loan goes in default within
the first six months, they mayhave to buy it back.
If they have to buy it back,they're going to look to exit it
because it's on a warehouseline and they're paying steep interest
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on it.
So if you can get in thatcircle, you could be first in line
when deals start trading.
So understanding thoseaggregators or some of these other
fund managers that play inthat space, also you want to educate
yourself on working out these loans.
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It is slightly different thanan owner occupied workout.
As we mentioned, they don'tcome with some of the same protections
as owner occupied mortgages.
They also can have very steepinterest rates tacked onto the loan.
And in some instances when youare dealing with a homeowner, you
want to send the demand andjust get that process started immediately.
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In this space you could have alittle more patience if the loan
is chomping at an 18% interestrate for you.
It's also extremely importantthat you underwrite the property.
But also the person behindthat llc, you really need to underwrite
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everything because if this istheir only property, you're not going
after the person, you're justgetting that property.
Which again is very similar tothe owner occupied standpoint.
But a lot of these loans, theymay have done some rehab work too.
And was it done, was itcompleted, what type of, what did
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it look like?
Lastly, some of theseinvestors can't get a DSCR loan,
so they're looking for shorterterm bridge financing.
You've got capital, you don'twant to wait to buy a loan off someone
else's tape.
You could look to originatedirectly through private lending
platform where you could do asix or 12 month loan.
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You could get 12 to 10 to 12%interest only and it's going to be
backed by solid collateral.
Should target predictableincome and you still have the hands
on control.
That's something at 70.
We incorporate some of thatelements in our strategy where we
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buy performing loans and basedoff of our portfolio that we want
to be very diverse in.
We also have some short termloans as well that are 12 months
to allow us to recycle that capital.
We keep a very close eye onthis industry, especially how these
loans are priced.
They're very susceptible tothe ten year treasury and interest
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rates.
Just last week when the 10year went up, we saw a significant
uptick in the rates on thesetypes of loans.
They can get updated bi weeklyto monthly.
They're very sensitive to the markets.
So I wrap up this episode.
Some final thoughts.
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This type of lending I don'tbelieve is just a blip.
It is a structural shift inthe way investor capital is starting
to move.
And while the front of some ofthis pipeline is hot with originations,
US savvy note investors arelooking 12 to 24 months out at where
loans will go when thingsdon't go as planned.
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More DSCR originations doesequal more future inventory, which
equals more opportunity forthose prepared.
So ask yourself this Are youpositioned for the next wave of non
performing paper that could beinvestor loans?
Do you understand the cashflow, the mechanics, the exit options
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and that state specific timelines?
If you don't, that's whatwe're here for.
It's what we do at 7e.
Go to 7einvestments.com youcan see some of the programs we have
at 7e investmentlending.comcontinue to follow us on the Paper
Trail podcast that I'mrecording right now or meet us at
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the paper trail conferencepapertrail conference.com where we
are running three verticals atthis conference one on private lending
hosted by Beth Johnson lend 2.
Live seller financing Tracy Z.
And Fred Rui talking about theseller financing space and of course
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I will specialize in that nonperforming space.
So check us out September 18thto 20th in Chandler, Arizona.
And as always, please leave areview or forward this to someone
you think would find this valuable.
Until next time, stay curious,stay informed and keep following
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the paper trail.
Thank you.