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DSCR Rental Loan Guidelines and Trends with American Heritage Lending · Private Lending Insights

• [00:00:00] Rocky Butani: Welcome to Private Lending Insights. I'm your host, Rocky Bati, and this episode I interviewed Dave Orloff from American Heritage Lending. Dave was my first interview for this podcast. I've had him back on for this episode to talk about DSCR loans. DSCR stands for debt service coverage ratio. These loans are for long-term rentals, or could be short-term rentals, but long-term loans for real estate investors that invest in properties and hold them for long term. [00:00:29] We talked about specific guidelines that American Heritage Lending offers and DSCR loans are sort of what you call an institutional type of loan where. Uh, where a lot of the lenders have a similar offering. There's a few things that American Heritage does that's a bit unique, uh, compared to other lenders that offer this program. [00:00:49] We get into a lot of specifics in this interview about DSCR loans, everything from loan to values, interest rates, loan terms. Credit scores and so much more. American Heritage Lending is primarily a wholesale lender, so most of their customers are brokers and lenders. They have a very small retail division to work directly with borrowers. [00:01:13] Uh, but the content in this interview is applicable to anyone. Uh, could be a real estate investor or it could be a broker or a lender. My original plan for this episode was to spend about 30 minutes talking about DSCR loans and 30 minutes talking about American Heritage Lending's Wholesale Program. [00:01:32] However, we spent so much time talking about DSCR ran out of time, so we're gonna have to split this into two episodes. So I'm gonna have Dave back in about another two to three weeks. To talk all about their wholesale lending program. I hope you find this episode to be insightful. Let's get started. [00:01:50] Here's my second interview with Dave Orloff. Alright, Dave, thanks for joining me again for Private Lending Insights. How's everything with American Heritage Lending at this time? [00:02:01] Dave Orloff: Hey, Rocky, you know, these are my favorite. Uh, times is spending time talking shop with you and, and you've been such a trusted partner of ours for, for many years now, so it's always great to see you. [00:02:14] AHL is doing great. We were just shy of our all time record last month in May in terms of, um, both units funded and our funded volume. So we're feeling great. Uh, we're really excited the team's been doing just. Amazing, amazing, amazing things. And I sort of wake up and pinch myself every morning, so, yep. [00:02:34] For We're good. [00:02:36] Rocky Butani: Yep. It's amazing. It's, uh, again, it's like I said this last time, it's been fun to watch you guys grow and, and it seems like you're, you're still growing and, and, uh. Doing tons of loans. So good job and keep that up. Um, so are you seeing anything new in the market in the, let's say in we, we last talked in December, uh, let's talk about, let's say Q1 or just the last five months. [00:02:58] Anything new happening in the industry or in, in your business? [00:03:03] Dave Orloff: So that's a really good question because that timing was so, um, relevant. We had just found out who the new president was gonna be, and I think there was a bit of a. Okay. You know, the, the anxiety of the decision of who was gonna get elected, you know, I think volume dipped a little bit in Q1, frankly, and I've written that off to people. [00:03:27] Were. You know, done making their bets prior to election and then they were kind of waiting to place new bets after the election. Um, so fundamentally with, with product or with even capital markets and investors, it, you know, appetites, we've seen no real fundamental change. It's very healthy. Delinquencies are, you know, down stable loan performance is really, really, really high. [00:03:57] Investors are clamoring for these, for these loans, and, and it's, it's neat, right? To be able to serve a market where, you know, traditionally it's harder for them to get loans. It's, it's, it's still a great place to lend for sure. [00:04:13] Rocky Butani: And there were a couple of scares with the, the bond market. Uh, have you seen anything change in the capital markets or is this, there's still a major appetite for, for private lending loans. [00:04:24] Dave Orloff: So I'm, I'm an old guy, Rocky, as you know, and you know, when I got started in non QM in probably 2018, you know, rates were kind of moving every six months and that's not an exaggeration. And now whether it's tariff talk or you know, something about bond yields and Jamie Diamond out a couple weeks ago saying we're we're destined for a crash. [00:04:48] It has been so volatile. I've seen rate, sheet rate sheets change, intraday. Um, so I, it hasn't, it hasn't affected yet total liquidity in the secondary market for capital markets, but I think people are far more tuned into the incremental adjustments day-to-day, hour to hour, and eyes are back on the bond, which is a real. [00:05:14] You know, uh, work practice from conventional lending, you know, you're staring at that thing all day long, kind of wondering which way it's gonna move before you lock your rate. So, uh, it's, it's become much more of a heightened focus this year. [00:05:29] Rocky Butani: Alright. And, uh, how much has, has pricing changed and, and let's just say business purpose lending. [00:05:35] Uh, have you seen major swings or is it kind of in the, in the, you know, let's say 50 basis points range? [00:05:43] Dave Orloff: I'd say we're wider of 50 basis points. Um, we sort of ended last year, I would say, in a, in a relatively, um, normal or average rate. The, the note rates in the sixes. I think we've drifted recently into the sevens. [00:06:00] Again, we haven't touched the eights for the averages, but you can sure sense that, you know, at the borrower, level six has become pretty palatable. Seven is still kind of, so, you know, you know, today as of this recording, you know, the, the inflation number came out a little bit tame. So now they're talking, they want the fed. [00:06:23] You know, Trump wants the Fed to, to reduce rates by a full point. I think if we can get and stay in those sixes, and then even trend lower than that into the back half of this year. That's a, that's a sign of a really healthy market for the borrower and, and credit availability and should be something that lenders can maintain margin and, you know, that whole ecosystem should be able to continue with, with, with growth. [00:06:50] Right. I think it can expand and continue if we see those kind of rates. I think sevens and eights, uh, [00:06:57] Rocky Butani: I'm not as confident about those. Sure, that would be great if, uh, if, if they could hold it in the sixes or, or even start to trend downwards. So we'll keep an eye on that. Uh, any other trends that you're seeing in private lending at this time? [00:07:10] Are you seeing a lot of defaults? Anything else you could tell us? [00:07:14] Dave Orloff: Well, I think, you know, the data is just as, um, new to me as it is to you and, and I think we're starting to see very specific pockets, days on market extend. Some price reductions, and I think it's explainable. I mean, there's been some natural disasters. [00:07:35] Insurance is difficult. Rates going up a little bit doesn't help appreciation, and I think for a while, for a long while in private lending, the availability of product. Inventory that even an investor could buy at the right price to maintain their margin through their value addition to the property. You know, it just kept getting tighter and tighter and tighter. [00:08:01] So maybe this last inning, you know, we were sort of stretching on those after repair values or we were building, you know, investors were building into the model. I'll have this thing gone in in 90 days. Such that, interest costs, carry costs, those kinds of things. You know, I could still maintain my profit margin, so. [00:08:20] Nothing catastrophic, but certainly we've seen an extension on the time window that, uh, you know, deals are in, in gestation and in some areas maybe they're converting that exit strategy. Like maybe I'll rent this out, or, you know, I need some sort of different strategy for, you know, some type of exit from, uh, from that investment. [00:08:46] Rocky Butani: Okay, good. So no news. It's good news I guess. [00:08:51] Dave Orloff: I mean, you know, so far we're, we're, we're working through a couple issues and I'm sure, uh, you know, a any lender our size has, but it's, you know, nothing that looks to be viral in nature or, or a landslide or anything even close to that. Um, thankfully. [00:09:11] Rocky Butani: Sure. And I'm not saying that. [00:09:13] Increased inventory is, is not nothing, but, um, or is nothing. But, uh, anyways, it, it doesn't sound like anything, anything major, normal, normal co course of the, the cycle, if you will. Yeah. [00:09:26] Dave Orloff: It seems to be, and, and you know, I'm always open to hearing other people's opinions as well, but you know, it's been so tight, so long and these, these borrowers that are fixed in, in these twos and three percents and they're not moving. [00:09:40] And, um, so even like a really healthy situation is sort of underpinning. Low supply. So, so anyway, I think the market can absorb that and, and maybe the price has to be adjusted a bit, but I, I certainly think our market is capable of handling increased inventory at, at, you know, stair step percentages. [00:10:01] Rocky Butani: Sure. [00:10:03] Uh, let's talk a little bit about loan activity. Um, from the data I've, I see with, for Casa, um, they, it shows that your loan volume is. Slightly higher than it was at the same time last year. And it's, um, it looks like that, uh, that gap may widen where you'll do a lot more loans, uh, by the end of the year than, than last year. [00:10:25] Has anything changed with your offering from what you did last year till, uh, the beginning of this year? [00:10:33] Dave Orloff: Oh. [00:10:34] Rocky Butani: I mean, you're still, you're still doing mostly long term loans. Mm-hmm. Um, a smaller percentage of, of loans are short term, uh, most of it's wholesale lending, right? Mm-hmm. [00:10:45] Dave Orloff: It, it's a really good question. [00:10:46] I, I was trying to think if I could give you a really specific answer. We, we've continued to invest in the team and, you know, we're still a relatively new brand. I mean, we kind of, we, we launched our wholesale, it'll be three years. In August. So, um, extremely proud of that team and their accomplishments. I, you know, they funded lots and lots of loans last month. [00:11:13] Um, super thankful for our broker partners that made that possible. The retail group, um, I think you've met some of the new staff members there. So we have leadership there and some new initiatives to, um, kind of focus specifically on the short term, uh, product, but. In aggregate, really rocky. It was just kind of a stick to our knitting. [00:11:38] Find grade team members, invest in them, surround our arms, or you know, put our arms around broker partners and figure out how we can be fast and easy to work with. Take out the. You know, the, the labor part of the business for them, the best we can. And thankfully they've come back, we're starting to see a pretty healthy repeat business percentage. [00:12:01] And, um, and that feels really good. So it, it, it's, it's very organic versus a shiny new product or tech or something that, uh, most companies talk about is just been hard work. [00:12:15] Rocky Butani: Nice. And it looks like last year your loan volume was about 1.1 billion, uh, for the entire year, and hopefully this year you could exceed that. [00:12:25] And it, it looks like, from the data I'm seeing on for Casa as, uh, your, your may loan volume as was almost the same as as your May, 2024 volume, although some of the data takes a little time to, to come in, but it, it looks like you're, like you're on your way to, to doing a lot more than than last year. So, so that looks really good. [00:12:45] Thank you. Yeah, we're, we're [00:12:46] Dave Orloff: certainly anticipating more, uh, than, than last year and, and we're, we were certainly, you know, budgeting and planning for that was in place. And I, and we have that capacity, that q you know, Q1 for us post-election was a little bit funky as I think most, most in the market felt. [00:13:06] But we are picking up steam and I think we're gonna have a really strong finish to the back half of the year. [00:13:12] Rocky Butani: Is there anything new happening in the world of DSCR lending? Any, any new offerings that, that are, uh, that are offered this year that weren't in the past? Mm-hmm. Uh, any major guideline changes that, that you've seen? [00:13:28] Dave Orloff: You know, just even two years ago, the short term rental thing was basically taboo. And I'd say now that's pretty accepted. And we have tools by which we sort of, lack of better word, we can underwrite those. Properly, you know, the BR strategy seasoning becomes a big problem and maybe a stumbling block for a lot of investors that are very quick or in a very, very small budget. [00:13:53] Rehab, we've adopted some programs to address that. You know, I think competitive advantage. We have a thing called fee stacking, which we can go into, but it's a really neat way if you know you're just a buy. Rehab, rent, and then refi, and you're gonna stay in that loan for, for a while. There's certain ways to get a, to get a lower interest rate so you have a lower payment, um, and not come out of pocket for that. [00:14:20] And, and we've really, really been trying to tell the market about that over the last 12 to 18 months. And then, you know, uh, loan amounts have actually gone up. So the DSER cap at most lenders, even three years ago was seven 50 to a million. I'm seeing two and $3 million loan amount. Uh, there's, it's a small window, but LTBs have gone from 80 to 85 in some cases. [00:14:46] Um, so I think just a general expansion of the box is taking place and certainly markets, securitization, uh, rating agencies stuck like that. They're starting to understand that this isn't just a no income. You know, loan, I mean, there is underwriting that goes into this and it's really a commercial loan and, you know, um, so certainly every loan is not without its pitfalls and underwriting, but I think there's, there's, there's an expansion of the guidelines and there's general acceptance at, um, even in the investor base that says, wow, look at the performance of these loans. [00:15:24] They're great. They're helpful. I think it even fulfills part of this American dream. You know, there's still so many of us that wanna make a living passively through investing in real estate. It's just, it's a wonderful loan program and I've been a fan for you. Remember? I mean, I, I, back in 18, I was, I was telling you, I can't believe it. [00:15:45] You know, you can kind of get these loans, set it, forget it, got a cash flow machine. But away you go. [00:15:51] Rocky Butani: Yep, definitely. And you mentioned the, the maximum loan to value has gone up to 85%. So let's talk about LTVs in general. In what case would you be able to offer 85% LTV? Is that just on a purchase? And what, what does someone have to do to qualify for that? [00:16:10] Dave Orloff: It's a high FIO requirement and it's a high DSCR percentage. So, um, and that's hard, right? Because the more you borrow, the higher the payment is in correlation to, to the income and rents. But it is possible, and I think as soon as market sees more of that, uh. It performs, you know, in step with the lower LTV stuff. [00:16:33] I'm sure they'll kind of lower the restrictions, but you, you guessed it correctly. So it's, it's a purchase only LTV and a high FCO requirement and a high DSCR ratio. So I, I believe it's even over 1.25, but don't quote me. [00:16:49] Rocky Butani: So it, aside from the credit, it just has to be a situation where, uh, the, the rent coming in is, is, is just it, it's just a hefty amount of profit that they're making, uh, compared to the expenses and, and, um, uh, and, and that makes sense, but. [00:17:06] But what would be the normal, if it's, if it's not your, more than average DSCR? Uh, if, even if credit is good, what's, what's the typical LTV at this time? Is it, is it still 80%? For most deals, [00:17:21] Dave Orloff: the majority of purchases are 80, majority of cash outs, 75 at max. Um, and, uh, you know, rate and terms still depending on where you go, 75 or 80, so that, that really hasn't changed in. [00:17:36] A [00:17:36] Rocky Butani: couple years now. Sure. And what about with cash out? Is that, does that typically go down to 70% loan to value? So no, we'll do 75 [00:17:45] Dave Orloff: cash out. And I guess you're right, maybe that change was, was about a year ago. We moved from 70 to 75, so maybe a year and a half. Um, so, so again, there's some evidence that I think they'll start to widen out the box a little bit. [00:18:01] Rocky Butani: Sure. And then for people who don't, don't know the term rate and term, 'cause it is kind of a funny term. It, it's, you know, what do you mean, rate and term? It, it's basically where you're just, it's a standard refinance and you're not getting cash out. Is that correct? [00:18:14] Dave Orloff: Exactly. It's a no cash out refi. And we see it pretty regularly in the BR strategy. [00:18:21] Uh, especially if there's a very cosmetic type of rehab where. That investor is willing to pay a little bit more of AR V or whatever, however they calculate what they're looking for in terms of their investment thesis return. There's not a lot left over, but they're looking to get out of sort of a high interest rate, short term maturity loan and get something fixed that they can get it rented and add to their portfolio of doors under management. [00:18:50] You know, we are sort of past beta. And we're probably a week from rolling it out on the rate sheets that we have added a five to 10 unit, uh, addendum to our DSCR program. So that is something that's brand new for us. I, I think that's been in market for a while, but we will have this for, for multifamily, five to 10. [00:19:11] Rocky Butani: Nice. So, so, um, so you've always been one to four units, the, you know, increasing from five to 10 units. I, I've, I've seen that in the market a bit. What, what's the, what's the thinking with, with five to 10 units? Why is it not more than that? [00:19:27] Dave Orloff: It's a really good question. I think somebody out there, um, has a belief that. [00:19:33] 10 and up, certainly a markets. Freddie has a really competitive product for that, and so I think they feel like there's this underserved mid-market five to 10, and I'm not sure how much of it's out there. Like I said, we have not written one loan yet. It's just coming, but I, it's been in market, like you say, and, and I hear a lot about it when I travel and go to conferences. [00:19:59] It seems like people are, you know. Providing pretty good service and a pretty good volume of loans there. So we'll have to catch back up on the next, on the next Rocky Bhutani, uh, podcast here. But, but, um, we're kind of excited about it. It took, it took a while to develop, you know, it's, it's sort of a unique, it's a unique asset and it's a unique set of documents for a lender to kind of get. [00:20:24] The right appraisal, get the right loan documents, the like, right or correct writers. It took us a while to get our heads around some of that compliance stuff, but, um, we're looking [00:20:34] Rocky Butani: forward to launching that here real soon. Okay. And do you know what the loan to value ratios are gonna be for that? I'm assuming it's gonna be lower than, than for, for your one to four units. [00:20:45] Dave Orloff: I believe it's a 5% reduction at all criteria. In any real commercial underwrite, you know, a lot of it has now you're looking at vacancies and you're looking at expenses, and you're looking at some different factors when it comes to an underwrite. But I think I, I do think with, with at least our offering to start, it won't be a dramatic reduction in LTD, maybe, maybe five, uh, points. [00:21:09] Rocky Butani: Okay. Let's talk about credit scores. Uh, have, has anything changed with that? What's the minimum in general? [00:21:16] Dave Orloff: So minimum is still six 80 here. I haven't seen much traction underneath that. You know, maybe there's consideration at six 60 and, and to be too far in the weeds when you have borrowers that have high, high util utilization because they're putting their credit card into these projects. [00:21:36] It's really understandable. It's not that they've missed payments or the behind on mortgages or whatever. A lot of times. These new algorithms at the credit bureaus, you know, really penalize you. If you have a $10,000 balance available on your card or you have $10,000 out, I've seen it drop scores 80, 90%. [00:21:56] So I would say through exception policy here we go lower, and there's certain circumstances that are very easy to understand that, look, this person pays their bills regularly. It's just that right now they have a large extension of credit out and we can get comfortable with that. [00:22:13] Rocky Butani: Okay, so six 80. But does there have to be a certain time that they've maintained that score? [00:22:20] So, so let, let's say they're trying to qualify for a loan. It, you know, when you first started talking to them, it was, it was six 60 and then you're, you're processing a loan now all of a sudden, okay, it jumped to six 80. It, is that acceptable or, or does it have to be some sort of. M maybe seasoning is not the right word, but, but, so you know, something like that where they've had that score for a certain period of time and then they qualify. [00:22:46] Dave Orloff: Our process is so fast, rocky, we really just look at credit at one time. And that's typically at origination or submission, depending if it's coming in wholesale. Um, there is a refresh pro, uh, process, but. I can't even remember the last time we had an uh oh, uh, or, you know, uh, an improvement such that it, it caused the underlying terms of the loan to change. [00:23:15] Rocky Butani: Okay. Got it. Uh, and, and as far as credit scores, uh, is it still the case that the higher the credit score, the better the pricing? Or, or is it once you have six 80 and up, it's the same for everyone. Yeah, [00:23:29] Dave Orloff: that's a really good question. So, you know, we call it the L-T-V-F-C-O grid and it's just, you know, that's been around for as long as I've been in the business and it applies to DSER loans as well. [00:23:40] So the higher the LTV you go, you know, the, the worse rate and the lower on LTV you go, sorry, the lower on credit you go, worse rate. So [00:23:52] Rocky Butani: yes, absolutely. Sure makes sense. Okay. Uh, let's talk about, um, calculating DSCR. Are there any resources where someone can easily just calculate A-D-S-C-R or anything that you guys have or anything you recommend to potential borrowers? [00:24:08] Dave Orloff: I think we've just published it to our website, and if we haven't, we have a little calculator. We're happy to send anybody, um, to, to do the DSER calc and, um. You know, happy to share that with anybody, whether or not you're doing a loan here. But, um, yeah, there's, we can provide those tools. [00:24:26] Rocky Butani: And, and just for newbies, people are not familiar with DSCR loans. [00:24:29] Um, if you could just talk about the calculation in general, what's, what are the main things that are calculated to, to get to that DSCR? [00:24:37] Dave Orloff: Yeah, of course. So you take your rent, and that's a convoluted statement in and of itself, but you take your rent on the top and you divide by principal interest, taxes, insurance. [00:24:49] Association fees and those are the ones that come to mind. And so it's just another way in, in the old days we used to say, does it positive cash flow? So meaning is what you're collecting versus what you're spending, you know, not vacancies and putting a new HVAC unit in or anything that, but on a monthly basis, are your costs less than what you're collecting in rent? [00:25:10] And that's what would make A-D-S-C-R uh, ratio positive. [00:25:14] Rocky Butani: But I think what makes it difficult for people to calculate the dscr is they don't know what the payment's gonna be, right? Because they don't know what the interest rate's gonna be. So if, if they knew what, what the, the loan amount would be off of, let's say it's a, a $300,000 purchase. [00:25:28] Uh, they put a 20% down payment. Uh, then they come in with, they come up with their loan amount. Uh, it's hard to calculate. The expenses when you don't know what the, the rate's gonna be. And, and, um, and, and I think that's, that, that becomes a challenge, but I, I guess people have to just reach out to the lender and, and, and get a few options and then, and then they figure out if it qualifies. [00:25:49] Right? [00:25:51] Dave Orloff: That's right. And, and, and to our just pre, you know, previously we were talking about L-T-V-F-I-C-O grid and whatever, but, but we're, we're happy to provide that information and all the different ways you can help yourself, whether that's. You know, there's w ways to get lower rates we talked about earlier, so compounding on the questions you've been asking, I, I completely understand. [00:26:14] Trying to find the right rate, excuse me, to compute the right payment. Could be, could be more work than just, you know, oh, I'm gonna plug in some number and, and their, their ego. [00:26:26] Rocky Butani: Sure. Alright. Going back to property types, do you do mixed use properties? [00:26:32] Dave Orloff: We don't allow mixed use in our DSCR um, uh, program. We used to say, you know, if if less than 25% was commercial in nature, we would allow it and it just got to be a war of words. [00:26:53] So rather than have that be confusing, we just eliminated books, juice. [00:26:58] Rocky Butani: Is there just not a, an appetite for mixed use properties in, in the capital markets that, that even if you funded one, that there's just, there's just not enough capital for that product. [00:27:10] Dave Orloff: To me, I always looked at it more fundamentally that, so maybe we'll go back to calculation of income. [00:27:18] There's a couple ways, and the, the basic way in, in a commercial or multifamily underwrite is show me the lease. Right? That's what the rent is. Well. As part of an appraisal. For those of you who don't know, I know this is really redundant. For those of you that do, you can ask for a rental survey and it's called the 10 0 7 in the appraisal, and it'll give you a number, right? [00:27:37] So for rents, you could pull this thing and it'll say the rent is $2,000. Well, in a mixed use building, let's say there's a hair salon on the bottom four and there's two units above, or let's make it three. So it's kind of the 25% rule. It just became sort of. Too interpretive for us to, to, to really zero in and have a fundamental analytical tool that said, Hey, this is what the rent of this place should be and what expense factor do you put on it? [00:28:08] And it started to cross, uh, another, another loan program we have. And so it just got convoluted for us. I'm not saying it is for any other lender. To really underwrite and be analytical and stand behind the decision of, well, this is what it produces and this is a sustainability and, and this is market and. [00:28:31] It, it just became more, more internal than maybe what capital markets does and doesn't have an appetite for, for us. [00:28:38] Rocky Butani: Sure, that makes sense. The, the valuation could be definitely a challenge. Um, the rent, the potential rent could vary by a wide margin. And, and then also the, the, the space could be vacant for a while. [00:28:50] They're not as easy to rent, so that kind of makes sense that, that they're just, they're just a little more difficult and, and why bother with them? [00:28:59] Dave Orloff: Well, and, and then you waterfall into, you know, do you have to check zoning and, and then, you know, is it grandfathered or non-conforming? And then, you know, what, what happens if the next investor won't buy it? [00:29:10] 'cause it was some sort of environmental stuff and it just put us into this box of, wow, it's not that we can't get comfortable with that or underwrite all that, but there's a, there's so many more considerations we hadn't thought of. It was easier to say. Alright. We're gonna stick to our knitting over here, and we're gonna do these single family one to four. [00:29:29] Uh, DSCR is pretty easy to calculate and it's industry adopt, adopted, uh, process, but we're gonna go do those. [00:29:38] Rocky Butani: Yeah, I'm, I'm sure there's some lenders out there that, that do 'em, because, you know, there, there's a lot of these types of properties and, and major densely populated cities like New York, Boston, San Francisco, and, and they have to go somewhere to get their financing. [00:29:53] Um, but yeah, it makes sense there, there are some complexities to those. Um, alright, let's talk about loan terms. So I've, I've heard from maybe some brokers over the years, or, or I don't know where I heard it, but I heard that you guys do a 40 year loan term, uh, whereas everyone else does a 30 year term. Um, what's the deal with the 40 year term? [00:30:14] Is it, is it offered to everyone? Is it easy to qualify for? Tell us more about that. [00:30:19] Dave Orloff: We do, it's a, it's, uh, another niche that we offer. It's a 40 year term, first year, 10 years, or interest only the remaining year at, at 30 year fixed. And it helps as, as intended. So if you're trying to maximize cash flow by removing that principle, amortizing principal payment every month, that goes to the investor, uh, meaning the real estate investor. [00:30:45] And so. It's fairly easy to qualify for. I think you have to have a 700, maybe you've seen seven 20 fico. But in terms of qualifications, it's actually kind of easier because it's easier to DSCR property. It's easier on the cash flow for the borrower and um, it's a very popular program for those that. It doesn't even have to be speculative, but if, but if I come from a philosophical orientation that over a very long period of time, real estate's always gone up and I'm not necessarily concerned with some orientations that are, I'm gonna pay this thing off and there's my retirement. [00:31:26] It's just gonna come to me every month. There are a lot of investors we work with that really enjoy the stepped up cash flow from day one. [00:31:36] Rocky Butani: And what are the downsides of getting a, a 40 year term? I mean, why would someone pick 30 instead of 40? [00:31:44] Dave Orloff: Um, that's, I think that's a really great question. I, I, I have this saying in the office, and I hope it's not, uh, misinterpreted as it goes out to the world. [00:31:53] But, you know, finance is a religion and I think it's just, uh, everybody has their beliefs and they're all fine. Uh, I think you just have to decide that there's, there's. Definitely a classical conservative approach to investing is the sooner I can eliminate my debt, the better off I am. I have more equity. [00:32:12] Right? And then certainly no debt means I get all the cash flow. Well, I think there's also maybe a different orientation, a k, a different religion that says. I want mass, maximum cash flow from day one even. So much so as I see my property or portfolio, appreciate I'm going back in and refinancing and taking that to go do more with the money. [00:32:35] And neither is right, neither is wrong, but I can see how both loan programs would appease, uh, one and probably frustrate the other. Um, so. That's why I've kind of coined it, uh, finances like religion. [00:32:53] Rocky Butani: I like it. And, and you mentioned that the first 10 years the payment's fixed and then it's amortized for, for the remaining 30. [00:33:03] So does so, so, so from a real estate investor's perspective, their, their payment is, is gonna be the same for, for that first 10 years. Is it gonna change or, or is it just, just the amortization of change? [00:33:17] Dave Orloff: It. So it, it'll be, it'll be interest only for 10 years at whatever note rate we, we fund a lot at. [00:33:25] Rocky Butani: Okay. [00:33:26] So, so it's not like their payment's gonna jump after the first 10 years? Nope. All right. That's amazing. Uh, and, uh, and how about rate locks? Uh, once someone gets a quote from you, do you offer a, a lock period where they, they're guaranteed to get that rate? [00:33:44] Dave Orloff: So this is. Been sort of new to non qm, but in 2021 we had our first kind of rate move, and certainly we had it in late 22 and 23. [00:33:56] We've always had a 45 day rate lock as standard, and we still offer that on all our programs. So if, if you're happy with the rate you see, uh, you lock that in for 45 days and not subject to market. [00:34:13] Rocky Butani: Okay, so if interest rates go up within that 45 day period, uh, and they decide to move forward, then, then you're essentially just taking a loss because you offer that lock period. [00:34:24] Is that right? Yes. I mean, hopefully not, but Well, but in theory, [00:34:29] Dave Orloff: so, so theoretically, yes, it's, it's at the risk of us, but um, in the back office, you know, our capital markets group, we're trying to hedge as best we can, our position that we can deliver, um, such that we don't actually have a financial loss. [00:34:44] But that, yes, there would be a market, there would be a, yes, it's too, it's too difficult to explain, but we do, we do hedge that interest rate risk. [00:34:52] Rocky Butani: Okay. And what if someone locked in a rate and then rates come down? Can they easily just say, Hey, I, I need a new rate, or are they stuck with that rate that they locked? [00:35:02] Dave Orloff: So it's called a float down policy, and we do look at 'em from time to time. In this market, you'd expect that we're gonna see some of that unless this tariff talk and all this other political stuff starts to mellow out. Float down non QM is really difficult. And this is probably a conversation for my cap markets group, not me, but it's really hard to hedge non qm. [00:35:28] There's not like a, you know, an MBS that it says non QM to it. And so it's really hard for all of us lenders to. Offer float down. So I think what we, what we try and do is be fair. Um, if we can do it, and it doesn't mean we're riding a loan at a loss. And, and it can help our clients and it can help our brokers and it can help our partners. [00:35:50] We do lean in. It's just, it can't be programmatic. We don't have a way to say, oh, market's better by an eighth. You know, take our whole pipeline and relock it. Nobody lets us do that. So, um, it's, it's kind of an individual case by case [00:36:05] Rocky Butani: situation. And at what stage of the process do they make that commitment to lock the rate? [00:36:10] Uh, let's say you send them a, a term sheet and they sign it. Is that at the time that the rate's locked? [00:36:16] Dave Orloff: So our brokers are allowed to float until it goes into underwriting. But you know, if, if, if a broker's gonna commit, like, Hey, here's the situation, here's the loan scenario. You know, I think it looks great. [00:36:30] We say, Hey, it seems to pass the smell test. Let's get it under into underwriting. We usually ask, you know, for your safety and ours, make sure the borrowers agreeable to the terms, you've got the right fees, and, and, and you know, your compensation built in. Lock the loan, get that confirmation, and then let's get it in underwriting and start the process. [00:36:51] Rocky Butani: Okay. Got it. Uh, so even if the process takes about 30 days to close, they're still getting that rate that, that you committed to 30 days prior. Absolutely. Alright. And let's talk about, well, since you mentioned entities, what if. The, the LLC for example, has multiple members. Let's say there's, let's make it easy and say there's two members. [00:37:13] Mm-hmm. Um, how do you qualify them? Is it, um, do you have to, do both of them have to qualify in terms of credit score, uh, and other financial situations? [00:37:24] Dave Orloff: So the way we look at an entity structure is any, uh, guarantor who owes 25% or more should be vetted. Um, so. In, in your situation, 50 50. We would vet both guarantors and then we would use the highest from a credit perspective for the pricing and the qualification. [00:37:43] Rocky Butani: So if, if, let's say one of them has credit challenges, they have a credit score of six 50, uh, and then the other one has a credit score of 700, are you just ignoring, uh, the, the one with the lower credit score and you're still qualifying it based on the person with a higher credit score? Theoretically, [00:38:00] Dave Orloff: yes. [00:38:01] I mean, if there's, if there's credit challenges, not just utilization or something like that. Yes. We're, we're, okay. It's the 700 [00:38:09] Rocky Butani: and then same thing, if it's three members of the LLC, you just take the highest one. [00:38:14] Dave Orloff: Mm-hmm. [00:38:15] Rocky Butani: Okay, great. Uh, all right, let's talk about, uh, short-term rentals. You mentioned this earlier that, you know, short-term rentals became part of the D Fs CR offering several years ago. [00:38:28] There's enough data out there for a lender to see what the potential rent could be in a certain area. Has anything changed lately in terms of short term rental DSCR loans? [00:38:41] Dave Orloff: Well, a lot I think. And they're all, it's all like this, um, this opinion and, and maybe sort of a, a risk approach to it. And, and, and so when it got started and everybody said we're not doing short-term rentals, it really came from a place of regulation. [00:39:02] So these cities and counties were against it. They were blocking it. A couple people got these grandfathered opportunities where they could kinda license 'em through the city. Then those were repealed. And so in, in the beginning, it was such a regulatory nightmare. I think lenders just said, we're out. You know, like we don't wanna participate in being part of something that its revenue is at risk. [00:39:24] Uh, the business operating model. I think over time to, if you fast forward all the way to today, there's probably more risk in a combination of saturation. Now, in certain areas, everybody's Airbnb or Bing their property, so the amount of rentals and the per night charge is coming down such that the overall income's coming down along with. [00:39:55] Maybe people aren't traveling like they did post COVID. So I, I think what you're hearing and what people are talking about is, wow, does the economic justification still exist? That these bring in so much revenue? Why, why wouldn't we lend on them? Um, now I think they're becoming more commonplace, lower revenue, lower margin, more commonplace. [00:40:21] And nothing's changed, right? A guideline hasn't been affected, and we're not taking a, a second look. But it certainly strengthens a borrower's position when you see that they've owned and operated one for more than 12 months. Um, it tells us that, okay, you've lived through sort of the months that are good, the months that are bad. [00:40:38] You understand you're gonna have some periods where cash flow is not gonna be great. You make it up in the holidays or whatever, if you're seasonal or you whatever it is. Um, but, but I, but I think as, as time goes on. The regulatory risk currently has been subdued, and now I think it's more they're just looking at these from an economic perspective. [00:41:01] Rocky Butani: So does the investor need to have experience and, and have operated a vacation rental or a short term rental prior, before they can qualify for A-D-S-C-R loan? [00:41:11] Dave Orloff: At, at our, at our company, they do for sure. And I'm assuming that will become pretty widespread if it isn't already. It, it, it's just, uh. It, it makes sense because they, they take a while to, you know, build up clientele. [00:41:28] And it's just like any business, it takes time to get it working. And if you're not, if you don't have great reserves, you're not in it for the long term or you don't understand that kind, you know, when you plug in your proforma, you're gonna get this number, and when you come out, uh, day one, you're gonna be operating at this number. [00:41:45] That's kind of a problem. [00:41:47] Rocky Butani: And what if it was a situation where someone operates a few rentals in one area. Let's say they're in Gatlinburg, Tennessee, they operate three vacation rentals there. Now they want to go buy a house in Nashville. And it's a totally different market, uh, as how do you factor the experience in that case? [00:42:06] So we, we [00:42:06] Dave Orloff: see, we see it as like experience. So if they're in the. They're in the, we don't even do it by night, but you know, if they're in the $400,000 pop property range in, in Gatlinburg and they're in the $500,000 property range in Nashville, and it's kind of the same occupancy data that we're getting out of the, the sites that we use. [00:42:27] It's fine. We, we, we don't, we're not very, very hyperfocused on the, on the geography. [00:42:33] Rocky Butani: Okay. So bottom line is if, if they've never operated a vacation rental, they're gonna have to operate it for about a year before, before you would consider giving them A-D-S-C-R loan? [00:42:44] Dave Orloff: Yes. [00:42:44] Rocky Butani: Okay. And are the loan to value is typically slightly lower in the case of vacation rental or short term rental versus a long term rental? [00:42:53] Dave Orloff: Mm-hmm. No, because if, if they, you know, again. Where they started the use case and the justification for doing it as an investor, real estate investor is, boy, these produce a lot more return. Sure, I have to furnish 'em and sure I have to pay some marketing and expenses and what have you, but boy, if I do that, maybe I get a 30, 40, 50, a hundred percent lift on what I would get if I put a long-term tenant in there. [00:43:21] Rocky Butani: Alright, now let's talk about fee stacking, which you mentioned earlier. So what is fee stacking and how does that factor into getting A-D-S-C-R loan? So [00:43:31] Dave Orloff: we've developed a way where basically you can finance discount points. So if you came to me and said, Dave, I don't like that seven and a half rate, but I love the seven rate and you know, I'm willing to pay a couple three points to get it down there. [00:43:47] In a traditional sense, that's fine. Uh, but I have to charge you for those discount points. And we've said, well, I could tell you what, Rocky, I've got a special for you today. We will take that amount that would be required to buy that loan down or buy that rate down and add it to the loan amount. So it's just a way that it's, it's a non-cash charge for helping you with a lower interest rate. [00:44:10] Rocky Butani: Interesting. And, uh, so in that scenario, you've got seven and a half as a quoted rate. They want it at 7%. The what, what are, what would the fee be like in, in that scenario? Is it, and, and how does it vary? [00:44:26] Dave Orloff: So it varies all the time based upon securitization and secondary markets. So sometimes it can be. [00:44:34] Three to one. Sometimes it can be four to one, depending if you're already at a really low rate. Um, but call us, it's a, we have it on a, we have it on a spreadsheet. It's, it's very easy to calculate and um, it's just a really nice way that borrowers can get lower rates. And then our broker partners that do charge origination fees, we allow them to stack those fees as well, which is just incredible. [00:44:59] So, um. You know, the net effect to originating a loan at a borrower's level when they're working with our broker partners is they don't have to come out of pocket or reduce their cash back in, in, in the case of a cash out loan, they can add it to the loan balance, [00:45:18] Rocky Butani: so it would just increase the loan balance and, and it would increase their monthly payment as well. [00:45:23] Right. [00:45:25] Dave Orloff: Yeah. [00:45:26] Rocky Butani: Okay. And hopefully at an amount that's not too significant where it, it, it kills a deal. It's pretty, it's pretty minor. It's pretty minor. Yeah. Okay. Great. And, uh, last thing about DSCR loans, uh, let's talk about prepayment penalty. Mm-hmm. Um, are those still typically done on a step down basis of 3, 2, 1, or 5, 4, 3, 2, 1. [00:45:47] Dave Orloff: It's funny how we get so sophisticated. Uh, you know, many years ago it was just a three year, 3, 2, 1, and then they're starting to get variations. We offer and price everything from a five year, 5% fixed all the way to a one year 5% fixed, or, uh, I think the lowest it goes at one year is 3%. So we, we have all different kinds of variations. [00:46:11] Rocky Butani: So if, if I wanted to get A-D-S-C-R loan, but I think that rates are gonna come down in a year, I just, I don't wanna have that prepay penalty. Am I just gonna be paying more points to get that, uh, to get that one year prepay [00:46:26] Dave Orloff: not necessarily points. You, you'd have a, you'd have a higher rate. Um, but yes, so you know, the lowest possible. [00:46:34] Outcome for, uh, a loan from a fee perspective would be a five year prepay and vice versa. The higher would be a one year prepay. [00:46:44] Rocky Butani: So with DSCR loans, a lot of people that come to our site and submit a loan request and they ask us for recommendations a lot of times. They're rejected because of the location and, and it's, it, it just, it's outside the metro area. [00:47:00] It's, it's too rural. Um, do you have any guidelines on, on the location of the property that, that, that most people can use to say, Hey, I'm, this is gonna work, or it's, it's just not gonna be possible? So [00:47:15] Dave Orloff: I have a funny one. I have a legitimate tool and then I have what everybody tries. Um, so. You know, the MSA count of the major metro, you know, they, they like to say it has at least 10,000 people in it. [00:47:31] And then, you know, the cascade of that is, you know, what is the city population there? And if it's, gosh, less than four or 5,000, it's probably rural. The fun one is, and I actually had an underwriter, not at this company, but I had an underwriter tell me this. If you put in the location of the property and you can drive to a Starbucks in five miles, it's not rural. [00:47:55] So I really like that one. And then, uh, there's a tool as long as it's still available and, and, uh, their site doesn't go down. It's A-C-F-P-B rural check, and I know it's for USDA loans and whatever, but it's just if you're triangulating and trying to figure out, is this property too rural? It just says yes or no. [00:48:15] And, um, those are kind of the ways we look at it as well. As, you know, we use Google and we zoom in and it's in the middle of a forest. It's probably too rural, has gravel or dirt roads. It's probably too rural. Um, but, but then the classical appraisal definition of that would be if there aren't three comps within five miles, it's definitely rural. [00:48:40] Rocky Butani: Okay. So as long as you could. Comp it out in terms of figuring out what the rent could be. Uh, then it, then it should be fine. So it's not, it's not necessarily a factor of, of, hey, it's in the small town, you know, population's 20,000, but it's about an hour drive from a, a major metropolitan area. Like it's an hour outside of Dallas Fort Worth metro and there's, there's no airport nearby. [00:49:03] Uh, so, so theoretically that, that location might be okay as long as there's comps. It might be okay. [00:49:11] Dave Orloff: And then you really get into the specifics of what's the marketability, who would be renting this place? Where are they working? What is the story behind, you know, why this place way out in the middle of nowhere would be a highly desirable rental. [00:49:27] But yeah, I mean, if it's a city of 20,000, there's a pretty good chance it's probably gonna comp and, and it's probably a, a, [00:49:37] Rocky Butani: a long, we [00:49:37] Dave Orloff: could, [00:49:38] Rocky Butani: we could do. And you mentioned the number 10,000, uh, so, so an MSA that has 10,000 people. That could still be a possibility. It's just, it's just kind of far away from a, from a major city. [00:49:52] Dave Orloff: MSA is a really weird thing, as if you, if you've ever looked at 'em, you know, sometimes they're, you know, like, uh, you know, in Irvine I might be, I, I don't know. I've never really looked, but it might be like the la. SA, well, I'm, I'm an hour drive from la, so, and then sometimes the MSA is like that little city and county, so it's another one of those, you know, which way is the wind blowing measurements, as is the CFBB rural thing, as is the Starbucks rule. [00:50:21] But you know, some dead giveaways are, there's a house in the middle of nowhere and. It's on a dirt road and like you said, it takes 40 minutes to drive there from, from a grocery store and it's probably rural. [00:50:39] Rocky Butani: Okay. And what about, uh, land size? What if it's, it's, they call it a ranch or, or whatever, it just has a lot of acreage. [00:50:46] Is there an acreage limit? Uh, for A-D-S-C-R loan? Our limit's five acres. [00:50:52] Dave Orloff: We can and have made exceptions above that and I think that's another good tell, although. There are some places that, you know, land isn't, you know, the style of living is not necessarily that it's a ranch or they raise and farm different types of, uh, you know, animals, vegetables, whatever that are that are doable. [00:51:16] Um, they're just more of an estate type property, but they, they still present as a rental property and, you know, maybe there's some mitigants people would take in terms of LTV and stuff like that. But, um. But the acreage in and of itself isn't a disqualifier. [00:51:33] Rocky Butani: Alright Dave, that's all the time we have for today. [00:51:35] I really wanted to talk about your wholesale lending, um, but you know, we've gone almost an hour just focused on DSCR, so I'm gonna have you back, uh, we're gonna try to do another interview in, in a couple weeks and we'll, we'll have that focused just on wholesale lending 'cause that's kind of the bulk of your business and it's a really good program from what I hear. [00:51:56] So we'll have you back on to talk about that shortly. So I [00:52:00] Dave Orloff: can't wait. You know, how much I enjoy these things. Thank you again, and uh, I look forward to seeing you here in a couple weeks. [00:52:06] Rocky Butani: Sounds good. And that's a wrap for this episode of Private Lending Insights. American Heritage is listed on private lender link.com. [00:52:15] I'll put a link to the profile in the description. Visit the profile to learn more about their guidelines. Obviously you learned a lot about their Ds CR. Lending guidelines where you could find out about other programs that they offer and you could find their contact information on their profile. You can call them, you could send them a short email form or you could send 'em a long loan request form. [00:52:36] When you reach out, please mention that you heard about them from Lender Link and the Private Lending Insights podcast. American Heritage Lending has a popular wholesale lending program for brokers and lenders throughout the United States. So if you originate loans, you're gonna wanna stay tuned for that next episode. [00:52:53] I'm gonna interview Dave Orloff again in the next three weeks or so, and that episode is gonna focus a hundred percent on wholesale lending. This is my last interview from this office on O'Toole Way in San Jose. We're moving to a new office just a few miles away from here. I need about a week to get that set up for podcasting, and then we'll start back up with our next interview the last week of June. [00:53:18] So if you're watching this content, you'll see a different background in future episodes. That's all for today. Thank you for tuning in and listening all the way to the end.