Adam Torres and Jeff Ball discuss DSCR loans.
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Show Notes:
Visio Lending provides long-term mortgage financing to investors in long-, mid- and short-term single family rental properties across the United States. In this episode, Adam Torres and Jeff Ball, CEO of Visio Lending, explore Visio Lending and mortgage financing options for investors.
About Jeff Ball
Jeff is responsible for setting Visio’s overall strategy and direction. Prior to forming Visio Lending, he founded Visio’s predecessor company, Econohomes.
Jeff previously served as the Global Head of Semiconductor Investment Banking at JP Morgan, where his clients included some of the largest technology companies in the world, including Intel and Texas Instruments. Before JP Morgan, Jeff was a corporate securities attorney at Gray Cary Ware & Freidenrich (now DLA Piper). Jeff received his JD and MBA from Santa Clara University. He received his undergraduate degree in Economics and Theology from Georgetown University.
About Visio Lending
Founded in 2012 and headquartered in Austin, TX, Visio Lending is the nation’s leader in rental loans. They help investors grow their rental portfolios with their laser-like focus, streamlined process, innovative technology, and outstanding team. A strong leadership team backed by decades of experience and a deep understanding of real estate, technology, and finance, led us to become the 100+ employee and 6,000+ loan success they are today.
Full Unedited Transcript
Hey, I’d like to welcome you to another episode of Mission Matters. My name is Adam Torres, and if you’d like to apply to be a guest in the show, just head on over to missionmatters. com and click on be our guest to apply. All right. So today’s guest is Jeff Ball and he’s CEO over at Vizio Lending. Jeff, welcome to the show.
Adam, it’s great to be with you. All right, Jeff. So I, I definitely want to get into today’s topic. So we’re going to talk a little bit about using DSCR loans to grow your single family rental investment portfolio. So a lot of real estate investors that listen to the show and would be real estate investors.
So happy to get into this topic today, but just to get us kicked off, I’m just curious. So on your end, how’d you get into the lending business? Like where’d all that begin for you? Adam, it was somewhat fortuitous. I started my career as a corporate securities attorney in Silicon Valley, and then I was an investment banker at JP Morgan working with tech companies.
And in the early 2000s, I decided I needed to take a different tact with my career. And. Moved to Austin, Texas, and ended up founding a company called Econo Homes that during the financial crisis, bought and sold about 12, 000 bank foreclosures around the country. And it was really through that process of reselling homes that we identified that there was a need in the market for long term.
financing for single family rental properties. And so we launched Visio Lending in about 2012 and it really took off in 2015 when we hooked up with a big hedge fund out of Southern California that helped us figure out how to refinance the DSCR product in the bond market. So it’s, it’s been an interesting ride over really about the last 18 years at this point.
Hmm. What was that like going into this market? Let’s just say post 2008, post, , rec there. It was an interesting time to be open, opening up shop, I would argue. Like, what was it like back then? So, it was a time that was, , a tremendous amount of opportunity, but obviously folks were incredibly skittish , just to say the least, right?
To say the least. That’s a great way to put it. Yeah. The financing alternatives, , in the bond market were super constrained in the time of renewed regulation, , at the federal level. And so 1 of the things that really kind of kicked off our business is that we figured out that we could originate this type of loan on a lot of states with a lot lower regulatory overhang because it’s a commercial loan on a residential property.
And so for us, , at a time with a lot of regulatory uncertainty, that was very attractive to us. So , it was, it, it required bringing together a lot of pieces. You actually had to understand real estate. You had to understand kind of mortgage, like how to originate a mortgage loan and underwrite it.
But then importantly, you also had to understand how to sell that in the bond market. And so, that was kind of, , the pieces came together. And. , when we first started originating DSCR loans in 2016, we were really one of the very, very first, and we were the first to complete a bond deal, a securitization of these assets.
Today, it’s a multi billion dollar a year business, and there’s lots of originators around the country, and , it’s growing in awareness, but part of the reason we’re talking today is a lot of real estate investors still don’t even, they’re not aware that DSCR financing is out there and how it can help them.
Actually, that’s a great point. I’m glad you bring it up. Let’s take a step back and maybe just define DSCR loans and what that entails. Let’s start there. Good point. Sure. So, a DSCR loan, DSCR stands for Debt Service Coverage Ratio. It’s basically looking at how well does the monthly rent. On a residential property cover a debt payment.
And so it’s very similar to how commercial real estate is financed. And so let me take a step back when you or I purchase a home, , to live in for ourselves. If we go get a mortgage loan, that loan’s gonna be underwritten primarily based on our personal income compared to our monthly payment.
On that mortgage. So what’s different about a DSCR loan is instead of looking at the borrower, the investor’s personal income, we look at the property level cash flow. So we don’t underwrite the borrower. We don’t ask for their tax returns. We don’t need to see their W 2 because many investors, real estate investors, they don’t have a W 2.
Their tax returns are very complicated. And so we simplify that by looking at, , if they’re If they’re purchasing a rental property, we look at that property and we ask, okay, what kind of rent can that property generate and how well does the rent from that property cover the payment that’s required on that?
And so that’s what a loan is, is it’s underwritten based on property level cash flow rather than the borrower’s personal income. And so for, I mean, I think you mentioned it, but maybe let’s go a little bit deeper. So especially like the self employed individuals, people with, , complicated or, or with complicated taxes and otherwise who may not always qualify, or even, I don’t know, maybe somebody that has, , Certain amount of properties, depending on what the limit is, you can have under a certain conventional financing methods.
I don’t even remember what the amount is of properties right now, but like, as they go to different areas, like it sounds to me like this, it works for a lot of different types of power borrow words. Am I off on that? You’re absolutely right. So when you think about what the financing alternatives are for a small to medium sized investor, there’s really 3 different pockets, , in terms of mortgage finance that they can look at.
So the 1st would be agency financing. This is a loan. That’s guaranteed by Fannie or Freddie. And historically this was the most cost competitive mortgage financing, but you have to You have to apply based on your personal income. You have to provide your tax returns those sorts of things but you can get an attractive rate.
There are some restrictions you alluded to one There’s property limitations. You can only typically finance 10 properties with agency financing another drawback of that financing is You actually have to hold it in your personal name rather than in an LLC or some sort of corporate entity. So great point there.
Yeah, you’re not able to shield your kind of your assets or isolate assets, but so that’s one bucket shifting to another bucket. Often small investors, they’ll have relationships with local or regional banks your community bank, maybe your community credit, , union. And, and if you have a relationship there, those, those entities have more flexibility than an agency loan, but they’re still going to look at your overall kind of financial situation.
They’re going to want your personal financial statements, those sorts of things. But they’ll, they’ll often lend into a, , a corporate entity. And so there’s some flexibility there. Okay. But what’s happened today is really two things. First, , for public policy regions FHFA, which regulates Fannie and Freddie, , everybody hears about how investors are driving up property values, that they’re competing with first time home buyers, et cetera.
So now, about two years ago, FHFA raised loan level price adjustments. On agency investor loans. So the price differential now between an agency loan and a DSCR loan is much smaller than it was maybe two or three years ago. And then also, , we all kind of hear about the challenges that this kind of hire for longer interest rate environment is created for the small and regional banks.
Most of them are pretty full up on their real estate exposure, and so they’re not really in the business right now of financing, , 500, 000 single family rental properties. So for us today, D. S. C. R. loans have become, , as I said, it’s a, , it’s a multi billion dollar origination market.
And it really is a very compelling alternative for investors, even well, well, healed investors who are looking for mortgage finance because of. The flexibility that it offers them to allow them to grow their portfolios pretty quickly and to hold those entities, those properties in, , legal entities, which, , honestly, for anybody who has a, , other assets that they want to make sure are protected real estate investments in corporate entities is probably wise risk management.
Mm hmm. What makes these loans? So DSR DSCR lending so attractive, especially in today’s current real estate market, like what makes it attractive? Yeah, so I think it’s, it’s a couple of things today, , the cost of a DSCR loan is very close to, , what the alternatives would be.
So, , if an agency loan is. Seven and a quarter, a DSCR loan is probably going to be seven and three quarters. So it’s only 50 basis points in rate. So it’s, it’s cost effective, but then it’s ease of use. Again it’s not that it’s not that providing , your personal financial statements and your tax returns is difficult or complicated.
It’s just that for a lot of investors, , small investors, their record keeping usually is not, , At the level that a lot of, , larger investors who are paying expensive advisors to help them with. And so, , the, the having to provide all that information when you apply for a loan, it introduces uncertainty into the financing transaction.
Uncertainty for investors is expensive. , it, it costs them time and at times they can cost them transactions. And so, as we designed how we do things at Vizio, , we talked about turning financing from a variable. Into a constant. The idea was really to create a very well defined product that’s underwritten based on property level cash flow, such that once investors understand how the product works, they can factor that into the process that they use for identifying and evaluating investment properties, and they know that , if it.
Okay. , they meet a certain box that Vizio will finance them on the following terms and that strategy of taking that or reducing a lot of that uncertainty for investors while offering them an attractive rate, , it’s turned into a really compelling value proposition. Yeah, that is, that is super interesting.
And in terms I guess, would this work? So somebody’s listening to this, maybe they’re out there shopping. And I know, , like any type of pre approval process or like, how does that be? I know you’re, you’re underwriting on the actual property. So I guess if they don’t have the property yet in mind, I don’t see how pre approval would work, but, but just educate me on this.
How does that piece of it work? Like turnaround? So somebody finds the property, like, what’s next? Okay. Yeah, so I would say for , so we work with folks who are relatively new to investing and then also folks who are established investors. So we provide purchase financing. If somebody’s looking to buy a property, and then we also provide refinance.
So, if somebody’s either looking to. Very common case today is somebody purchased a property to and they use short term financing. Let’s say the property needed rehabilitation. And so they took out a two year construction loan to purchase the property and make improvement. And now they’re looking to turn that out.
They need a 30 year term because they’re gonna hold it as a rental property. That would be a use case. Another very common case is I’ve owned the property for a while and it’s got a lot of embedded equity in it and I’d like to take some cash out of a property and use that to go buy another property.
So, all of those situations, and we finance folks, and we can talk more about long term rentals as well as short term rentals like Airbnbs. But for somebody who wants to understand how this financing works, I would say that. Kind of the best practice is to develop a relationship with your lender before you need the financing.
And so we have, we call them account executives. You could think of them as loan officers. We have a team of about 20 who this is the only thing they do, which is finance single family rental properties. And so. Folks find us through either calling our 800 number or reaching us, , through our website and then they strike up a relationship with one of our account executives and the account executive can walk them through more what the requirements are and how the product works and then that helps the investor.
If they’re looking to purchase a property, they then can plug that into their modeling to see whether a deal works. And they look at given properties. Okay. Or if they’re looking to refinance, , they can model it to see, Hey, does, is this going to work as a whole property or, , am I going to be able to get the cash out that I would like to go buy another property or do something else with those proceeds?
What geographies are you working in? Is this nationwide or give us a feel for that. Yes. So we work across the country. There’s probably only one state like of any significance, , that we’re not a player in today, which would be Nevada. But so, yeah, we work across the country and for us, , big states for us are , Florida and Texas California and then up, kind of, across the Eastern seaboard.
And so, , it’s the DSCR which is the ratio between the rent and the monthly payment. The DSCR for us , in most cases needs to be above one. And so , , that means , , the rental yields need to be relatively strong on the property for a DSCR loan to work.
We do finance the rent. Some properties below one DSCR, and there are other DSCR lenders in the market that do more of that. But yeah, it’s really a product that’s designed for, , single family rental properties, again, whether it’s long term or short term rentals. Yeah, it sounds to me like when somebody’s building their just circling back to what we mentioned earlier, if somebody’s starting out, or even building up their single family roster.
This is something that could probably be an option depending on, especially all those other, like, I mean, I, one of my first, one of my first jobs out of college was actually as a mortgage officer. And that was, I mean, our mortgage banker. And that was, I don’t know how many years ago. I’m not, I don’t know.
I don’t know, many, many years ago. I haven’t done that in a long time. And I remember, I remember thinking about like, like for certain people who had, , like even getting all their accounting together, everything else. And I remember people losing deals. So especially if you’re talking about like, let’s just say some competitive markets and you’re out there and you’re hunting, and then maybe you found what you want, and then all of a sudden you’re, you’re going to the bank and you’re trying to get it done and all of a sudden you have these maybe hoops to jump through that you.
Can’t necessarily do again. I like that you bring up that point. It’s not that somebody’s not doing anything right. It’s that maybe you don’t have really sophisticated accounting or otherwise because, , you’re just even getting started in real estate. So as you mentioned, you work with some, some newer individuals as well.
Am I off on any of this or do I have a decent lay of the land? No, I think you, you summed it up very well. I mean, one of the things that’s the most fun about this business for me is we just see an unbelievable myriad of investing strategies, and it really shows the power of our capitalist system that, , folks just find all kinds of interesting ways to make real estate investments work for them.
And it’s super inspiring. And, and so to this point of , there’s, there’s folks that kind of stratify who owns the single family rental properties in the country. And, , we hear a lot of headlines about the big, , Wall Street firms, but they actually own a very small percentage of these properties.
These properties are really owned by people that you and I know it’s amazing how many people when they find out what I do and they say, Oh, I, I own two or three properties. Right? Yeah. They think of themselves as a real estate investor. They, they probably have something else to do. , but then I explain to them what I do and their eyes light up.
Part of what’s held me back from buying more properties is it’s such a hassle to get mortgage finance. Wow. Yeah, this is, this is a great story, Jeff. And one that I’m happy to bring to my audience. So you mentioned, I think you have over 20, 20 mortgage mortgage bankers over there. What, what is the best way for individuals to, that are listening to this program, to connect with your team over at Visio Lending and to keep the conversation going to see if they, if they qualify.
Yes, the best way to do that is through our website, www. Visio, it’s V I S I O lending. com. You’ll find a lot of, , good content there about what we do and how we do it. And you can connect right through there to one of our loan officers. We’d love to talk to anybody from your audience. And, and again, we spend a lot of time with folks just helping them understand how the product works and how it can help them achieve their investing goals.
Wonderful. And for everybody listening we’ll put the links to the website and all that good stuff in the show notes, so you can just click on the links and head right on over and speaking of the audience, if this is your first time with us and you haven’t done it yet, hit that subscribe button.
This is a daily show each and every day. We’re bringing you new content. New ideas, new stories, and hopefully new inspiration to help you along the way. And your journey as well of growth. Again, hit that subscribe button or that follow button. Cause next tomorrow, guess what? You’re going to get that notification.
We’ve got another episode coming for you. And Jeff, again, thank you so much for coming on. This has been a lot of fun and I appreciate all the work you’re doing over there to help our, our real estate investors. So thank you, Adam. I enjoyed it. Have a great afternoon.