Here are the questions that we asked Albert Bui
1. Tell us your background, where are you from and how are you involved in real estate investing?
2. Have you been a lender for your entire career? Do you ever plan to quit your day job or do you see it as giving you an advantage as an investor to also work as a lender?
3. At what point in your career did you decide to become an investor yourself?
4. How do you find deals for your own portfolio?
5. Do you follow real estate / tech start up news? If so, which one(s) do you think will have, or already have, the biggest chance to disrupt the RE industry? How about disrupt in lending? Is that coming too? OpenListings, OpenDoor, Loftium?? Redfin? Amazon prediction?
6. What do you invest in yourself and what is the criteria and “rules” you have for your investments?
7. What do you suggest is the best way for a new investor to get started? House hack, rehab, passive income investing or something else?
8. Is a borrower’s income & credit score important in all loan types? How is an investors income/credit factored in if they are buying 2 – 4 units or 5+ units?
9. For new investors listening, when would an investor use hard money vs conventional financing vs portfolio loan vs commercial loan? Please describe each “lane” for us.
10. What is the best loan type for an investor who wants to “house hack”?
11. What do you think of short term rentals as a business model for investors?
12. Who is your favorite portfolio lender and when would an investor need to use a portfolio lender? What is rate/term difference between conventional & portfolio loans?
13. Do you have a favorite commercial lender for 5+ unit multi-family deals?
14. What mistakes do you see investors making in regards to financing their deals?
15. What are your top 3 tax planning tips for investors?
If you’d like to read the transcript… it’s below!
Joe Bauer: Welcome to another edition of the Seattle Investors Club Podcast where we talk about the Nuts and Bolts of Real Estate Investing. My name is Joe Bauer, and I have my cohost Julie Clark on the show today. Julie, how are you doing?
Julie Clark: I am doing wonderful. Thanks, Joe. I’m sure you’re doing better than me because you’re getting ready to kick off, what is it? What are we talking? A year long road trip?
Joe Bauer: Holy smokes, yep, something like that. But who knows what’s gonna happen? I’m packing up the van right now.
Julie Clark: Nice. That’s kinda how we roll on these podcasts. Who knows what’s gonna happen? We never know where the conversations gonna go, but I sure am excited bout today’s conversation.
Joe Bauer: Heck yeah.
Julie Clark: Who do we have with us today, Joe? Kick it off.
Joe Bauer: Well, today we have the lender and investor, Albert Bui. So Albert, how are you doing today?
Albert Bui: I’m doing great guys. Thanks for having me here.
Joe Bauer: Yeah, we love to have you on those show.
Albert Bui: How are you guys doing?
Joe Bauer: Just crushing it pretty much. Yeah. Thanks.
Julie Clark: We were, Albert was just driving previous to us hitting the record button here, so we told him he better pull over. What were we gonna call it? What was that? The most dangerous podcast ever.
Albert Bui: Yes, most dangerous podcasting. Yeah.
Julie Clark: [crosstalk 00:01:36]
Joe Bauer: I still might label it that. We’ll see. Get us some extra views maybe.
Julie Clark: That’s right.
Joe Bauer: Cool.
Julie Clark: Awesome.
Joe Bauer: Well, Albert, we’d love to hear more about you. So if you could take a second, tell us about your background, how you got involved with real estate investing, and what you do.
Albert Bui: Yeah, I went to school down in the LA area for computer science originally Cal Poly Pomona. I’m from the Orange County area, went to college there. I thought I was gonna be a computer science engineer, write code and everything. I just got a little disenchanted with the corporate job at the time. I was working with a cell phone company doing sales and was making more than what my targeted income was as an engineer. I figured “Shoot, if this is what I’m supposed to get a job in, and I’m already making double what I’m supposed to be making as a sales phone rep, then this is probably not what I want to do, you know, if going to school to make money of course.”
Albert Bui: That one purple book, Rich Dad, Poor Dad, and I knew I wanted to do real estate but I didn’t know how I was gonna get into it. I ended up helping out a lady with a [inaudible 00:02:52], a new line at a phone store, and what she mentioned was she was a loan officer. And I should come over and she’ll teach me the ropes, and I could work for her for free. At the time I just wanted information, so I decided to go and on my off time and just go over there and learn how to originate mortgages. But I knew I always wanted to invest, so I figured “Shoot, I have to learn the debt side of it to figure out how to invest.”
Albert Bui: That was the reason I got into it. Little did I know you actually make pretty good money living in it. So I’ve been [inaudible 00:03:27] ever since but the focus was always to learn how to invest while making a living. So that’s how I slowly moved into the niche of helping investors, I would go to local [REAs 00:03:40] in the area, anywhere from southern Orange County all the way up to LA, all the way out to Pasadena and Riverside, Inland Empire areas. I got my first rental in Tacoma in about 2013, and I’ve been buying ever since. So currently at 25 doors, and that’s where I’m at right now.
Julie Clark: Awesome. I love the fact that you said you wanted to get into real estate by learning the debt side as kinda your intro into it. I think that is why you as far as I’m concerned are one of the smartest guys that I ever, you know, we are all on these groups and these threads, and we all network with each other. But I find myself keenly like a laser, when I hear … I can tell when somebody knows what they’re doing. And that’s pretty much what I’ve done, is lasered myself over here to Albert because, I mean, even just that comment there I think is even just unusual, about learning the debt side as a way to get into real estate.
Julie Clark: People jump into real estate, they know nothing. You know, the debt side is something that they, I think, think about later. And they’d be a lot smarter, I think, doing it how you do it which is understanding all that first because it allows you to kind of find deals or understand how to do creative deals that nobody else is gonna understand, in my opinion. What do you think?
Albert Bui: Yeah, it helps a lot. I mean, every loan I’ve ever done, even from down payment assistance, first time buyers, all the way up to complicated people with multiple companies and lots of properties. And I’ve always thought about, “If I was this borrower, this investor, maybe first time buyer, how would I buy this to keep my risk low or to convert my first home into a rental, how do I keep my risk low? Keeping it below the rent, so I could always have cash flow if I ever had to leave the house.”
Albert Bui: So every time I advise the client, it would always be from that frame. I would make it applicable to their scenario, if they’re a first time buyer or if they’re an investor, I might say, “You might not want to cash out so much because when you got to rent this house out, you’re gonna be negative cash flow. What are you gonna do?” You know, that’s an example.
Julie Clark: Right, exactly.
Albert Bui: So [crosstalk 00:06:14].
Julie Clark: So you’ve been, you think that you’re gonna plan to keep the day job. Is that your plan long-term and just layer all the investing on top, which is called passive, I guess. That’s the point.
Albert Bui: Yeah, as passive as it can be, right?
Julie Clark: Yeah, exactly.
Albert Bui: I don’t really consider it a day job just because it’s more like self-employment in that there really is no 9 to 5 hours, per se. I continue to be a lender, I enjoy it. I learn a lot because I’m on conference calls like this with accountants and attorneys sometimes. So, if I don’t have to pay the 250, 400 an hour, but I can learn all the free advice, and I get to comment on the lending end, I enjoy.
Julie Clark: Yup, sounds good. How do you find deals for your own portfolio?
Albert Bui: I’ve had good success obviously with brokers. But contacting the property management companies that have or tend to have, I would say … I guess the best way you could say, they manage the more slummy properties or they don’t do as well. I like those property management companies because they generally have leads for distressed properties.
Julie Clark: Right.
Albert Bui: [crosstalk 00:07:35]
Julie Clark: Are there any rules on-
Albert Bui: Yes?
Julie Clark: Are there rules on being a … would you be considered a mortgage broker? Is that the right term or not?
Albert Bui: Right now I’m a mortgage loan officer, lender since I work with a company called American funding. But in essence I’ve always-
Julie Clark: Are there rules on-
Albert Bui: Yeah, go ahead.
Julie Clark: Are there rules on, lets say, somebody comes to you that’s a landlord that wants to get rid of their property, but they’re deciding whether they wanna refinance or sell it. Do you have, are there rules on you as a because of your fiduciary or whatever, are you able to buy their property if they wanted to sell it
Albert Bui: I mean, not that I know of. There’s the distressed homeowner thing with Washington state. I can only come from a soliciting point of view, right?
Julie Clark: Right, and-
Albert Bui: [crosstalk 00:08:26]
Julie Clark: You might need to insert, you know, a 3rd party there like a broker in the transaction, but seems like it might be a good source [crosstalk 00:08:34].
Albert Bui: [crosstalk 00:08:31] lender’s point of view.
Julie Clark: You know?
Albert Bui: Yeah. If somebody’s deciding, you know, they don’t wanna put money in it anymore, and if you could offer that opportunity … I’ve never had that opportunity, although I definitely would be very interested [inaudible 00:08:50] the numbers make sense.
Julie Clark: Hey, Joe, I’m getting a little bumpy sound over on my side of things. Are you hearing everything clear over on your side?
Joe Bauer: Yeah, sounds pretty good.
Julie Clark: Okay, you know, I was gonna say, sorry guys, just a little admin check-in over there. I’m over out here by the water, and sometimes sea planes come by and give me a little zap on my connection.
Julie Clark: But some of the greatest lead generators or I would think they would be great lead generators, are I know a guy that owns a carpet company, and he gets a ton of deals off, just going into homes because he’s a carpet guy. Or how about a roofer? I mean, you know? I mean, Joe, we talked about one time, maybe partnering up with a roofing company as a business, so almost helping … so that roofer could market and we’d have an opportunity maybe on those deals as part-owner of that company. I always think about things like that.
Albert Bui: Yeah.
Julie Clark: You’ve gotta do things differently these days. Of course, all legally. We like to play by the rules at Seattle Investors Club because I sure like to sleep at night without worrying about anything, but all kinds of deals where people are employed in different ways or have different avenues. And I wonder if they think about how awesome it could be to tap into those things. I think they forget about that sometimes.
Albert Bui: Mm-hmm (affirmative).
Julie Clark: Awesome, so you’re … this is something I was thinking of asking you, I thought might be interesting, because you’re such a smart guy and you’re in-touch with everything. How about real estate, or tech startups in real estate, are there any ones that you have your eye on or that you’ve heard about that might be either disruptive that you think might actually work for the real estate industry or even disrupt lending.
Albert Bui: Yeah, probably lending I was gonna … that comes to mind. There’s a lot of platforms that tie these monotonous tasks together. There’s CRMs out there, like Blend; that’s one of them that come to mind. Roostify, what else? Floify’s one of them. That’s one I use.
Albert Bui: And basically, they make the lending atmosphere more like what you would consider, I guess the catchphrase nowadays is rocket mortgage. So they make it a more streamlined experience, where the borrower can upload anything. And basically handle it all automated in the background. And each department talks to each other. Because I’m sure everyone that’s ever done a loan knows, a lot of people don’t talk. The left hand doesn’t talk to the right hand when you’re doing mortgages. And one department doesn’t know what’s going on in the other department oftentimes. And these new softwares, what they do is they allow everyone to be on the same page, the borrower, all the staff, and the loan officer, and the company. And I think that’s gonna make a big shift. And it allows the small guy to compete with the big guys.
Julie Clark: Right.
Albert Bui: [crosstalk 00:11:54] got my eye on.
Julie Clark: So are those software, again, I don’t wanna call it like a CRM. Again, I’ll say I’m not the tech brain.
Albert Bui: Yeah.
Julie Clark: On our team. But are those things that any lender can use? Or are those actual companies that would compete-
Albert Bui: Yeah. Yeah, any lender can pay them their monthly and use them. So it would allow the little guys to compete with people with huge workforces.
Julie Clark: Awesome.
Albert Bui: In essence.
Julie Clark: Good stuff.
Albert Bui: Yeah.
Julie Clark: What is- have you heard of Loftium?
Albert Bui: I heard of that, yes. I actually have on a podcast. [crosstalk 00:12:30] which one.
Julie Clark: It’s a good thing to do with, like if you Airbnb out one of your rooms, they’ll give you down payment money. I don’t know if anybody else has heard of that.
Albert Bui: Yes, that’s what I’ve heard, yeah.
Julie Clark: Yeah. [crosstalk 00:12:42]
Albert Bui: It sounded like a middle man, kind of, or an intermediary.
Julie Clark: Right. I always think, “These all sound good. They almost sound like fads.” I don’t know. I haven’t checked up on that one lately. But should be interesting to see what happens here over the next few years for sure with the game totally changing. I think its gonna look different in the next two years is my prediction, but …
Julie Clark: So let’s get into investing a little bit more.
Albert Bui: Sure, sure.
Julie Clark: So, what do you invest in yourself? And what’s your criteria for investments? And do you have any rules that you stick to on your investing?
Albert Bui: I’ve mostly stuck to the 1-4 units, mostly 4-plexes. I like the ones that are distressed that I could add some value to by rehabbing it or changing the type of tenant base perhaps. So I can get a higher rent, charging back from utilities. So I do all the things we do to increase the income and decrease the expenses.
Julie Clark: Yup.
Albert Bui: I kind of fell into the 1-4, just because I knew the loan- I knew the debt side of it. So, I had a 100% grasp on what it would take. So, I didn’t have as much fear going into it. But I do plan to go into larger, 5+ apartments, now that I feel like I’ve gotten a grasp on the 1-4. So, that’s what I currently do.
Albert Bui: In terms of rules, I generally want the rents to by about 1.25% of the cost, and the cost to me would be the price you’re paying for it plus the rehab. So if it’s 300 grand and the rehab is 400, or 100, then I would like the gross rents to be 5,000 a month, 1.25% of that 400 grand total. That would be an example.
Julie Clark: Right. And what’s your reasoning behind that. That’s your a benchmark calculation as you do as a quick check as you see deals? What is that … does that end up …
Albert Bui: [crosstalk 00:14:48]
Julie Clark: Does that calculate out for you as some sort of certain IRR or something like that you’re trying to hit?
Albert Bui: Yeah, there’s certain-
Julie Clark: [crosstalk 00:14:57] for you?
Albert Bui: Right, there’s certain metrics on it that make it desirable. I mean, it comes out about an 8 or 9 Cap, so that’s the minimum in general. And when I’m looking at my expenses, I’m looking at completely not being involved, so property management, repairs, utilities, property tax insurance, everything in there. I find some people, they do their measurements, but they’re managing the property, so their numbers sound better. But in reality, that might be fine if they wanna manage it. I just prefer not to. With all the loan conditions and dealing with the lending end, I just don’t wanna be involved.
Julie Clark: Right.
Albert Bui: After I purchase and rehab it, I usually hand it off. And so I don’t, I’m not involved.
Julie Clark: And when you say, 8-9 Cap, are you talking about 8-9 Cap on your actual numbers or your stabilized numbers?
Albert Bui: Right, on your actuals, yes. So if we were to compress that Cap to the actual market, the value would be much higher of course. Another reason I do that is, if we do those numbers and we work em backwards, usually you’re in the property for 75% of the market value or less, generally, if you do the numbers like that.
Julie Clark: Right.
Albert Bui: So that means, I could go to a bank and get all of my original money back out. That’s the reason for that formula.
Julie Clark: So that’s your end goal is to be able to-
Albert Bui: Yeah.
Julie Clark: Do a cashout or just get all your money back out. How about cashout? Do you try for cashout? Or do you just try and get all your-
Albert Bui: I do cashout, sometimes I don’t need the money, so I’ll just get a line of credit. But the whole premise is, if I were to get a cashout, can I still cash flow? And those numbers make it possible to still cash flow, while you’re taking most or all of your money back out.
Julie Clark: I imagine those deals are harder and harder to come by at this time.
Albert Bui: Yeah, right now.
Julie Clark: Right?
Albert Bui: [crosstalk 00:16:55]
Julie Clark: Do you have any [crosstalk 00:16:55] at all? Any out of state investing?
Albert Bui: I am looking at other states as well. Definitely not my home state, California, nothing there really cash flows, unless if you’re in the valley or something. And [crosstalk 00:17:10].
Julie Clark: Whoah, hey, Buddy is with us today. [inaudible 00:17:16], Buddy.
Albert Bui: What was that?
Joe Bauer: That’s Buddy the dog.
Albert Bui: Oh, oh, Buddy, okay.
Joe Bauer: He is a guest on the podcast from time to time.
Julie Clark: Buddy is our sidekick. That is for sure.
Albert Bui: Nice.
Julie Clark: And he just got his haircut yesterday, so he’s all beautiful. Our little boy that looks like a girl. It’s okay.
Albert Bui: [crosstalk 00:17:38] groovin.
Julie Clark: Yeah, so everybody’s got different criteria in investing of course. Do you-
Albert Bui: Uh-huh.
Julie Clark: So that pretty much covers it for you on … I always, I think people get confused when they’re talking about Cap rates and this and that because people don’t know are you talking about a Cap rate on the actual numbers that exist today or a Cap rate on the stabilized numbers, I mean, there’s so many different ways to calculate.
Albert Bui: Oh, yeah, did you want me to explain that?
Julie Clark: Sure!
Albert Bui: Yeah, so when I mean Cap, I mean, Cap on the cost. So [crosstalk 00:18:20]
Julie Clark: I gotcha.
Albert Bui: [crosstalk 00:18:21] would call it yield to us. Some of the banks like to call it [inaudible 00:18:28]. Meaning your net income with all your expenses divided by your loan amount. Because they’re trying to figure out how much income you have coming relative to how much payment going out, what their risk is. So yeah, there’s different calculations on it. I like to keep it simple, that’s why I use these rules. I mean, I could do the complicated calcs, but it takes a lot of time on each deal to do them. So I like to have a rule of thumb makeup for properties, so I can quickly gauge where I’m at.
Julie Clark: Right, on big institutional level deals on commercial real estate, those guys how they decide whether it’s a good deal or not, is they also use yield on cost. So that applies, also the way you’re describing it is also the way, like I said, big institutional investors who build 250, 350 unit apartment buildings consider how to … if it’s a deal or not, is yield on cost.
Albert Bui: Yeah.
Julie Clark: So definitely something people wanna learn about and all that sort of thing.
Albert Bui: Yeah.
Julie Clark: So on our podcast here, we have people that are more experienced. We have people that are listening that are less experienced. And for those that are just getting started, what do you suggest is maybe a good way, the best way for an investor to get started? Is it maybe a house hack jumping into a [crosstalk 00:19:54]
Albert Bui: Yeah.
Julie Clark: [crosstalk 00:19:55] type of situation? You know-
Albert Bui: I think house hack is probably the best, to be honest.
Julie Clark: House hack.
Albert Bui: I mean, assuming it’s a cosmetic rehab or less, so they can kind of learn the ropes of working with contractors while it’s a smaller dollar figure because those flips and rehabs … I mean, it’s kinda like you’re jumping in the deep end of the pool. It could be a very large rehab and sometimes a lot of these buyers are buying it at auction. They don’t even know what the house condition is in. So I think that’s pretty risky.
Julie Clark: Agreed.
Albert Bui: Learning from the house hacking point of view, they’re getting [inaudible 00:20:33] to pay for the mortgage. They’re learning it slowly while they, you know, do their job or whatnot. Yeah.
Julie Clark: So set, give us the scenario, so if somebody picks up a house, let’s even say, at auction or however they get it.
Albert Bui: Mm-hmm (affirmative).
Julie Clark: Do they take that down immediately with a conventional loan because they’re gonna live in it? How long do they have to live in it to get the best loan rates and what type of loan would that be? For a house hack.
Albert Bui: There’s a couple options [crosstalk 00:21:05] of doing it that way. House hack with a standard purchase, they could use a conventional loan with as low as 5% down, on up to a 4-plex. [inaudible 00:21:16] program requires actually that they own no other property at the time. It’s a great first loan program, when you own no other properties to start real estate investing. You can live in one of your 4 units or 3 units or 2. And rent out the rest.
Albert Bui: I mean, you can also use FHA for it, but there are pros and cons of each program. They’re both pretty low. FHA’s 3.5% down. The conventional program is 5% down. But the conventional program if you have really good credit, you can get very little to no mortgage insurance if you structure the loan correctly. And but the downside with FHA is, mortgage insurance is really expensive. So if you don’t qualify for the conventional at least you’ve always got the FHA option to live in and rent out the other units.
Julie Clark: Right. And so that’s an interesting topic. One of the things that I talk about at Seattle Investors Club is we did a presentation on which lane are you in ,right? And to decide are you brand new where you don’t have, where you gotta borrow hard money. You’re not a general contractor. You don’t have a real estate license. You don’t have a contractor crew ready to go. I mean, that’s kinda the starter lane. Maybe a lane up from then is you have one of those tools in your toolbox, where maybe you are a contractor or maybe you are a real estate agent, to give you a little ability to have some cost savings.
Albert Bui: Mm-hmm (affirmative).
Julie Clark: I would think the same thing goes, and the point of that presentation was to point out to people, you might be here, but you wanna work your way into the next lane so you ultimately get in the fast lane, I guess, was the point of that presentation. And I think, maybe I’m just talking off the top of my head and making this up as I go, but seems like as a borrower, right … so yeah, you’re an investor and what do you have in your investor toolbox. But you’re also a borrower, most likely. And so I would think that you have sort of a borrower’s toolbox. You start out in the starter lane, which would be what? FHA or some type of … if you have good credit, you get the conventional. And then beyond that, you bump into faster lanes that have better loan terms and better rates. You kinda get what I’m saying?
Albert Bui: Yes. Yeah, that’s-
Julie Clark: [crosstalk 00:23:49]
Albert Bui: You build a great point, Julie, I think. Because in the beginning I used a lot of private and hard money, which was a lot more expensive, with the rates and the points. It was contrary to what I was brought up with. No debt, don’t take debt out. So it was really scary to use it the first time. But after you use it for awhile, you’re like, “Wow, I captured a bunch of equity. I brought a property that was undervalued, and I fixed it up. And I refinanced it out.” After you do your first one, you get kinda desensitized to it. And then you realize that you don’t wanna be paying to use 10 or 12% and multiple points day to day. So [crosstalk 00:24:27].
Julie Clark: Right, you could get lazy there.
Albert Bui: Yeah, yeah. You can get lazy is right.
Julie Clark: You could get lazy there and think hard money’s the way to go and not educate yourself about the better ways to borrow money. I mean, once you know what you’re doing on the rehab flip or the side of actually understanding construction or the best way to roll with your property management, I think the number one thing that you can do, that you should do, is become an expert at the different lending options. In fact, I’ll go back to what you said in the very beginning is you started off as an expert in the different lending options and backing into it that way.
Albert Bui: Mm-hmm (affirmative).
Julie Clark: Just, I think these are backwards these days, how investors are taught. They’re taught to be wholesalers.
Albert Bui: Yeah.
Julie Clark: And then, flip houses, and then, use hard money. And then, slowly make your way towards getting into passive income. It is my mission, Brother Albert, and hopefully you’re with me on this, to let’s you, and me, and Joe, and Buddy, Buddy’s in on this. Let’s flip the coin upside down together, I think, and with our other friends here in our local community, and let’s start telling people, “Hey, you know what? Instead of starting off as a wholesaler and a flipper, from day one, you should always look to be a passive investor because there are ways for you to do that from the start. From the start, right?”
Albert Bui: Yeah, you bring up a great point, Julie. I’ve always been a great fan of, I guess the saying is, “You start with the end in mind.” I think it’s one of those phrases from The Habits of Highly Effective People.
Julie Clark: Yeah.
Albert Bui: And that’s how I’ve always done my investing. I had a borrower change the course of my lending career. I mean, investing career technically, but it was a lending scenario. And everyone declined him because they immediately looked at his tax return, and he showed a 0 income. And I’m thinking, “Oh, God, this is one of those declined loans I’ve got to win over the realtor with.” But when I looked at his tax returns, the guy owned probably 40 to 45 4-plexes, all leveraged, and probably 4 to 5 apartment buildings that were 40 to 70 units.
Albert Bui: And what I learned from that was, you can use [inaudible 00:26:53] loss to make it look like you have a complete loss on your tax return. Most loan officers would look at that and think, “Oh, there’s no income here. It’s negative.” But I looked further and I was able to add back all depreciation. And the guy actually made probably 3 or 400 grand a month off all these units he had, his entire portfolio. And I was able to get him qualified. I mean, [inaudible 00:27:16] a loan, great.
Albert Bui: The whole point was the knowledge or seeing that scenario, tax-wise, was more valuable than the commission times maybe 100. So that was one of those scenarios that changed the course, I knew I was doing apartments after that for sure.
Julie Clark: Right, totally. I agree, I think that people, they need to be taught from the beginning the different lanes of borrowing, like I said, right? So you’re starting here, and you’re in the starter lane. This is what you can do, when you’re in the starter lane. And here’s the lane next to it that you wanna try to switch into as fast as possible, almost like a road map, how to work your way up the borrowing chain, and things that open up to you as you go. I think that people are taught to earn the fees off of your … like, flipping is ordinary income and it’s just fees. I mean, it’s kinda like to me almost having a day job. I mean, it’s the worst taxable situation. And yes, you need to be able to … the question is how much money do you need? Maybe we’ll back it up, there’s the next question. How much money do you need to on a typical, let’s say a duplex, how much money do you need for equity on a duplex? And how do you go about getting that equity? Can you- I know it’s all gonna be, just maybe if you can throw out an example if that’s possible.
Albert Bui: Sure.
Julie Clark: People have an idea, and I think rather, they’re looking at all these leads. And if they’re doing their own off-market marketing, I think they’re passing by opportunities to pick up rental properties, even if they’re single-family rentals, because they don’t understand the debt side of it. And they’re just so focused on flipping, every flipper, every rehabber that I’ve talked to, especially it is like coming out of the woodwork this year. It is like the hot topic. Everybody wants to be getting into cash flow investing and passive investing. And everybody is regretting that they flipped all those houses. That they didn’t keep some of those.
Albert Bui: Yeah, so true.
Julie Clark: Everybody is talking about it. So what does somebody need to get started, from day one. Let’s say you’re brand-new, and you’re listening to this podcast, and you’re clued in today that you need to look at passive income from the very, very start.
Albert Bui: I think it begins with philosophy. You have to have an [inaudible 00:29:52] philosophy of why you’re getting into this. I think a lot of people, and it happens in lending too. There’s a lot of career lenders that are there. And they say they’ve been doing it for 30 years. And I’m like, I’m thinking, “Well, if you’re making that kind of money and you’re doing it for 30 years, there must be something wrong or they have no goal.” [inaudible 00:30:10], so it has to do with I think the, why you’re doing it, if we’re getting deep on the philosophy side of the investing.
Julie Clark: Let’s go deep.
Albert Bui: You’re looking for passive income to free you from your job. What are you trying to do it for? If you’re flipping, are you doing it because you love designing properties and to stage them and look good, or is it the thrill, or is it money, or is there an end goal? I think that is the most important part of it, Julie.
Julie Clark: I agree, 100%. And you might end up with a combo of things that you’re doing to reach those goals, right? Obviously.
Albert Bui: Yeah, yeah. I mean, for me it was passive income to fill out the months where I’m not doing as much loans. So I could get maybe one or two loans’ worth of commission, in terms of cash flow, and so those months if I had clients, or I didn’t have any let’s say, then I didn’t have to work. I could just do loans because I apparently enjoy or because I wanna learn different scenarios. So I’ll take on difficult files for the heck of it.
Julie Clark: Right.
Albert Bui: And that’s why- I wanted to have the freedom to do it, I guess, is the best way to say it.
Julie Clark: Exactly. So again, we started with the philosophy, first you need to decide what your personal goals are, your “why”. And then, layer that on top of, well, what do you actually like to do? What part of the process do you like? And let’s get you towards being able to spend more time doing that. But regardless of who likes what, you’ve still got to be able to pay your bills, right? So there’s usually a path to getting there. You build the path. You carve out that path so you can reach the top of the mountain there. So what else do people need to know about getting started for multi-family investing, multi-family investing from the start? How much money does it take, I guess is the question? I mean, it depends of course, where you’re located, equity-wise.
Albert Bui: Yeah, it depends on if you’re … right. Yeah, I suppose it depends on, if we’re talking about a person who has a fully-involved job or role or self-employment, where they cannot get away from it. They’ve got a bunch of money, and they can passively invest into a syndication, where somebody else is sponsoring the deal and operating the deal. Then they could do it passively with chunks of money invested that way. I mean, if they’re trying to house hack if they’ve got limited money, then it’d be better to house hack and live in a multi-unit or even a single-family, where they can rent out all the rooms or do something creative. Because I’ve heard a lot of these cities are passing some, are being looser about building accessory dwelling units, and in-law units in the back. So that’s another way to do it, too. So you don’t have to necessarily have a duplex or 4-plex, although that would be great to do it. Yeah.
Julie Clark: Totally. I agree, the whole ADU play and stuff like that is, I mean, it’s no secret already here in Seattle, but definitely.
Julie Clark: Let me back it up a little bit further and say, so for people who are newer and don’t understand what’s going on, how much does a borrower’s income and their credit score, how important is that in the loan types? As they’re getting started investing, I think people … I think they get confused. I think they think, “Well, I don’t have a lot of income. And my credit is … okay, but not stellar, so I can’t do any passive investing.” Is that a fact or a myth?
Albert Bui: To a certain degree it’s a myth. But there are hard-line numbers you need to reach in terms of credit score, most of the loans are around 620 FICO or higher. I mean, of course there are lower programs as well, but they’re usually for primary residents. Or they have much higher rates. So there is the ability to use the less favorable rates or programs to at least get yourself some loan to invest. However, it’s not the ideal scenario. And ideally, you’d wanna keep your credit or improve your credit, so you have as many options as you can have when you enter a deal. You can either live there, rent it out. You can buy it with hard money. You can use conventional lenders like myself to acquire the property.
Albert Bui: So it’s good to know all the type of money, even if it’s local bank, community money, or private money with family or other associates. It’s just good to know which options you have in the toolbox to figure out, some days you don’t need the hammer. Some days you wanna use the flat head screwdriver or whatnot; that’s my best example.
Julie Clark: Right, exactly a toolbox of debt as well as a toolbox of investor tool sets.
Albert Bui: Mm-hmm (affirmative), yeah.
Julie Clark: So I’m gonna ask it a different way, if somebody comes across a duplex or a triplex, and that property pencils as far as, it has the right debt-service coverage ratio, and all that kind of stuff. When we’re looking back then at the borrower, it still needs to be considered then what their debt to income ratio is. Is that correct?
Albert Bui: Correct, yeah, at least on the residential lending end. If you go to the local portfolio lenders-
Julie Clark: And residential [crosstalk 00:35:51].
Albert Bui: Uh-huh.
Julie Clark: Well, residential, let’s qualify for people who are listening, is anything from 1-4 units, right?
Albert Bui: Correct, my definition from a lender point of view is 1-4 units, but in the general lending end, they will use debt to income. So in essence, that will be your total expense per month divided by your before tax income. And it’s a ratio. Generally, the banks only wanna lends up to 45-55% of your before tax. What I always tell clients is the best way to think of that is for every dollar you make before tax, the bank will lend you about 45 cents to about 55 cents. In terms of payment, maximum payment you can [inaudible 00:36:39] per month, so they have a general idea of where they’re gonna be at. That gives em an idea of that.
Albert Bui: But other banks, such as portfolio, or local community, or credit union commercial departments, not the residential department, may lend on 1-4 units as well. But they’re lending commercially to your LLC or maybe to you personally, but it’s a rental, so the use affects type of money, even though it’s still 1-4 units lending. They use debt coverage, which is the more commercialized formula. So they don’t [inaudible 00:37:11] income. But it’s important to note that, if you’re trying to borrow each type of money, it’s good to know the type of criteria they’re judging you on so you can aptly prepare before you apply and get the most favorable results.
Julie Clark: So if you were to line up, side by side, a triplex with a, I’ll say, a residential type loan. Is that called conventional? Versus a portfolio loan, what would be the differences if you could take the same property between the two? Would it be how you’re qualified, rates, loan terms?
Albert Bui: Yes, right.
Julie Clark: How does that work?
Albert Bui: The residential [inaudible 00:37:58], the conventional and the FHA-type programs, focus more on the borrower, as opposed to the commercial or portfolio programs. Even though it’s still 1-4 units, I don’t want people to get lost on that track. They’re focusing more on the income of the property, and then the borrower second. So the property is 80% of it. The property’s got a cash flow based on debt coverage, and that is the total net operating income divided by the total mortgage payment. And as long as the income coming in after expenses is 1.25 times the expense, then they’re cool with it. So that’s a way to break down the numbers from a banking perspective.
Julie Clark: But are we saying, though, but are the rates higher on that? Usually going that route?
Albert Bui: In terms of rates, right now, I would say they’re lower. Commercially, they’re lower than residential because residential, they’re based on different metrics. Residential loans are based on bonds on Wall Street, the [inaudible 00:39:02] bonds that are issued [inaudible 00:39:05]-bond. And the rates from those bonds affect residential rates. However, commercial, they’re looking at the short-term money. And they’re based off indexes, so they’re more of a short term without getting too complicated or into the weeds. Right now, you have an opportunity to get commercial money a little cheaper actually. There are pros and cons to each, though. So we can also go into that if you.
Julie Clark: Yeah, I mean, why would somebody not just go … what would be the reason somebody wouldn’t go after a portfolio loan if it’s 80% based on the property rather than your income or credit qualifications? What would be the downside or what would be the reason somebody wouldn’t 100% go towards the portfolio loan, if they’re getting started and they’re not in the lane that they’re the strongest borrower as of yet? [crosstalk 00:40:01]
Albert Bui: The main reason, yeah, the main reason most people do it for the residential loans is because they’re 30-year fixed. And these commercial loans, usually are 5, 7, or 10 year terms, meaning [inaudible 00:40:15] will have to refinance or pay it off in that 5, 7, 10 year period, sometimes 15 if you’re lucky. So that was one downside of the commercial [inaudible 00:40:28] money, portfolio.
Albert Bui: And the other downsides are, I would say, the terms. So full recourse, meaning you have to guarantee the loan, personally. And they’re just, the notes aren’t standardized. So the agreement, written, the promissory note, isn’t written in the favor of the borrower. The banks can put whatever they want because you’re considered a commercial loan. You’re sophisticated. You should be able to read it and know what you’re signing up for. So there’s a little bit more, I guess, homework or due diligence you gotta do, I guess, when you’re doing commercial or portfolio loans, as opposed to the residential loans. They’re boilerplate templates. Anybody can download a blank copy of the mortgage note or deed and look it over before they even sign one because we all use the standardized templates for those.
Julie Clark: Thinking about how investors think because they’re all cheapos, cheapasses. I love you guys, but you guys are definitely nickel and dime, cheapasses. Hey, that’s the way it goes, I get it, but what would be the down payment, the equity requirement, is there a difference between conventional and a portfolio loan from that standpoint?
Albert Bui: Yeah, there is. Conventional for 1 unit properties is as low as 15%, so it is lower. Most portfolio banks will want anywhere from 20 to 25 generally, [crosstalk 00:41:58].
Julie Clark: So just that right there, that fact alone right there might push people one way or another. And they just have to deal with the terms and the rates based on how much money they have, right?
Albert Bui: Correct, I mean, we’re assuming the investor in this hypothetical doesn’t live in this property, right, Julie?
Julie Clark: Right, correct.
Albert Bui: Yeah, so that is correct. However, there are pros of the portfolio money. You can cross-collateralize, meaning you can add other properties to the loan, so that you can [inaudible 00:42:30], so you can get the money you need. You can qualify based on debt coverage, which is easier to qualify on if you have tenants, I suppose, than debt to income. You can fund an LLC as an entity, so you don’t have to have it in your personal name, which is important to some people. What I like is they’re much less paperwork to close than a regular residential loan. Depending on what your taxes look like, what your income looks like on your property, you may want to do one versus the other. And rate may not be the only determinant.
Julie Clark: Right. So just like you guys are doing for all you investors listening out there. All the savvy investors, I am sure, or here’s your tip if you’re not doing this, you have a deal analyzer on your property, right? And maybe if you also are doing the right thing, you’re gonna have more than one exit strategy guys for every deal that you’re looking at, every investment opportunity that you’re looking at. So you’re lining up whether that’s gonna be a flip or a buy-in hold, or if there’s seller financing available, or if you’re gonna have whatever the scenario might be. House hack, whatever the scenarios are that you’re looking at as your investment play and your exit strategy. You definitely need to have then another, we’ll say, loan analyzer, where you’re applying which loans are available to you and running your deal through those and see what pops out. Wouldn’t you say, Albert, that might be a good idea?
Albert Bui: Yeah, I mean, I analyze it just like, I think, a larger investor would. I stress-test my investments as well. So I’ll basically run an analyzer with a higher rate for instance. Or I’ll assume more vacancy, or I’ll assume more repairs, and I’ll play around with numbers and see how much I can stress it before it doesn’t make any more money. Not that I’m such gloom and doom, but I wanna know what my worst downsides are. Use portfolio money, as well. So if it’s doomed in 5 years, I wanna know worst case, what my value will be. So I’ll assume a lower value. Can I refinance out of it? Can I sell it? Let’s assume a low selling price because we don’t know what the economy will be in 5 years.
Julie Clark: Exactly.
Albert Bui: So I’ll do all these assumptions, and if I’m still happy with where I’ve bought and where the deal is, I’ll still buy it.
Julie Clark: Let me ask you a question, so right now we’re in May of 2018. We’re in a super hot, low inventory market with still really low interest rates available at this point, even though they’re on the rise. Do you, for yourself, I mean, always consider the downsides and project out, especially if you’re looking at a 5-year term, you’re gonna be forced to do something in those 5 years at the end of that term there. Do you have any feeling or do you have a rule for yourself at this point on the maximum loan to value that you will put on a property? Even if you could squeeze your required equity down, would you be cautious with this at this point, just in case we have a correction, considering, especially if you’re using … maybe if you have a residential loan on there, and you’re getting a 30-year term, you can ride it out, right? But if you are [crosstalk 00:46:05].
Albert Bui: Right [crosstalk 00:46:05].
Julie Clark: Situation you damn well better be planning for a correction to happen. Do you have any rules for yourself on maximum loan to value on portfolio loans that you, regardless if you could, put less equity down or not, lower down, do you max it out a certain percent for yourself?
Albert Bui: I think maybe with lines of credit. I don’t like to max out with actual money, meaning taking the money out and just [inaudible 00:46:32] sit around in my checking account, earning nothing. So I do [inaudible 00:46:39], and that’s another topic, but a lot of people call it [inaudible 00:46:42] banking or paycheck parking, the strategy where you’re systematically putting all your money into your line of credit, beyond your [inaudible 00:46:54] of course, emergency fund in cash. So I guess, that’s a topic of personal finance.
Albert Bui: I like that because I’m saving interest [inaudible 00:47:02]. And but, in terms of your question about [inaudible 00:47:08] properties, yeah, I do like to stay lower leverage, but for me it’s mainly what determines that is it focuses on the cash flow. I want to obtain a certain cash flow because that is what holds property through downturns, not value. Values could be great because I have stories on podcasts, where people in Florida had 50% loan to value and they lost houses.
Julie Clark: Right.
Albert Bui: Because rents went way down, and suddenly developers were renting out properties competing with other landlords, and then rents crashed, and then people they were 50% loan to value, but now since the values crashed, they were at 100% loan to value and they had no tenant. So they couldn’t hold property because they couldn’t pay all the mortgages.
Julie Clark: Right.
Albert Bui: At the end of the day, it was all about cash flow. So that’s what I focus on mainly is the difference between the money coming in and the money going out.
Julie Clark: Right.
Albert Bui: So for me, it’s a [crosstalk 00:48:00] scenario, just keep the money going in as [inaudible 00:48:03] as possible and keep the money going out as low as possible. So paying [inaudible 00:48:10] is an advantage, too, [inaudible 00:48:11].
Julie Clark: Did you say, paying- what did you say on that last part? It glicked out on me. [crosstalk 00:48:17].
Albert Bui: Paying slower.
Julie Clark: Paying it down?
Albert Bui: Paying slower.
Julie Clark: Okay.
Albert Bui: So I guess, in the business world, you know, if a contractor is willing to accept net [inaudible 00:48:26] at 60, payment in 30 or 60 days, I would prefer to pay it slower. And then, have the money coming in, they come in every month, for instance, rents. So I try to pay money going out, expenses [inaudible 00:48:39] slower and the rents faster, if I can. An example would, [inaudible 00:48:44] being or just giving the tenants incentives to pay quicker or on time.
Julie Clark: Right.
Albert Bui: Yeah.
Julie Clark: I hear ya.
Albert Bui: Yeah.
Julie Clark: All good stuff. We’re getting a little long on time here. We don’t wanna keep you in a parking lot too long. But I do have curiosity for myself, so I’m being selfish, what do you think of short-term rentals as a business model for investors? And then I’ll let you go.
Albert Bui: I’ve actually a few clients that do it as a business. They lease, and then sub-lease out via Airbnb or VRBO and other sites. So I do help them with that. I like the model because you own nothing and rent [inaudible 00:49:35]. I mean, some investors buy and then [inaudible 00:49:38] and rent it up, so they own the property as well. I’ve seen different models where they lease and sell [inaudible 00:49:47]. It’s a really a viable business [crosstalk 00:49:46].
Julie Clark: Are you saying if you had a lease option, and then you sub-lease it out as Airbnb? Is that-
Albert Bui: Yeah. Like a lease, and then they’d sub-lease, yeah.
Julie Clark: Ooh, I like it, yeah. Well, that’s another topic for another day, guys. There’s a little tidbit of maybe something we’ll do a follow-up on. But are there, is there any regulation out there in regards to the short-term. Isn’t there like a hotel tax or anything like that? Is there some extra cost or something like that?
Albert Bui: Yeah, every city will vary, so I guess, [inaudible 00:50:17] upon each person’s city and area where they’re looking to do a short-term rental strategy, but from the lending end I’ll talk on that, so that every one of the listeners will get an idea of how the income is calculated. We can only use short-term rental income if it’s on the tax returns for two [inaudible 00:50:37]. There are ways to use it still, from a qualification standpoint. In short [inaudible 00:50:45], so it could be one year and whatnot. But it does have to be filed, so it’s not like a rental agreement. You could use the income right away. So for people out looking to do short-term [inaudible 00:50:55], keep in mind that we may calculate in [inaudible 00:50:59] with no income to help off-set for a while until [inaudible 00:51:04] your returns.
Julie Clark: Right.
Albert Bui: So hopefully, they can qualify without that short-term rental income [inaudible 00:51:10].
Julie Clark: Well, maybe we’re gonna have to twist your arm to come to Seattle Investors Club and give a presentation about all these great things. And is that included as a topic as well, or maybe have you back on the podcast and … we like to go nitty gritty on this stuff here on our podcast, here at the Nuts and Bolts of Real Estate Investing. I, myself, am like, this has been a great … I love this side and diving deep on the lending side. We’ve only scratched the surface today on stuff that you guys should be thinking about. But hopefully Albert’s gonna help and team up with me. And start talking more about how people getting started should be paying more attention to passive income, and understanding lending from the start, and making lending and understanding debt as big of a conversation as how to rehab a house. I think it’s even more important, in my opinion.
Julie Clark: So, Albert, thank you so much for coming on and joining us today. We look forward to hearing a lot more from you in the future, as one of our go-to guys. How can people reach you, Albert, if they need some help with loans and getting qualified or having questions and … I highly recommend you guys give Albert a call, and reach out, and get on that sooner rather than later.
Julie Clark: I actually think we tell investors, getting sidetracked here, that you should all get your hard money file set up from the beginning. You should all get qualified with a hard money lender. For God’s sakes, you should also, as importantly and I think pushing more importantly these days, is to make sure you from the start establish a relationship with a lender that can help you consider the different conventional, and portfolio, and passive income loans and different loan strategies that you can use.
Albert Bui: Yeah.
Julie Clark: Not only in general, but for your particular situation. It’s no different than having an attorney on your team, or your CPA on your team.
Albert Bui: Right.
Julie Clark: So you guys should all put Albert on your team. There you go.
Albert Bui: Yeah.
Julie Clark: How can they contact you, Albert?
Albert Bui: Yeah, they can give me a call. My number is (425) 951-5300. And my email is [email protected]. So it’s albertbui.com. And you brought up a good point, Julie. Thanks for having me on. And what I think you brought out that was a good point was that they should always have a backup option because it’s so often that I find flips gone wrong, or budgets gone over. And people scramble at the last minute after maxing all their credit cards at Home Depot or wherever else to try to refinance the flip into a house they’re living in or as a rental because the flip can’t make enough profit now because of all of the overruns, and the delays, and the extra points to extend their hard money loan.
Albert Bui: So all of that could have been resolved if they just figured out a backup strategy upfront just in case. Because I would have told them how to manage their credit to instantly refinance out of that or the highest they could go in cost before it’s probably not gonna work out in the loan end or selling end anymore. So they’d know, before going in, how to get out multiple ways. So, perfect point.
Julie Clark: That’s right. Have the end in mind, when you get started.
Albert Bui: Yeah, [crosstalk 00:54:48].
Julie Clark: Know all your options. Not only that, you might have decided from the start. My point also is, you guys might have decided from the start, that you don’t need to flip it. That there’s a better way for you to make more money. I get that everybody needs to make some sort of fees and income and stuff like that to pay bills and pileup a little bit of cash, but something that I’m gonna be talking a lot about going forward here is, like I said, getting Albert on your team. And do you do lending in other states, Albert? Is it Washington and California?
Albert Bui: Yeah, I do lending in other states. I’m licensed in Texas and Tennessee, Washington, and California.
Julie Clark: Wow.
Albert Bui: However, through the mortgage company I’m at, we can lend in other states as well, through our other licensed agents. I mean, I’ve done em everywhere from Raleigh, North Carolina, to Minneapolis, all the way down to Texas, back to Washington and California.
Julie Clark: Boom, awesome. Awesome.
Albert Bui: Mm-hmm (affirmative).
Julie Clark: We don’t know when our podcast here is reaching people out there in podcast land from anywhere so if you guys like what Albert had to say today and you’re off in whatever state that you’re in, worth a call, because I’m telling you, hands-down, this guy knows what he’s talking about. And is one of my … I’ll say, Albert, I’ll just say it here, publicly, with everybody listening. You’re getting my favorite guy of the year award, right now, aside from Joe. You know.
Albert Bui: Awesome.
Julie Clark: I am super impressed with you, man. And I look forward to developing a growing relationship with you as we kick off further down this year. And to all the years that come. So thanks again.
Albert Bui: Thanks for having me, guys. Thanks, Julie.
Julie Clark: Right. Joe, what else do we got here? Wanna wrap us up and …
Joe Bauer: Yeah, yeah. So if you guys loved this podcast, like I did, we’d love to have an iTunes review. If you head over to SeattleInvestorsClub.com/iTunes and review the podcast that always helps us get the podcast out to more people. And if you wanna check out the show notes of anything that we’ve talked about today, you can do so at SeattleInvestorsClub.com/33. That’s SeattleInvestorsClub.com/33.
Joe Bauer: Alright, Albert, thanks so much. And, Julie, awesome job. I will talk to you guys later.
Julie Clark: Awesome stuff, guys, thank you!
Albert Bui: Thanks guys.