How to do creative finance with CPA Ryan Bakke - Part 2

Quick Summary

Jeremy and Ryan Bakke continue the discussion on creative and seller financing in real estate, providing advanced insights into structuring deals, navigating financing contingencies, and leveraging tax strategies. It emphasizes the importance of flexibility in financing arrangements and showcases how these tools can benefit both buyers and sellers in fluctuating market conditions.

Key Points

• A financing contingency allows buyers to back out of a deal if their financing terms change (e.g., interest rate increases), safeguarding against financial risk in volatile markets.
• Creative financing methods, including seller financing and DSCR (Debt Service Coverage Ratio) loans, can make deals viable when traditional financing falls short.
• Presenting multiple offers (e.g., one conventional and one seller-financed) can increase the likelihood of a deal closing.
• Seller financing spreads out capital gains taxes over time, reducing the seller's immediate tax burden and creating a steady income stream.
• Buyers can leverage depreciation and other tax advantages when structuring deals creatively, improving long-term financial outcomes.
• In a fluctuating interest rate environment, locking in favorable financing terms quickly or renegotiating rates when they drop can save significant costs.
• Buyers and sellers must remain informed and responsive to changes in market conditions to optimize their strategies.

Full Transcript

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Jeremy: We are back with Ryan on the second part of the Short-Term Rental Pros podcast. Special episodes on seller finance, and Ryan, how you been the last few days, brother?

Ryan: Pretty good. I hear that you are under contract on another property.

Jeremy: I am. Yep, yep. I think we went under contract on Tuesday or Wednesday of last week. Just had the inspection done. Have some issues, you know, that came up there, but hopefully nothing that's a deal-breaker. But yeah, I was definitely pretty happy to go under contract. And then rates just fell, like what, half a point in the last two days?

Ryan: Yeah, so definitely make sure if you guys already have pre-approvals and that, make sure that you check with your lender to get those updated because you probably get a half-a-point decrease from what we're seeing with the rates dropping.

Jeremy: Which is just crazy. Think about that, literally, two days. A two-day difference on when you get that rate lock. And for those of you guys who are under contract, normally, when you're going through the process with the lender, there's a point when, like, the quote-unquote rates are locked. Up until then, they're subject to change.

So sometimes people try to time the rates. I never recommend timing the rates; I just feel like you can't. However, if you were like—potentially, I mean, if you already had a rate lock, could you just... could you rate lock again? Or would you start shopping loans around at that point?

I guess, what would you do if you rate locked and then rates dropped a half percent?

Ryan: Yeah, I mean, one of the things that I learned probably early—it was whenever interest rates were super volatile—I want to say later 2022, earlier this year.

One of the things you can actually put in your contracts is what's called the financing contingency. So, for whatever reason, everybody knows about the appraisal contingency—that the property has to appraise and the bank will give you a loan.

Everybody knows about the inspection contingency, but another contingency is actually financing contingency. So, if your financing changes between when you write the contract, it gives you the right to back out of the deal.

And so, an example of that is, if I'm using, let's say, a DSCR loan, and the property needs to produce certain gross rev compared to what I'm going to pay in mortgage interest, and the interest rates go up, that deal doesn't pencil out anymore, and I'm actually able to back out.

Jeremy: Yeah, so financing contingencies are important. They're important nowadays, again, with this volatile interest rate environment. But yeah, man, what else? What else? I know we went deep last week, but what else is new with you on the real estate side of things?

Ryan: Yeah, we're doing a ton of year-end tax planning for people. November and December is probably where I make all my money. Just helping people save before the end of the year, telling people to jump, some telling some people not to jump, and everywhere in between.

I would say one of the most important concepts to understand—and I just sent out an email to 8,000 people this morning—is timing. If you're not on the list, you should check it out; we'll link it in the show notes below. But timing is everything.

So, when you do real estate moves or events, or you want to go pull money out of your 401k or IRA, you have to be really careful with the timing of when you do that. If I sell a house on December 15, and I have to pay a capital gain—let's say I owe tax—that tax bill is due April 15, 2024. So, I only have four months to pay it.

Versus, if I waited until, let's say, January 5 to sell the house, then I don't have to pay the capital gain tax bill until April 15, 2025. I buy myself an entire year just because I was smart with the timeline.

Jeremy: Yeah, so timing, timing is everything. People talk to me right now. They're like, "Yo, I want to buy a house by the end of the year to do the short-term loophole. Like, what do I have to do by the end of the year?"

What I tell them—and why I love having Ryan on—is because I can say, "You know, I'm not a CPA here." But then, you know, Ryan is one, so he can actually say things without saying, "I'm not a CPA."

But what I say is like, "All right, you got to show three rentals by the end of the year that are under seven days on average."

I'm going to be honest; I don't know how in-depth someone's going to check as to, you know, did they—they're going to put cameras on the front of your house and look and see if someone, you know, came in. Are they? Maybe. Are they going to check a rental agreement?

Like, even so, I just say you got to have three rentals by the end of the year that are less than seven days. So, if you close on the 31st, I don't—it might be a little bit hard to say that you got three rentals in between December 31 and January 1. If you close December 1, you know, do you even need to rent the house with furniture? I don't know. Ryan, do you?

Ryan: So, that's something we're still waiting to see on because a lot of these short-term rentals haven't gone to audit yet. For what I've been telling people, to be available for rent, it has to be ready for its intended use. So, if you're having a short-term rental, it should be fully furnished.

Now, can you use the old owner's furniture? Yeah. So, if you're tied on the wire, one thing you might want to do, especially if you're closing in early December, is just run it out as is for the first month.

Then next year, go in and swap the furniture and the hardware and whatever you need to do.

Jeremy: Or maybe you go to Walmart and get some air mattresses.

Ryan: Yeah, but one of the things you said there that's important is what happens if you place on December 31.

So, unfortunately, you probably won't qualify to take the short-term rental against your W2 or your business income. But that property is still considered placed in service, which means you can still use the losses in depreciation from the property to offset any other rental income that you might have.

So, if your portfolio did really well that year, or let's say you sold the property at a gain, as long as you get the new property in service before the end of the year—December 31—you could use that loss to offset the gain from the other property.

Jeremy: Yeah, a lot of people obviously want to leverage a short-term rental loophole as a way to get rid of their W2, just because it is really the only thing you can do. Correct me if I'm wrong.

Are there other strategies to offset taxes against your W2 income, or is it really the short-term?

I mean, you can—I know you can write off primary mortgage insurance on your primary home, or sorry, mortgage interest on your primary home. Like, there's little things here and there, but there's nothing nearly as powerful as the short-term rental loophole, at least in my opinion.

Ryan: Yeah, if you're a W2— I always say this; it's funny, but if you're W2, the only real options you have are to contribute to 401k, HSA accounts, or to have more babies. And then most people laugh after I say that.

But that's really the only option that you have if you're W2, in order to save money on taxes. I mean, sure, you could go start up a business and lose a bunch of money, but why would you want to do that?

That's why short-term rentals are just so beneficial—because you'll actually cash flow, and you can use the losses that are generated to offset your W2.

There are more aggressive strategies, especially in the oil and gas field, as well as the charitable donation part, but they're very aggressive. The IRS is looking out for those strategies, so we typically don't recommend them to people unless they're more on the risk-seeking side.

Jeremy: Yeah, we definitely want to stay out of the scope from the IRS.

So, okay, right now, cost seg rush. Everybody, you know, you've got a whole year to do it, but a lot of times folks procrastinate and wait till the end of the year, which we're definitely seeing along the board.

But let's get into what we talked about last episode and kind of continue it here, which is seller financing—specifically subject to.

You know, last time, last conversation, if you guys haven't listened to Ryan and I, we talked about what the benefits to seller finance were for a buyer and a seller.

We really took the perspective of like, it's more important to understand things from a seller's perspective because a lot of times, sellers don't actually know why it's beneficial to them in the first place. And then buyers don't know why it's beneficial to sellers.

So, the only way you're going to convince a seller to do seller finance is if you know why it's actually good for them. And we talked about the examples where it genuinely is good for them.

But this time, we're going to talk about subject to. Which, guys, the difference—Ryan, correct me if I'm wrong—the difference between subject to and seller finance is: seller finance, the seller becomes the bank. So, instead of getting a loan out from, you know, Wells Fargo, you're getting a loan out from Ryan. You know, Ryan's giving you a loan on his house. Hope Ryan would give me pretty good terms.

As for subject to, the seller or the buyer is taking on the seller's existing mortgage. They're taking it on, they're continuing the payments that the seller is doing, and the bank is still the bank. Just the new buyer has effectively committed to paying those bank payments.

Ryan, was I—is there anything you want to add there?

Ryan: No, I would just also mention, let's kind of talk about what it is not. Subject to is not you assuming a loan. Do not say that. If you're buying a property using subject to, don't say that you're assuming the loan because the, uh, Pace Morby group people of the world will get extremely mad at you for saying that. I've done it before, so learn from my mistake.

But before we get into subject to, let's talk about the loans that are actually assumable.

Jeremy: What is the difference between assumable, then, and subject to?

Ryan: So, assumable, in my opinion, is a lot—it's a more of a safer, kosher transaction to do for all parties involved.

Jeremy: Because it's when you're technically, like, when you're talking to the bank, and they do the paperwork where now you're actually on the loan.

Ryan: Yeah, and so let's say Jeremy has a nice FHA super low-interest rate loan, but he wants to move. He wants to move; he wants to get on New York City. His payment's too high, and he doesn't—he wants to allow me to assume his loan.

I'm able to buy Jeremy out for the equity that he has and take over his existing mortgage—assume, basically step into the shoes of his existing mortgage. So, if he had an outstanding loan balance of $500K and an interest rate of 2.8%, I get to step into the shoes of that. And the key word is, you have to owner-occupy it as well.

So, FHA and VA loans are assumable, and if you could find somebody that has that, that wants to sell, look into taking over or assuming their loan rather than just buying the property in a normal sale because you'll probably get in there for a lot cheaper and a way lower rate.

Jeremy: Got it, guys. Yeah, so that works for VA loans, which are military financing, as well as FHA loans.

Why would this be—let's just kind of go into, first of all, why would this be beneficial for someone with an FHA loan or VA loan? Ryan, what are the unique, like, down payment aspects of both of those loan types?

Ryan: Yeah, when somebody buys a loan with FHA or VA, they're going to be super low down payments.

So, VA—you can actually buy with zero money down, 0% down. FHA is three and a half. But these people that buy these houses, they don't have a lot of equity in the property for a few years.

If you're buying a property with three and a half percent down, you're not going to really build up decent equity in that house for like seven or eight years, until you finally start building up some decent equity, because so much of your payment is going to go towards interest.

And the same thing with VA loans, and that's why those are really good targets to assume. Because when you assume a loan, typically you're just going to buy the owner out for his or her share of the equity and then step into the shoes of their mortgage.

So, somebody putting three and a half percent down on a $500,000 house—they got $20,000 down. But five, six years later, their principal, their pay-down, is probably only $40,000 or $50,000.

So, I could buy a $500K house—at that point, it'll probably be worth even more—but, you know, I could buy a $500K or $600K house, take on a sub-4% interest rate loan, and all I'm out of pocket is $40,000 or $50,000.

Jeremy: Yeah, and one situation we're seeing this really come into play right now is in the Sunbelt.

So, a lot of markets in Texas and Arizona, property prices just ballooned during COVID. Austin, Texas, is probably the most prime example where a home that was like $500,000 might be $1 million at one point in 2022.

And a lot of folks bought, you know, with low down payments. They moved from California; they did low down payment loans—maybe FHA, three and a half percent, maybe conventional, 5%.

But let's just say they did like an FHA loan at three and a half percent down. They only actually have $35,000 in equity, and that million-dollar home might only be worth $800,000 now, two years later.

Home prices have decreased. So not only do they lack equity, they might actually have negative equity. So, if they were to sell that house at $800,000—and keep in mind, you also have got to pay that 6% agent fee—which, actually, that's definitely a current event. Did you hear about the NAR?

Ryan: Yeah

Jeremy: And I'm actually going to the NAR (National Association of Realtors) conference next week. They just had a $1.8 billion anti-monopoly lawsuit because of that setting, that 6% rate for buyers' and sellers' agents.

We can get to that later. Sorry, not to riff off-topic. But I told my colleagues at BNB Calc—because we're going to the conference next week—I'm like, this might not be the happiest conference of all time because that's such a big, big thing that happened. We'll talk about that one later.

But going back to the example—so, not only do you have low equity in a house, you have negative equity. You know, if you put $35K down at $1 million and now it's $800K, you have what? Negative, maybe negative $160K of equity in the house.

So, if you were to sell the house, you owe the bank—you know, after the realtor's fees, the closing fees, all that stuff—you might owe the bank several hundred thousand dollars.

So, in your case, it's very, very unopportunistic, you know, for you to go that route. It's much better for you to just say, "Hey, someone come in. I've got a low-interest rate here. I got this at 3% or 4%. You can have it. Maybe I'll even hand you the keys. Maybe you don't even have to give me any down payment."

Like, I'll potentially just hand you the keys, but at that point, really, the loan becomes the asset that you're selling. You're selling the house, but really, you're making it attractive to somebody because you have that fixed, low-interest rate debt.

So that's where someone might assume the loan if it's FHA or VA. What is the other situation that's not assuming the loan? What's the situation where it's subject to?

Ryan: I was going to say one more point on that, especially in those highly appreciated markets like Austin. People who buy properties using three and a half percent or 0% down—the reason why they're doing that is probably because they don't have a lot of money.

And what happens when their property does go up in value and those property tax bills hit? Like, if your property value in Austin goes from $600K to $800K, and now you're paying an extra $5,000 a year in property taxes, those people can't afford that.

And so, it's just another reason why somebody with low money down would need to get out of their current mortgage.

It's really sad because it's just like a revolving door. If you get in for low money down but can't afford it, odds are you're going to get rid of it after five or six years, and you probably won't have any equity in it after you sell and pay realtor fees.

Jeremy: Yeah, so you'll come out where you began. So there's really no benefit to—I know people say "buying versus renting," but if you have no equity anyways.

And that's why—I mean, I don't own a primary home. Like, I don't, you know, I—every asset I have, I'm trying to maximize. I do stay in my assets because, you know, they're nice places.

But that being said, I don't—I think about things from the investment lens. You don't want to put yourself in a situation where you buy in a place that's not appreciating, and the value of the house goes down, and you put yourself in a bind.

But if you do put yourself in a bind, maybe subject to, maybe seller finance—like, maybe there are creative ways to get yourself out of the bind. And then, for probably folk listening here, that's not the situation they're in or want to be in. They're on the other side, which is they're trying to get cash-flowing assets.

And in order to do that, getting low-interest rate debt is a great way to set yourself up for success in that regard.

So we talked about—we talked about essentially literally talking to the bank, assuming someone's loan, meaning your name's now on it. The seller's—when your name's now on it, is that then added to your DTI?

Ryan: Yeah, when you assume somebody's loan, you have to qualify for the loan. And the reason why I know a lot about this is my little brother might assume my existing loan on this house in the future, right? So I know all about it.

Jeremy: If you're watching on YouTube, he's doing a hazy background because he's self-conscious about his ironing board and his Habitat for Humanity couch that he normally has behind him.

Ryan: And so, I'm very familiar with assuming loans now. The person who's assuming the loan has to qualify for it just like they would a normal, regular loan.

But yeah, when I sell the property—or when I sell the property to my brother, let's say—that hits his DTI, and then it comes off my DTI because I'm no longer responsible for the payments.

Jeremy: Got it. So it gets taken away from yours and added to his. Does that differ from subject to, and what is subject to? We probably said "subject to" 25 times on this podcast without actually saying what it is yet.

Ryan: I think you want to dive into it, so let's give them a background on it.

Jeremy: Ryan, what I've been wanting you to do the whole time is wish me a happy birthday here, so can we start talking about my birthday?

That's what I really wanted.

Ryan: Subject to Jeremy's birthday, guys!

Jeremy: Yeah, for those listening, guys, today is actually my birthday—November 6. So, just had to throw that one out there. But yeah, tonight, my girlfriend is taking me to a Bucks-Nets game, which I'm super excited about.

Ryan: Are Dame Lillard and Giannis are still playing?

Jeremy: Yep, yep. And I'm actually a Nets fan. I mean, we stay here in Brooklyn, so we're locals, I suppose, in a way. But all right, back to my excitement about subject to.

So, subject to—and Ryan, if you have a different impression, let me know—but it's really simple. You just log in and start paying somebody else's mortgage. So, let's say they're getting serviced by some random loan servicer. You just get their email, get their password, you go in, put the autopay to your bank, and you transfer the title of the house.

So, the owner of the house changes to you—the title, the document, the deed document—that changes, but the loan is still in someone else's name. You're just literally going in and paying it for them.

Ryan: Yeah, I mean, you pretty much summed it up. You'll also probably have a legal binding contract between the seller and the buyer as well, stating that the buyer is now responsible for the payments.

Right now, I guess one of the things that's kind of up in the air is that it’s still under Fannie and Freddie guidelines. I've tried to pick through this with lenders, and it still remains in the seller's name. That could be the problem for some people. If I sell my house

Jeremy: The loan does?

Ryan: yeah, sorry—the loan still remains in the seller's name. So, I guess the biggest worry, and that's why we talked about assuming a loan first before subject to, is just the biggest worry with this: if the bank sees that the title changed hands, especially if the loan's now responsible to be paid by somebody else, technically, could the bank come and call the original note due?

Jeremy: Yeah, and that's the million-dollar question.

If you ask Pace Morby and any of their gang, the answer is no. But from my understanding, as long as the mortgage is getting paid, banks don't really care who's on title as long as the mortgage is getting paid.

So, if the mortgage stops getting paid, then they might look and say, "All right, what's going on here? Why is, you know, the person who we gave the loan to not making the payments?" But what's going to tip them off or make them care unless something happens? So that's my understanding.

And, you know, in my opinion, mortgage officers and that loan world right now have bigger things to worry about than the super small percentage of people who've subject to someone's loan. But yeah, that is the question there. And you're the CPA, so you're allowed to say your opinion without a disclaimer.

Ryan: I think it’s the opposite. I'm regulated over here. You got nothing!

Jeremy: Well, I just have to give a disclaimer: not a CPA. However... just do it. No, I'm just kidding.

But definitely make sure that the situation you're in—again, I would just say, my recommendation is, pay the mortgage every month. Go into a cash-flowing asset.Don't go into—like, don't just assume someone's loan or, well, don't subject to someone's loan just because their interest rate's 3%. Don’t ignore the rest of the deal.

You don't care about the small details because you're like, "Well, I got this loan at 3%, so I got a steal here." No, you still gotta run your numbers on the property. You still gotta make sure it cash flows.

It could be 3%, but it might be 3% of $1.2 million instead of 3% of $800,000. Or sorry, 6% of $800,000. Your monthly payment might end up being more at 3%, based on the purchase price. So, the recommendation is just run the damn numbers, as always.

All right, anything else that our listeners should know about subject to in particular?

Ryan: Yeah, I would say the biggest thing with subject to, in my opinion, is—and I've never done a subject to loan. At this point, I have done traditional seller financing, and I've also assumed an SBA loan. That's all I've done.

And that's what I meant to say earlier: SBA loans are actually assumable. So, if you have a mom-and-pop with some commercial debt, and they're looking to get out, and they're not fully paid off, maybe assuming their most commercial debt or SBA loans—they’re assumable.

I digress. But with seller financing—I'm sorry, with subject to—the most important thing is an exit plan.

Because, if for whatever reason—let's just say the bank is going to come and call that loan, or the seller’s pissed off because they’re like, "Well, this is still in my debt-to-income, but it’s your house now, and this sucks," and you have to get out, you know, what is the exit plan?

Do you have enough financial wherewithal to take on that loan yourself at the current interest rate?

Like, if I buy a house from Jeremy subject to and I get his 4% loan, and then the bank wants to come and call the loan on the property, or get me to refinance or get a new loan at seven and a half percent, do I have the financial wherewithal and ability to do that?

And if the answer is no for the foreseeable future, then don’t do the deal originally. Only do the subject to deal if you have the ability to save face if things were to go south.

Jeremy: Yeah, and what—like, what’s an example of something going south?

Is it the seller who, you know, has essentially given their credentials and handed over the title of their house, saying, "I’m going to do a password reset here unless you buy me out?" Like, what does that look like in practicality?

Ryan: No, I just look at it from a banking perspective. Like, I would never want that to happen. I think getting a note called due is probably the scariest thing I could ever think of having happen—especially having over $3 million of debt in my name. Like, having a bank come and call the loan would be frightening.

Jeremy: Yeah, no, I’m with you. I’m with you on that one. And yeah, liens—different liens on houses and stuff—that stuff gives me nightmares.

Which, honestly, when you get to more and more properties, just keeping track of, like, "All right, are we paying property tax?" Because sometimes—and I don’t need to vent from, like, a recent personal kind of situation—but sometimes your loan is escrowed, and they hold property tax on a monthly basis.

Sometimes they don’t. You know, so you’ve got to pay. Like, commercial loans often don’t escrow property tax, so you have to remember to pay that on an annual basis. Sales tax sometimes—sometimes Airbnb remits payments on your behalf. I would say most of the time, Vrbo remits payments on your behalf.

But there are certain counties in certain places where they don’t remit property tax payments. So, you know, after two years, you might have thought that Airbnb was sending property tax, and—yeah, I actually had that happen—where it was like, "Oh crap."

All of a sudden, like, we were paying taxes, but there was an additional tax. The only county—essentially Palm Beach County in Florida—is the only county in the state of Florida where they don’t remit their tourism tax to the county. Airbnb doesn’t.

So, you know, we had fines on that one, plus interest, and we had cash in the bank to, like, take care of it. But it’s just—yeah, you want to keep track. If you keep growing your portfolio, you’ve got to just keep track and make sure that you’re paying your mortgages.

You don’t stop; you don’t not look for a month, and then, you know, a mortgage payment bounces, and they’re starting the foreclosure process. And then, when they do that, they look at who has—you know—they might look into everything a little bit.

So yeah, keep track. Keep track of everything. Keep track of your taxes, sales tax, property tax, annual tax payments. I mean, for me, I do my estimates personally—my estimates for my corporation—making sure that there's money in those bank accounts because those hit quarterly, and you want to make sure you're paying everything.

So, tangible advice is: as your portfolio grows, keep track in documents of all the taxes and fees you're paying—your bank, your state, your county—and keep a record of when you need to pay them.

Just so, you know, you don't get a notice of something at some point. Also, make sure your addresses are right. This is also a personal situation. If you move, update your damn address on all your documents.

Because a lot of times, like, yeah, you might get your statement over email, but if something happens—unforeseen—you forget to pay something, and they’ll send you notice over mail. They don’t send the bad notices over email.

So, if you haven’t updated your address on everything, you might miss a really important document. So, yeah, now we've kind of gone into doomsday on my birthday a little bit.

But yeah, let's lighten everyone's mood here a little bit. Why, you know—why can getting a deal subject to, or seller finance, change the trajectory of your life?

And especially—I mean, the thing that’s cool about subject to is, and I don’t want to quote Pace Morby commercials here, because I get the ads a lot—which, you know, no—like, no... What’s he say?

“No income verification, no...” Like, you essentially don’t have to show anything, because the seller might not even know to do a background check on you or anything like that. So, you can get these loans, get these houses, with no credit history or anything like that. That’s definitely one of the benefits, right?

Ryan: Yeah. Yeah, I mean, they don’t have to pull tax returns. You know, nobody’s—nobody is... Yeah. Yeah, I mean, there’s just so much. There’s a lot of upside.

And that, I think, kind of goes back to the last podcast that we did, where when I first learned about seller financing or creative financing, I used to always think that it was really in the buyer’s best interest.

Maybe it was at the time because rates were just overall super low. But I would say educating the seller on why doing creative financing or seller financing is your number one shot to getting those deals done.

I—again—I used to think, "Man, no tax returns, no income verification, I don’t need to pass DTI. What’s in it for the seller?" The seller—they’re giving me a loan at a super low rate. But, as we talked about before, really, it’s taxes and inflation that make seller financing attractive to them.

Especially in seller financing, the seller would want to do that because, if they do get a windfall of cash, odds are they’ll have to pay a tax bill. And then, number two: once that cash is taxed and it’s sitting in their bank account, it’s going to lose value to inflation.

So, they’re better off seller financing it to you because the payment that they’re getting on that—maybe it’s a five or six percent rate, or 5% rate—is going to be better than if they were to take that money and invest it into some other asset.

Jeremy: Yeah, something—again—relevant to me and my situation. We currently—the property that we’re under contract on—we are actually looking at doing an adjustable-rate mortgage, and I want to get into just the pros and cons of that because I think it’s super important.

I saw the headline the other day that the number of adjustable-rate mortgages was at a 10-year high or something. What an adjustable-rate mortgage is—the rate you get to start is not the one that you end with.

Oftentimes, they switch every five years. For instance, the one that we're looking at starts at 7%, and after five years, it can go up to 9%. It's capped at a 2% increase, and then over the lifetime of the loan, the highest it can go to is 13%—so like a 6% increase from the initial amount.

The way we're looking at that—and that actually might go down, that was like Friday's rate because rates dropped half a percent over the weekend. I wouldn't be surprised if I looked it up right now and it went down like a quarter percent or a half percent there.

The way I think about it is, I would rather have an adjustable-rate mortgage with a rate increase cap than a balloon mortgage. I currently have two balloon commercial loans that are five-year balloons. We got those initially at, like, 3.7% interest rates, so we're accustomed to a pretty low monthly payment, but we're going to have to refinance.

With an adjustable-rate mortgage, you don't have to refinance; the rate just changes. But with the balloon payment, you either have to sell it or refinance it. So, two properties: one of them we actually have on the market to sell. The other one we don't, and we're prepaying principal on that.

For the second one, the one that's cash flowing more, we're saying, "All right, if rates are going to reset three years from now, it can be a higher interest rate, but if we have a lower debt load, then it might equal out."

Whereas the other one, we're doing the equation, and we're like, "All right, it's gone up a lot in value, and we don't want to prepay principal and reduce our risk there, so we'd rather sell it in the next year and take our profit and lock that into some 30-year fixed-rate debt."

So, I don't know. What are your thoughts on an adjustable-rate mortgage and a balloon payment situation?

Ryan: Yeah, I think it comes down to debt allocation within your portfolio. I wouldn't want to have all my portfolio with adjustable rates, and I wouldn't want to have all my portfolio with balloon payments.

But very similar to you, if you can—one thing might work over here, and then that same principle or strategy may not work over there. It’s just being really key on your numbers. One of the things that we do is we have what's called a global debt sheet. It lists out every single property: the address, the lender, the person that we have the loan with.

We also put on there what we bought it for, what's the loan balance, what's the rate—just to make sure that not too much of our debt is with one bank or is in a certain position. Or, if we have ARMs, that if you have a five-year ARM that refinances into a fixed rate or rolls to a fixed rate, make sure that you don't have all of that come due at a certain time.

There's somebody in our mastermind group that has seven or eight properties they bought for a steal back in the day. Now, in 2026 or 2027, they're going to have all that debt—commercial balloon debt—come due, and they're going to have to make a decision on, you know, which ones are we selling, which ones are we keeping, should we pay down some of them now?

It's a really risky spot to be in, and it all goes back to what I said earlier about just beginning with the end in mind—you know, having an exit strategy.

Jeremy: That being said, I think a lot of people see the commercial debt, like there's a massive amount of commercial debt out there that's on five-year balloons that are set to mature in 2024, 2025, and 2026.

I've seen some characterizations saying, "Oh, that's going to sink the housing market." The thing is, most people don't have commercial debt for residential properties.

I have two of my properties with commercial loans—just two of them. The rest are all fixed-rate, 30-year loans. I have one ARM, but that ARM adjusts, you know, a maximum of 2% every five years. So, again, it's not that the risk is low, but the worst-case scenario is it just goes up 2%.

Residential properties in the US—mortgage delinquencies are low. Some people have adjustable-rate mortgages, but very few people have balloon payments. So, it's really not something we're going to see affecting residential real estate.

But definitely, if you're in multifamily commercial, be on the lookout for folks like Ryan just explained, who are saying, "All right, what am I going to do here? I might have to sell, you know, I might have to sell three of these in order to make everything work."

So yeah, for those of y'all in multifamily commercial, just be wary that that's something a lot of people refinanced in 2021, and terms or notes are going to come due in 2026. So, be on the lookout for that.

But I hope we gave you guys lots of helpful, tangible insights today. Ryan, what is your last tip for anybody navigating this uncertain environment in order to best sail through the seas?

Ryan: Yeah, I mean, cash on hand right now is really good. Putting in a super competitive offer—there's going to be a lot of people, I think, with the tick down in rates a little bit, there's going to be a lot of people selling now because they can sell at a little bit higher of a price.

There's also going to be people buying because people can afford a little bit more now. Anytime you see a drop in interest rates, you could expect more market movement, and whoever has the most cash on hand is going to be the winner now because they can put in more competitive offers.

So, getting yourself ready—even if you're not going to be ready—and like, we have, like, Caitlyn from our coaching group, right? Even though you're not ready yet, doing this now—have some things that you can do to get ready so that, in five or six months, when you are ready to buy, you're not starting over from scratch.

You have all the pieces except what you're missing, whether that's just time or capital or waiting for a deal.

Jeremy: Exactly. Prepare. Just be prepared. Be looking at deals. And also, yeah, cash is king, but also, don't look at a house and feel—I just tell people—don't feel rushed right now.

Like, it's kind of great because, a couple of years ago, you had to feel rushed with everything you did. Like, you'd find the perfect house on the market, and you'd be like, "Oh my gosh, this would be a super property, an absolute cash-flowing machine."

But, you know, 20 other people are looking at it today too, and you're like, "Crap, crap, crap, we gotta throw an offer and go 20, 30, 40K over."

The way I see it is, if I feel rushed at all right now, it's not for me. Like, you don't have to be rushed. The opportunities are out there. A lot of people are antsy. You know, people are looking. There might be 20 people at an open house, but zero offers.

So, just do not feel rushed. There is no need to feel rushed right now. If you're going to feel rushed into doing something, then it's not for you. That's the way I at least see it.

And you know, the house we're under contract on was on the market for several months, and it dropped in price over, I think, $130,000. Since then, we're under asking significantly.

And, you know, I talked to them. We were talking to them before. We didn’t feel rushed. You know, we waited, and now, you know, we’ll see what happens. But that being said, patience is a virtue. So, cash is king. Patience is a virtue.

Thank you guys for listening to the Short-Term Rental Pros podcast. And Ryan, thanks so much for running back with me.

Ryan: Thanks for having me on the podcast again.