Using Commercial Loans to BRRRR for Faster, Infinite Returns | Jon Fulp

In this episode, Dalyn Hazell sits down with Jon Fulp to discuss commercial banking for your BRRRR deals. Financing those deals, refinancing out of your BRRRR properties to get the maximum cash flow, and the maximum amount out of your deal so you can keep repeating that process for that long-term wealth.

Jon Fulp was born and raised in Springfield, Missouri. He graduated from Glendale High School in 2010 and then went on to play golf at Drury University where he later graduated in 2014 with a bachelor’s degree in finance. After his undergraduate, Jon then went on to be a Graduate Assistant for the Missouri State University College of Business and earned his Master’s in Business Administration. Upon graduating from MSU, Jon started his banking career as a Credit Analyst at Springfield First Community Bank. After 18 months of doing credit analysis, he was promoted to be an Assistant Vice President of Commercial Lending. In 2020, Jon moved from Springfield First Community Bank to Central Bank of the Ozarks where he is now an Assistant Vice President of Commercial Lending and manages a commercial loan portfolio of $60 million.

Key takeaways from this episode:

• The basics behind commercial lending, and how it differs from traditional lending.
• The terms and interest rates of one to four units in commercial lending.
• Commercial lending versus Consumer lending.
• The advantages and disadvantages of loans.
• House Hacking is a great wealth-building tool.
• The lender’s job can be made easy.
• Relationships and open communication with your banker are very important.

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Connect with Guest, Jon Fulp:

Website: https://www.centralbank.net/ozarks/

Phone Number: (417) 841-4237 and 417-848-9777

LinkedIn: https://www.linkedin.com/in/jon-fulp-924b1833

Connect with the Host, Dalyn Hazell:

Facebook: https://www.facebook.com/dalyn.hazell/

Instagram: https://www.instagram.com/dhazell24/

Email: dalyndhazell@gmail.com

Transcript

Introduction  0:00  

This is the real estate investing for freedom Podcast, where we bring on the experts to teach you the golden nuggets of real estate investing, so you can escape the rat race and start living life on your terms. Now, here's your host, Dalyn Hazell.

Dalyn Hazell  0:23  

Get ready for another great episode of the real estate investing for freedom podcast. In this show, we are sitting down with Jon Fulp. He is a local commercial banker in my area, and he is going to teach you all about commercial banking for your BRRRR deals. Okay, the BRRRR method, which we touched on episode 11 of the podcast. Well, in this show, it's all about financing those deals refinancing out of your BRRRR properties to get the maximum cash flow, and the maximum amount out of your deal. So you can keep repeating that process for that long-term wealth. Well, in this episode, you're gonna learn all about that. I feel like it's not something that a lot of people talk about is commercial financing. Many people think that you have to have a large building to utilize commercial financing. Well, that is not the case. I have used commercial financing with Jon Fulp on single-family houses. And it's been a great experience so far. And we're gonna obviously dive into all that. But before all that, here is today's golden nugget of the day. Today's gold nugget is pretty obvious, it's used for commercial financing. You may think that you cannot tap into commercial financing with having something as small as a single-family house, but you certainly can. Now, it does have its advantages and disadvantages, which we will go into the show on. But my favorite advantage of commercial financing is if you find the right lender if you find the right bank, they will let you refinance out of the property at any point. So let's say hypothetically, you were to buy a property today, you could refinance it tomorrow. And in a lot of cases, there are no seasoning requirements for this type of arrangement. So that makes it incredible when you think about increasing your velocity of money increasing the amount a decrease the amount of time that you have your money invested in a certain property. Because the whole essence of the BRRRR method is to refinance and repeat that process multiple times. And commercial financing can help you do just that. Well, with all that out of the way. I'm going to usher in Jon Fulp, he was a great guest and he has a lot to share with you. So here we go. Welcome to the show Jon. How are you doing today? 

Jon Fulp  2:51  

I'm doing good Dalyn. How are you doing, man? Happy Saturday. 

Dalyn Hazell  2:54  

Yeah, Happy Saturday. I see you're about to go golfing. So we won't take too much of your time. And so you can have a nice afternoon there.

Jon Fulp  3:01  

I appreciate it. Man. I hope the weather stays nice. I know typically when it's after a long work week, the golf course is kind of the only thing that I can kind of do that kind of takes my mind off everything. So it's kind of nice.

Dalyn Hazell  3:12  

Yeah, no, I don't golf, but I slept in pretty late this morning. That's what I like to do on Saturday mornings. It is very relaxing and relieving for me. After a long week, obviously. Oh, so Jon, can you give the listeners a short introduction about yourself and what you do in your professional career right now?

Jon Fulp  3:29  

Yeah, absolutely. So my name is Jon Fulp. I am a system vice president over at Central Bank of the Ozarks here in Springfield. I'm in the commercial banking department. I've been in banking now for about six years, ever since 2015. And I'm born and raised in Springfield. I was the kind of guy who I have actually never left Springfield before. I left for a little bit, for different very different things. But for the most part, Springfield's been my home, you know, that throughout the whole thing, I graduated from Glendale high school in 2010 that I went to the jury for undergraduate and I played golf there and then I left Drewery went to go do an internship in Kansas City. I kind of figured out that, you know, if, when you're in the game of relationships and stuff, you kind of got to take advantage of what you were given. And so in Springfield, I know I knew more people until I moved back shortly after I did my internship there. I was a graduate assistant at Missouri State for the Dean of the business school. And then shortly after that, I finished in 2015, and I joined SFC bank and then just this past year, and I guess it would have been almost like 17 months ago or so. Almost 18 months ago, I joined the central bank of the Ozarks, just right in time for the whole pandemic and it was a wild ride, to say the least.

Dalyn Hazell  5:00  

Yeah, I'm sure it was just, I was freaking out for you guys with all the PPP loans and nonsense going on and people just throwing paperwork at you, I'm sure it was a shuffle there for a while.

Jon Fulp  5:13  

From my experience in banking, it's always like when you give someone money, you have to make sure they have made an underwriting. You know, there are so many factors in banking, whether it's a credit score, cat dti, global cash flow, liquidity levels, debt to debt to liquidity levels. And so when it comes to this PPP that started on basically April 1 of 2020, I just started there and didn't have a portfolio yet. And we pretty much if you had a business of any sorts, you got money, and just for an example. So let's say you have a, you're an independent contractor, or you're, you know, you're a sole proprietor, and you own your own business, and you made, you know, $100,000 in gross receipts, during 2019, you qualified for? So you divide that by 12, and then multiply that by 2.5, you would qualify for $20,833, no questions asked. And it's a little different if you have a, you know, a company with payroll on it. When you have a company with actual employees, you have to base it on payroll, but pretty much anyone that had sales, at least during the 2020 run, you got money. And, you know, for the guys like you and I that are also two employees, pretty much everyone benefited off that except for if you worked for somebody else. And but I will say I think that banks across the country right now have more deposits than ever, which you'll kind of see that, you know, people if you actually dig into the whole, you know, side of banking, why are banks being so aggressive right now too, you know, lend in for like future development and stuff. It's because when a bank has all these deposits on hand, they're not getting a very good return on it. Typically, you know, the Fed Funds pay about point one, so they want to lend it out. And it's actually when you hold deposits on your balance sheet, and you're not lending it out, it actually decreases your return on assets. So it's been with rates still low. It's been a crazy couple, you know, almost a couple of years now. And now with starting on July 31, if you haven't had a PPP loan, if you originated the PPP loan in 2020, starting July 31, whatever bank you did it through is going to have you start making interest payments or some sort of payments because you have to apply for forgiveness now. So we're all hands on deck because the last thing I want to have is a customer call me on August 1 and be like, Hey, bro, I knew I thought this was forgiven. And you know, it just takes a kind of like teamwork between the bank and the customers.

Dalyn Hazell  7:57  

Yeah, I can vouch for that in my personal life, you know, I had a small consulting gig in 2019. So I was actually able to get the PPP loan, just a small amount. But still, it was like free money just because I had sales. And I was an independent contractor. And I actually just got forgiven for that. So would you say to people, I mean, this is not the topic of the show. But would you say go out and apply for the PPP if you haven't already? Or is it too late for that?

Jon Fulp  8:20  

So right now, it's too late. Who knows what's going to happen as far as around three goes? So it actually stopped? As far as I know, it's over because I think there are some banks that are CDFI certified, which has something to do with loaning money to lower low income and you know, more like low-income housing, all that stuff. So I've heard those banks were able to do it. But as far as us, we couldn't really do it past May 1. So it's almost been two months. Now. It's been kind of a break from the hustle and bustle. But I would definitely, if you are listening to this and you have a PPP loan and you haven't applied for forgiveness, definitely go talk to your banker and see, you know how you guys can work out a plan to get that forgiven? Because, contrary to popular belief across any rumors that I've heard, they're not you're not supposed to have to pay them back. You're, they're supposed to be forgivable if you use them correctly.

Dalyn Hazell  9:17  

Yeah, absolutely. Well, yeah, getting away from the PPP. That's awesome. And you can find more information online about that. It's kind of more of a 2020 thing. You kind of had to get in on it a little bit earlier. But yeah, like Jon said, if you do have one in the books right now, make sure you get that forgiven because it is intended to be completely forgivable. Well, the main topic of today's show is commercial lending. I know you know a lot about that topic, Jon, just because you work day in and day out in that field. So can you give the listeners the basics behind commercial lending, and how it differs from traditional lending that a lot of people know where an individual is borrowing money from a bank?

Jon Fulp  9:56  

Yeah, so you know, commercial lending. It's as a commercial lender, I've done this now for about four years in the lending world. It differs from consumer lending in the sense where there's really no consumer protection. There is but not as intense as fair lending, there's a lot more negotiating, there's a lot more competition. As far as when you do a million-dollar commercial loan versus a 20,000 consumer loan, every portion of that interest rate matters, because, let's say 4% on a million dollars is $40,000. So, but if you had 3.5%, what's $35,000? Matt $5,000 can matter a whole lot versus if it was $100,000. That's only $500. difference. So commercial banking, in Springfield, Missouri is probably the most competitive sector, you can probably find any, I'm sure there is an accounting too. But these days, you know, my dad was in banking growing up, and like, he always preached relationships, relationships, and it is 100% about relationships. Because at the end of the day, if you're trying to get started in commercial real estate, you want to have a great relationship with some commercial lender, some maybe sometimes two, just in case, you know, one bank doesn't want to do something, and you know, you want to make sure you still have the rates and stuff you're getting is still competitive, you know. But yes, there's a lot of different kinds of commercial lending, you have, you know, CNI lending, which is, you know, where you do like operating line of credit for some big manufacturing company, there's obviously commercial real estate, which is kind of my specialty. That's, that's the bread and butter of any community bank that you go into, you know, and then there's also like, you know, business financing where there's, like, you know, if you want to acquire a business, there's, you know, there are those kinds of called SBA loans where there's really no hard collateral behind it. But the most popular thing you'll find at any bank is your one to family commercial lending, which is, you know, your single-family rentals and duplexes, up to actually fourPlex, because a fourPlex and below is still considered a, I guess they would call it a residential mortgage loan, still commercial if it's in a business, but they, you can finance it on the secondary market, and kind of what they call house hack, which is a whole, you know, a whole different realm where, if you're looking at buying a house, you can actually buy a four Plex and live in one side while renting out the other three units and have those three units pay for your mortgage. So you know, and then you get to five Plex or five units and above, which is multifamily, you know, commercial, and that's right now, probably the most competitive market, you can probably find, it's very competitive and single-family and duplex, you know, four Plex, but when you get to like, five units and above, if you buy it right, you can make a lot of money up doing it, just because there are different ways the appraisals come back if you have a one to four-family, the appraised values are based on sales approach, which means you know, what's a comp in the area that this is sold for, and if it's a five Plex and above, it's more on the income approach. Just, you know, for example, if you were to buy a 10 unit apartment complex, and let's say each unit was renting for about, let's say, 650 because, in Springfield, that's a pretty good guesstimate. So at 6500 a month times 12, that means your gross rents per year are 78,000. So as a bank, we will project an expense ratio. So we'll multiply that by point seven, which is a 30% expense ratio, and then we'll divide that by a cap rate of what is going on right now is a six and a half cap rate or below, so that it's automatically worth in my in the bank size, or in the appraiser's eyes, that's worth about 840,000. If you were to raise those rents from 650 to 750, which is about too little under 15%, I think, or maybe it's about 15%. That would actually, you take that 140,000 and that would actually increase your property value by $120,000, just by raising the rents by $100. And that's the beautiful thing about commercial real estate, it's all income-driven. So you know, I work with guys a lot that scour the streets for good deals, and if you can find an under market value, an apartment complex for, you know, whether it was for someone that, you know, was a landlord for 30 years and didn't really ever want to push the button as far as getting the tenants too, you know, raise rents on there. So they're still stuck like 2010 2005 levels, you can actually create the most value for yourself. In the commercial real estate realm under the income approach, and so it's one of my favorites. I'm sure that you talk about it quite a bit. But there's just such a broad category of commercial lending, that it's kind of, we could talk about this all day.

Dalyn Hazell  15:15  

Yeah, absolutely. And I want to kind of summarize some of the things you said, the first one being, commercial lending is from the bank to a business, right? You'll never see a loan from a bank to an individual in your department. Correct. And then secondly, it's based on the asset, so use the income approach. So it's all you and your underwriters are looking at the asset themselves. So whatever an investor can do to raise rents, and maybe pass on the utility costs to the tenants, those sorts of things directly improve the value of the property. And then, therefore, what you can get a loan on, correct? Yep. Perfect. All right. Well, I think, yeah, a lot of our listeners are maybe, you know, delving into the bigger stuff, like the five to 100 units, things, but I think a lot of people also just do the one to the four-unit game, and they are still looking for commercial lending. So what are the typical terms and interest rates that one can expect for like the one to four units, and then we can talk about the five, five to 100 units, and so forth? For sure.

Jon Fulp  16:23  

So I mean, that's the great part about commercial lending versus consumer lending is that when you look at consumer lending, it's really you come to a bank, they tell you, this is the interest rate. And that's kind of what it is if you say, Oh can you do any better, they really can't, because it's based on fair lending. And no matter who you are, when you walk into a bank, I've got to give the billionaire the same rate as the person working, you know, the blue-collar job, which in my opinion, is great. I think that's great for society, and all that stuff. So commercial lending. It's all based on two different kinds of finance rates, which would be the Wall Street Journal crime. And also the libor is kind of like old school, like libor more like for larger institutions, but at the Central Bank of the Ozarks, we base it on Wall Street Journal Prime. So, you know, when I moved to the Central Bank last year, in March, Wall Street Journal prime actually reached its historic level lows at three and a quarter. So three and a quarter is the base rate that the Wall Street Journal primary would be, whenever the when they first lowered, you know, the raise to three and a quarter. Typically, the bank likes to get a spread of over 3%, between her deposits and our loans. So, you know, we started off by having about, you could find a five-year balloon rate, which means you buy a property, and could you go through a bank, like, you know, a regional Community Bank, we can't fix the rates for 20 years. In some cases, we have a product at the bank where we can fix it for 15 years because it's a one to two families. And we can actually pledge those if we need liquidity at the bank. But if you ever, if you guys have ever heard of the savings loans institutions back in the 80s, and 90s, you'll notice that they aren't around anymore. That's because back then they actually would have fixed rates for 20 and 30 years. And whenever, you know, five years go by, and the deposit rates actually are over what you're actually paying someone on a loan rate. So you have to, you really have to look out for interest rate risk. So typically, at a bank, just this is completely standard, you'll find three and five-year balloon fixed rates. So you come to me, you want to buy a, you know, a duplex, and I will offer you 4% for five years based on a 20-year amortization, that means that your interest rate will be 4% for the next five years. And then after five years, you come back to me and we renegotiate the rate at whatever market rates are at the time. But your loan is actually paying on a 20-year amortization. So in 20 years, your loan will actually pay off. So typically, I guess, in that kind of sense, you'll actually meet with your banker after five years, after 10 years, and after 15 years. And that 20 years, hopefully, you know you haven't refinanced it or anything like that, although there are some cases in my opinion that it's actually something worthwhile doing. You'll have it paid off in every bank is different. Right now, we have seen rates stay at that three and a quarter level for the past 18 months. So just by competition rates have gone from your typical five-year fixed rate was about four and a quarterback last year. And now your typical five-year rate is about 3.75% for five years. And you know, different banks have different competitive advantages. I don't want to overwhelm you. I want you to kind of ask questions. I don't want to go down a rabbit hole but that's kind of like what The rates aspect are, but there are variables in negotiation.

Dalyn Hazell  20:04  

No, I think that's good that you point that out. I don't think a lot of people understand that on commercial lending the whole five-year fixed, but it's on a 20-year arm. So basically, what you're saying is, when I come to you and want to buy a real estate investment, I can expect a five or even sometimes seven-year, like fixed interest rate, and it's a balloon. But it's not really because I mean, it's very unlikely that you will actually require all that money due at the end of the five to seven years, which is the essence of a balloon payment. But you're just there to renegotiate that. And I mean, should investors expect that interest rate to go up significantly? Or is it just at the whims of the economy at the end of that five years?

Jon Fulp  20:49  

So that's a great question. And that's a question I get all the time. As far as will people get scared because back in the housing market housing crisis, back in 2008, there was a big discussion around adjustable-rate mortgages. And I don't know if you ever see the movie, The Big Short, but they talk about, you know, different clientele bragging about, you know, I've got a rate, I've got a house here, here and here. And, you know, little they know that after three years, that was the big, big bad news back in the day in 2008, the three and five-year adjustable-rate mortgages. So, you know, with adjustable rates, your rates and let's say it was, let's say right now, your adjustable-rate would be 3.75. And then after three years, it doesn't balloon, it just adjusts to whatever market rates are. So in that sense, it can be scary, because you know, who knows what's going to happen. But at the same time, you know, the Fed has been at this for quite a while, and they know what will happen if they raise rates too quickly, because that will be detrimental for the banks. So in reality, if you have a balloon, note with the bank, five to seven, in some cases, even a 10-year balloon, if you can get one, you will actually not be as scary as you think. Because back when I started in banking, we were actually pretty similar to where we're at now, where rates were at three and a quarter, I honestly was in New at banking. So I forget what really caused him to be a minor scare in the market back in 2016 17. But rates were 3.25, which was prime. And so now, you know, in 2018 19, rates actually went up to about five, five and a half percent. But I think everyone always thinks like, you know, balloon, oh, my God, like, in five years, we'll have to pay 20% on my mortgage. And that's not that could not be farther from the truth. You know, in the worst-case scenario, you're going to be paying about five to 6%, in about five years from now. Just because the Fed knows, if they raise rates any faster than that, then it would be not only very detrimental to our banks, interest rate risks, but the whole global economy, because that means, you know, that means if you know, if rates are at seven and 6%, that actually means that you know, CDs and money markets, those are not paying your point one 2.4% they're paying like two to three and a half percent, which is great for retirees, but it's kind of transitory. But yeah, I think that you know, that's always a scare. But I think that you know, and also, you know, if rates were to go up to five and 6%, you have to raise rents, too. So you know, if you're scared about your mortgage payment going up, well, if rinse-free through 6%, you're going to be raising rents to cover their mortgage payments. So you're not going to get the same prints you are now you know when you're when the banks are only charging you three and a half to 4%.

Dalyn Hazell  23:48  

Now, as investors, we have so many different exit strategies. So if you see that your amortization is coming up, you're closing in on five years, and you're not okay with the interest rate your bankers are giving you, you could sell it, you could refinance into a different product. But really, as you said, I mean, your rent should have increased like 10% over five years. So your rent should very well cover any increased interest rate. And who knows that interest rate could even go down or it could stay stagnant? We don't know. So worst-case scenario, as you said, it's like five to 6%. But nobody has a crystal ball on that either. Very true. I do wish we did. Um, can you talk about the advantages like the traditional Fannie Mae, Freddie Mac loans, I know you don't maybe do a lot of that directly, but just quickly, like the advantages, but also the disadvantages of that.

Jon Fulp  24:36  

For sure. So I would say that, from my understanding, I've never been a mortgage loan officer, but I've worked with them enough to know the difference like you know, pros and cons of Mark. So it's my understanding that when you do use the secondary market, obviously the big pros you know, you get your primary mortgage, you can get a 30 year fixed rate right now at 2.75 ish percent. Which is great, that's awesome. You got to kind of think about it, though. You're from what, like, there's been a lot of research on this stuff, typically, no one stays in their house past about eight and a half years. So if you truly think that this is going to be your forever home, yes, you should get that 30 years fixed rate. But if it's possible that you can get a lower rate by doing like a 10, one arm on a 30 year AM, and you can get 2.25 for 10 years, maybe that's the way to go. And you may know, after 10 years, you can refinance it again. But with a secondary market, there are just different things you can do. So first thing from my understanding, you can't do LLC lending on the secondary market, if you do a loan on the secondary market, it has to be in your personal name, you're allowed 10 of them on the secondary market. And then you have to start once you in the 10 includes the primary that's, you know, with Fannie and Freddie, and then you have nine more than you can do investment properties. So when you do a, you know, mortgage loan with them on or any kind of like, you know, investment property, the underwriting standards are a little more stringent, or underwrite you at the beginning. And unlike a, you know, commercial loan that I do, once you do that loan, it's done, you can literally, kind of do whatever you want with it. There are no annual checkups. As far as income goes, there's no it's more transactional, in my opinion than in working with a commercial lender. And it can be good and bad. I think the biggest Pros for the secondary market lending is if you're just starting out, and you're, you know, 22 to 32 years old, and you're wanting to get into, into commercial real estate, if you were to go buy your first primary residence and let's say you go buy $150,000 house, and you get a 30 year fixed rate mortgage on it on a 30 year, and you can actually, you know, live in that house for a couple of years, then move out to a different house and then keep that same rate on that house. So when you move, it's not like you have to refinance, you know, that rate is locked in when you sell the house. So you can actually keep doing that, and doing that and doing that. And so all your mortgages will be 30 year fixed rates, which for people who get them, for people who want to hold long term and not really buy and sell properties, that's a great outlet for you to do. You know, there are other benefits of doing that. But I would say that that kind of secondary market financing is plus like I said before, on the secondary market, you can actually they call it house hack. So let's say you're, you're 23 years old, and you're like, man, I need to go buy a house. But I also kind of want to get into an investment, real estate, you can go buy a duplex, and you can actually finance that duplex on the secondary market and get those really favorable rates, but actually live on one side of the unit, and then rent out the other side. So for example, Ozark right now they're getting the rental rates there, it's very desirable, you can actually, I have customers that have duplexes there that they'll actually get about 12 to 1300 aside, I mean, they're very quality duplexes and stuff, but they cost around 250 to 280. You can actually go buy a duplex with 5% down, which would be about $14,000. But there's also a lot more closing costs, and we're in the secondary market, go live in that duplex and actually have that guy, pay your whole mortgage and you can actually live there rent-free without any possibility of ever paying the utility bill taxes and insurance or the mortgage p&i payments, which is a perfect world, what do you look for? Or he honestly, if you can even get a new situation or that guy on the other unit can even pay a portion of your p&i and in taxes and insurance and utilities. That's a win. That is a lot. You know, it's a big-time for a guy to start. Now you can stay that cash flow and do other things with it. But yeah, there's lots of pros to secondary market financing. But there's also a lot of pros to you know, working with your regional community bank and doing loans on the bank's portfolio instead of it being sold off. Just because I will say there's, when it comes to mortgage financing, the closing fees per my understanding are quite a bit more significant. For that example, with that duplex, let's say you buy a duplex for 280. I'm pretty positive that your closing costs will be around five $6,000. versus if you buy one, your closing cost with the bank on a commercial mortgage. It'll be like 2000 or less because you'll have a $500 origination fee, $500 appraisal, and about $1,000 in title work, and that's pretty much it. And you have yours much more negotiating with it.

Dalyn Hazell  30:08  

Yeah, absolutely. I mean, house hacking is a great wealth-building tool. And definitely as a pro for the secondary market, 30 years fixed loans because you're living in it, and you can just buy it in your individual name, and they work off of your personal income and so forth. That is definitely an advantage of those types of loans. Because am I correct in saying, that you can't do a commercial loan on a house hack? Because? Or could you? Is there a way to do that?

Jon Fulp  30:39  

No, no, that's actually a good question. It's very, very, I guess, kind of like a board line, okay. Because if you were to freeze, this happened about three months ago, where I had a guy in Rogersville buy a house on about 10 acres. And, you know, on the parcel, there's actually another house on there. And that house has been rented out for about 10 years. And so it was kind of like, okay, is, is tinted. So if you live in the house, it's called trid. And when you do a primary mortgage with a bank, there's a lot more rules and regulations. But because there is a rental property on the property, that actually means that there's a business on the property. So you could actually come to me, and buy a duplex, live on one side and an LLC, and then also rent out the other side. And you can still call that a commercial loan. The main benefit to doing that versus doing the secondary market financing is a liability. Because if you, if you buy a house, and you use a secondary market and put it in your personal name, you're actually opening yourself up to a lot of liability. If something were to happen with your tenant, like let's say, you know, in theory, let's say your roof collapsed, while he was sleeping at nighttime, I know, it sounds really messed up. But that stuff happens. And, you know, he has serious bodily injuries. So obviously, you're gonna have liability insurance on the property, but he actually can sue you in your personal name. Because your name is on the property, it's not held in a limited liability company, he can actually come after your assets in court. So if you were to have that property in an LLC, and that were to happen, that guy can only come after the assets in that LLC, which kind of makes you a, you know, opens up another question, do I get a new LLC for each property? That's a little bit overboard. I know that you can work with attorneys and kind of limit your liability to each property in that case, but yeah, so risk and liability is kind of what comes into play whenever you come through us to get a commercial loan, just because everyone's out there to make $1. And you want to protect yourself even in the worst-case scenario.

Dalyn Hazell  32:59  

Yeah. And that's why I like working with you. Because you obviously lend to my LLC and my LLC holds my properties. One thing that you could do if it's this kind of a thing I learned more recently, just because I just went through this process with you. But my first rental property I bought on the secondary market with the 20% down, and I rented it out for a year, you know, exposing myself to that liability, which I guess I quit, claiming it to my LLC after that. But, and that kind of as a side note, even if you buy it in your personal name, first, you can always quit claiming it to your LLC. That's not to say that your secondary market lender won't call it to do because technically it switches hands so they have the right to call it to do. Although if you are paying on time, then they usually don't. But that is 99% of the time. But then what I did is after it was in my LLC still on the secondary market, I came to you and I said hey, Jon if I refinance, but I get my down payment back, and you were like certainly and you ran the numbers. And sure enough, I got my whole down payment back and a little bit more while still keeping the house. So my cash flow went down because obviously, the interest rate was a tick higher, and the amortization period was shorter. But I was able to get all my cashback that I put in. And as you get going with real estate investing, you realize liquidity is super important. And you'll sacrifice a little bit of cash flow to have more properties. So that's something powerful that I did, it was almost like a reverse BRRRR I guess, because I bought it traditional rather than refinanced it commercial. So that's something that if you are exploring that, or if you could ever explore that then that can be advantageous to you. Or if you're the kind of person that doesn't like that risk, you want to have plenty of equity in your property. By all means, just keep it on the secondary market. But if you're a person that's wanting to scale quickly, and buy a Lot of properties, that can be a good method. Yep. 100%. So that leads me to this other portion. In talking about the bur method I don't want, we don't need to go into each of the steps. Even though we know that pretty well because I've talked about that in previous episodes, can you explain how you come into play during the refinance portion that second to last are in the BRRRR method.

Jon Fulp  35:24  

I'm actually doing it right now, and with a buddy of mine, so he bought a house, you know, just recently fixed it up. Tonight is coming to me to slap up 80% loan, which means whatever the appraisal comes back at, I can loan you 80% of that. So in this instance, we're kind of hoping that he gets all his money back, he has 100,000 in the property. So the appraisal has to come back at 125. And if it does, then I can loan him all of his money, purchase price, and fix her up money and get it back in his pocket, and then put a renter in there, and we ran the numbers, I think that monthly payment is 3.99. For five years and a 20 year am is about 605 or 650 a month. And then on $100,000. And with taxes and insurance, you can't always get utility, sometimes you have to pay the utilities and that kind of stuff, but taxes and insurance you're looking at are about, you know, 850 $900 a month. So if you get a tenant in there, that's paying $1,000 a month, perfect, he pays your mortgage, he pays your taxes and insurance, and you just kind of wipe your hands clean. You know, and you're right. You know, I think that when this guy actually also talked about it, let's say it appraises for 160. And I can get him over 120,000 out if actually, the mortgage payment goes up from I believe it was 650 to eight 825 or something like that. And I know that different people find that to be a different number, whether that if people think it's higher, it's low. But when you borrow too much money, and you know, you have that same renter now paying you $1,000 and your principal and interest plus taxes, insurance is now 1050 or 11 $100. So you put $100 in every month, it's almost not worth it to borrow more money, then you know what you think you can get in rents just because you also want to keep some equity in the project. But if you were to, let's say you had a few 10 of these things, and, and I had a buddy of mine, that actually faced this where he had to leverage and every month, you know, he was also putting in repairs to the property and stuff. And the monthly rent payment was never actually covering the expenses for the property each month. So you know, that happens for five, six months, that can be a lot of money on a lot of properties. So it's very important not to over-leverage yourself, whenever it comes to, you know, doing the BRRRR method. But yeah, and it's also very, very, very dependent on the appraiser. You know, in some cases, the appraiser, you may find a guy, and you may completely disagree with what his appraised value comes back, you know, in certain instances, you buy a CR 80, put 20 into it, and the guy's like, Well, I think this is worth 90, and I can only loan you 80% of 90, so you actually have a lot more in the deal than you planned for. And in those cases, in my opinion, it would be smarter just to sell the property. Maybe you have flipped on those instead of keeping it because if you were to go to a different bank, in order to a new appraisal, you know, you may have the same problem. So you always want to have all your options open, whether it's, you know, birth, or just fix it up and sell it just so you can get that equity back not to worry about the mortgage each month.

Dalyn Hazell  38:52  

Yeah, that's a very good point having multiple exit strategies. Because let's say that appraisal in your example came back at 160, you really got to watch out for that. Because you may think, Oh, it's my lucky day, you know, I can pull out 30,000 more than I have into this. Well, but then you're not going to be cash flowing. And I think a lot of people get into this real estate investing for the cash flow, so you can't lose sight of what you initially set out to do. So maybe you only pull out let's say 65 or 70% of the appraised value. And don't think of that as a loss. Like you're, you're gonna keep your cash flow in check, and you're gonna have this equity cushion for yourself. So it's a balance, you know, right now, if you feel like I'm young, and I want to scale quickly, so I'm more likely to do over leveraging than somebody who's maybe older and seasoned, but I really have to keep myself you know, aware of that because I do have friends. We know of somebody, a common friend that did that. And he was putting in money each month because his payment was exactly what the rent was. But as we know your bank It is not your only expense, your bank payment, you've got repairs and maintenance. So it is a game.

Jon Fulp  40:07  

I will say that in different situations, it's different for everybody. You know, I have guys like you who have a nine to five job that has that W 2 income per year. And then you have guys that, that their sole job is real estate investing and rental cash flow and that stuff. So it's honestly, it's to each his own, what you kind of what your comfort level is, because it's, there's no one size fits all for everybody.

Dalyn Hazell  40:32  

Yeah. And that actually leads me to another question. So do you need a solid W 2 job to secure a loan with your department? Or do you only look at the deal itself inn a commercial deal?

Jon Fulp  40:44  

So that's a very good question. And I would say it just depends. Because if you were to go buy a, let's call it a 10 unit, apartment complex, or above, most of the time you look at the project. And then you look at the person's balance sheet, will a person have two or 3 million in debt and only 300,000. In liquidity, you perform what's called a global cash flow, which is when you get all their financials together, and it spits out a number after you take in like rental expenses, rental income, W two-income, all the income and expenses combined. I will say that it's not necessarily easier when a person has a W two as a salary. But if you have an actual business outside of just owning real estate, whether it's being a realtor or wholesaling houses or buddy, he's an architect and can be an independent contractor for architecture. So he gets paid and has his own business, or myself and I work a W two job that always helps get qualified because if you ever you're familiar with a what's called a Schedule II on a personal tax return. And most of the time, there's a number on the top that has your gross annual rents. And then there's two numbers interest in depreciation. And then there's a bottom-line number for total expenses. kind of complicated, but what you want to do is make sure you have enough gross or net cash flow from the operations of your real estate to cover your annual debt service. And if you don't, then you want to have that secondary job. Because, you know, let's say and this is I have to kind of coach people when they do this, if you really want to get in the business of borrowing a lot of money and being a guy who really really gets aggressive with debt and stuff. The bank's look at your financials every year, they call it an annual review at Central Bank, it's if you have over I think a $500,000 loan relationship, commercial loan relationship with the bank, then we perform what's called an annual review where every year around tax time, I'll email you the accountant and ask for I need your personal business and a new PFS impossibly, your rent roll on your properties. So we have a loan review team that is at the main branch of my location at Central Bank. And they will actually perform what's called the annual review. Different banks do it differently. But then we kind of met and talked about, okay, how did you book up a $5 million loan in 2017. And then in 2019, you see that they actually suffered a huge loss. So if that happens, you have to watch those credits more intensely. Because there's actually an old saying in banking that, you know, you don't necessarily always make a bad, you never really make a bad loan, you make a good loan, and then it goes bad. Just you know, if a guy loses his job Two years later, or gets cancer or the DS of the deal, you know that all that stuff factors in then it's not really your fault. It's just the kind of life that happens. But the banks reserve loan losses for those situations when we're very, very, very safe with that stuff.

Dalyn Hazell  43:55  

Wow. Yeah, so definitely, those are some good points. I'm, I'm curious, how much like employment time do you expect to see? If somebody is self-employed? Let's say they want to, you know, leave their job eventually. How much employment time like rental history and self-employed history do they need to get the most optimal result? Yeah. In terms.

Jon Fulp  44:20  

I think it just varies for each person. You know, I think that if, let's say you have a W two job, and then you decide to go do your own thing. I think it's smartest to possibly do that on the side before you fully commit to that. Because I can tell you that if you were to come to a bank and you know, ask for a commercial loan, and you had four months ago started a brand new career of owning your own business. I mean, the banks can kind of look at it and be like, okay, we would kind of maybe want to see about a 12 months income history for your own business. Now that's completely different. If I moved from, you know, if I moved from banking to go to a W two job as a finance guy somewhere else, because w two is guaranteed most of the time unless you do something with that job. But when you do have When you're a sole proprietor and you and you kind of make you eat what you kill, typically bankruptcy about 12 months 12 to 24 months history before you can they want to get real aggressive with you. Now, there's, you know, there's a lot of times where I think one of your other questions here was, how much rental history would someone like to have. And that's actually kind of a double-edged sword there. Because, you know, some banks may look at that, and they may want, hey, you know, you've never done a commercial loan before, we want you to have at least 24 months, or a couple, we want you to have some help and maybe be in the real estate industry before. But a lot of times, that's not possible like you to get in the real estate industry. It's like getting a job. A lot of times job postings post, you know, I need five years experience. Okay, how do I get that five years experience without actually having the job first. So when you look at people that are trying to get into the commercial real estate industry, you really want to look at someone and say, okay, they're making good income, they don't have a lot of what I call dumb debt, which is credit cards. I'm not saying that installment loans are dumb, I had installment loans or auto loans, I'm not saying they're dumb, because you can get 0% interest financing, you can get one point, you know, 2.99 financing right now very, very cheap money. But it's also a, there's a guy who I watched pretty intently His name's Graham, Stephan on, on YouTube. And if you were to instead of going out and buying a BMW for 40,000, and leveraging yourself, in practice, you should probably wait to do that until you make enough money, so you can really pay for that. But anyways, so when a new person comes in to buy their first, you know, piece of real estate, you want to make sure that they have enough liquidity to make sure that if something bad were to happen, that they're covered on that aspect, not a lot of that typically, your most healthy forms of debt, and you probably have already talked about in this show would be your mortgage loan, one car loan, depends, it just depends on your income levels, one or two-car loans. And then not a lot of credit card debt, and not a lot of personal loans that are just signature notes where you want to restrict the mortgage and auto loans. And then you want to stick with business debt, and you want to have a healthy level of liquidity on hand. And it's pretty, you're in a pretty safe position with that borrower. And then that's why it's good to have a relationship with a banker because you can grow together six months later, they can kind of tell you can watch their balance sheet over time, and kind of dictate, Okay, you know, this guy had come at me in January of 2021, and had 50, grand, personal mortgage, no other debt 12 months, he has 20 grand, a personal mortgage in a rental property. Where did that 30 grand go? Well, he's spending it on you know, dumb things, you can actually look at the balance sheet. So it gives you what's called a personal financial statement as like a thermometer for someone's financial condition. So what you like to see is someone saving money, obviously putting money in investment vehicles and whatnot, looking at the stock market, bank account, and whatnot, and kind of you can watch them and grow together.

Dalyn Hazell  48:25  

Yeah. And that's why I just preached knowing like your financial statement. And because you threw out a lot of terms like your balance sheet, which is basically all the assets you own minus your liabilities, your personal financial statement, PFS, which is all your income and expenses for the year. And this is not just terms for accountants and bankers like everyone needs to know these things. I know they don't teach it in school. It's a travesty. But you have to know these things. Because when you come to somebody like you in the commercial department, they're going to expect you to know what these things are and be able to fill out a statement like this. So just and just leveling up your financial education all the time is super crucial. It's one less important thing in life. So as we're wrapping up here, Jon, how can investors like myself and other real estate investors make your job easier as the lender?

Jon Fulp  49:17  

You know, I would say that you want to be like you just said you want to be more well versed in your tax returns, you want to know exactly what bankers look for. As far as cash flow. You know, this is a huge issue I dealt with in PPP time. So back last year, in 2020, the PvP loans were based on sole proprietors based on net profit, and they changed that during 2021 to go off gross profit. But you know, if you're a guy and you own your own business, and you say, you know, you made $200,000 from gross sales, and then, at the end of the year after all profit and expenses, he only showed $30,000 in profit. The banks can only use $30,000 whether you think you make 200 or not, we take net profit. Just like any other thing, so it's very good be very cognizant of that if you want to be borrowing money, you know, just be very aware of your spending habits, if you really, if you want to work with the banks, their job is to protect their depositors and also make money for the bank. They're their shareholders. And so, you know, if a bank, you want to find a relationship with a good banker. Maybe if you're young, find a younger banker that way, like, you know, you guys can grow together. And in my opinion, the younger bankers, they want to work pretty hard, because they want to do good and move up in the banking world. But yeah, you want to have an open communication and to talk with your banker about finances and whatnot.

Dalyn Hazell  50:53  

Yeah, just I would emphasize just having that relationship with your banker is super important. And obviously, I'm trying to grow our relationship here. And just hopefully, that, you know, as you see me grow, and I see you grow, that we just continually bounce ideas off each other and help each other out in our careers. Well, it's, we're coming up on the hour mark here, thank you just so much for sharing your knowledge about banking. And if you have anything more to add, please do now, before we wrap it up.

Jon Fulp  51:20  

The only thing I wanted to add, because there's so many different parts of banking that for you to for a person that, you know, there's the commercial real estate lending, CNI, business acquisitions and lines of credits and all that stuff, if you're a business out there, because honestly, I would say 75% of the time I work with real estate investors on their projects. But I also 25% of the time I work with businesses like whether it's your manufacturing businesses and stuff, because they have to sometimes your own, they own their own real estate. If you're out there, and you're a business owner, and you own your and you want to own your own real estate, and maybe it be your owner occupied building, please do your research on what an Rmi 504 loan is. It allows you to get a fixed long term rate, it allows you to put 10% down. And, um, you know, and there's a lot of, there's fees, also associated with it too. But a lot of like, you know, when you're starting a business, the money down is the biggest obstacle that you'll face. And so I think if you do your research on Rmi, we have local people with the SBA, that we work with our local representative, as a net Darnell with the 504 Rmi. And I feel like that tool isn't used enough. I'm actually working on one right now. It does take longer, there's more red tape, because what you do get right now is, for example, it's a commercial loan, and it's a $3 million purchase. So we only have 10%. And then I'm sorry, you put down 10%. We loan you 50%. And the Rmi loans you the remaining 40% they take a second deed, well, there's a second deed, that could be a, you know, $1.4 million $1.3 million loan. That loan is actually fixed for 20 to 25 years. And right now the rates are about 3%. So it does take longer. But I feel like this, that product isn't talked about enough. And I'm, as I'm working on running right now, I think that it's a great product for a lot of businesses to have. But there's just a lot of banking stuff. And if you guys have any questions, you guys can always feel free to call me at the Central Bank of the Ozarks.

Dalyn Hazell  53:37  

Yeah, absolutely. Thanks for mentioning that. There's so many products out there than just your typical products that we talked about for investors. But I think most of the people listening to this are investors, maybe they're looking to do the BRRRR method or house hack, or just buy it straight up with you. And I know there's a lot of local folks around the Ozarks area so you work for the central bank of the Ozarks in Springfield, Missouri. What is a good, you know, oh number or email address that you'd like to throw out there if people want to pursue a relationship with you?

Jon Fulp  54:09  

Yeah, absolutely. So my phone number is 417-848-9777. That's called what I call the bat line. You can call me whenever you need anything. And I work at the main branch at Glen stone in the sunshine right across from the plaza tower, the VIP hotel, and then my email is Jon jon.fulp@centralbank.net. And I work all the time. So if you have any questions on anything, just feel free to give me a shout, run some ideas by me and I'll be happy to help.

Dalyn Hazell  54:47  

Yeah, and Jon is fantastic to work with. He can even negotiate with you on certain terms. So absolutely. Thanks for being here and sharing your knowledge. Thanks so much. 

Jon Fulp  14:49  

Thanks Dalyn. I appreciate it man.

Outro  54:57  

Thank you for listening to the real estate investing for freedom podcast. If you enjoyed the show, please subscribe and leave us a review and Unit next week for the next episode.