The Money Bucket: Lenders vs. You

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For any project you do, you need money. We refer to this collection of money as your money bucket. 

The money in your bucket comes from two sources: 1) a lender and 2) you.

Both of these areas of funding are going to come together and fill the bucket to finance your project. 

Lenders

This is the part most people think about the most when it comes to real estate investing.

As an investor, it’s important that you’re attractive to lenders. Lenders, as a rule, want to lend you money, but it’s important to understand what they’re really looking for as well as how you can diversify your money bucket to maximize your success. 

Sometimes you need hard money, sometimes you need a bank, sometimes you need conventional loans. Sometimes you just need gap funding. 

Lenders offer a variety of options, and you should shop around to make sure you’re finding the right option that fits your project.

You

When it comes to the part of the money bucket you’re responsible for, there are two important areas for you to consider:

Credit Score

The better your credit, the more options you’ll have. 

Impact of Credit: Banks love clients with high credit scores. The higher the score, the more options they’re likely to offer. 

As with finding a loan, the more options banks offer, the more likely you are to find a great deal.

Personal vs. Business cards: Using personal credit for investing can quickly turn into a problem. 

Using personal credit cards or lines of credit for business projects can drive people’s scores down.

We strongly recommend using business credit cards for your real estate investing. You still should make sure you’re paying everything on time, but that business credit card in your name isn’t going to be reported on your personal credit report.

This keeps your credit score higher as you’re looking for loans.

Lines of Credit: Having a variety of credit lines, and opening those strategically, will help you fill  your money bucket. Lines of credit in business credit cards, HELOCs, etc. can get you more prepared for down payments, earnest money, repairs, and more. 

It’s helpful to have backup lines of credit that are ready for when you need money for time-sensitive deals. 

Fill your bucket and your options. 

Other People’s Money

When trying to fill your money bucket, you shouldn’t overlook your friends and family. 

Look out for real people in your life who are willing to invest in your project. Even if they only want to invest $10K, that can still help you cover your earnest money or smaller payments.

A lot of people are looking for private investments that offer better returns than traditional banks. Working with the real people in your life can make a huge difference in your ability to fund your project.

If you need help with navigating those personal investments, we’re happy to help. We have a lot of experience working with diverse money buckets and know how to keep notes for your financial records so those private loans are correctly accounted for.

Read the full article here.

Watch the video here:

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Traditional vs. DSCR Loan Comparison

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This loan comparison can help you figure out what loan is right for YOU. 

Whenever we’re talking about rentals, we’re always going to come back to cash flow, and it’s important to find the best cash-flowing loan. 

We want to look at the pros and cons of each type of rental loan to help you understand which might be the best option to help your cash flow for a specific deal. 

Traditional Rental Loans

Pros of Traditional Loans

1. It’s a 30 Year Mortgage. This standardized timeline is reliable and consistent across most traditional loans.

2. No Prepay Penalty. Without a prepayment penalty, you can get out of the loan whenever you want. This is great if you anticipate a changing market and might want to sell early.

3. Lower Interest Rates. Between DSCR and traditional rental loans, you’re often looking at at least a whole point difference in the interest rates. While a single percentage might seem small, when you’re dealing with hundreds of thousands of dollars, the interest adds up very quickly, and you should consider it during loan comparison. 

Interest rates affect everything from your cash flow to your credit score to your debt ratio. Depending on where you’re at financially, lower interest rates can be a huge point in favor of these traditional loans.

4. Home Hacking. With traditional rental loans, you’re actually able to do an owner-occupied loan. This allows you to live in one of the units you’re working on. Especially if you’re working on multiple units, you can move from one to another as needed.

Sometimes these owner-occupied loans have lower down payments and better rates, so they’re often worth looking into.

5. Same Rules Nationwide. Traditional loans are consistent across the country. No matter where you go, the guidelines are the same. This makes them predictable although they often have stricter guidelines than other loan types.

Cons of Traditional Loans

1. Property Limits. With traditional loans, you’re limited to 10 properties or 10 units. So while they do often have the best rates, you’re limited in how many properties they cover.

2. Need Income Proof and Good Credit. Not all loans need proof of income, but traditional loans certainly do. Your rates will also be limited by your credit score.

3. Cannot Close in an LLC. Unlike other loan options, traditional loans require you to close in your personal name because you cannot own the property when you’re going through a purchase or refinance in an LLC.

An LLC typically works to protect individuals from the financial effects of a business. However, because of the limits of traditional loans, you can’t use that protection in this scenario.

4. One Year Seasoning. You’re not allowed to refinance until after a full year has passed. This is especially important to consider if you’re doing a BRRRR and want to tap into some equity with a full refinance or purchase.

DSCR Rental Loans

DSCR stands for debt-service coverage ratio. You’ll often see these loans come up for anything from a single family home to a larger multi-unit property.

Pros of DSCR

1. Flexibility. While traditional loans find strength in their consistency, investors sometimes find themselves needed a lot more flexibility. That’s where DSCRs come in. 

DSCRs are significantly more flexible because lenders and investors can negotiate unique terms that fit a project’s specific needs. When doing your loan comparison, consider how much flexibility you’ll need.

2. Ease! The biggest benefit of DSCR is ease. It doesn’t matter if you’re employed, what your tax return says, or how much income you have flowing. DSCR lenders only care about the rental property and whether it has the potential to produce cash flow.

3. Close in an LLC. Another big thing in the real estate investor world is closing in an LLC. Unlike traditional bank loans, you can both buy and refinance in an LLC, so you’re protected all the way through.

4. Available in all 50 States. No matter where you are, you will be able to find available DSCR rental loans. However, the details might vary.

Each lender offering DSCRs have their own terms, guidelines, etc. This makes it incredibly important to shop around to make sure you find the right fit.

5. Unlimited Number of Properties. You will find so many options in the DSCR world. You can find loans for specific properties or do a blanket loan for $50 million that could cover as many units as you wanted.

Always make sure that the lender and loan are the right fit for you, and remember that there are a ton of options available!

Cons of DSCR

1. Prepayment Penalties. The number one downside of DSCR loans are the prepayment penalties. If you’re looking to get in and out of a property within the first three to five years, there’s a prepayment penalty unless you buy it out.

2. Higher Rates. Rates for DSCRs typically run anywhere from 1%-3% higher than traditional bank loans, depending on credit score, size of loan, etc.

3. Might Disappear or Change Quickly. DSCR loans are prone to change quickly. When shifts happen in the real estate market, they might even disappear for a brief time before showing up again.

While traditional bank loans are more slow-moving, DSCR moves quickly, and sometimes that can become an issue to real estate investors.

4. Can’t Home Hack. DSCR also does not allow you to live in any of the units you’re working on as you could with an owner-occupied traditional loan.

 

Read the full article here to learn more about loan comparison.

Watch the YouTube video:

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Rental Loans Compared: Traditional vs. DSCR vs. Local Banks

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Which rental loans are the BEST for your rental property?

There are three main loans that cover rental property loans: traditional, DSCR, and small bank loans.

Whenever we’re talking about rentals, we’re always going to come back to cash flow, and it’s important to find the best cash-flowing loan. 

If you’re deep in the real estate investing game, then you’ll probably utilize all three of these types of loans at some point. They all have their place. However, if you’re a newer investor, it can be tricky to figure out which loan is right for you.

We want to look at the pros and cons of each type of rental loan to help you understand which might be the best option to help your cash flow for a specific deal. 

Traditional Rental Loans

Pros of Traditional Loans

1. It’s a 30 Year Mortgage. This standardized timeline is reliable and consistent across most traditional loans.

2. No Prepay Penalty. Without a prepayment penalty, you can get out of the loan whenever you want. This is great if you anticipate a changing market and might want to sell early.

3. Lower Interest Rates. Between DSCR and traditional rental loans, you’re often looking at at least a whole point difference in the interest rates. While a single percentage might seem small, when you’re dealing with hundreds of thousands of dollars, the interest adds up very quickly. 

Interest rates affect everything from your cash flow to your credit score to your debt ratio. Depending on where you’re at financially, lower interest rates can be a huge point in favor of these traditional loans.

4. Home Hacking. With traditional rental loans, you’re actually able to do an owner-occupied loan. This allows you to live in one of the units you’re working on. Especially if you’re working on multiple units, you can move from one to another as needed.

Sometimes these owner-occupied loans have lower down payments and better rates, so they’re often worth looking into.

5. Same Rules Nationwide. Traditional loans are consistent across the country. No matter where you go, the guidelines are the same. This makes them predictable although they often have stricter guidelines than other loan types.

Cons of Traditional Loans

1. Property Limits. With traditional loans, you’re limited to 10 properties or 10 units. So while they do often have the best rates, you’re limited in how many properties they cover.

2. Need Income Proof and Good Credit. Not all loans need proof of income, but traditional loans certainly do. Your rates will also be limited by your credit score.

3. Cannot Close in an LLC. Unlike other loan options, traditional loans require you to close in your personal name because you cannot own the property when you’re going through a purchase or refinance in an LLC.

An LLC typically works to protect individuals from the financial effects of a business. However, because of the limits of traditional loans, you can’t use that protection in this scenario.

4. One Year Seasoning. You’re not allowed to refinance until after a full year has passed. This is especially important to consider if you’re doing a BRRRR and want to tap into some equity with a full refinance or purchase.

DSCR Rental Loans

DSCR stands for debt-service coverage ratio. You’ll often see these loans come up for anything from a single family home to a larger multi-unit property.

Pros of DSCR

1. Flexibility. While traditional loans find strength in their consistency, investors sometimes find themselves needed a lot more flexibility. That’s where DSCRs come in. 

DSCRs are significantly more flexible because lenders and investors can negotiate unique terms that fit a project’s specific needs.

2. Ease! The biggest benefit of DSCR is ease. It doesn’t matter if you’re employed, what your tax return says, or how much income you have flowing. DSCR lenders only care about the rental property and whether it has the potential to produce cash flow.

3. Close in an LLC. Another big thing in the real estate investor world is closing in an LLC. Unlike traditional bank loans, you can both buy and refinance in an LLC, so you’re protected all the way through.

4. Available in all 50 States. No matter where you are, you will be able to find available DSCR rental loans. However, the details might vary.

Each lender offering DSCRs have their own terms, guidelines, etc. This makes it incredibly important to shop around to make sure you find the right fit.

5. Unlimited Number of Properties. You will find so many options in the DSCR world. You can find loans for specific properties or do a blanket loan for $50 million that could cover as many units as you wanted.

Always make sure that the lender and loan are the right fit for you, and remember that there are a ton of options available!

Cons of DSCR

1. Prepayment Penalties. The number one downside of DSCR loans are the prepayment penalties. If you’re looking to get in and out of a property within the first three to five years, there’s a prepayment penalty unless you buy it out.

2. Higher Rates. Rates for DSCRs typically run anywhere from 1%-3% higher than traditional bank loans, depending on credit score, size of loan, etc.

3. Might Disappear or Change Quickly. DSCR loans are prone to change quickly. When shifts happen in the real estate market, they might even disappear for a brief time before showing up again.

While traditional bank loans are more slow-moving, DSCR moves quickly, and sometimes that can become an issue to real estate investors.

4. Can’t Home Hack. DSCR also does not allow you to live in any of the units you’re working on as you could with an owner-occupied traditional loan.

Local Banks for Rental Loans

Another option that fewer people consider is looking at loans from small, local banks. These local banks sometimes offer in-house products that can offer more flexible loans to people investing in their local area. 

Pros of Small Bank Loans

1. More Flexibility. Depending on your area, some local banks love real estate investors. If you shop around and find a small bank willing to invest, these loans often offer more flexibility than larger traditional loans. 

Because local banks are more likely to understand the area, unique properties that might seem strange to larger lenders might be more seriously considered by locals.

2. Decent Rates. Rates for local banks typically fall between traditional loans and the higher DSCR rates. However, you do keep more flexibility (the appeal of DSCR) for a lower rate.

3. No Prepay Penalties. Most local banks don’t have the extensive prepay penalties like DSCRs.

4. Good for Smaller Towns and Loans. Banks often want to invest in their local areas, and they’re often more willing to give out smaller loans for those areas as well. Of course, these banks still want to see good income and good credit.

Cons of Local Bank Loans

1. Each is Different. Every small bank makes their own rules. Because of this, its so important to shop around to find a bank that will offer you good rates for your specific project.

2. Lending Limits. Local banks also have lending limits. If you’re putting a portfolio together or doing multiple properties, you might hit up against that lending limit, and the bank might have to step away from offering you a loan.

3. Shop Around. As we already mentioned, one of the big negatives is you have to shop around. Small bank loans can also change like DSCR loans, so just because you talked to a bank at one point doesn’t exclude them from being considered again in the future.

4. Limited Areas/Regions. They also limit their areas and don’t want to go too far out of that market. Look for banks in the local area of your investment property.

5. Callable. Loans from small banks are callable. This means that, if they feel like the values have gone down, they could call the loan and make you pay it off or refinance it somewhere else. Neither traditional nor DSCR loans have this feature.

This gives small bank loans a bit more risk than other types of rental loans.

Which Loan is Right for Your Rental?

All three of these loans have their strengths and weaknesses. You can decide which is right for you based on your individual financial history and the needs of your project.

If you want help figuring out what loan is the best fit, we recommend checking out the tools on our website. We have our free DSCR calculator that can help you figure out your DSCR ratio. 

Our goal is to help you maximize the cash flow of your real estate investments. 

If you’re buying or refinancing a rental property and want to know if you’re getting the best terms, or if you have questions about comparing loan types, reach out to us at Info@TheCashFlowCompany.com.

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Why You Should Be Honest With Lenders

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When you’re filling your money bucket, being honest with lenders can make a huge difference in your loan and the options they offer!

1. Be Honest About Your Financial History

This may seem obvious, but make sure you’re honest with your lender.

Make sure you’re upfront and honest about your financial history with your lender. It should go without saying, but don’t try to hide a bankruptcy or that you defaulted on a loan before. 

If you’re concerned about your financial history, trust us: It’s much worse to hide it and make the lender find out on their own (which they will).

Once they find out, it will be harder for you to get a loan. And if you do find a loan, your options are going to be severely limited—not just because of the history, but even more so because you hid important information. 

Options are super important to your work as a real estate investor. 

Options drive down the costs of loans. Anytime you pay less for money, the more money there’s going to be in your bucket. 

2. Stick to Your Timeline to Build Trust with Your Lenders

Similarly, when you say you’re going to get a project done, get it done. Whether it’s a flip or a BRRRR, construct a solid timeline on the front end. This keeps you and your lender are on the same page.

It’s often a good idea to put in a bit of a cushion when talking to your lenders so that you don’t panic if there are minor delays in your project. 

Lenders want to see honest people who are doing their best. Most lenders are happy to support investors who are upfront with them with more money, more funding, more options. 

Read the full article here.

Watch the video here:

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What’s the Right Prepay Option For You?

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How can you choose the right DSCR prepay option for your project?

It’s important to look at the prepay penalties of your loan so that you can figure out what fits your particular investment. You should also take time to research the following to make sure you’re getting the best deal possible:

Think about your timeline.

Are you keeping the property long term? Do you think the market’s going to go down? All those things come into play when you’re determining what prepay is best for you. 

A good lender will walk you through the numbers and your options, but the more information you have about your timeline, the better they’ll be able to help you.

Work with a knowledgeable lender.

Make sure you pick a lender who has options. DSCR companies often specialize in loans for a specific group, so it’s possible they won’t have the perfect loan for you. 

A good lender should have at least five to ten different DSCR funders that they could match with your loan. They should be able to help you find a loan that fits your timeline, cash flow, and specific project needs. 

Consider your exit strategy.

Prepay penalties come into play when you exit your loan. 

If you know on the front end of your project that you want a DSCR loan but might not need five years to complete it, then that should be a huge consideration when configuring your DSCR. 

Prepay Cost Examples

This chart can help you understand how DSCR prepay penalties can affect the cost of your project.

In this example, we’re considering a loan of $100K from a person with a 780 credit score. 

DSCR Prepay Penalties Comparison

When comparing straight vs. declining prepay options, it’s always worth considering the timeline of your project as well as whether or not interest rates are projected to drop. 

Also, always check what added fees your lender might have connected with their prepay option as these can vary significantly. 

 

Read the full article here.

Watch the full video here:

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Real Estate Investors: How to Win in 2024

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How can real estate investors WIN in the changing 2024 market?

We’re expecting to see more foreclosures and more properties available at discounts in the coming year which is ideal for real estate investors in the business of fix and flips and rentals. 

No matter where you came from or whether you have a college degree, anyone with the willingness to work and learn can make good money in real estate. 

We’re here to share a few tricks so that, as opportunities show up in the coming year, you’re set for success. 

Preparing as Real Estate Investors

There are typically two sides of real estate investing: 1) finding good properties and 2) financing. 

As we said before, you need money to make the money. Today, we want to look at the financing side of things so you’re ready when the good properties show up. 

As an investor, it’s important that you’re attractive to lenders. Lenders, as a rule, want to lend you money, but it’s important to understand what they’re really looking for as well as how you can diversify your money bucket to maximize your success. 

Filling Your Real Estate Money Bucket

For any project you do, you need money. We refer to this collection of money as your money bucket. 

The money in your bucket comes from two sources: 1) a lender and 2) you.

Both of these areas of funding are going to come together and fill the bucket to finance your project. 

1. Be Honest With your Lender and Get Your Projects Done

This may seem obvious, but make sure you’re honest with your lender.

Make sure you’re upfront about your financial history. It should go without saying, but don’t try to hide that you’ve had a bankruptcy or defaulted on a loan in the past. 

If you’re concerned about your financial history, trust us: It’s much worse to hide it and make the lender find out on their own (which they will).

Once they find out, it will be harder for you to get a loan. And if you do find a loan, your options are going to be severely limited—not just because of the history, but even more so because you hid important information. 

Options are super important for real estate investors. 

Options drive down the costs of loans, and anytime you pay less for money, the more money there’s going to be in your bucket. 

Similarly, when you say you’re going to get a project done, get it done. Whether it’s a flip or a BRRRR, construct a solid timeline on the front end so you and your lender are on the same page.

It’s often a good idea to put in a bit of a cushion when talking to your lenders so that you don’t panic if there are minor delays in your project. 

Lenders want to see honest people who are doing their best. Most lenders are happy to support honest investors who are upfront with them with more money, more funding, more options. 

2. Your Credit Score Matters

The better your credit, the more options you’ll have. 

Impact of Credit: Banks love clients with high credit scores. The higher the score, the more options they’re likely to offer. 

As with finding a loan, the more options banks offer, the more likely you are to find a great deal.

Personal vs. Business cards: Using personal credit for investing can quickly turn into a problem. 

Using personal credit cards or lines of credit for business projects can drive people’s scores down.

We strongly recommend using business credit cards for your real estate investing. You should still make sure you’re paying everything on time, but that business credit card in your name isn’t going to be reported on your personal credit report.

This keeps your credit score higher as you’re looking for loans.

Lines of Credit: Having a variety of credit lines, and opening those strategically, helps real estate investors fill their money buckets. Lines of credit in business credit cards, HELOCs, etc. can get you more prepared for down payments, earnest money, repairs, and more. 

It’s helpful to have backup lines of credit that are ready for when you need money for time-sensitive deals. 

Fill your bucket and your options. 

3. Finding Real People’s Money as Real Estate Investors

When trying to fill your money bucket, you shouldn’t overlook your friends and family. 

Look out for real people in your life who are willing to invest in your project. Even if they only want to invest $10K, that can still help you cover your earnest money or smaller payments.

A lot of people are looking for private investments that offer better returns than traditional banks. Working with the real people in your life can make a huge difference in your ability to fund your project.

If you need help with navigating those personal investments, we’re happy to help. We have a lot of experience working with diverse money buckets and know how to keep notes for your financial records so those private loans are correctly accounted for.

Calling All Real Estate Investors: Prepare for 2024!

It’s important in 2023 to get ready for what’s coming in the future. 

Make sure you have lenders set up from hard money to neighbors and everyone in between. Check your credit scores now to ensure you have the options that will make your investing a success. 

You can also check out our free and easy tools to help get you ready for the upcoming market. We even have a free credit score checklist for you to use.

As always, we’re always happy to help! If you have any questions about the upcoming market, your loan options, or how to fix your credit, reach out to us at Info@TheCashFlowCompany.com.

You can also check out our YouTube channel to learn more about real estate investing.

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Requirements for DSCR Loans in 2023

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How has the changing landscape of real estate in 2023 affected requirements for DSCR loans? What are lenders looking at and how can you find the right deal for you?

The Power of Shopping Around

While this isn’t new, shopping around is very important in 2023. With a growing number of lenders loosening their requirements, finding a lender that specializes in projects like yours can make a big difference. 

If your project is unique or you’re dissatisfied with the rate you’re offered, reach out to mortgage lenders or brokers who have the power to offer something different. 

Requirements for 2023

Products change constantly, so it’s always a good idea to talk to professionals in your area, particularly when it comes to how DSCR lenders look at funding, financing limits, and credit:

Gift Funding Flexibility:

Lenders are trending towards having looser rules around gift money. Previously, it was better to have seasoned money in your account. Now, so long as the money is there for closing and it comes from your account, you’re usually set. That said, if you have any questions about gift funding, talk to your particular lender.

Property Ownership Limits:

A few lenders are also lifting their limits on how many properties you can finance. Previously, the majority of companies limited investors to 5-10 properties. Now, it’s fairly easy to find lenders without those restrictions.

Credit Influence:

Although DSCR loans don’t look at your income, they still look at credit. The better the credit score, the better the loan to value ratio. Also, the higher the DSCR calculation (rent ÷ income), the better the terms.

Standard Interest Only Options:

As always, there are interest only options. Depending on your project and the current market, these aren’t always the most helpful, but they are available. 

 

Read the full article here.

Watch the full video here:

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What are Prepay Penalties?

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What are DSCR prepay penalties and how can you navigate them?

One of the normal things you’ll come across when looking at DSCR loans are prepay penalties. Understanding how they work (and the options you have) can help you make the best choices for your project.

What are DSCR Prepays?

If you’re working with a DSCR or a non-QM investor, you’re likely going to find lenders charging prepay penalties. 

Typically, if you want to exit the loan within a certain time period—often three to five years—they’ll charge an additional exit fee. This means that if you pay off your loan early, you could run into what’s called a hard prepay. 

Understanding the Cost of Prepay Penalties

Lenders don’t care about why you’re paying off your loan early. If you pay them in full, they’re going to charge the agreed upon fee (the prepay penalty). 

For example, if you have a $100K loan with a 3% prepay penalty, you would pay them 3% of the $100K on top of the principal and any interest or other fees owed.

While this can feel frustrating, these penalties actually allow these lending institutions to keep money flowing. Therefore, a prepay helps them keep interest rates stable by ensuring a consistent flow of capital.

Different Prepay Options for DSCR Loans

DSCR loans offer two standard prepay options: five-year or three-year periods. 

How does this connect to DSCR prepay penalties? 

During the initial five- or three-year period of your mortgage, you will be penalized for paying off your loan before the prepay period has elapsed. If you keep your loan past that benchmark, you will have no more prepay penalty. 

You typically will find two basic types of prepays:

  1. Straight Prepay: If you have a straight prepay, a lender may charge you a fixed percentage of the principal balance for each year, regardless of when you pay off the loan.

  2. Declining Prepay: A declining prepay is exactly what it sounds like. Each year, the prepay penalty decreases. For example, it may be 5% of the principal balance the first year, 4% the next, etc. until the prepay penalty disappears altogether.

Read the full article here.

Watch the full video here:

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DSCR Prepay Penalties Explained

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What are DSCR prepay penalties and how can you navigate them?

One of the normal things you’ll come across when looking at DSCR loans are prepay penalties. Understanding how they work (and the options you have) can help you make the best choices for your project.

What are DSCR Prepays?

If you’re working with a DSCR or a non-QM investor, you’re likely going to find lenders charging prepay penalties. 

Typically, if you want to exit the loan within a certain time period—often three to five years—they’ll charge an additional exit fee. This means that if you pay off your loan early, you could run into what’s called a hard prepay. 

Understanding the Cost of Prepay Penalties

Lenders don’t care about why you’re paying off your loan early. If you pay them in full, they’re going to charge the agreed upon fee (the prepay penalty). 

For example, if you have a $100K loan with a 3% prepay penalty, you would pay them 3% of the $100K on top of the principal and any interest or other fees owed.

While this can feel frustrating, these penalties actually allow these lending institutions to keep money flowing. A prepay helps them keep interest rates stable by ensuring a consistent flow of capital.

Different Prepay Options for DSCR Loans

DSCR loans offer two standard prepay options: five-year or three-year periods. 

How does this connect to DSCR prepay penalties? 

During the initial five- or three-year period of your mortgage, you will be penalized for paying off your loan before the prepay period has elapsed. If you keep your loan past that benchmark, you will have no more prepay penalty. 

You typically will find two basic types of prepays:

  1. Straight Prepay: If you have a straight prepay, a lender may charge you a fixed percentage of the principal balance for each year, regardless of when you pay off the loan.

  2. Declining Prepay: A declining prepay is exactly what it sounds like. Each year, the prepay penalty decreases. For example, it may be 5% of the principal balance the first year, 4% the next, etc. until the prepay penalty disappears altogether.

Choosing the Right Option for You

How can you choose the right DSCR option for your project?

It’s important to look at the prepay penalties of your loan so that you can figure out what fits your particular investment. You should also take time to research the following to make sure you’re getting the best deal possible:

Think about your timeline.

Are you keeping the property long term? Do you think the market’s going to go down? All those things come into play when you’re determining what prepay is best for you. 

A good lender will walk you through the numbers and your options, but the more information you have about your timeline, the better they’ll be able to help you.

Work with a knowledgeable lender.

Make sure you pick a lender who has options. DSCR companies often specialize in loans for a specific group, so it’s possible they won’t have the perfect loan for you. 

A good lender should have at least five to ten different DSCR funders that they could match with your loan. They should be able to help you find a loan that fits your timeline, cash flow, and specific project needs. 

Consider your exit strategy.

Prepay penalties come into play when you exit your loan. 

If you know on the front end of your project that you want a DSCR loan but might not need five years to complete it, then that should be a huge consideration when configuring your DSCR. 

Prepay Cost Examples

This chart can help you understand how DSCR prepay penalties can affect the cost of your project.

In this example, we’re considering a loan of $100K from a person with a 780 credit score. 

DSCR Prepay Penalty Comparison Chart

When comparing straight vs. declining prepay options, it’s always worth considering the timeline of your project as well as whether or not interest rates are projected to drop. 

Also, always check what added fees your lender might have connected with their prepay penalties as these can vary significantly. 

How We Help

Sometimes it can be difficult to find lenders who will take the time to run through all the numbers with you. You’re welcome to contact us at Info@TheCashFlowCompany.com and we will be happy to walk you through your options.

You can also visit our website to learn more about real estate investment or to find tools such as our free and easy DSCR calculator. 

As always, we’re more than happy to look at your project and help you figure out a deal that works for you. 

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DSCR Loans for Multi-Units and Large Portfolios

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Is it possible in 2023 to find good DSCR loans for multi-units or larger portfolios?

If you’re looking for a DSCR loan for a large project such as a multi-unit or large portfolio, you’ve come to the right place.

DSCR loans have been around for a long time. In 2023, the real estate climate has experienced a few changes, and knowing how they relate to DSCR loans can help you get ahead of the game.

Changing Landscape for DSCR Loans

DSCR loans used to be most common for single-family or 1-4 unit properties. Now, in 2023 we’re seeing DSCR loans explode into multi-family, blanket loans for larger portfolios, and multi-units. 

With new options available, you need to know what to look for while remembering that all DSCR companies have specific niches. It’s important to find a lender who understands the particulars of your project.

Expanded Loans for Multi-Units

DSCR loans now cover a wider range of properties. It’s fairly easy to find options for large portfolios of more than $50 million, blanket loans for mixed-use properties, and larger multi-family units.

The range of these options provide greater flexibility when shopping around for DSCR lenders and exploring their requirements.

Flexible DSCR Loan Requirements

It’s now possible to find DSCR loan options for first time investors and investors who don’t own a primary residence. 

This opens up DSCR loan opportunities for investors who were previously more limited in their abilities to purchase investment properties.

Loans for Rural Properties and Condotels

If you’re looking to purchase rural properties, condotels, or other vacation rentals by owner (VRBO), you can now find DSCR loans for properties up to 20 acres. 

 

Read the full article here.

Watch the full video here:

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