How Income Impacts Your Real Estate Loan Options

Categories:

How income impacts your real estate loan options (and other requirements you need to know in this market).

The mortgage industry is constantly changing, and not to the advantage of borrowers.

If you’re in a situation with a property that isn’t cash-flowing, you want to get locked in somehow – whether with a 30-year product or a 3-year one.

Loan options are changing just about daily – to the detriment of buyers. Credit score requirements are going up, loan-to-values are going down, and rates are steadily rising.

Here’s what you need to know (especially to refinance a property that has negative cash flow).

Credit Requirements for Loans

Just as you care about the financial health and responsibility of your tenants, the bank cares about the same for you. The expectations from banks become stricter when money is as tightened like it is now.

Credit requirements specifically have increased. You’ll have a hard time finding any loan at all in this market if your score is below a 680. To get better terms and rates, you’ll have to have a score in the mid-700s.

Income Impacts Your Real Estate Loan Options

Income is an important part of the underwriting process for any loan, but especially so on a property that isn’t cash flowing. Different types of loans will have different income requirements.

How Income Impacts Traditional Loans

Your income matters most if you’re attempting to get a traditional loan or other bank loan. Even if a property is negatively cash flowing, you can still get a traditional loan based on your income. If you make enough money (from a W2 job, other investment properties, etc.), banks will gladly offer you a loan.

As long as your income can cover the property’s costs, then the rent income doesn’t matter so much for a traditional loan.

Income for Bridge and DSCR Loans

Let’s say the property has no or negative cash flow and you don’t have a strong enough income for the banks’ requirements. In that case, a bridge or DSCR loan is a better option for your property that isn’t cash flowing.

Neither a bridge loan nor a DSCR loan rely on your personal (or business) income at all. A DSCR loan typically works based on the ratio of your rent and your expenses, but there are also no-ratio or negative DSCR loans available.

Terms and LTVs: Your Real Estate Loan Options

The length of time, or term, of your loan is important to consider when you have a property that isn’t cash flowing.

Why you need a loan in this circumstance comes down to two reasons:

  1. You need to lock in a loan before the market gets worse.
  2. You need that loan to carry you until the market improves.

LTVs are also important, and will dictate whether or not you can afford this new loan.

Traditional Loans

There are a lot of options for a traditional loan on a property that’s not cash flowing. Some will work better for your property than others.

Many bank terms are between 3- to 7-years fixed, amortized over 20 or 30 years. These loans are useful for non-cash-flowing properties because that three, five, or seven years can bridge you into the next season where rates will come down.

If you can qualify for one of these traditional loans, your maximum potential loan-to-value in this market is 75%. Bank loans will offer the highest LTVs out of all of your real estate loan options in this situation.

Bridge Loans

The term of a bridge loan is typically one or two years. If you know you’ll have an exit after that year or two, bridge loans are a great option.

Bridge loans are easy and fast. However, it’s possible interest rates won’t go down within that 1- to 2-year term, so you may be stuck refinancing into a second bridge loan, or other loan.

Additionally, the LTVs on bridge loans average 60-70% maximum.

DSCR Loans

There are many different types of DSCR loans available, with varying terms.

They traditionally go for 30 years. However, there are other options, including interest-only 40-year or 3- to 7-year fixed loans.

LTVs also take a hit with DSCR loans, averaging around 65-70%. 

How Income Impacts Real Estate Loan Options

If you need a loan for a non-cash-flowing property, see if you can qualify for a traditional loan first. Their high LTVs make them the best, but their income requirements may be tough to meet.

Read the full article here.

Watch the video here:

https://youtu.be/AQ-zcRBQB9c

by

How to Calculate the Uncertainty of Real Estate Investing

Categories:

If you keep your house on the market until it sells, just how much are you paying for the uncertainty of real estate investing?

If you’re deciding whether to sell at a loss or keep fighting a declining market, the question comes down to whether you want a certain loss or an uncertain loss.

Let’s dig through the numbers to see how much a client of ours was paying every month to keep a property on the market with no in-flow.

How Much Are Carry Costs?

Our client with a $600,000 loan could only sell at $570,000 in the current market.

This is a $30,000 loss. But the number is certain.

Remember their alternative is covering the costs while holding the property for an indefinite period of time. In a market that’s not seeing higher property values for potentially a long time.

The list of costs adding up month after month gets long fast:

  • Mortgage
  • Interest
  • Insurance
  • Taxes
  • Staging
  • Utilities
  • An extension fee if you go too long with your short-term loan
  • And more.

On a $600,000 house, these costs add up rapidly. The market could take 2+ years to get to a point where they can sell for more than $600,000… This client would be losing much more than $30,000. And still, even that is not a promise.

What Does Uncertainty in Real Estate Investing Cost?

Here’s the breakdown for this client’s property’s costs:

  • Mortgage (in this case, interest-only payments): $4,900
  • Taxes: $300
  • Insurance: $200 (Paid up-front for the period of time they thought they’d sell by. That period has passed, so this became a monthly charge.)
  • Staging & Utilities: $325 (Since it was a larger, higher-quality house, they added some furniture and decor to help it sell. Utilities also stayed on while the house was on the market.)

That’s a grand total of $5,725 per month to keep this house on the market. 

This is money that adds no true value to the property. It’s cash flying out of their pockets and getting them nowhere fast.

These costs are a necessary evil in normal real estate investing. The kicker here is that there’s truly no end in sight.

The market is not expected to get better (especially for higher-end properties) for quite some time. In fact, interest rates are actually anticipated to go up.

Interest rates rising just one more point could impact buying power so much that the house’s market value could go down another $50,000.

Read the full article here.

Watch the video here:

https://youtu.be/NaWRQXoD8ZM

by

What Is BRRRR? 3 Simple Fundamentals to Maximize Cash Flow

Categories:

What is BRRRR? Here’s an intro to the most basic concepts.

BRRRR is one of the most powerful forms of real estate investing.

It’s not uncommon for people to retire, 10x their net worth, or become full-time investors with BRRRR.

Done wrong, though, BRRRR is a giant waste of time and money.

We want to help you have a positive experience with BRRRR. Getting BRRRR right is a matter of basic education. So let’s go over the 3 key fundamentals that explain: What is BRRRR?

What Is BRRRR?

“BRRRR” stands for “buy, rehab, rent, refinance, repeat.” It’s a process for capturing equity and creating cash flow on rental properties.

What Is BRRRR Step 1: Buy

BRRRR is not a retail-buy strategy. The properties you get for a BRRRR need to be off-market and under-market.

There are several considerations that go into a “good” BRRRR property:

  • The rent you can charge has to create cash flow.
  • The appraisal during the refinance will need to create a profit.
  • The property needs to be desirable enough to attract great tenants.

BRRRRs are bought with “sweat equity.” This doesn’t just refer to the physical work you put into a home once you have it… It also applies to the work you have to put in before purchasing the property to ensure it’ll make you money.

What Is BRRRR Step 2: Rehab

For the rehab of a BRRRR, there’s a balancing act to make the project “rental grade.” On the one hand, you have to stay within budget. Rental properties take some wear and tear, so your updates should account for that.

On the other hand, you still want quality. Why? Firstly, because better properties attract better tenants. And secondly, because your refinance depends on the appraisal. To get a good appraisal value, the property must show quality work.

What Is BRRRR Step 3: Rent

A BRRRR property’s cash flow is largely dependent on the amount of rent you can charge. Be aware of the rent range you can realistically charge in your property’s location.

Knowing the rent will help tell you what updates you should make to the property. For example, if adding an extra bedroom would get you an extra $500 per month, it may be worth the construction costs.

You can estimate an area’s rents by going to Zillow, Rentals.com, or talking to local property managers.

What Is BRRRR Step 4: Refinance

Part of the BRRRR strategy is to use two loans. You buy with a short-term hard money loan, then refinance into a long-term loan after all the rehab.

To make the most money, you’ll want to set yourself up for a rate and term refinance rather than cash out.

What Is BRRRR Step 5: Repeat

The true secret to how BRRRR can create so much wealth is the repeat-ability of the process.

We recommend people getting into real estate investing to buy 10 BRRRR properties in 3 years, or 5 in 2 years.

How can you possibly afford to buy so much real estate in such a short amount of time? The right BRRRR properties require zero money down. If you were pulling from your savings for every down payment, you wouldn’t be able to get as far.

So, what is BRRRR? It’s a method for building an investment rental property portfolio that requires no money out of your pocket.

3 Factors that Ensure a BRRRR Success

After helping investors through the BRRRR process for over 15 years, we’ve seen 3 key factors that make these transactions successful.

1. Building a Team

The really good under-market BRRRR properties won’t just jump into your lap. These properties require a little digging, and – more importantly – a team to help you.

You’ll need to know wholesalers, real estate agents, other investors, and anyone else who can help you locate good undermarket properties.

(It’s also an advantage to keep lenders on your team so you can close fast on these great properties once you find them.)

2. The Money Side

“It takes money to make money.”

If you can learn the basics about the costs of your BRRRR projects, you can squeeze more money out of each project.

We always say that there’s money in the money. Do the research to learn about real estate before your first investment, and you’ll be miles ahead of other investors.

3. Using the Right Leverage

Yes, it takes money to make money, but it doesn’t have to be your money.

Plan for and understand the entire BRRRR process, and leverage can work to 10x your net worth.

Where To Go From Here

This only brushes the surface of BRRRR. Over the coming weeks, we’ll visit each of these topics in much more detail. Why do you use two loans? How can you do this with zero money down? How do you go about a refinance?

If you have a deal now you’d like us to look at for you, send us an email at Info@TheCashFlowCompany.com.

by

Affordability in Real Estate in 2021 vs 2023 (and Why It Matters)

Categories:

$1.2 million of real estate in 2021. How much will it go for in 2023?

The real estate circle of life:

  • Interest rates change affordability.
  • Affordability changes buying power.
  • Buying power changes the profitability of your investments.

Knowing past and future interest rates, affordability, and buying power will help you make informed decisions about your next real estate purchase.

For reference, let’s work out some examples of affordability for real estate in 2021 compared to 2023.

Purchasing Power for Real Estate in 2021 for $1,000 Payment

If we had a buyer who could afford a payment of $1,000 today, they could buy a $150,000 home. 

Just a year ago, buyers could get interest rates at 3% or lower. So in 2021, this buyer would have a purchasing power of $252,000.

That same buyer, in 2023, is anticipated to have a purchasing power of only $124,000.

Purchasing Power for Real Estate in 2021 for $5,000 Payment

If another buyer was going to buy a $750k house in 2022 at a 7% interest rate, what was their purchasing power in 2021?

For the same $5,000 payment, someone in 2021 could afford a $1.2 million house! In 2023, that payment could only get a $620,000 property.

How Affordability Impacts Sellers

As an investor, it’s wise to keep this reality in mind: 

In a matter of two years, someone can go from being able to afford a $1.2 million house to a $600,000 one. 

With no change in income. No change in qualifications. No change in credit score. The only change is how interest rates impact payment.

Although affordability changes so drastically in a short amount of time, mindset does not. People will still expect the quality of their previous higher price point while they’re looking at homes in their current lower price point.

In addition to focusing on the numbers of your flip, you also have to obsess on quality. If buyers don’t see the quality they expect, they’ll either stay in their current home, or find another property on the market that won’t need any fixes.

Read the full article here.

Watch the video here:

https://youtu.be/-Q_jNTQQzyo

by

No Cash Flow on a Property? Here Are Your Best Loan Options

Categories:

What kind of loans can you get when you have no cash flow on a property?

You have a flip. The only way it will sell is at a steep loss. Carry costs are draining thousands from your bank. What’s your other option? Turn it into a rental.

This is a typical scenario where you end up with no cash flow on a property. Rent isn’t set up as a source of cash flow here. Rather, it’s a last-ditch effort to hold a house in a bad market.

Let’s look over your options for loans if you have no cash flow on a property.

Why You’d Need a Loan for No Cash Flow on a Property

There are a couple other common reasons real estate investors need a negative cash flow loan on their properties:

  • The property can’t be rented yet, so there’s $0 coming in.
  • People want to lock in an interest rate. Although rates are much higher than they were earlier this year, they’re still anticipated to rise another 4 or 5% in the next year or so. Properties that are in a bad spot now will only get worse and worse. Opting for certain, planned payments now over uncertain future ones is choosing the lesser of two evils.
  • If a property has equity but no cash flow, you can get money from that equity by using a loan. We’ve helped people get cash to put back into their real estate investments or business this way.
  • Banks might start calling loans soon. So a new loan for a property that isn’t cash flowing could keep you out of an uncomfortable payoff on the old loan.

Overall, flip owners want to get locked in to a longer-term loan before it’s too late. Banks are tightening more and more. Soon, they’ll turn down loans for properties that don’t cash flow, or refuse to extend their loans.

Working with a property that isn’t cash flowing comes down to one question: How can I get certainty while I wait out the next two or three years?

Best Loan Options for Negatively Cash-Flowing Properties

There are three main types of loans you can get for a property that doesn’t cash flow: traditional, bridge, or DSCR loans.

Using a Traditional Loan for a Property That Isn’t Cash Flowing

You can still get into a traditional loan in this market for a property that doesn’t cash flow.

This could look like a 30-year fixed Fannie or Freddy, or even a regular bank loan. Many banks are offering, three, five, or seven year fixed products. That term length could get you past the anticipated market downturn, into an environment where rates start improving.

Bridge Loans for No Cash Flow Properties

Bridge loans span just one or two years. These loans are fast, flexible, and easy, but they’ll likely cost you more money.

Additionally, you’ll have to be careful about the length of a bridge loan for your non-cash-flowing property. One or two years won’t guarantee to carry you into a time of better interest rates.

No-Ratio DSCR Loans

DSCR loans are designed for properties with rental payments. To use a DSCR loan, you don’t necessarily need to have active rent income on the property. DSCRs can be based off the market rent for the area of the property, rather than the literal rent income.

Read the full article here.

Watch the video here:

https://youtu.be/AQ-zcRBQB9c

by

How to 10X Your Net Worth and Cash Flow

Categories:

There really is a secret to 10x your net worth and cash flow…

The true “secret” to generational wealth is buying at the right time, then… letting the market take care of itself.

Let’s map out the possibilities if you buy properties while interest is high and prices low, then wait.

Past Client Success 10x-ing Net Worth

Back in 2010, we helped two families who were particularly successful buy 10 properties each using the BRRRR method.

After 12 years, each of the properties they purchased in 2010 either tripled or quadrupled in value. The rents tripled.

This worked because they bought smart and played the waiting game. They purchased with high rates and low prices, then refinanced once the rates flipped low and values high.

Your Future Success with 10x Net Worth

Let’s say you buy 10 properties in 2023 while rates are high and prices low. Then you hold until the market flips for you – low rates and high values.

You can capture $90k-$100k in equity when the market flips back. Ten properties would add almost $1 million to your net worth.

When you add an extra $500/month in cash flow through a well-timed refinance, that makes for an extra $6,000 in your pocket per year. Multiplied by 10 properties? $60k/year.

All this – just for buying when no one else is buying. Buying when rates are high, values are low, and letting the market correct itself. 

Your Plan to Buy Real Estate in 2023

Buying low with high interest rates, waiting, and pulling in the generational wealth. It’s possible with real estate in 2023.

Want to build a game plan for kickstarting your generational wealth next year? Have a deal now you want us to run the numbers on? Send us an email at Info@TheCashFlowCompany.com.

Read the full article here.

Watch the video here:

https://youtu.be/I5jRjQvHJhk

by

BRRRR Strategy Explained: Why These Properties 10x Your Net Worth

Categories:

Buying on-market properties is a money-suck for real estate investors. Here’s why to use the BRRRR strategy instead.

There are a lot of ways to mess up the BRRRR method.

But when you understand it right, this real estate strategy creates cash flow and net worth almost out of thin air.

We want to put the power of BRRRR in your hands. This is the start of a series walking through the BRRRR process step-by-step.

Let’s begin with the fundamental idea behind BRRRR – the thing that gives this method its money-making magic. How does the BRRRR strategy create cash flow out of seemingly nothing?

BRRRR Property vs Buying Retail

This is the basic concept behind real estate investing. There are two types of real estate properties:

  • Retail – When we think of a house as “on the market,” it’s a retail property. These houses are sold at market price, a cost determined by current market conditions. In real estate, this includes supply, demand, location, interest rates, and a number of other factors.
  • Undermarket – Properties that might be considered “off-market” are sold at an under-market price. There’s something preventing the house from being sold at market value as-is. The home could be outdated, damaged, foreclosed, or suffering from some other condition.

To break down exactly why and how BRRRR works, we need to look at the difference between buying retail and buying under-market as an investor.

Buying Retail with the BRRRR Strategy Doesn’t Work

The problem with buying retail as an investor is the house comes with no equity.

Let’s say you buy a property worth $400,000 (listed for that amount). With a conventional loan, the lender will cover up to 80% of the cost of the house. So you’ll need to put down 20%.

When you purchase the house and make the down payment, you’re transferring wealth, not creating it. You’re taking the money from your financial account and transferring it to the physical property.

So, you’ve moved $80,000 into the house, got a loan for $320,000, and created no additional wealth from the transaction.

There are three main disadvantages to retail properties:

  • The property may create cash flow or wealth in the future as a rental property, but there is no wealth created from the purchase.
  • You’ll require money up-front (in this case, $80,000 plus closing costs).
  • You can only repeat BRRRR retail properties as long as you have the money to fund them.

Buying Under-Market for BRRRR

True BRRRR properties, however, solve all three of those problems retail properties have. A BRRRR property:

  • Creates equity & cash flow immediately (and over time).
  • Can be done with zero money down.
  • Is a repeatable process.

BRRRR is all about buying under-market properties – the houses that are unwanted and unloved. In this market going into 2023, a lot of these types of homes will pop up, resulting in some great deals.

BRRRR Purchase

There are certainly some nuances to BRRRR, but let’s look at the bare basics. Let’s take the same example used for the retail property.

You, again, buy a property with a value of $400,000. However, since it’s valued under-market, you can purchase it for only $250,000.

The catch is that the house isn’t necessarily worth the $400k as-is. The potential is there, but you’ll have to update and rehab it. Between those fix-up costs and the closing costs, you’ll have to put $50,000 more into the property.

So the total cost of the property ends up being $300,000, or just 75% of the value of the home.

Cost of the BRRRR Strategy

That 75% number is not only realistic but recommended for BRRRR properties. In down markets, it’s not entirely uncommon to see houses at 65% or below.

In this example, our all-in price (purchase + closing + rehab) is $300k, and the property is worth $400k.

Right away, we’ve created $100,000 in net worth.

Retail vs BRRRR: The Numbers

Now that we’ve explained the initial numbers, let’s do a side-by-side comparison to see why BRRRR is powerful enough to create generational wealth.

  • Value: We’re comparing two homes with the same value – same neighborhood, same block, same size. Let’s say the value is $400k.
  • Loan: For the BRRRR, our total costs would add up to $300k. Our leverage 100% covers this amount. For the retail home, we could get an 80% LTV, so our remaining loan is $320k. On retail, we have less cash flow because we owe more money.
  • Cash Transfer: With BRRRR, you’re moving $0 of your own money. This is why properties with the BRRRR strategy are so popular for investors. With the retail property in our example, you need to transfer $80k of your money as a down payment. 

There are two problems with the cash transfer requirement in retail properties. 1) You need the cash to get into it. And, 2) The last “R” in BRRRR is repeat, so you’d have to have $80k again for your next property and your next. On under-market BRRRR properties, the zero out-of-pocket costs free you up to repeat the process over and over.

  • Payments: BRRRR payments will be lower than retail payments by about $25-$50/month, simply because the loan amount is lower.
  • WEALTH: The BRRRR strategy property immediately creates $100k. The retail property adds $0. It only has the loan + the $80k that was yours to begin with.

BRRRR Strategy Explained: Why These Properties 10x Your Net Worth

How BRRRR Creates Wealth

The wealth in BRRRR comes from the difference between the value of the property and what you owe on it. This usually ends up being 25% of the value of the home.

If you multiply this process by 5-10 properties? You’ve suddenly got half a million to a million dollars in net worth.

Using the BRRRR strategy like this isn’t just wishful thinking. In 2010, we helped multiple families buy 10 properties in one year using this method. Many of their properties tripled and quadrupled in value over the last 10+ years.

The 2023 market is shaping up to look a lot like 2010. The time to buy is coming soon.

Using the BRRRR Strategy

Thinking about testing the BRRRR strategy for yourself?

We’ll be walking through the entire BRRRR process over the next few weeks. BRRRR is a simple way to generate wealth – but only if you really understand how the process works!

Send us an email at Info@TheCashFlowCompany.com if you have any questions. Check out our YouTube channel for more free information on BRRRR and other real estate investing strategies.

by

How to Calculate the Certainty of a Real Estate Investment

Categories:

What’s worse: Paying money for an unknown amount of time? Or paying with certainty on a real estate investment?

A flip stuck on a market like the current one is a death knell for your profit.

The question is: do you keep paying carry costs in hopes of a higher sell price? Or do you cut your losses and move on in your real estate career?

Here’s our take on the dilemma.

What Is Certainty in Real Estate Investing?

Certainty in real estate investing is about coming up with a conclusion. This conclusion is whatever path:

  • Gets the property somehow moving along.
  • Offers the least out-of-pocket cost for the client.
  • Provides a clean slate to get them back on track to take advantage of the upcoming better market.

Certainty in Real Estate Investing by Taking a Short

In a market like this, you often end up with two options:

  1. Continue paying carry costs, with no sale in sight.
  2. Sell at a loss, for certainty about how much you’ll lose and the freedom to move on.

Taking the first option involves high monthly payments for 6-9 months, or longer. Once the end is finally in sight, it’s possible you’ll find out you’ll have to pay even more and take a huge loss anyway.

With the second option, you accept what the market is giving you. You take the short, then you move on. Money will still be lost, but the timeline of the payouts has a clear end. It becomes certain.

The first option is a gamble with the cards stacked against you. The second option is a clean slate to start fresh.

If you’re trying to find the best route to certainty for your property, we’ll go over some examples. You can follow along with the numbers for your own situation. Running these numbers will help you find out if it’s smart to opt for certainty in your real estate investment.

How to Calculate the Certainty of a Real Estate Investment

One client owed (and were paying interest on) $600,000 for their loan. When they first took out this loan in early 2022, they were expecting to sell the property within a month or two for $800,000+.

This property was supposed to be a quick cleanup – get in, get out, and make a quick couple hundred thousand dollars. Then the market changed, especially for higher price point homes in their area.

Now, five months later, they’re desperate to get out of the property.

What Is the Cost of Certainty?

If sold now in the current market, they could get $570,000.

That’s $230k less than they had originally hoped to get for this property – enough of a gut-punch as-is. But to sell for $30,000 less than you owe on the loan itself? Not ideal.

Although selling right now would mean a $30,000 loss for this client… At least that number is certain.

They’ve already spent close to that much on carry costs alone since purchasing the property. If they can’t get a better price for another several months… Which option is more worth it?

Would you rather lose $30k for sure? Or pay dollar signs with question marks and no end in sight?

How Do You Pay for the Loss?

So, say you’re in this client’s position, and you’ve decided to sell for $570k. How do you go about paying off the remaining $30,000?

 In this specific instance, we as a lender worked flexibly with our client. Since they were already locked into making payments indefinitely, we trusted them to also pay in a definite amount of time. So we put a term on the remaining $30k for the same payment amount.

Now, the client has the property out of their hands and a much smaller loan to pay off. They will make the same payments as they were on the larger loan, and they could pay the full loan off in 5 months and be done with it.

$30,000 isn’t a little money. Five months isn’t a short amount of time. But paying that much for certainty can beat paying 2x or 3x as much for uncertainty in this market.

What If Your Lender Isn’t Flexible?

Most lenders will be open to working something out with you. They want certainty, too. It does them good in the long-term for you to get this property out from over your head.

Opting for a shorter term loan is a great way for a lender to clear the decks and get ready for the next wave of great purchases.

However, even if your lender is unwilling to work out a shorter term, you still have a couple options for paying off the loan when you sell at a loss:

  • Cash – The obvious answer is you pull this cash right out of your own bank account. Not everyone has that luxury (or wants to take that path if they do), so there are a few other options.
  • Private money – In a bind like this, the flexibility of OPM is useful. If you borrow money from family, friends, or people in REI groups in your area, you can pay them back at a rate better than they’d get in the stock market or a bank right now.
  • Gap funding – You could also do a lien on another property to provide some gap funding. If your original lender won’t do this, we can help.
  • Use another lender – If the property’s original lender won’t agree to a short-term loan, someone else might.

Read the full article here.

Watch the video here:

by

What You Can Do with a Property That Isn’t Cash Flowing

Categories:

Here are your current loan options for a property that isn’t cash flowing.

Our recent blog talked about one course of action when you have a property stuck on the market: selling at a loss.

There comes a point where the loss in a short sale is cheaper than the loss of carry costs for who knows how long while you wait for a better market.

But those aren’t your only two options.

Maybe you want to hold the property, see it through to the next seller’s market, and capture all the equity you know is there. In this case, selling isn’t the right answer. But carry costs still pose a problem.

The answer to the problem? Renting with negative cash flow. 

This brings us to the question at hand: How do you get a loan for a property that isn’t cash flowing? What’s the best way for you to preserve as much money as possible? Let’s talk about what you can do with a property that isn’t cash flowing.

Why You’d Need a Loan for a Property That Isn’t Cash Flowing

No one in their right mind would choose to pay thousands in carry costs on a finished fix-and-flip project. So when you have a flip that won’t sell, it can be appealing to just clear the slate with a short sale.

But what if you want to cash in on the equity in that house? What if you know you just need the right market to finally recoup all these costs…?

This is a common way negative cash flow rentals are born. Losing just $500/month is much better than losing $2,000/month on the same property with no tenants.

Other Reasons to Have No Cash Flow Property

The most typical scenario where you need to figure out what to do with a non-cash-flowing property is when a flip needs to become a rental, and the rents won’t cover the loan payment.

There are a couple other common reasons real estate investors need a negative cash flow loan on their properties:

  • The property can’t be rented yet, so there’s $0 coming in.
  • People want to lock in an interest rate. Although rates are much higher than they were earlier this year, they’re still anticipated to rise another 4 or 5% in the next year or so. Properties that are in a bad spot now will only get worse and worse. Opting for certain, planned payments now over uncertain future ones is choosing the lesser of two evils.
  • If a property has equity but no cash flow, this loan could be used to get money from that equity. We’ve helped people get cash to put back into their real estate investments or business this way.
  • Banks might start calling loans soon. So a new loan for a property that isn’t cash flowing could keep you out of an uncomfortable payoff on the old loan.

Overall, flip owners want to get locked in to a longer-term loan before it’s too late. Banks are tightening more and more. Soon, they’ll turn down loans for properties that don’t cash flow, or refuse to extend their loans.

Working with a property that isn’t cash flowing comes down to one question: How can I get certainty while I wait out the next two or three years?

Most Common Loan Options for Non-Cash-Flowing Properties

There are three main types of loans you can get for a property that doesn’t cash flow: traditional, bridge, or DSCR loans.

Using a Traditional Loan for a Property That Isn’t Cash Flowing

You can still get into a traditional loan in this market for a property that doesn’t cash flow.

This could look like a 30-year fixed Fannie or Freddy, or even a regular bank loan. Many banks are offering, three, five, or seven year fixed products. That term length could get you past the anticipated market downturn, into an environment where rates start improving.

Bridge Loans for No Cash Flow Properties

Bridge loans span just one or two years. These loans are fast, flexible, and easy, but they’ll likely cost you more money.

Additionally, you’ll have to be careful about the length of a bridge loan for your non-cash-flowing property. One or two years isn’t guaranteed to carry you into a time of better interest rates.

No-Ratio DSCR Loans

DSCR loans are designed for properties with rental payments. To use a DSCR loan, you don’t necessarily need to have active rent income on the property. DSCRs can be based off the market rent for the area of the property, rather than the literal rent income.

Requirements for Loans on Negative Cash-Flowing Properties

The mortgage industry is constantly changing, and not to the advantage of borrowers.

If you’re in a situation with a property that isn’t cash-flowing, you want to get locked in somehow – whether with a 30-year product or a 3-year one.

Loan options are changing just about daily – to the detriment of buyers. Credit score requirements are going up, loan-to-values are going down, and rates are steadily rising.

Credit Requirements for Loans

Just as you care about the financial health and responsibility of your tenants, the bank cares about the same for you. The expectations from banks become stricter when money is as tightened like it is now.

Credit requirements specifically have increased. You’ll have a hard time finding any loan at all in this market if your score is below a 680. To get better terms and rates, you’ll have to have a score in the mid-700s.

How Income Impacts Your Real Estate Loan Options

Income is an important part of the underwriting process for any loan, but especially so on a property that isn’t cash flowing. Different types of loans will have different income requirements.

Traditional Loans

Your income matters most if you’re attempting to get a traditional loan or other bank loan. Even if a property is negatively cash flowing, you can still get a traditional loan based on your income. If you make enough money (from a W2 job, other investment properties, etc.), banks will gladly offer you a loan.

As long as your income can cover the property’s costs, then the rent income doesn’t matter so much for a traditional loan.

Bridge and DSCR Loans

Let’s say the property has no or negative cash flow and you don’t have a strong enough income for the banks’ requirements. In that case, a bridge or DSCR loan is a better option for your property that isn’t cash flowing.

Neither a bridge loan nor a DSCR loan rely on your personal (or business) income at all. A DSCR loan typically works based on the ratio of your rent and your expenses, but there are also no-ratio or negative DSCR loans available.

Terms and LTVs on No Cash Flow Real Estate Loans

The length of time, or term, of your loan is important to consider when you have a property that isn’t cash flowing.

Why you need a loan in this circumstance comes down to two reasons:

  1. You need to lock in a loan before the market gets worse.
  2. You need that loan to carry you until the market improves.

LTVs are also important, and will dictate whether or not you can afford this new loan.

Traditional Loans

There are a lot of options for a traditional loan on a property that’s not cash flowing. Some will work better for your property than others.

Many bank terms are between 3- to 7-years fixed, amortized over 20 or 30 years. These loans are useful for non-cash-flowing properties because that three, five, or seven years can bridge you into the next season where rates will come down.

If you can qualify for one of these traditional loans, your maximum potential loan-to-value in this market is 75%. Bank loans will offer the highest LTVs out of all of your real estate loan options in this situation.

Bridge Loans

The term of a bridge loan is typically one or two years. If you know you’ll have an exit after that year or two, bridge loans are a great option.

Bridge loans are easy and fast. However, it’s possible interest rates won’t go down within that 1- to 2-year term, so you may be stuck refinancing into a second bridge loan, or other loan.

Additionally, the LTVs on bridge loans average 60-70% maximum.

DSCR Loans

There are many different types of DSCR loans available, with varying terms.

They traditionally go for 30 years. However, there are other options, including interest-only 40-year or 3- to 7-year fixed loans.

LTVs also take a hit with DSCR loans, averaging around 65-70%. 

Next Steps for Your Property That Isn’t Cash Flowing

If you need a loan for a non-cash-flowing property, see if you can qualify for a traditional loan first. Their high LTVs make them the best, but their income requirements may be tough to meet.

Have any questions about a property with negative cash flow? Looking for a different type of real estate loan? Send us an email at Info@TheCashFlowCompany.com. We’d love to help if we can, or refer you if we can’t.

by

Interest-Only Loan Part 2: Calculating the Paydown Payment

Categories:

The basics on calculating the paydown payment on the amortization part of an interest-only loan.

There are two parts to an interest-only loan. Part one is just interest, and part two is the paydown, or amortization.

You never have to wait to get to the paydown in order to refinance your interest-only loan. Some investors refinance the same interest-only property over and over before ever getting to the paydown part.

But it’s important to know the numbers even if you don’t want to keep an interest-only loan until the paydown. Here are the basics of calculating 30-year and 40-year interest only loans.

 

Calculating The Paydown

The interest-only portion of an interest-only loan lasts for a set number of years. For example, let’s say ours lasts 10 years.

The paydown period is when the loan starts amortizing – the actual amount borrowed starts going down. However, you’ll still need to pay normal interest along with the principal payment.

With most lenders, you’ll get either a 30-year or 40-year loan. A 30-year interest-only loan would involve 10 years of just interest, plus 20 years of paydown. For a 40-year, you’d have 30 years’ worth of amortization payments.

A 30-year loan’s payments will be higher because you’re paying the same amount off in a shorter period of time.

Calculating a Paydown Payment Example

Let’s break down the difference between a 30-year and 40-year interest-only loan.

30-year loan = 10 years interest, then 20 years of amortization

40-year loan = 10 years interest, then 30 years amortization

You can use an amortization calculator tool to figure your monthly payments for the paydown period.

Let’s look at an example for a $300,000 interest-only loan. The paydown period payments would be:

30-year =  10 years of $2,000/month + 20 years of $2,509/month

40-year =  10 years of $2,000/month + 30 years of $2,201/month

Remember that you’re never locked into paying a full interest-only loan. An interest-only loan may be worth looking into for your property. Especially if you need a product with lower monthly payments while you wait out rising interest rates.

Help with Interest-Only Loans

Have questions about interest-only loans, or calculating your paydown payment? Is there a deal you’d like us to take a look at?

We search hundreds of loans every month – now is a great time of variety in loan products. We’d love to help you find exactly what you need.

Email us at Info@TheCashFlowCompany.com.

Read the full article here.

Watch the video here:

by