Real Estate Investing Math: How to Make a Profitable Deal

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Investing in real estate doesn’t have to be a guessing game. Here’s the real estate investing math that works every time.

Real estate investing is a number puzzle. There are a lot of different metrics and ratios that you need to be aware of, such as credit scores, DSCRs, and more.

However, when it comes to basic fix-and-flips, the most important number to focus on is ”The 85% Rule.”

This rule tells you exactly how to stick to what you know will make you money.

The Numbers to Follow

Every fix and flip property has an “after-repair value,” or ARV, that tells you what the value of the home will be after a rehab.

If you want to make money off your flip, your project’s total expenses must stay under 85% of the property’s ARV.

Specifically, the purchase price and the rehab price combined should cost no more than 72.5% of the ARV.

Following this rule strictly will leave you with at least 15% profit on every real estate investment.

Example of the Real Estate Investing Math

Let’s use an example to show these real estate investing numbers.

Say we found a good property with an ARV of $300,000. Regardless of whether we “love” the property, think we can make a hundred thousand dollars off of it, or any other emotional reaction… Let’s see what the numbers say.

Here’s how much each portion of this project should cost if the ARV is $300,000:

  • Purchase – 60% ($180,000)
  • Rehab – 12.5% ($37,500)
  • Realtor – 4.5% ($13,500)
  • Cost of Money – 5% ($15,000)
  • Miscellaneous – 3% ($9,000)

If the seller can swing the price, and your contractor can quote you a budget within that frame… then this might just be a great investment.

But what if your contractor can’t get the job done for any less than 15%? Does that ruin your chances with this property? Not necessarily, but it does mean that the extra 2.5% has to come off the purchase price. So if you can still buy the property for 57.5%, go for it!

In this example, keeping everything under 85% leaves us a healthy profit margin of 15% – or $45,000.

Read the full article here.

Watch the video here:

https://youtu.be/q9d_ZvUUFfM

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Is Real Estate Investing Hard? Here’s the Main Reason Why People Fail

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People who flop in real estate investing tell horror stories. But is real estate investing hard? Here’s the truth.

Real estate investing is a great way to make money and achieve financial freedom. But it can also be a minefield for those who don’t know what they’re doing.

After helping hundreds of investors over the last 20+ years, we notice that most people who fail at real estate investing share the same struggle…

They invest based on emotions rather than numbers.

They get greedy, or they buy on a gut feeling, or they become fearful they’ll lose all their money. All this leads to delusion about the numbers of a property.

But in reality, is real estate investing hard?

Let’s go over the basic numbers of a fix-and-flip investment to see how simple the math breakdown really is.

Is Real Estate Investing Hard? What Are the Numbers?

Real estate investing is a number puzzle. There are a lot of different metrics and ratios that you need to be aware of, such as credit scores, DSCRs, and more.

However, when it comes to basic fix-and-flips, the most important number to focus on is ”The 85% Rule.”

This rule tells you exactly how to stick to what you know will make you money.

Following the ARV Rules

Every fix and flip property has an “after-repair value,” or ARV, that tells you what the value of the home will be after a rehab.

If you want to make money off your flip, your project’s total expenses must stay under 85% of the property’s ARV.

Specifically, the purchase price and the rehab price combined should cost no more than 72.5% of the ARV.

Following this rule strictly will leave you with at least 15% profit on every real estate investment.

Example of the Real Estate Investing Numbers

Let’s use an example to show these real estate investing numbers.

Say we found a good property with an ARV of $300,000. Regardless of whether we “love” the property, think we can make a hundred thousand dollars off of it, or any other emotional reaction… Let’s see what the numbers say.

Here’s how much each portion of this project should cost if the ARV is $300,000:

  • Purchase – 60% ($180,000)
  • Rehab – 12.5% ($37,500)
  • Realtor – 4.5% ($13,500)
  • Cost of Money – 5% ($15,000)
  • Miscellaneous – 3% ($9,000)

If the seller can swing the price, and your contractor can quote you a budget within that frame… then this might just be a great investment.

But what if your contractor can’t get the job done for any less than 15%? Does that ruin your chances with this property? Not necessarily, but it does mean that the extra 2.5% has to come off the purchase price. So if you can still buy the property for 57.5%, go for it!

In this example, keeping everything under 85% leaves us a healthy profit margin of 15% – or $45,000.

Where Do People Go Wrong in Real Estate Investing?

If the numbers are so simple, why would someone think real estate investing is so hard? How is it possible to mess it up?

Here’s where real estate investing goes wrong: when investors let emotions change the numbers.

How an Emotional Investment Shakes Out

What happens when someone finds a property and falls in love with it? They may think it’s worth paying 63%.

That in itself isn’t bad. We can still make a more expensive purchase work as long as we take from another category to keep us under 72.5% for the buy and fix and 85% total.

Where people go wrong is that they don’t make these adjustments…

Let’s say they also let the contractor overspend, leaving the rehab at 15%. Between that and a 63% purchase, we’re already well over our 72.5% max for the purchase and rehab.

Where do we end up if we stray from the numbers just a bit in the rest of the categories, too?

  • Purchase – 63% ($189,000)
  • Rehab – 15% ($45,000)
  • Realtor – 5% ($15,000)
  • Cost of Money – 7% ($21,000)
  • Miscellaneous – 5% ($15,000)

In this instance, we’d end up with only a 5% profit, or a measly $15,000 on a $300,000 house.

If we let emotions run away with the numbers, suddenly… Real estate investing is hard. 

Emotional vs Numbers-Based Real Estate Investing

Done right, a property with a $300,000 ARV should easily bring in $45,000. With an average of three fix-and-flip projects a year, that’s a yearly profit of $135,000. Not a bad take-home pay number.

Done wrong, the very same property could slide into a $15,000 or less profit. Multiply these mistakes by three projects in a year, and you’ve only made $45,000 in the same amount of time, for the same amount of work.

Finding a Balance with the Numbers

The most successful real estate investors get good at manipulating these numbers.

If you have to pay a little bit more for the property, then you have to cut somewhere else.

Maybe you need to partner with a cheaper realtor, or work on your credit score to lower the cost of your leverage. It has to all come back to the numbers, though. Investing on emotion leaves people frustrated and broke.

Profitable real estate investing is a matter of finding a way to get the numbers to fit.

Numbers vs Feelings: Is Real Estate Investing Hard?

So, is real estate investing hard? It can be, but it doesn’t have to be.

By understanding the numbers and sticking to them, you increase your chances of success. Of course, there will always be some risk involved in any investment, but by focusing on the numbers, you’re making informed decisions and setting yourself up for success.

We’ve seen too many clients come to us with a bad deal and an emotional approach to fixing it. We want to teach you the basics to make sure you don’t suffer the same fate.

Download our free deal analyzer to see if the numbers work on your project.

Send us an email at Info@TheCashFlowCompany.com with any other questions about real estate investing.

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DSCR ratio and interest rates explained

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DSCR ratio and interest rates explained

Today we are going to discuss the DSCR ratio and explain interest rates. Many investors are intimidated by DSCR loans and are unsure as to where to start. However, the main thing that you need to take into consideration is whether or not the property cash flows. This in turn will have a significant impact on the interest rates for you DSCR loan. Let’s take a closer look! 

Calculating a DSCR ratio. 

Let’s go over how to calculate DSCR quickly and understand what it means for your property. The DSCR ratio is found by comparing a property’s income to its expenses. To clarify, the property’s income is the rent that is received for the property. On the other hand, the expenses include the monthly mortgage payment, taxes, insurance, and HOA. A ratio of greater than 1 means the property is cash flowing, which is what both you and your lender want to see. Also, for a DSCR loan, the higher this ratio is, the better the terms your loan will have.

Negative DSCR Loans

Contrary to popular belief, you can still find a DSCR product for negative cash flow properties. However, these loans come at a higher interest rate.To clarify, a negative DSCR loan is used when someone gets stuck with a property they can’t sell. Under these circumstances, having very little income on the property would be better than none at all. This is why it is imperative that you have a cash flowing property from day one! By taking your time and working through the numbers, you can in turn avoid being stuck with a property that is not helping you to move forward.

Knowing your thresholds! 

There are certain thresholds when you calculate DSCR loans. When you break these thresholds, you get a better rate. And better rates mean… more cash flow! Your monthly payments will lower.Let’s go over what some of these thresholds will look like.

Property Income Property Expenses DSCR ratio  Profit  Interest Rate for DSCR
$2,000 $1,590 1.25 25% 7.25%
$1,500 $1,590 .94 9%+

Remember, anytime you can lower the rate, that’s cash flow that goes into your pocket. In this example, the difference between a negative DSCR and a 1.25 is about $220/month on your payment. Over the course of a year, that adds up to $2,600. If you have 5 rental properties, that’s $13,000/year. At 10 rental properties, it’s a $26,000 difference!

Know your numbers to get ahead! 

If real estate investing is going to be your career or retirement plan, buying properties that you know will cash flow is vital. A couple hundred bucks a month can snowball into hundreds of thousands over time.This is why it’s important to know how to calculate DSCR quickly when you’re looking at buying a new property. Never put a contract on a rental property when you’re not sure if the cash flow fits your goals.

How can you calculate a DSCR ratio quickly?

To help keep the numbers straight when you calculate DSCR, you can download our free, simple DSCR calculator at this link.

Watch our most recent video to find out more about: How to calculate a DSCR ratio

If you have any other questions about how to calculate DSCR (or how to get a DSCR loan!), send us an email at Info@TheCashFlowCompany.com.

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DSCR Loan Interest Rates: Explained

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What can you expect to pay on your DSCR loan interest rates? Here’s what it is (and why it matters).

You can still find a DSCR product for ratio 1 or negative cash flow properties.

DSCR loans have certain ratio thresholds. When you break these thresholds, your rate gets better. And better rates mean lower monthly payments. Which means… more cash flow!

Let’s go over some of these thresholds for DSCR loan interest rates.

Loans for a 1.25 DSCR

Say we have a property with $1,590 worth of monthly expenses, which we can charge a $2,000 rent on. Divide the rent by the expenses, and we get a DSCR of about 1.26.

One way of thinking about this is that the property is profiting 25% over the expenses. That’s good for the underwriter (and it’s good for you), so you’ll get a lower interest rate.

1.25 is a major threshold for DSCR lenders. In the current market at the beginning of 2022, the rate for a 1.25 DSCR is around 7.25%.

DSCR Loan Interest Rates for a 1 or Lower Ratio

If a property has negative cash flow, say 0.94, then the average interest rate would be 9+% on a DSCR loan.

For a breakeven ratio of 1, the typical interest rate right now would be more like 7.75%.

The Difference in DSCR Loan Interest Rates

Anytime you can lower the rate, that’s cash flow that goes into your pocket.

The difference between a negative DSCR and a 1.25 is about $220/month on your payment. Over the course of a year, that adds up to $2,600. If you have 5 rental properties, that’s $13,000/year. At 10 rental properties, it’s a $26,000 difference!

If real estate investing is going to be your career or retirement plan, buying properties that you know will cash flow is vital. A couple hundred bucks a month can snowball into hundreds of thousands over time.

This is why it’s important to know how to calculate DSCR quickly when you’re looking at buying a new property. Never put a contract on a rental property when you’re not sure if the cash flow fits your goals.

Read the full article here.

Watch the video here:

https://youtu.be/o5js06y–qM

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How to fund with lines of credit

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How to fund with lines of credit

Today we are going to discuss how to fund your real estate investments with lines of credit. With lenders cutting back, there is a greater need for investors to find alternative financing. Don’t let this lending squeeze affect you! Let’s take a closer look at your options and how you can ensure success.

What is a lending squeeze?

If you’re a real estate investor, you’re probably familiar with the concept of shrinkage in the loan business. During economically turbulent times, lenders cut back the amount of money they’re willing to lend. As a result, this affects how much money you get for your project (aka, your LTVs).

For example: If the typical bridge lender offers you 80-90% of the purchase, you’ll need something to help you cover the other 10-20%. It’s up to savvy investors to find alternative sources of funding to fill that gap left by your loan. 

What Determines Your Gap Financing in Real Estate?

Firstly, there are a few ducks you’ll need in a row before diving into gap financing. Most gap funding will determine whether to lend to you based on three things: credit, assets, and experience. Both the amount of primary funding you’ll receive from your lender and the amount of gap funding you’ll be able to get will be dependent on credit. Also, you can get other lines of credit by putting up your assets as collateral. Finally, having experience or knowing what you’re doing may incline some gap funding lenders to give you a loan.

1. HELOC

If you have good credit and real estate assets (owner-occupied or not), you should always have a line of credit called a HELOC available to you. HELOC stands for “home equity line of credit.” These funds will typically be the safest, easiest, and cheaper you can get. All real estate investors who have property and good credit should have a HELOC. This is going to be your safest, easiest, and cheapest source of funds because they’re always available to you.

2. Lines of Credit from Banks

But what if you have good credit but no real assets? In that case, you’ll need to look at other, unsecured options to fill the gap. One option is to use an unsecured line of credit from a local bank or national company. These lines of credit typically have higher interest rates than a HELOC, but they’re still a good option if you have good credit. 

Don’t Misuse Your Funds

One thing needs to be clear with gap funding: dDo not abuse it. If you use a line of credit that was intended for a real estate investing project, then make sure it’s used for that purpose. It should also be entirely paid off after each transaction is completed. Treat credit like a lender, and treat your investments like a business. Never use real estate lines of credit for personal use. It will kill your credit, your financial future, and your investing career.

How to Get Gap Financing in Real Estate

We’re happy to help with any questions you have about funding or gap financing on real estate projects.

We’ve helped with thousands of transactions worth millions of dollars using OPM. You can download our free OPM guide here.

Watch our most recent video to find out more about: How to fund with lines of credit

Any other questions? Send us an email at Info@TheCashFlowCompany.com.

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5 Proven Ways to Get Gap Financing for Real Estate

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With lenders cutting back, here are 5 options for gap financing in real estate.

If you’re a real estate investor, you’re probably familiar with the concept of shrinkage in the loan business.

During economically turbulent times, lenders cut back the amount of money they’re willing to lend. This affects how much money you get for your project (aka, your LTVs).

If the typical bridge lender offers you 80-90% of the purchase, you’ll need something to help you cover the other 10-20%.

It’s up to savvy investors to find alternative sources of funding to fill that gap left by your loan. In this article, we’ll go through 5 ways to get gap financing that could work for you.

What Determines Your Gap Financing in Real Estate?

Firstly, there are a few ducks you’ll need in a row before diving into gap financing.

Most gap funding will determine whether to lend to you based on three things: credit, assets, and experience.

Both the amount of primary funding you’ll receive from your lender and the amount of gap funding you’ll be able to get will be dependent on credit. Also, you can get other lines of credit by putting up your assets as collateral. Finally, having experience or knowing what you’re doing may incline some gap funding lenders to give you a loan.

Now, let’s go through some particular ways to get gap financing in real estate.

1. HELOC

If you have good credit and real estate assets (owner-occupied or not), you should always have a line of credit called a HELOC available to you. HELOC stands for “home equity line of credit.”

These funds will typically be the safest, easiest, and cheaper you can get. All real estate investors who have property and good credit should have a HELOC.

This is going to be your safest, easiest, and cheapest source of funds because they’re always available to you.

2. Lines of Credit from Banks

But what if you have good credit but no real assets? In that case, you’ll need to look at other, unsecured options to fill the gap.

One option is to use an unsecured line of credit from a local bank or national company. These lines of credit typically have higher interest rates than a HELOC, but they’re still a good option if you have good credit. 

3. 0% Credit Card

Another option is to use a 0% credit card. We’ve helped people use this method.

Used properly, credit cards can be great for a real estate investor. You only pay the activation fee, and maybe 2% over a year with the right card.

Warning: you have to treat credit like this with respect. Make sure you pay the balance back completely after your project.

4. Real OPM as Gap Financing in Real Estate

One way to fill that funding gap is by finding real OPM (other people’s money). This means connecting with individuals who want to make a better return on their money than their bank provides. Lending you the money for your real estate projects can get them that better return.

OPM can be used flexibly for a down payment, carry costs, or construction costs on any real estate project.

OPM is one of the cheapest, fastest funding options for real estate investors. It can be a good option if you don’t have great credit, or don’t have many existing assets. With OPM, you don’t need good credit or a property with equity – you can set your lender up with a lien on the property you’re buying.

5. Don’t Misuse Your Funds

One thing needs to be clear with gap funding: do not abuse it.

If you use a line of credit that was intended for a real estate investing project, then make sure it’s used for that purpose. It should also be entirely paid off after each transaction is completed.

Treat credit like a lender, and treat your investments like a business. Never use real estate lines of credit for personal use. It will kill your credit, your financial future, and your investing career.

How to Get Gap Financing in Real Estate

We’re happy to help with any questions you have about funding or gap financing on real estate projects.

We’ve helped with thousands of transactions worth millions of dollars using OPM. You can download our free OPM guide here.

Any other questions? Send us an email at Info@TheCashFlowCompany.com.

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How to calculate a DSCR ratio

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How to calculate a DSCR ratio

Today we are going to discuss how to calculate a DSCR ratio. Many investors are intimidated by a DSCR loan and are unsure as to where to start. However, the main thing that you need to take into consideration is whether or not the property cash flows. Properties that do cash flow will in turn have a pretty good shot at getting approved.

Where do you start? 

To clarify, DSCR stands for the debt service coverage ratio. This ratio is used by underwriters to determine if a property is positively cash flowing. It’s an important metric to understand how to maximize your leverage by getting the most out of your investments.

Calculating a DSCR ratio. 

Let’s go over both how to calculate DSCR quickly, as well as discovering what it means for your property. The DSCR ratio is found by comparing a property’s income to its expenses. The property’s income is the rent that is received for the property. On the other hand, the expenses include the monthly mortgage payment, taxes, insurance, and HOA. If the ratio of greater than 1, that means the property is cash flowing. This is good for not only you, but your lender as well. The better the DSCR ratio the better the loan terms.

Example 1:

Property Income Property Expenses DSCR ratio
$1,700 Mortgage payment $1,290

Taxes: $100

Insurance: $100

HOA: $100

 Income / Expenses

$1,700 / $1,590
$1,700 $1,590 Total: 1.07 

In this example the ratio is great! The break-even point for a DSCR is a ratio of 1. Underwriters and lenders like to see a ratio of at least 1 because it ensures that the property can take care of itself. In doing so, the lenders know that you won’t need to take money out of your pocket to cover the expenses. This is assurance for them, and makes them more likely to approve the loan with good terms. In sum, a 1.07 ratio means the property is positively cash flowing, and it’s a good investment.

Example 2:

Property Income Property Expenses DSCR ratio
$1,500 Mortgage payment $1,290

Taxes: $100

Insurance: $100

HOA: $100

 Income / Expenses

$1,500 / $1,590
$1,500 $1,590 Total: .94

In this example the DSCR ratio is less than 1, which means that the property is negatively cash flowing. This is why it is imperative that you estimate the rent on a property before purchasing it. By having a property with a $1,500 income, it wouldn’t be a good investment. Also, it wouldn’t qualify for a good DSCR loan. However, the same property with a rent of $1,700 would be a good investment because it cash flows..

Know your numbers to get ahead! 

If real estate investing is going to be your career or retirement plan, buying properties that you know will cash flow is vital. A couple hundred bucks a month can snowball into hundreds of thousands over time.This is why it’s important to know how to calculate DSCR quickly when you’re looking at buying a new property. Never put a contract on a rental property when you’re not sure if the cash flow fits your goals.

How can you calculate a DSCR ratio quickly?

To help keep the numbers straight when you calculate DSCR, you can download our free, simple DSCR calculator at this link.

Watch our most recent video to find out more about: How to calculate a DSCR ratio

If you have any other questions about how to calculate DSCR (or how to get a DSCR loan!), send us an email at Info@TheCashFlowCompany.com.

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Quick ‘n Easy DSCR Calculation

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Your DSCR calculation made easy with our free loan calculator.

Don’t be intimidated by a DSCR loan. If the property cash flows, then you have a pretty good shot at getting approved.

And there’s a simple way to find out the cash flow of a rental property: the debt service coverage ratio.

Underwriters use this ratio to determine if a property is positively cash flowing. It’s an important metric to understand if you want to maximize your leverage and get the most out of your investments.

Now, let’s go over how to calculate DSCR quickly and understand what it means for your property.

What Is a DSCR in Real Estate?

Firstly, let’s define what DSCR is. It’s a ratio that compares a property’s income to its expenses.

You calculate DSCR by dividing the property’s income (rents) by its expenses (monthly mortgage payment, taxes, insurance, and HOA if applicable). A ratio of greater than 1 means the property is cash flowing, which is what both you and your lender want to see.

So, the higher the ratio, the better the cash flow, and the more money in your pocket.

For a DSCR loan, the higher this ratio is, the better the terms your loan will have.

Expenses & Income for DSCR Calculation

Next, to find out the expenses your DSCR loan will consider, you’ll add together four items:

  • Mortgage
  • Property Tax
  • Insurance
  • HOA Fees

Finally, to find out the income, you’ll need to check out what rents are in the area for comparable properties.

How to Calculate DSCR Quickly

To help keep all these numbers straight when you calculate DSCR, you can download our free, simple DSCR calculator at this link.

Read the full article here.

Watch the video here:

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Why You Need To Refinance a BRRRR

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Why can’t you just keep the first loan on your BRRRR? Here are the reasons to refinance a BRRRR.

The BRRRR strategy uses two loans. The second one is for the refinance – the third “R” in BRRRR.

You buy with a hard money or bridge loan, but eventually you need new funding for the property. There are 3 reasons why you need to refinance.

1. Term Length

Hard money and bridge loans are useful when used right, but only good for a couple of months. How BRRRR works is that renting your property will require a second, longer loan. However long you’ll want to hold the rental unit is how long your refinance loan will need to be.

2. Rate When You Refinance a BRRRR

Hard money loans won’t have a good long-term interest rate. This second refinance loan should give you a much lower rate. Not only should a refinance create net worth, but it should also give you good cash flow on the property.

3. Capture Equity

BRRRR refinances tend to grab at least 25% of the house’s purchase price in added net worth. Check out this post to see how the numbers break down on a BRRRR refinance.

When To Refinance a BRRRR

Want the greatest profit on your project? Have the refinance loan ready by the time you buy your under-market property.

If you need help finding the right refinance loan, send us an email at Info@TheCashFlowCompany.com.

Read the full article here.

Watch the video here:

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How to Calculate DSCR on Your Rental Property

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Here’s how to calculate a property’s DSCR (and what it means for your loan).

Don’t be intimidated by a DSCR loan. If the property cash flows, then you have a pretty good shot at getting approved.

And there’s a simple way to find out the cash flow of a rental property: the debt service coverage ratio.

This ratio is used by underwriters to determine if a property is positively cash flowing. It’s an important metric to understand if you want to maximize your leverage and get the most out of your investments.

Let’s go over how to calculate DSCR quickly and understand what it means for your property.

What Is a DSCR in Real Estate?

First, let’s define what DSCR is. It’s a ratio that compares a property’s income to its expenses.

You calculate DSCR by dividing the property’s income (rents) by its expenses (monthly mortgage payment, taxes, insurance, and HOA if applicable). A ratio of greater than 1 means the property is cash flowing, which is what both you and your lender want to see.

The higher the ratio, the better the cash flow, and the more money in your pocket.

For a DSCR loan, the higher this ratio is, the better the terms your loan will have.

How to Calculate Expenses & Income for a DSCR Loan

To find out the expenses your DSCR loan will consider, you’ll add together four items:

  • Mortgage
  • Property Tax
  • Insurance
  • HOA Fees

To find out the income, you’ll need to check out what rents are in the area for comparable properties.

How to Calculate the DSCR

To give you a better understanding of how to calculate DSCR, let’s look at a quick example.

Let’s say we have a property with rents coming in at $1,700 a month. 

The monthly mortgage payment is $1,290. Taxes are $100/ month, insurance is $100/month, and HOA is $100 /month. Added together, this gives us $1,590.

Now, to calculate the DSCR ratio, we divide the income ($1,700) by the expenses ($1,590). We get a ratio of 1.07.

This is great! The break-even point for a DSCR is a ratio of 1. Underwriters and lenders like to see a ratio of at least 1 to ensure that the property can take care of itself. Now lenders know you won’t need to take money out of your pocket to cover the expenses. This is assurance for them, making them more likely to approve the loan with good terms.

A 1.07 ratio means the property is positively cash flowing, and it’s a good investment.

Example of a Low Ratio

But what if we could only charge $1,500 in rent for this same property? 

Let’s look at the impact of a decrease in rent. In this case, we’d calculate the DSCR ratio by dividing $1,500 (income) by $1,590 (expenses), which gives us 0.94. You’ll need an extra $90 out-of-pocket just to breakeven.

This is less than 1, meaning the property is negatively cash flowing.

You need to estimate the rent on a property before you think about buying it. This property at $1,500 wouldn’t be a good investment (and wouldn’t qualify for a good DSCR loan). But remember – the same property at $1,700 rent would be a good investment.

Usually, the only time DSCR loans are used on a negatively cash-flowing property is when someone gets stuck with a property they can’t sell, and a little income on the property is better than none at all. It’s not wise to purchase a rental property that you know won’t cash flow from day 1.

Negative DSCR Loans

You can still find a DSCR product for negative cash flow properties.

There are certain thresholds when you calculate DSCR loans. When you break these thresholds, you get a better rate. And better rates mean… more cash flow! Your monthly payments will lower.

Let’s go over what some of these thresholds will look like.

Loans for a 1.25 DSCR

Say we have a property with $1,590 worth of monthly expenses, which we can charge a $2,000 rent on. Divide the rent by the expenses, and we get a DSCR of about 1.26.

One way of thinking of this is that the property is profiting 25% over the expenses. That’s good for the underwriter (and it’s good for you).

1.25 is a threshold for DSCR lenders. In the current market at the beginning of 2022, the rate for a 1.25 DSCR is around 7.25%.

Rates for a Negative to 1 DSCR

If a property has negative cash flow, say 0.944, then the average interest rate would be 9+% on a DSCR loan.

For a breakeven ratio of 1, the typical interest rate right now would be more like 7.75%.

The Difference

Anytime you can lower the rate, that’s cash flow that goes into your pocket.

The difference between a negative DSCR and a 1.25 is about $220/month on your payment. Over the course of a year, that adds up to $2,600. If you have 5 rental properties, that’s $13,000/year. At 10 rental properties, it’s a $26,000 difference!

If real estate investing is going to be your career or retirement plan, buying properties that you know will cash flow is vital. A couple hundred bucks a month can snowball into hundreds of thousands over time.

This is why it’s important to know how to calculate DSCR quickly when you’re looking at buying a new property. Never put a contract on a rental property when you’re not sure if the cash flow fits your goals.

How to Calculate DSCR Quickly

To help keep the numbers straight when you calculate DSCR, you can download our free, simple DSCR calculator at this link.

If you have any other questions about how to calculate DSCR (or how to get a DSCR loan!), send us an email at Info@TheCashFlowCompany.com.

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