How To Calculate Affordability in Real Estate Investing

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Home prices are decided by what buyers can afford. Here’s how to calculate affordability. 

As an investor, you have to understand where prices are now and where they’ll be in a few months. 

If you buy a property now, then 4 to 6 months from now is when you’ll either be selling as a flip or appraising for refinance.

For medium-priced homes and below, purchases are mainly based on affordability. Interest rates dictate affordability. Affordability dictates the value of homes.

So let’s look at the numbers. We’ll use an example of a homebuyer who can afford a $1,000 monthly payment right now at the end of 2022.

How to Calculate Affordability – The Payment

Affordability is the monthly payment a buyer can afford. This number is determined by:

  • The buyer’s financial comfort.
  • The income and budget of the buyer.
  • And most importantly: the lender’s qualification requirements.

Many buyers would feel comfortable paying a higher monthly amount, but they’re restricted by their lender. Affordability is a major factor in the loan approval process. Buyers in the mid- to low-price range only get approved for one monthly number, regardless of market conditions or property values.

How Affordability Changes Buying Power – The Price

Interest rates are currently at a 7% average. Only being able to afford a $1,000 payment, this buyer could qualify for a $150,000 home. The $150k is their “purchasing power.”

But interest rates are expected to increase to 8% next year. What happens for this buyer then?

When interest rates rise, purchasing power falls. This buyer still only qualifies for a $1,000 payment, but at an 8% rate, they can only afford a $136,000 house.

What if rates rise to a whopping 9%? Buying power for this buyer decreases to $124,000.

A $124,000 house with a $1,000 payment may not be realistic in many markets today. You have to see what the current environment is in your area, and base your numbers on current interest rates and property values.

How Affordability Impacts the Seller

Affordability doesn’t just impact the buyer; it should also change your expectations as a real estate investor. With higher interest rates, affordability will drop. You have to take this into account when you’re buying properties in this market.

If you buy a house right now in the 7% market, you expect it to sell for $150k. However, you need to keep changing interest rates and affordability in mind. In 6 months when you’re ready to sell, interest rates may be at 8% and your list price will sink to $124k.

Each time interest rates rise by 1%, prices drop by a little over 9%. When interest rates go up 2%, there’s a 17.3% drop in values.

Rates when you’re buying matter less to price than rates when you go to sell. You need to anticipate where rates will go. If rates rise 1-2%, you have to account for affordability.

This balancing of affordability and buying power is one of the biggest factors in home pricing. The majority of people buy based on payments and affordability. Their payments are not going to change despite price changes.

Read the full article here.

Watch the video here:

https://youtu.be/-Q_jNTQQzyo

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How Interest Rates Impact Affordability (and Your Cash Flow!)

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Buying low and selling high all comes down to interest rates’ impact on affordability. Here’s what that means.

Building generational wealth with real estate depends on leveraging buyer affordability.

Interest rates and prices work like a seesaw. When interest rates go up, affordability and buying power go down, so prices go down. When interest rates come down, buyers can afford higher payments, so prices re-inflate.

So, where will we be in 2023, and how will prices play out? Interest rates are projected to be 8% – the highest they’ve been in years. Let’s look at an example of this seesaw effect.

Interest Rates’ Impact on Affordability

We’ll use 8% as an example, since that’s the projected average for next year. (But this math will work whether your interest rate is 7%, 10%, etc.).

Let’s say our buyer can afford a $250,000 house with an 8% interest rate. We can calculate that their monthly payments would be $1,834.

That monthly payment amount is important. We tend to think of a buyer’s budget as the purchase price they can afford. But really, a buyer’s budget is the monthly payment they can afford.

Even if a buyer is willing to pay a higher purchase price with high interest rates, their lender may stop them. A buyer qualifies for a loan based on the affordability of the monthly payment.

For an interest rate of 8% in 2023, buying power looks like this:

You can plug any numbers you want into this formula to figure out affordability.

For example, let’s say interest rates are 9%. The affordability doesn’t change – our buyer could still only swing a $1,834/month payment. Therefore, this homebuyer’s buying power goes down to $228,000.

Cash Flow with High Interest Rates

As you can see, the higher the interest rate, the lower the price. This is why you should buy while interest rates are high. 

Prices will be lower than they have in a while. The challenge is that high interest rates make generating cash flow on properties more difficult. However, even if your rental property only breaks even every month – that’s fine for right now. 

A little temporary cash flow loss is worth it when you’re on the path to generational wealth. When interest rates come back down, cash flow will accelerate through the roof.

Let’s flash forward our 2023 example a few years in the future.

Building Equity when Interest Rates Impact Affordability

Say we bought that $250k house at 8% in 2023. Three or four years later, the market has stabilized. More money is flowing in the economy and in real estate, driving interest rates back down. Inflation has calmed down to normal levels. Now, let’s say the average interest rate is down to 5%.

What’s the affordability of that 5% rate with our buyer who could qualify for a $1,834/month payment? Now, they can qualify for a $341,000 house.

That means the house you bought for $250k in 2023 could be worth $341k by 2027. This one property could create $91,000 in equity.

Of course, this isn’t a guaranteed timeline or number. But we know it’s close. Real estate operates with the seesaw of rates and prices, affordability and payments.

Refinancing Once Rates Fall

So you have $91,000 in extra equity. But here’s where the cash flow starts to kick in: You can now refinance the property from an 8% rate to 5%.

Your original loan will be down to about $245,000 after 4 years of $1,834 monthly payments. Refinancing $245k at the new 5% interest rate makes for monthly payments of $1,315.

This refinance would increase your monthly cash flow by $519.

Multiply that by 12 months in a year. By 10 more properties… And you’re on the track to generational wealth.

Read the full article here.

Watch the video here:

https://youtu.be/I5jRjQvHJhk

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How to Create Certainty in Real Estate Investing (Why Smart Investors Do THIS)

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Do you sell at a loss, or wait out the market? Which is right?? Sometimes it’s best to go for certainty in real estate investing.

A real estate horror story:

You buy a big, pricey house in early 2022 for a quick flip. Seven months of carry costs later… It still hasn’t sold, with never-ending price drops, and no profit in sight.

We’ve had a lot of clients in this spot. They have flips on the market that just aren’t selling. They come to us overwhelmed, feeling crazy for paying a constant stream of outflow every month.

The property becomes a giant anchor they’re dragging behind them. They just want to figure out – How do you make it stop??

We have a plan we work through with people in this situation. We call it: “Certainty.”

Let’s walk through an example of how we’ve helped a client create certainty in their real estate investment.

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.

How to Calculate the Uncertainty of Real Estate Investing

If you’re deciding whether to sell at a loss or keep fighting in 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.

Uncertainty vs Certainty in Real Estate Investing

Uncertainty: You know you’ll pay $5,725/month. But you have no clue how long.

Certainty: You know you’ll owe $30,000 on the short. But you also know the payments will be done in 5 months.

–

Uncertainty: You know money will be leaving your investment business, but you don’t know for how long.

Certainty: You know you’ll go into the next market without this property and its almost-$6,000 monthly payment hanging over your head.

–

Uncertainty: You don’t know what the selling price will be next year. It could be $520k or lower.

Certainty: You know the house could sell for $570k now.

–

Uncertainty: You don’t know where the market is going. But it’s probably going to be rough for sellers.

Certainty: You know that wherever the market goes from here, better deals are likely to become available for buyers.

Do You Want Certainty or Uncertainty?

Our client took a property that was uncertain, and they found a path with a doable, certain number.

Despite the financial loss, the certain option allowed them more freedom. They knew when the payments would end, and they could plan for the future. 

Property values are anticipated to keep going down. Terrible if you have a bunch of properties sitting on the market eating up your cash flow… but great for buying.

If you have any questions, or want to run through some numbers, we’d love to help. Even if we’re not your lender, we can give you guidance or gap funding.

Send us an email at Info@TheCashFlowCompany.com. For more info on real estate investing in this market, check out our YouTube channel.

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Prepare and Prevent Your BRRRR Investment

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The BRRRR prepare and prevent: Prepare for your refinance. Prevent a bad investment.

We believe in this quote:

“It is better to prepare and prevent than it is to repair and repent.”

This line applies to all real estate investing, but especially BRRRR. 

The BRRRR Buy Box is a framework designed to help you bring a “prepare and prevent” mindset to your rental investments.

Prepare and Prevent with Your BRRRR Buy Box

The BRRRR Buy Box involves keeping the refinance at the forefront of the process. You need these 4 key pieces of information before ever closing on a property:

  • Cash flow requirement.
  • Money you can put in the property.
  • Required loan amount.
  • Purchase and rehab budget.

Knowing the BRRRR Numbers

If the maximum loan you want to do is $250,000 and you’re willing to put in $30,000, that makes $280,000 total for everything. This “everything” includes the purchase, both closings (for the initial loan and the refinance), all construction costs, and carry costs.

There are a lot of reasons to prepare for BRRRR. Poor prep results in holding the house longer, missing out on vital rent income, and paying high interest rates on a hard money loan.

Before diving into BRRRR, remember:

  • The house can involve major repairs.
  • Your lender could delay the appraisal process.
  • You need to factor closing and carry costs into your total budget.

Don’t give up on BRRRR

Make sure you’re prepared to win at BRRRR. Know your BRRRR Buy Box, and you’ll be successful.

Nine out of the 10 people we meet who stop doing BRRRR give up because they got to the refinance and it just did not work.

These people didn’t prep their buy box ahead of time. Therefore: They had to bring in too much money. The house did not cash flow. They didn’t qualify for a refinance. The hard money loan sat on the house, eating away at their funds.

In this situation, people usually sell at a loss, then they’re turned off from BRRRR forever.

BRRRR is an excellent process. It’s a smart way to get into rentals, if you prevent and prepare before you start buying. 

Download this free BRRRR tool to plug in your numbers and understand your BRRRR Buy Box quickly and easily.

Help to Prepare and Prevent

If you’re left with any questions or have a potential BRRRR deal you want us to look at, we’d be glad to help. We can go through the numbers for you and help you find your BRRRR Buy Box.

Send us an email at Info@TheCashFlowCompany.com.

Read the full article here.

Watch the video here:

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Interest-Only Loan Part 1: Calculating the Interest-Only Payment

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Will an IO loan really save you money? Find out by calculating the interest-only payment.

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

Typically, the interest-only period is 5 or 10 years where your only cost is interest. You aren’t required to pay down the principal at all during that time. So for, say, 10 years, you pay interest, but your loan amount stays the same.

Keep in mind, with an interest-only loan, you always have the option to pay down the principal. These loans typically don’t come with a prepayment fee.

Calculating Interest-Only Payment Example

Find the numbers relevant to your deals, and you can follow along by calculating the interest-only payment. You might need a loan for $500,000, or maybe just $100,000. For our example, we’ll use $300,000 as our loan amount.

The interest-only phase of interest-only DSCR loans uses one simple formula.

First, multiply the loan amount by the interest rate. This gives you the yearly interest. Divide that number by 12 (for the 12 months in a year) to get your monthly payment. The formula looks like this:

Loan Amount x Interest Rate = Yearly Interest

Yearly Interest ÷ 12 = Monthly Interest

We’ll use 8% as our example interest rate. So our equation would be:

$300,000 × .08 = $24,000

$24,000 ÷ 12 = $2,000

As long as you don’t pay down any principal during the interest-only period, your payments will be $2,000/month. This $2,000 goes directly to the bank. Your loan amount will remain $300,000, unless you choose to make an extra payment toward the principal.

Calculating the Interest-Only Payment While Paying Principal

Every time you opt into a principal payment during the interest-only period, your monthly payment changes.

For example, let’s say you pay down $20,000 from your loan, leaving the total loan amount as $280,000. You can re-use the previous formula with this new loan amount to get your new monthly payment:

$280,000 × .08 = $22,400

$22,400 ÷ 12 = $1,866

If you chose to pay down your principal by $20,000, your new monthly payment of interest would be $1,866.

How Annual Interest Works on Interest-Only Loans

Don’t let the idea of “annual” interest trip you up. For these interest-only DSCR loans, interest isn’t calculated once from January to December. Instead, the bank will do this formula each month for your loan using your current principal.

Remember that this interest is your monthly loan payment, but it is not your property’s total monthly expenses. If your loan is a DSCR, you also have to consider taxes, insurance, and HOA fees to know your actual monthly expenses.

Pros of Interest-Only Loans

There are two major advantages of interest-only loans:

  • Cash Flow – Interest-only loans lower your payments, which makes for less money out and more money in. With the interest-only period, you can do deals that would never work with a typical loan payment.
  • Flexible Refinance – You can refinance most interest-only loans at any time (dependent on the lender’s prepay policy). It can be a great strategy to use an interest-only loan for the next four or five years while rates are high. When rates come back down, you can refinance into another loan product that will build equity.

Read the full article here.

Watch the video here:

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This Is How To Determine Home Prices in 2023

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Where is buying power going? How do you determine home prices in 2023?

This is the perfect time to start real estate investing. Great properties are available. …As long as you understand how to price them for the current market.

The good news is, real estate prices aren’t a complete guessing game. Supply, demand, and other circumstances do factor in. Ultimately, however, everything consumers buy is based on affordability, not necessarily price. 

For example, someone who could afford a $10,000 car could also afford a $30,000 car – as long as the financing worked out to be the same monthly payments.

Let’s go over the simple math of how this idea of affordability affects real estate, especially in 2023.

How to Determine Home Prices in 2023 (and Payments!)

As an investor, you have to understand where prices are now and where they’ll be in a few months. If you buy a property now, 4 to 6 months from now is when you’ll either be selling as a flip or appraising for refinance.

For medium-priced homes and below, purchases are mainly based on affordability. Interest rates dictate affordability. Affordability dictates the value of homes.

So let’s look at the numbers. We’ll use an example of a homebuyer who can afford a $1,000 monthly payment right now at the end of 2022.

Affordability – The Payment

Affordability is the monthly payment a buyer can afford. This number is determined by:

  • The buyer’s financial comfort.
  • The income and budget of the buyer.
  • And most importantly: the lender’s qualification requirements.

Many buyers would feel comfortable paying a higher monthly amount, but they’re restricted by their lender. Affordability is a major factor in the loan approval process. Buyers in the mid- to low-price range only get approved for one monthly number, regardless of market conditions or property values.

Buying Power – The Price

Interest rates are currently at a 7% average. Only being able to afford a $1,000 payment, this buyer could qualify for a $150,000 home. The $150k is their “purchasing power.”

But interest rates are expected to increase to 8% next year. What happens for this buyer then?

When interest rates rise, purchasing power falls. This buyer still only qualifies for a $1,000 payment, but at an 8% rate, they can only afford a $136,000 house.

What if rates rise to a whopping 9%? Buying power for this buyer decreases to $124,000.

A $124,000 house with a $1,000 payment may not be realistic in many markets today. You have to see what the current environment is in your area, and base your numbers on current interest rates and property values.

Affordability and Buying Power Impact the Seller

Affordability doesn’t just impact the buyer; it should also change your expectations as a real estate investor. With higher interest rates, affordability will drop. You have to take this into account when you’re buying properties in this market.

If you buy a house right now in the 7% market, you expect it to sell for $150k. However, you need to keep changing interest rates and affordability in mind. In 6 months when you’re ready to sell, interest rates may be at 8% and your list price will sink to $124k.

Each time interest rates rise by 1%, prices drop by a little over 9%. When interest rates go up 2%, there’s a 17.3% drop in values.

Rates when you’re buying matter less to price than rates when you go to sell. You need to anticipate where rates will go. If rates rise 1-2%, you have to account for affordability.

This balancing of affordability and buying power is one of the biggest factors in home pricing. The majority of people buy based on payments and affordability. Their payments are not going to change despite price changes.

Home Prices in 2023 for a Higher Price Point

To show how affordability and buying power work at any price point, let’s go over an example with a $750,000 property.

If a buyer was looking at a $750k home in 2022 at a 7% interest rate, their payment would be $4,990. Their affordability (the monthly payment they’ve qualified for) is $4,990. So if interest rates change, the home price they can afford will go down.

For example, if rates go to 8%, their buying power drops to $680,000.

At 9%, they can only afford a $620,000 house. 

Make sure you understand where rates are projected to be in the future. The profitability of both flips and rentals are dependent on these rates.

As of right now in late 2022, rates are expected to continually increase – potentially up to 9-10%.

Comparing Home Prices in 2021 – 2023

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 purchasing power for a homebuyer in 2021.

Purchasing Power 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 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 Purchasing Power 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.

Buying Now to Sell at the Home Prices in 2023

Going forward in 2022 and 2023, you need to look at affordability. The US buys on payments, so your prices need to be adjusted to buyers’ affordability.

If you have any questions on how to price properties, or have a deal you’d like us to look at, reach out. Email us at Info@HardMoneyMike.com. 

And be sure to check out our YouTube channel for more information on real estate investing.

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How to Calculate Different DSCR Loan Options

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There are many DSCR loan options – but how do you calculate the ratio for each one?

Some of your DSCR loan options include 30-year fixed mortgages, 40-year fixed, or interest-only. But how do you know which one’s best?

You’ll have to crunch the numbers. Here’s one example of calculating different DSCR loan options on a $200,000 loan with $2,000 rent.

What Is a DSCR?

DSCR means debt service coverage ratio. It’s a loan for rental properties that hinges on cash flow.

A DSCR loan will be a useful product in your real estate investing career. It requires no income verification and no work or investment history. These loans only require that the property’s income is the same (or higher than) the expenses.

Cash flow is always important to you as an investor, and for DSCR loans, it matters just as much to your lender. The better your cash flow, the better LTV and rates you can get. 

It all depends on a little number – the ratio itself. Here’s how to calculate the DSCR with different loan options.

How to Calculate the DSCR

Loan LTVs and rates on a DSCR are determined by the debt service coverage ratio itself. Now that we have all our raw information, we can plug it into our DSCR calculation to get the ratio.

Here’s how you get the numbers you need:

Add up your expenses (taxes, insurance, and HOA fees) with each loan’s payment amount. Then divide rent by all those expenses.

Costs + Mortgage = Total Expenses

Rent ÷ Total Expenses = DSCR Ratio

Here’s an example of what it would look like with an example using a $200,000 loan and an 8% interest rate:

We want the DSCR to at least equal 1.

Over 1 is ideal. This is a higher cash flow, and you’ll get a better loan.

Less than 1 means negative cash flow, and means you might have to look at a negative DSCR or a no-ratio loan instead.

<1 = Negative Cash Flow

At 1 = Rent = Expenses

>1 = Positive cash flow

Read the full article here.

Watch the video here.

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This Is Why You Should Buy Real Estate in 2023

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Fastest route to generational wealth? Buy real estate in 2023.

2023 will be a great time to buy real estate.

When a recession hits, when interest rates are high… that’s where you create generational wealth.

Let’s look at the math and past examples to prove it.

We’ll go through the market mechanics behind buying in 2023. Plus, we’ll review the success our clients had during the last recession (and show how you can do the same).

The Secret Behind Generational Wealth with Real Estate in 2023

Building generational wealth with real estate depends on interest rates. Let’s run through the math of how it all works.

Interest rates and prices work like a seesaw. When interest rates go up, affordability and buying power go down, so prices go down. When interest rates come down, buyers can afford higher payments, so prices re-inflate.

So, where will we be in 2023, and how will prices play out? Interest rates are projected to be 8% – the highest they’ve been in years. Let’s look at an example of this seesaw effect.

Interest Rate vs Price When Buying Real Estate in 2023

We’ll use 8% as an example, since that’s the projected average for next year. (But this math will work whether your interest rate is 7%, 10%, etc.).

Let’s say our buyer can afford a $250,000 house with an 8% interest rate. We can calculate that their monthly payments would be $1,834.

That monthly payment amount is important. We tend to think of a buyer’s budget as the purchase price they can afford. But really, a buyer’s budget is the monthly payment they can afford.

Even if a buyer is willing to pay a higher purchase price with high interest rates, their lender may stop them. A buyer qualifies for a loan based on the affordability of the monthly payment.

For an interest rate of 8% in 2023, buying power looks like this:

You can plug any numbers you want into this formula to figure out affordability.

For example, let’s say interest rates are 9%. The affordability doesn’t change – our buyer could still only swing a $1,834/month payment. Therefore, this homebuyer’s buying power goes down to $228,000.

Cash Flow with High Interest Rates

As you can see, the higher the interest rate, the lower the price. This is why you should buy while interest rates are high. 

Prices will be lower than they have in a while. The challenge is that high interest rates make generating cash flow on properties more difficult. However, even if your rental property only breaks even every month – that’s fine for right now. 

A little temporary cash flow loss is worth it when you’re on the path to generational wealth. When interest rates come back down, cash flow will accelerate through the roof.

Let’s flash forward our 2023 example a few years in the future.

Building Equity with Real Estate in 2023

Say we bought that $250k house at 8% in 2023. Three or four years later, the market has stabilized. More money is flowing in the economy and in real estate, driving interest rates back down. Inflation has calmed down to normal levels. Now, let’s say the average interest rate is down to 5%.

What’s the affordability of that 5% rate with our buyer who could qualify for a $1,834/month payment? Now, they can qualify for a $341,000 house.

That means the house you bought for $250k in 2023 could be worth $341k by 2027. This one property could create $91,000 in equity.

Of course, this isn’t a guaranteed timeline or number. But we know it’s close. Real estate operates with the seesaw of rates and prices, affordability and payments.

Refinancing Once Rates Fall

So you have $91,000 in extra equity. But here’s where the cash flow starts to kick in: You can now refinance the property from an 8% rate to 5%.

Your original loan will be down to about $245,000 after 4 years of $1,834 monthly payments. Refinancing $245k at the new 5% interest rate makes for monthly payments of $1,315.

This refinance would increase your monthly cash flow by $519.

Multiply that by 12 months in a year. By 10 more properties… And you’re on the track to generational wealth.

Generational Wealth from the Last Recession

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

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

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.

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An Example of the BRRRR Buy Box

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This framework can save your entire rental property from failure. Here’s an example of the BRRRR Buy Box.

What is a “BRRRR Buy Box”? It’s a set of parameters to keep your BRRRR on track to a successful, profitable refinance.

Let’s take a look at the contents of your Buy Box.

What Is the BRRRR Buy Box?

What’s in your BRRRR Buy Box? There are four important numbers:

  1. What is your minimum cash flow requirement? Not only yours, but what is your lender’s minimum net cash flow for you to qualify? 
  2. What amount, if any, do you want to put into the property? This is money that you’re willing to keep in the property. You don’t get it back out at the refinance. 
  3. What’s the maximum loan you feel comfortable with? What do you qualify for? What fits your cash flow requirements for this particular market?
  4. What’s your maximum amount for purchase and rehab? These numbers are vital to keep you in-budget with cash flowing.

Let’s go through an example of what a BRRRR Buy Box would be. 

Example BRRRR Buy Box

Cash Flow Requirements

Let’s start with the first question. Say your minimum needed cash flow for a property is net $500 per month.

This is your first criteria, so you want to make sure every property you look at would cash flow $500/month. To predict cash flow, you can approximate rent in the area of the property, as well as estimate the monthly mortgage payment and other costs. 

If you know you can charge $2,000 for rent, but your loan, taxes, and insurance will equal $1,450, then you can predict a $550 monthly cash flow.

Cash Put into the BRRRR

How much money do you want to put in? On one hand, people do BRRRR for the appeal of zero down properties. On the other hand, some people want to put as much in as possible at the beginning to keep loan payments down and cash flow up.

Having a target number helps you better set up your refinance.

Maximum Loan

The maximum loan doesn’t always mean the highest possible loan you qualify for. Rather, it’s the loan that works best for the property and the situation.

What is the maximum leverage you could use and still meet your cash flow requirements and the bank’s refinance guidelines?

Most banks will refinance you on rate-and-term from 75 – 80% of the appraised value, as the house sits after you’ve bought and rehabbed it. Cash out refinances cover somewhere between 65 – 75%. That may be too much for your particular area, or not enough. It’s important to understand the maximum loan for your particular deal.

Purchase and Rehab Budget Example for BRRRR Buy Box

Finally, what is the maximum amount of money you can put into the purchase price and rehab? What budget fits in your buy box?

Remember that on top of the purchase and rehab, you’ll still have carry costs and closing costs. All of these numbers will have to fit within your budget.

Read the full article here.

Watch the video here:

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Real Estate Strategies So You Can Combat Rising Interest Rates

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It feels impossible to buy AND sell. Here are some real estate strategies to help combat rising interest rates.

Interest rates are averaging 7%.

Yet buyers can only afford the same payments they could when interest rates were 4%.

This reality of affordability puts buyers and sellers both in a tough spot – buyers can’t qualify for the price point they’d like to, and sellers can’t get rid of the flips they bought earlier this year.

What can you do to combat rising interest rates like this?

How a Buydown Impacts Your Listing Price

You end up with two main strategies to combat rising interest rates in this market:

  1. You can lower your price to make the monthly payment the same for the buyer, based on interest rates.
  2. You can buy down the rate for your buyer.

A buydown is a strategy where the seller pays in advance to bring down the interest rate for the buyer.

In our previous example of the $800,000 property, our target payment would be $3,800/month. What would the purchase price be if we took the 7% interest rate down by a percentage point? Could that get us closer to $3,800 without sacrificing as much purchase price?

Let’s say it would cost 2 points to bring the interest rate down to 6%. That interest rate would allow you to sell at $640,000, while still keeping the buyers’ monthly payment at $3,800/month.

Buying down the interest at a cost of 2 points would only cost you $12,800. Yet even with that buydown cost, you’d still make an additional $52,200 selling at $640,000 (compared to the $575,000 pre-buydown).

It becomes a win-win: the buyer can qualify for the $3,800/month payment, and the seller can ask for a higher price.

How to Price a Flip to Combat Rising Interest Rates

This example covered a higher-end, $800,000 house. Does all this math work the same at a lower price point?

Let’s look at a $250,000 instead.

At the beginning of 2022, a $250,000 house would have cost a homeowner $1,193/month. Now, that same house would cost the same person $1,663. That’s $470 more per month, or a 39% increase. From early 2022 to early 2023, the monthly payments will have gone up by 54%, to $1,834/month.

These numbers are still probably cheaper than rent for a comparable property. However, that doesn’t necessarily mean buyers will be able to qualify with lenders.

If someone could buy a $250,000 house at the beginning of 2022, now the same exact person could only afford $180,000. By next year, they can only afford $162,000.

This is why properties are sitting on the market. When prospective homeowners buy by payment, they can only afford 30-40% less in purchase price.

Buydown at $250,000

What if you try the buydown technique here?

If you paid 2 points, you could bring the interest rate down to 6%. This would cost you $4,000, but allow you to sell for $200,000. You’d net $16,000 more than if you were to sell at $180,000.

Sometimes, it’s not about price for the buyer. Many homebuyers are payment-motivated shoppers. Instead of lowering the price, try getting your buyer’s payment in line.

Read the full article here.

Watch the video here:

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