You Are Doing BRRRR Wrong

Categories:

Most people do BRRRR wrong. Here’s the step they usually miss.

Buying properties at undermarket prices. Fixing them up. Keeping them as rentals. Refinancing.

We’ve helped clients with this process for over 20 years. What’s the biggest error we see people make?

They don’t start with the end in mind.

Many beginning investors take the order of the BRRRR acronym literally. They buy, rehab, rent, THEN try to figure out what the refinance will look like. That’s actually doing BRRRR wrong.

Going into the refinance blindly is how to do BRRRR wrong. At best, you won’t know how the property cash flows. At worst, you can’t get a refinance loan at all.

Let’s look at what you need to do instead.

How to Keep From Doing BRRRR Wrong

The refinance is where you make your money in a BRRRR. Refinancing determines the cash flow, your money out-of-pocket, and the financial success of the project.

If everything hinges on the refinance, why would you wait until the fourth step of the process to start figuring it out?

You need to mentally move the third R, “Refinance,” up to the beginning of the process, before you even buy.

Refinance Questions to Answer

There are certain questions you should know the answers to before you put money down on an undermarket property.

You can get the cheapest house out there, with the highest ARV… But if you aren’t able to get a decent refinance for it, you’ll still lose money.

Here are some questions you should be able to answer at the beginning to ensure you don’t do BRRRR wrong:

  • What loan-to-value (LTV) does the bank require?
  • When you go to refinance, will you have to bring in money? How much?
  • Will it cost more money than you have? Or more than you want to spend on this project?
  • Will you do a rate-and-term or cash-out refinance?
  • What will be your cash flow on the property?
  • What’s the minimum cash flow you need? What about the minimum the bank needs?
  • Does the bank require investment experience to lend you a refinance loan?
  • Does the bank have reserves requirements? (This is usually around six months’ worth of payments the bank requires you to have in savings or a mutual fund).

If you don’t know the answer to these questions up front, you end up like a lot of buyers who get BRRRR wrong and lose money.

You get to the refinance part of the process and learn you don’t have enough money to bring in. Or you find the cash flow is bad.

Prepping for a BRRRR Buy

Does it make sense to buy a property (with a higher interest loan), put all the money into repairs, rent it, and THEN figure out whether it’s a good or bad investment?

It takes just a little time and effort up-front to figure out if a property is worth pursuing.

We like to call this time up-front “building your BRRRR buyer’s box.” It’s a process that helps you prepare for the refinance ahead of time so you don’t do BRRRR wrong.

Going into a property, you should know:

  • Your max LTV
  • Your cash flow minimum
  • How much cash you’ll need to bring in
  • What rehab budget you can afford.

Do BRRRR Right

Download our free BRRRR Checklist to understand the numbers of your refinance. Make your rental property a success.

Leverage determines whether you’ve done BRRRR wrong or right. All real estate investing hinges on leverage, and our goal is to help you create the best leverage possible. 

Using the right debt will accelerate your business, while the wrong stuff will slow your investing career to a halt.

If you have questions about a BRRRR product, email us at Info@TheCashFlowCompany.com.

by

Impact of Appraisals on Your Real Estate Investment Loans

Categories:

Listing price has an impact on appraisals. You have power. Use it wisely.

The appraisal of a property decides the details of its refinance. Appraised value is an especially important detail if you have a fix-and-flip you need to turn into a rental.

Here’s what you need to know about how your flip’s listing price impacts its life as a rental.

What Is the Impact of Appraisals?

If you expect to keep a flipped property, stop dropping the listing price NOW. Otherwise, it will impact the value of your home (and your LTV when you go to refinance).

The appraiser has certain guidelines they have to follow while determining the value of your home.

First of all, they have to go by whatever the current market conditions are. What are like-properties selling for in your market?

It doesn’t matter what properties sold for 3-6 months ago in the same place – they look at current conditions.

Your Price Changes the Appraisal

From the appraiser’s perspective, your price keeps dropping because the house won’t sell there. If the house won’t sell at a price, then it’s not worth that value.

If you dropped the price by $30,000, then $40,000, then $50,000, and it still hasn’t sold… the appraiser can’t give you the original value. In fact, they can’t even use your last list price. It’s clear the house didn’t sell for that much, so it must not be worth that much right now. Typically, your appraisal will come in between 1-10% lower than your last listing price.

The impact of appraisals is huge. Everything in a refinance hinges on it. If the appraisal is too low, you’ll get a low LTV. With a low LTV, your rates will be high. If your rates are too high, you’ll have negative cash flow. Your loan options can get totally squashed – all because of a lower list price.

Stop dropping the price if you may want to refinance before selling.

Read the full article here.

Watch the video here:

by

Why You Need Hedge Funds and OPM

Categories:

Here’s how to use both hedge funds and OPM to maximize your cash flow.

Hedge funds and OPM are forms of real estate leverage that can be overlooked by newer investors. These funding sources can fill in the blanks left by hard money and banks.

Here’s an overview of why hedge funds and OPM should be a part of your lender circle.

Hedge Funds

You might find yourself in need of a lender who is more flexible than banks, but still has an “unlimited” cash supply. In that case, hedge funds will have the right leverage for you.

We also call hedge funds “capital funds” or “private equity.” These are firms that can fund real estate investments across multiple states, have a lot of money available for both flip loans and DSCRs.

A problem with banks is they’re limited to one state or region. A problem with hard money and OPM is that funds can run dry. Hedge funds solve those problems.

Keep hedge funds in your portfolio to have a lender who can handle every deal. They can grow with you as you move across state lines and take your investment career to the next level.

Real OPM

OPM stands for other people’s money. It comes from a real person you know (who’s sitting on a lot of cash!). They want to put their money somewhere secure that’ll give them a better rate than a bank… So they loan it to you.

You can give your OPM lender a rate of 5-6% back. For you, this beats the 9-12% rates of hedge funds or hard money. For your lender, this beats the 1-2% rate they’d get from a CD or savings account.

OPM can fill in the gaps of any project. It could cover down payment or construction costs, or potentially fund entire properties.

With reliable OPM, you have access to the speed of hard money, the low cost of a bank loan, and the flexibility of a hedge fund.

The main drawback of OPM is simple: it can run out.

Hedge Funds and OPM

Hedge funds give a steady stream of money that can help advance your real estate career. OPM is the quiet hero that has you covered for cheap, fast, and easy money… But it won’t last forever. Having both of these forms of leverage at your disposal will make you a better investor than just hard money and banks alone.

Read the full article here.

Watch the video here:

https://youtu.be/3_T81gqiZdk

by

How to Price a Flip in 2022’s Real Estate Market

Categories:

With rising interest rates, homes aren’t valued like they used to be. Here’s how to price a flip in the current market.

As a real estate investor with a fix-and-flip, it’s tempting to fixate on purchase price. Why aren’t buyers throwing themselves at your door with your listing price?

You have to remember one simple reality: People buy based on payment.

When interest rates change, the monthly payment people can afford doesn’t. This results in buyers’ available price points dipping lower and lower.

People might be willing to pay a little more per month for a higher purchase price in this market. But that doesn’t matter if they can still only qualify for a loan with the original lower payment.

Let’s look at a real example from one of our recent clients about how they need to price their current flip.

Interest Rates Impact How to Price a Flip

Back in January, our client’s property would have sold for $800,000. That number was still on their mind as they brought the house to market a couple months ago.

However, back then, the interest rate would have been around 4%. This would have made the property’s monthly payment around $3,800.

Fast forward to now. If people are buying properties based on payment… Could this client still sell for $800,000?

The problem is: interest rates are now closer to 7%. 

Let’s look at how this impacts payment. If someone could qualify for the $3,800 payment back in January… then they qualified for that payment, not necessarily that purchase price.

If the target buyer can only budget/qualify for $3,800, then in order to keep that monthly payment with a 7% rate, the new price will need to be $575,000.

Why Is It Important to Know How to Price a Flip?

This client’s main motivation is that they want to clear off properties like this because they know better deals are coming. They need to be free to buy soon without past flips hanging over them.

Another motivation is: they don’t want to keep making payments on a property that will sell for even less in a year.

Next year, experts anticipate interest rates will be up to 8%. Affordability for this property would go down to $520,000. This client certainly doesn’t want to be caught with this property for sale in that market.

How a Buydown Impacts Your Listing Price

You end up with two main strategies regarding how to price a flip 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 at a Lower Price Point

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.

If Selling a Flip Isn’t Right for You Right Now…

Once you learn how to price a flip, you can try lowering price to accommodate buyer payments, or you can try a buydown strategy.

Or, if you have a property sitting with a hard money loan, maybe it’s time to refinance into a rental. Maybe it’s time to take the property off the market, instead of continuing to drop the price. Every time you drop the price, it hurts your appraised value.

We can help you with a DSCR loan or a traditional loan.

Reach out if you’d like us to price out a property and see if we could provide you a loan. 

Send us an email at Info@TheCashFlowCompany.com.

by

Why You Should Refinance a Flip To a Rental

Categories:

Your flip isn’t selling? Here’s our view on why you should refinance a flip into a rental.

Have a flip on the market? It probably didn’t sell in a week like it might have this time last year.

Once it’s clear you won’t get the price you need to turn a profit… What do you do? 

Keep dropping the price and take the hit? 

Cross your fingers the market improves in a few months and refinance with a bridge loan?

Or take the hint, turn the property into a negatively cash flowing rental, and wait out the market for another couple years?

None of those options are ideal. But the most effective way to make your money back over time is the rental unit route. Here’s why we believe you should refinance a flip to a rental right now.

How Bad Is the Negative Cash Flow?

The hesitation for many investors in this situation is: if you take the property off the market, it will have negative cash flow. The price is too high, and rent probably won’t cover the costs. Why would you intentionally put yourself in a situation where you’re losing money?

But the reality is: the house is a negative cash-flowing property now. Every month the house is on the market, you pay interest. That money adds no value to the property – you’re just draining your money straight into your lender’s pocket.

Even if you don’t refinance with a rental loan, you already have a negative cash flow property.

Why not take the step to turn your flip into a rental now and reduce the amount of money you’re losing each month?

Refinance a Flip To a Rental

Typically, people spend more money leaving a house on the market for 2 or 3 months than they would turning it into a negative cash flowing rental for 2 years.

Does it make more sense to pay $2,500 monthly on a house with a for sale sign on it? Or get $2,200 in rent and only pay $300 of your own money per month? This is the question you’re left with when your flip isn’t selling in this market.

Turning a Flip to a Rental in Past Down Markets

Take a lesson from 2008 and 2009. Many investors who sold during the crash later realized that if they had waited 3 or 4 years, they could have made their money back on those properties.

Not only would their property values have gone up, but rates would have come down. Those properties would have become major assets. Instead, investors took a big hit selling in a down market.

What Loan Can Refinance Your Flip Into a Rental?

So if you decide to go with this negatively cash flowing property, what are your options for a loan? 

We recommend a negative DSCR or no-ratio loan program.

These loans allow you a 30-year fixed product that’s interest-only. These DSCR loans work even on properties that aren’t cash flowing.

Typically for a DSCR loan, the rent from the property has to at least cover the monthly expenses (principal, interest, taxes, and insurance). Outflow has to equal inflow.

But the negative DSCR and no-ratio options allow you to refinance rental properties even when you bring in less rent than you pay out per month.

Read the full article here.

Watch the video here:

by

When Is a DSCR Loan Cheaper Than a Bridge Loan?

Categories:

Here’s how you can tell whether a DSCR loan is cheaper than a bridge loan for a flip on the market.

When a flipped house isn’t selling, many investors resort to converting the house into a rental while they wait out the market. You can use a bridge loan or DSCR loan to do this.

But how do you tell which loan you should use? What are the qualities of each one? Is the DSCR loan cheaper than a bridge loan? Here’s what you need to know.

Using a DSCR Loan to Turn a Flip Into a Rental

A DSCR loan is the perfect longer-term option if you need to switch your fix-and-flip property to a rental. 

First of all, a DSCR loan is based only on:

  • Your credit score (640-680 minimum).
  • The LTV (maximum of 80%).
  • Whether the property’s rent covers monthly expenses (including mortgage, insurance, taxes, and HOA fees).

There’s a variety of DSCR loans available – interest-only, 40-year amortization, regular 30-year, etc. Whatever loan you get, there’s an important detail to consider for all DSCR loans…

The DSCR Prepayment Penalty

The downside of a DSCR loan is the prepayment penalty.

Each loan has a term set for this penalty. If you pay off the loan before that term ends, you’re charged an exit fee. However, the fee amount does decrease each year.

As an example, one common structure for DSCR loans is a 5-year prepay penalty with a 5% fee. If you pay 4 years early, the fee goes down to 4%, 3 years, 3%, etc.

Additionally, there’s always a point where a DSCR loan, despite the prepay fee, becomes cheaper than a bridge loan.

Is a DSCR Loan Cheaper Than a Bridge Loan?

We’ve covered that the DSCR loan comes with the prepayment fee. Sounds pricey. But we also have to consider that the bridge loan will have a much higher interest rate.

Difference in Cost

If you intend to keep a property for more than 2 years, then a DSCR loan will always end up costing less, despite the fee.

But if you only want the property for 1 year or less, then the bridge loan will always be cheaper.

The gray area is the 1-2 year range. It varies with each loan, but there’s a tipping point somewhere in that timeframe where the bridge loan (with interest) becomes more expensive than a DSCR loan (with prepay fee).

Difference in Time

An underrated aspect of a DSCR loan is its built-in peace of mind. We have our educated guesses about how the market will go, but at the end of the day – things don’t always go as planned.

With a DSCR loan, if you end up needing to keep the property for 3, or even 30 years, you already have a product in place.

After one year with a bridge loan, you commit to either getting rid of the property or putting another loan (like a DSCR) in place.

Read the full article here.

Watch the video here:

by

Stop Dropping Listing Price NOW

Categories:

If you want to refinance your flip – stop dropping the listing price!

Will you keep your flip property as a rental? If the answer is “yes” or “maybe,” then STOP dropping the listing price today.

Lowering the listing price kills your deal. It becomes impossible to get the best loan to keep the property as a rental. 

Why? Let’s go over the ways a lower list price affects your ability to refinance – plus a real life example from one of our clients.

How an Appraisal Impacts Real Estate Loans

If you plan on keeping the property, stop dropping the listing price NOW. Otherwise, it will impact the value of your home (and your LTV when you go to refinance).

The appraiser has certain guidelines they have to follow while determining the value of your home.

First of all, they have to go by whatever the current market conditions are. What are like-properties selling for in your market?

It doesn’t matter what properties sold for 3-6 months ago in the same place – they look at current conditions.

Your Price Changes the Appraisal

From the appraiser’s perspective, your price keeps dropping because the house won’t sell there. If the house won’t sell at a price, then it’s not worth that value.

If you dropped the price by $30,000, then $40,000, then $50,000, and it still hasn’t sold… the appraiser can’t give you the original value. In fact, they can’t even use your last list price. It’s clear the house didn’t sell for that much, so it must not be worth that much right now. Typically, your appraisal will come in between 1-10% lower than your last listing price.

Everything in a refinance hinges on the appraisal. If the appraisal is too low, you’ll get a low LTV. With a low LTV, your rates will be high. If your rates are too high, you’ll have negative cash flow. Your loan options can get totally squashed – all because of a lower list price.

Stop dropping the price if you may want to refinance before selling.

How Dropping Listing Price Hurt a Refinance

We had a recent client come across this exact issue. Here are his real numbers and what happened to him.

The First Listing

This client listed his property in late July, early August of this year. Everything had been going well for his investments in the last 7 or 8 years, so he took his time on a couple recent flips. But it took him a little too long on this one, and the timing is now killing him.

Let’s look at his numbers.

This client owes $425,000 on the loan. His initial listing price for this property was $769,000. 

So far, so good. These numbers are great. He has a low loan-to-value. Sixty-five percent is a major threshold for LTVs. Being under 65%, this would be a great position for a refinance.

He would have had a lot of options available to him at this point, even if his income didn’t suffice for a conventional loan.

The Second Price

A couple weeks later, like most people would do when their property hasn’t sold, he decided to lower the price.

The new price was $725,000. His LTV crossed the threshold to above 65%. 

Although not as great as before, he still would have plenty of loan options. Everything still looking good.

Third and Fourth Price Drops

One week later, he decided to drop price again. His realtor talked him into dropping below $700,000.

Now at $699,800, he’s lowered the price three times. When the appraiser looks at this, they’re going to see the continual drops, making it clear that the property is not selling at these prices.

Eight weeks in, this client started getting desperate. Remember, he’s making monthly payments on this property. The house has a high negative cash flow. So he drops the price to $649,000 in hopes of selling.

He’s crossed another major LTV threshold into 70-75%. He’s created a big hurdle for refinancing by dropping the property 4 times over the last 8 weeks.

Dropping Listing Price Hurts Refinance

The appraiser will see the property isn’t selling at $649,000. So based on the current market rates, they’ll appraise it 1-10% less than that number. With this low appraisal, our client could get trapped above a 75% LTV. Getting a decent refinance loan just became way harder, with a nearly guaranteed negative cash flow.

The LTV has gone up, so now his refinance rates will go up. Additionally, he’s backed into a corner where he’ll need a higher credit score to get the loan. At a 65% LTV, there are options for almost any credit score. At 75%, you need a much higher score to get anything.

Every time you drop the price, you’re putting yourself at a higher risk of a worse rental refinance loan. Dropping price gets you lower LTVs, worse cash flow, and potentially takes away the option to refinance altogether.

Other Tips to Help You Stop Dropping Listing Price

If you made the decision to rent the property and you’ll keep it on the market, that’s fine up to a certain point. We recommend a few extra tricks to get the property sold without lowering price:

  • “Accepting all offers.” Putting this in your listing tells buyers you’ll take less. But it doesn’t affect the actual listing price (so it won’t knock down your property’s value in an appraisal).
  • Offer an incentive. You can give an incentive to the buying broker to put your property up front.
  • Buy down. Buying 2 points on a $500,000 loan costs you $10,000. This buys down the rate up to 1 point, which could help a buyer qualify with a new debt ratio.

Help to Stop Dropping Listing Price

We hate to see clients end up with pains from dropping their listing price. Let’s make sure you don’t land in the same spot.

If you have a loan you want us to look at, price out, and calculate cash flow on, send it our way!  Email us at Info@TheCashFlowCompany.com.

by

What Are Interest Rates for Fix-and-Flip Loans in 2022?

Categories:

Here are current interest rates for fix-and-flip loans – and how should you move forward because of them.

What do rates look like for fix-and-flip loans currently?

You can probably guess – rates for all loans have gone up.

Interest Rates for Fix-and-Flip Loans

At The Cash Flow Company, we represent about five or six capital funds. We’re always looking for the ones with the best rates, but still – there’s nothing much available in capital funds lower than a 10-12% interest rate.

Six months ago, you could find these same loans for closer to 7-8%. This is the squeeze. This is the tightening the Fed wanted when they raised interest rates. Now it’s affecting your loans for fix-and-flips, but you can still get prepared for better opportunities.

Advice on Flips for the Next Few Months

There are a few things we recommend to set yourself up for success with flips in the next few months.

  • Smaller Projects – Smaller, lower price point homes tend to sell better in this type of market.
  • Bigger Neighborhoods – Outlier, rural properties were popular in the midst of the pandemic. But now those same properties are sticking on the market for a long time. Keep your flips inside a big, good neighborhood.
  • Aggressive Funding – Be proactive and relentless in your search for funding sources (or have someone searching on your behalf). When great new deals come, you’ll be one of the few investors who is ready.
    • Consider getting a HELOC on your home now so you have available funds when you need them.
    • Call banks and other lenders to stay updated on their requirements.
    • Find OPM lenders. Especially in an economy like this, people with money want safe, secure returns. Getting those people to fund your investments can help you take advantage of upcoming low prices.

Read the full article here.

Watch the video here:

by

Why You Need Hard Money and Bank Funding

Categories:

Here’s how to use both hard money and bank funding to maximize your cash flow.

You can’t get by on just hard money or banks alone. Hard money and bank funding both have their place in your real estate portfolio.

Here’s an overview of the advantages of both types of leverage.

Speed with Hard Money

What if you have a great deal, but you’re required to close in 5-7 days? In that case, you need hard money.

You’ll meet sellers in your real estate career who just don’t want an extended closing. These sellers would rather you close quickly – and they’ll give you a better deal on the price if you can do it. Sometimes, taking too long to secure your financing can get you kicked out of a deal.

You can call your hard money lender and get leverage fast. There’s no hold-up for an appraisal or trudging through a lengthy underwriting process. Hard money is specifically designed for real estate investing.

Even seasoned real estate investors, who do dozens of deals every year, still require hard money from time to time. Every investor runs into deals where they need to close quickly. Whether it’s because your bank won’t be ready in time, you’ve maxed out your line with your hedge fund, or some other unexpected circumstance, you need a hard money lender in your portfolio for speed.

Fast closing can capture a lot of equity on a property. Despite hard money being one of the most expensive forms of leverage, purchase price savings on a quick close can far outweigh the cost of the loan.

Pricing with Banks

If hard money is for speed, then banks are for price.

Finding a bank that loves working with real estate investors is a valuable weapon. If you can build a relationship with the right bank, you can get a better rate and a better closing cost.

Some circumstances when you’d benefit from getting your leverage from a bank include:

  • Whenever you have the time to close. If you can afford to wait for appraisals and underwriting, your loan costs will be much cheaper.
  • If the rehab work will take longer than 6-9 months. When you close on a flip with hard money, you need to complete construction on the property within a month or two. If you use a bank loan, you can afford to spend longer fixing up the house.
  • Any time you want more cash in your pocket! Banks have half the interest rates of hard money lenders. Lower rates and fees mean more money in your pocket by the time your property sells.

Hard Money and Bank Funding

Hard money’s role is to save the day when you need a quick close. Banks are the stars if you need a slow and steady loan at low cost. Having just one or the other won’t cut it. You need both forms of leverage.

Read the full article here.

Watch the video here:

https://youtu.be/3_T81gqiZdk

by

Numbers Don’t Lie: Turn Your Flip into a Rental Now

Categories:

These numbers show you when it’s time to turn your flip into a rental.

What do you do with a flip that won’t sell?

The question is: is it smarter to leave the house on the market and keep dropping the price? Or take it off and turn it into a rental now before rates go further up and prices further down?

You don’t want to sell for a price that loses you money. But if you refinance into a rental, you know it’ll be negative cash flow.

It can feel lose-lose. But we can show you the better way out.

Let’s go over the numbers behind this, so you can look at this problem clearly. Here’s what it will look like if you turn your flip into a rental now.

How Bad Is the Negative Cash Flow?

The hesitation for many investors in this situation is: if you take the property off the market, the house has negative cash flow. The price is too high, and the rent probably won’t cover the costs. Why would you intentionally put yourself in a situation where you’re losing money?

But the reality is: the house is a negative cash-flowing property now. Every month the house is on the market, you pay interest. That money adds no value to the property – you’re just draining your money straight into your lender’s pocket.

Even if you don’t refinance with a rental loan, you already have a negative cash flow property.

Why not take the step to turn your flip into a rental now and reduce the amount of money you’re losing each month?

Refinance a Flip To a Rental

Typically, people spend more money leaving a house on the market for 2 or 3 months than they would turning it into a negative cash flowing rental for 2 years.

Would you rather pay $2,500 per month on a house with a for sale sign on it? Or get $2,200 in rent and only pay $300 of your own money per month? This is the question you’re left with when your flip isn’t selling in this market.

Turning a Flip to a Rental in Past Down Markets

Take a lesson from 2008 and 2009. Many investors who sold during the crash later realized that if they had waited 3 or 4 years, they could have made their money back on those properties.

Not only would their property values have gone up, but rates would have come down. Those properties would have become major assets. Instead, investors took a big hit selling in a down market.

Negative DSCR and No-Ratio Loans

So if you decide to go with this negatively cash flowing property, what are your options for a loan? 

Let’s go over the negative DSCR and the no-ratio loan programs.

These loans allow you a 30-year fixed product that’s interest-only. These DSCR loans work even on properties that aren’t cash flowing.

Typically for a DSCR loan, the rent from the property has to at least cover the monthly expenses (principal, interest, taxes, and insurance). Outflow has to equal inflow.

But these negative DSCR and no-ratio options allow you to refinance rental properties even when you bring in less rent than you pay out per month.

Refinancing with Bridge Loans vs DSCR

Getting a DSCR or no-ratio loan from a new lender is typically a better move than continuing to refinance with bridge loans from your current lender.

You don’t know where the market will be in 12 to 24 months. We know that long-term, the markets will come back, but what if that doesn’t happen for 3 years? You could get stuck refinancing with a bridge loan year after year, charging points with each refinance.

DSCR loans are often a better option in this situation. You just have to know your numbers.

Let’s go through an example so you know exactly how to calculate a DSCR loan and see if it’s the smart choice for you.

Using a DSCR Loan to Combat Negative Cash Flow: The Numbers

Let’s look at an example with a $300,000 loan. We’ll assume that both the original flip loan and the DSCR loan you’re refinancing into are interest-only.

This $300,000 flip loan has a 10% interest rate. That means you’re paying $2,500/month just for interest. This is the current negative cash flow of the property.

On the other hand, if you can get a DSCR loan for a 7% interest rate, you’d be paying $1,750/month instead. Plus, you could get a tenant renting for $1,800/month.

At this point, $1,800 would be coming in, and $1,750 would be going out for mortgage payments. This is actually a positive cash flow of $50/month.

However, your mortgage isn’t your only expense on this property. We still have to take taxes and insurance into consideration. Let’s say both of those costs add up to $300 per month. 

This raises the total expenses with a DSCR loan to $2,050 per month, bringing the cash flow to a -$250 every month.

Flip Loan vs DSCR Loan Compared

Obviously, you never like to lose money on a property. But that $250 of negative cash flow multiplied by 12 months is only $3,000. After 2 years, it’s $6,000. That may seem like a lot, but let’s look back at what you’d spend with the original flip loan.

If we go back to our example, remember we’d be paying $2,500 per month in interest, plus $300 in taxes and insurance with the original flip loan. That’s $2,800 spent for 1 month with the flip loan – close to the $3,000 for the full year with a DSCR loan!

If you keep the house on the market with this flip loan for 2 months, it’s $5,600. That’s comparable to 2 years of out-of-pocket costs if the same property was converted into a rental. 

This is how you have to look at the numbers in this scenario. It will help you determine what’s right for your flip. Is it better to wait for the market and shell out thousands of dollars in the meantime? Or rent the property with a little negative cash flow for 2-3 years in hopes of recouping an extra $100k in equity when the markets come back? (Or at least until rates come back down so you can refinance?)

In many cases, it makes more sense to turn your flip into a rental ASAP with a negative DSCR or no-ratio loan.

What Should You Do Next?

If you feel ready to refinance your flip into a rental, act quickly. Rates are going up, prices are going down.

There are some downsides to no-ratio and DSCR loans. Let us know you’re looking, and we’re happy to help you find the best loan for your situation.

The Cash Flow Company looks at hundreds of loans every month to find the best terms for investors, with the lowest down payments, highest LTVs, and best rates. Let us run the numbers on your property, and we’ll let you know what product will be best for your situation.

We want to get you to a place where you reduce negative cash flow and get back into some profitable flips. Email us at Info@TheCashFlowCompany.com.

by