How to Calculate a DSCR Loan Ratio

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Could this be the right leverage for your deal? Here’s how to calculate a DSCR loan.

“DSCR” stands for “debt service coverage ratio.” It’s a number that explains cash flow, or money coming in vs money going out.

In a real estate rental situation, there are two important numbers to figure out this ratio:

  1. Income – rent from tenants.
  2. Expenses – mortgage principal and interest, taxes, insurance, and any HOA fees.

What Ratio Do DSCR Lenders Take?

If your income 100% covers your expenses with none left over, that’s a ratio of 1:1. Most DSCR lenders require 1:1 as a standard minimum.

Some lenders will go as low as .75, which is called no ratio. That’s if your income from your rental leaves 25% of the property’s expenses left over. 

But the ideal use of a DSCR loan is when you have a higher ratio. This would mean your rent is higher than your expenses, and your property has positive cash flow.

How Do You Calculate the DSCR?

So now you understand what the ratio is… But how do you calculate your DSCR ratio?

You need the two numbers:

  1. The rent you’ll charge (income)
  2. Mortgage principal and interest, taxes, insurance, and HOA fees (expenses)

Note: utilities and property management costs are not considered expenses on a DSCR loan.

Once you add up your expenses, you have to find out if your rent covers them. To get the ratio number, you divide income by expenses.

DSCR Loan Calculation Example

Here’s a simple example.

Let’s say you have a single-family property, and the interest and mortgage is $1,000/month. Taxes are $250, property insurance is $150, and there are no HOA fees.

Your total monthly expenses adds up to $1,400.

Now let’s say the rent you can charge based on your property’s location is $1,600.

So, you can divide $1,600 (income) by $1,400 (expenses). You get a ratio of 1.14.

A 1:1 ratio (the typical minimum) can also be called 1. So our 1.14 is higher than the minimum. With a ratio higher than one, you’ll have a much better shot at finding a DSCR lender who will work with you.

If the market in our example went up, maybe you could charge $2,000/month for rent. If your expenses were still $1,400, your ratio would be 1.42. With that ratio, you could likely get a bigger loan and lower rate.

The higher your ratio, the better your opportunities for rates and terms. The lender sees it like this: the more income coming into the property, the more guaranteed it is you’ll pay them back.

Using a DSCR Loan Calculator

If you’d rather skip the manual math, you can download our simple, free DSCR loan calculator here.

Read the full article here.

Watch the video here:

https://youtu.be/W7-P0YL_yU0

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A Breakdown of Current Real Estate Loan Rates and Fees

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The market is changing fast. Here’s an update on current real estate loan rates and other charges for bridge loans.

There are 3 main types of bridge loan lenders: banks, capital funds/hedge funds, and local hard money lenders. 

But the market has changed. Here’s a glimpse into what you can expect for the next few months:

Current Real Estate Loan Rates and Other Info

Current Real Estate Loan Rates

Banks – Interest rates average around 6% to 6.5% for banks.

Capital Funds – Expect 10% to 12% interest rates for hedge fund bridge loans right now.

Hard Money – Hard money interest rates are about the same as cap funds, around 10% to 12%, but with a bit more flexibility.

Points for a Current Real Estate Loan

Banks – Banks have the cheapest money, at 1 to 1.5 points. Smaller banks tend to charge more in origination fees than national banks.

Capital Funds – Cap funds charge around 2 to 3 points.

Hard Money – You can expect 2 to 4 points on a hard money bridge loan transaction.

LTVs

Banks – Depending on your relationship with the bank, you can get up to  65% to 70% LTV on a bridge loan.

Capital Funds – You can get 65% LTV on a refinance or bridge loan with a hedge fund.

Hard Money – Hard money has the most LTV flexibility, like putting a cross-lien on other properties. Typical LTV range is 70% to 75%.

Terms for Current Bridge Loans

Banks – For bridge loans, banks have the most flexible, longest terms, from 1 to 3 years.

Capital Funds – For cap funds, 3-year bridge loans are now two. Two-year bridge loans are now one.

Hard Money – Bridge loans from hard money have the shortest terms – as short as 1 month, and typically no longer than 1 year.

Closing Times

Banks – Banks’ lead time for a bridge loan is typically 3 to 6 weeks. But lately, we’ve seen loans take up to a couple months in the current market.

Capital Funds – The standard closing time for cap funds is 2 to 3 weeks.

Hard Money – Hard money can close fastest – which is very important for a bridge loan. Depending on your relationship with the lender, the loan can take a week or less.

Location

Banks – Banks have a footprint they’ll lend within, which is typically very local.

Capital Funds – Hedge funds lend nationwide. They’re the best option for multi-state bridge loans.

Hard Money – Hard money lenders are flexible, but they tend to lend locally, or in other areas they’re familiar with.

Valuation

Banks – Banks require an appraisal for all loans over $250,000. (And some loans under that amount).

Capital Funds – Hedge funds always require an appraisal.

Hard Money – There is no appraisal in the hard money loan process. That’s why they can close so much faster than everyone else.

Overview

Banks – Will be your cheapest but slowest options. They have high requirements.

Capital Funds – Middle of the road for cost and speed, but helpful if you need loans within multiple urban areas.

Hard Money – The most expensive option for bridge loans, but also the most flexible and the fastest.

Where to Search for Current Real Estate Loan Lenders

Check with local real estate communities (REITs in your area, biggerpockets.com, etc). Once you get some lender names, call around. It takes some effort to find lenders.

Or you can offload the research onto us.

We search every day for the best bridge loans in the real estate world.

Email us with a question about a deal or a bridge loan need, and we’ll find a way to help: Info@TheCashFlowCompany.com.

Read the full article here.

Watch the video here:

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How to Turn a Flip Into a Rental

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Stuck on the market? You might need to turn a flip into a rental… Here’s how!

What do we do with these flips that aren’t selling?

First, you have a big decision to make quickly – will you turn the flip into a rental?

You get the freedom of a little cash flowing in while you wait out the bad market. Depending on how long you’re willing to wait, you have a couple options to get into a temporary rental.

Here’s what you need to know about turning a flip into a rental with DSCR or bridge loans.

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.

DSCR vs Bridge Loan – Which Is Better for Turning a Flip Into a Rental?

The two main options when you need to turn a flip into a rental are a DSCR loan or a bridge loan. But how do you know which to pick? 

We’ve covered that the DSCR loan comes with the prepayment fee. But 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.

A Close Look at the Numbers

To help us understand when a DSCR loan becomes the cheaper option, let’s look at an example. Then we can see exactly when the scale tips in the DSCR’s favor.

Let’s say we get a DSCR product with the following numbers:

  • A higher interest rate at 8%
  • All fees and loan costs at 2.5%
  • We’re a year or two into the loan and the prepay penalty is down to 4%

Let’s look at the number comparison for a $250,000 loan.

The DSCR loan’s 8% rate adds up to $20,000/year. The fees at 2.5 points is $6,250. Lastly, that 4% penalty will cost us $10,000.

Now let’s factor in our bridge loan numbers. The average bridge loan for a $250,000 loan would look like an 11% rate costing $27,500 per year. This is $7,500 more yearly than the DSCR loan, or $625 more per month. The closing costs would be the same for the bridge loan, and then, of course, no prepay fee.

You can see the bridge loan is still almost $3,000 cheaper than the DSCR loan.

These calculations only represent year one of the loan, however. Within that first year, a bridge loan will definitely be cheaper. But let’s look at how things change at month 15:

The bridge loan’s interest starts adding up, and suddenly the DSCR doesn’t seem so expensive. And at month 16, the loans are the same price:

After 16 months, the DSCR loan in this scenario would always be the cheaper option. And every year, the DSCR’s prepay fee drops lower; meanwhile, the bridge loan keeps accruing high interest at the same rate.

Is 16 Months a Realistic Timeline for the Market Right Now?

We expect that the market won’t pick back up for another 14-16 months anyway. If your flip is stuck on the market now, you could:

  1. Get a DSCR loan for the property.
  2. Take a 12-month tenant.
  3. Leave 4 months to spare for getting the house ready, on the market, and closed.

This puts you right at the 16 month minimum to make the DSCR loan worthwhile.

I Want to Turn My Flip Into a Rental

If you have a flip on the market now, converting it to a rental could be right for you. Do you know your tipping point? Should you get a DSCR or bridge loan? Bring your property to us, and we can give you an exact idea of the numbers.

Send us an email at Info@TheCashFlowCompany.com. Let’s get you connected to the right lender.

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Your Fix-and-flip Loans When the Fed Tightens Money

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What changes to expect on LTVs for fix-and-flip loans when the Fed tightens money.

There are a couple ways raised federal interest rates impact fix-and-flips.

In about six to twelve months, the market is expected to have another shift. Prices should come down, and better properties will become available.

However, your fix-and-flip loans when the Fed tightens money also get tougher to work with. To be ready for those upcoming opportunities, here’s what you need to know about loans for fix-and-flips now.

Fix-and-Flip Loans with Tightened Money

What does it mean for real estate investors when the Fed starts tightening money? Lenders start to pull back.

Lenders want to wait to figure out what will happen with the markets. Their money isn’t returned as fast as usual because investors’ properties take longer to sell. Less money becomes available overall.

This tightening of money results in many recent changes we’ve seen in loans for fix-and-flips.

Changes in LTVs

The loan-to-cost or loan-to-ARV on properties has lowered, and appraisals are being cut. The average LTV used to be 75%. Now, most lenders have pulled back to 65-70%.

Lower LTVs mean you need to bring more money into a deal. It’ll take more out-of-pocket to actually close on a property in the current market.

With low LTVs and lenders being picky with transactions, it’s important to only take fix-and-flips you can obviously turn a profit on.

Home Value Changes

While loan-to-values are going down, credit score requirements are going up. Typically, lenders’ credit score minimums start at 620 or 640. Now, many lenders won’t take anyone with lower than a 680 or 700 score. Six months from now, that could become even tighter.

If you’ve been investing for a while, you’ll need to change how you look at leverage. For the past ten years, lenders have been seeking you. Now, you’ll have to proactively find your money. It’s more important than ever to plan your funding.

Read the full article here.

Watch the video here:

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How to Refinance with Real OPM

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What are the advantages to refinance with Real OPM?

Refinancing can get you out of some rough situations with your fix-and-flips in this market.

While there are many loan products you can shop for to save your flip, good ol’ OPM (Other People’s Money) can be the easiest, fastest, and cheapest way to refinance.

Let’s look at why you might need to refinance your flip and why you should try to refinance with real OPM.

Why Should You Refinance a Fix-and-Flip?

The most important thing about this market is that you use it to your advantage to prepare for the next market.

We anticipate that over the next 12 months:

  • The Fed is going to continue raising rates.
  • The economy will soften.
  • There will be great real estate deals like we haven’t seen in years.

You want to make sure you’re money-ready for those opportunities. You don’t want properties sitting on the market, taking up your time and energy, and tying up your funds.

So when you have a house that just won’t sell… What are you supposed to do?

Of course, there are traditional refinance methods. You can go to a bank and get a Fannie or Freddie non-conforming loan. But these loans need you to fit into a pretty small box. What if you own too many properties? Or you need your refinance loan fast? What if you don’t fit in the box?

That’s where refinancing with real OPM can come in handy.

Refinance with Real OPM

When it comes to real estate investment funding, OPM is almost always the best choice.

OPM is Other People’s Money. You match up with a real person you know who has money. These are usually retired people, or people nearing retirement.

Inflation is hitting them as bad as it’s hitting you. If they have a lot of cash, they probably want to put it somewhere more stable than stocks and with a better return than a bank account.

If you can offer these people a 5% to 7% return, then they may be willing to become your lender. OPM isn’t as concerned about typical loan qualification requirements. OPM done right is a win-win for both parties.

Overall, the fastest, easiest, cheapest way out of a fix-and-flip that’s stuck on the market is to refinance with real OPM. This form of lending is what you need most now. Prioritize finding these lenders.

What Are Your Next Steps to Refinance Out of a Fix-and-Flip?

If you have a flip that’s in trouble, let us know. We fund some loans ourselves, and we scour the nation looking for all the best loan products available. Let’s find the best debt for your position.

Send your questions to Info@TheCashFlowCompany.com. We’re happy to look at your loan, and if we can’t help you, we probably know someone who can.

Read the full article here.

Watch the video here:

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4 Real Estate Loans You Need To Leverage Deals

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You use real estate loans to leverage deals, but which loan is best?

You should have one goal with leverage: maximizing cash flow on your investments.

There are 4 main types of real estate investing leverage:

  • Hard money
  • Bank financing
  • Hedge funds
  • OPM

But where do they each fit? How can you tell which type of leverage is right for your deal?

It depends on what your particular deal needs most to succeed – speed, low pricing, flexibility, or a little bit of everything.

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.

Real Estate Loans to Leverage Deals for Every Investor

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.

Flexibility with 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.

Hedge funds are also known as 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.

Gap Funding with 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 be used to 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.

The Right Real Estate Loans to Leverage Deals AND the Right Lender

No one form of leverage is going to be right for every single deal. Understand this: You need a mix of all four types of loans to be truly successful as a real estate investor.

And not only do you need the right loan, but you also need the right lender. Getting to know the lenders in your area is vital.

Find Lenders Whose Real Estate Loans Leverage Deals

Not all banks are willing to work with real estate investors. Banks tend to have a “specialty,” whether car loans, credit cards, or even HELOCs. Many banks don’t want to do deals with real estate investors.

It can be the same with hard money and hedge funds – they’re all looking for a particular client. One of your deals may not fit the criteria for those lenders, but another one will.

There is no one-size-fits-all. Reach out and find the lenders that fit your needs.

Find lenders who focus on real estate investing loans regularly – not lenders who will help investors every once in a while. They’re the lenders who will want your business, and will do everything they can to keep you. For a lender who specializes in real estate investing, a successful investment for you is successful for them, too.

If you have any questions about:

  • The different forms of leverage
  • How to find a good lender
  • Which loan is right for your deal

Send us an email at Info@TheCashFlowCompany.com! Or visit our YouTube channel for more info on cash flow in real estate.

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What a DSCR Lender Looks For

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Know what a DSCR lender looks for before you close!

While conventional conforming loans have one main underwriting guideline all lenders follow, every DSCR lender creates their own requirements, offers, and processes.

The most important thing to know about DSCR loans right now is that they vary from lender to lender. You need to get to know the lenders in your area.

How DSCR Loans Differ

Firstly, each lender has their own nuances. Any number of these factors can change for a DSCR loan between different lenders:

  • Ratio requirements
  • Credit score requirements
  • Terms and products (interest-only, 40-year, etc.)
  • Interest rates

Lenders will also have different restrictions for properties, based on:

  • Location
  • Unit size
  • Short-term vs traditional rentals
  • Personal name vs LLC name

To be successful with DSCR loans, then you need to become a master of which lenders offer what in your area.

Lenders won’t come knocking on your door to let you know what products they have available. You have to be proactive.

How to Connect with DSCR Lenders

With more investors asking for money and less money available, many lenders are overwhelmed. The best thing you can do is be proactive, educated, and prepared with your lenders.

It’s also wise to get someone who can help connect you with lenders and products. A place like The Cash Flow Company can help with this aspect of real estate funding. They can advocate for you to make sure you get the best loan for your deal.

What Ratio Requirements A DSCR Lender Looks For

“DSCR” stands for “debt service coverage ratio.” It’s a number that explains cash flow, or money coming in vs money going out.

In a real estate rental situation, there are two important numbers to figure out this ratio:

  1. Income – rent from tenants.
  2. Expenses – mortgage principal and interest, taxes, insurance, and any HOA fees.

The ratio is income divided by expenses. Therefore, if your income 100% covers your expenses with none left over, that’s a ratio of 1:1. Most DSCR lenders require 1:1 as a standard minimum.

Read the full article here.

Watch the video here:

https://youtu.be/W7-P0YL_yU0

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How This Real Estate Market Is Impacting Bridge Loans

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If you’re an investor, here’s how the current real estate market is impacting bridge loans for you.

Federal interest rates keep rising, tightening up money across the country for real estate investors.

The entire real estate market is feeling the squeeze of rates. Many fix-and-flips on the market now were purchased in a different market. Investors may have expected to get top-dollar for houses that now may take weeks or months to sell at all.

The Market Changes & Bridge Loans

Firstly, what changes have already occurred, and what can we expect going forward for bridge loans?

In general, you can expect the following changes from real estate leverage lenders:

  • Lower LTVs – The amount of money you can get from a lender will continue to go down.
  • Cutting Appraisals – Lenders expect a 5% to 15% decrease in market prices, and appraisals will begin to reflect that.
  • Shortened Terms – The length of bridge loans or some lenders will be cut in half.
  • Credit Score – While a 620 credit score used to be the minimum, now lenders won’t consider applicants with less than a 680.
  • Pricing – Six to eight months ago, you could get a bridge loan at a 7% to 8% interest rate. Now, they’re around 10% or 11%.

Just as you might feel some uncertainty in these economic times, lenders feel it too. Lending institutions want to keep themselves safe. Unfortunately for real estate investors, that means tight money in this real estate market is impacting bridge loans.

Why Bridge Loans are Needed

Secondly, these market conditions increase the demand for bridge loans. Homes may be staying on the market longer, but lenders still need their loans paid back on time, and you still need to move on to your next project.

Now is the time to set yourself up well financially. Due to tightened conditions now, the market 6 months from now will have a lot of great deals for investors. Bridge loans can help you get ready.

With a bridge loan, you can free up the capital you have in houses on the market. Plus, you can improve your relationship with lenders by paying off your flip loan.

You can put your flipped house into a short-term bridge loan for 2 to 3 years. In the meantime, you could rent out the property, or just use the loan to pay off the lender while waiting for a buyer.

Using bridge loans in this way keeps you from foreclosure or other negative effects on your credit.

Who Does Bridge Loans Right Now?

Lastly, the following places are still lending:

  • Small to mid-size banks
  • Lenders that work with capital funds or hedge funds
  • Small lenders, like The Cash Flow Company
  • Some hard money lenders

The catch is they’ve all tightened their funds.

You can get a bridge loan from these places. You’ll just get lower LTVs, higher rates, and need a better credit score.

In this market, it’s important to reach out to any lender who can help you. Nothing will fall into your lap – you’ll have to actively search to find a loan product to fit your bridge needs.

You can also work with a place like The Cash Flow Company, who always searches for the best real estate loans available.

Read the full article here.

Watch the video here:

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How to Use a Bridge Loan to Buy a New Property

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What are your options when a past project is stuck on the market? Here’s how to use a bridge loan to buy a new property.

Gone will be the days of fix-and-flips selling within hours. 

In this new market, real estate investors need to prepare for the possibility of their projects staying on the market for quite a while.

To avoid a full standstill in your real estate investment career, you have to know how a bridge loan can help you buy a new property.

Buy a New Property with a Bridge Loan in 2022

Instead of selling in two to three days, we’ll soon see houses taking two to three months to sell, depending on size and location.

Your investment career can’t come to a halt just because a house takes too long to sell. What if you find a great deal while your old project is still on the market? All your capital is tied up in that first property.

Bridge loans solve this problem.

A bridge loan puts a lien on both the new property and the old property. This gives you the equity needed to close on a new house before the money from selling the old one hits your pocket.

Using a bridge loan to buy a new property is the number one use of bridge loans.

What to Look For In a Bridge Loan

Bridge loans are all about getting the right lender and the right position.

Terms of a Bridge Loan to Buy a New Property

It’s important to pay attention to the terms of a bridge loan. You want a lender who charges fewer points – even if their interest rate is higher.

You only have to pay interest in small, monthly chunks. With points, you have to pay a percentage of the whole loan. Since bridge loans are very short-term, you won’t end up paying much in interest anyway. However, you’ll still have to pay the points (regardless of how long you kept the loan).

Shop Around for Lenders

Make sure you shop around for the right lender for your bridge loan. Find out who does bridge loans, who can do them quickly, and who focuses more on the interest rate rather than other costs (originations, appraisals, etc.).

Bridge loans are meant to be quick, short-term, and relatively inexpensive. You want to find a lender who can provide that.

Read the full article on bridge loans here.

Watch the video here:

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What is Happening with Loans for Fix-and-Flips in 2022?

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Loans for fix-and-flips are changing fast. Here’s what you need to know.

There are two ways you might be thinking about loans for fix-and-flips right now.

First, maybe you have a property on the market now you’re trying to get rid of.

Second, maybe you’re planning for what’s going to happen with flips in the near future.

In about six to twelve months, the market is expected to have another shift. Prices should come down, and better properties will become available.

To be ready for those upcoming opportunities, here’s what you need to know about loans for fix-and-flips now.

Money Tightening on Loans for Fix-and-Flips

What does it mean for real estate investors when the Fed starts tightening money? Lenders start to pull back.

Lenders want to wait to figure out what will happen with the markets. Their money isn’t returned as fast as usual because investors’ properties take longer to sell. Less money becomes available overall.

This tightening of money results in many recent changes we’ve seen in loans for fix-and-flips.

Changes in LTVs

The loan-to-cost or loan-to-ARV on properties has lowered, and appraisals are being cut. The average LTV used to be 75%. Now, most lenders have pulled back to 65-70%.

Lower LTVs mean you need to bring more money into a deal. It’ll take more out-of-pocket to actually close on a property in the current market. 

With low LTVs and lenders being picky with transactions, it’s important to only take fix-and-flips you can obviously turn a profit on.

Home Value Changes

While loan-to-values are going down, credit score requirements are going up. Typically, lenders’ credit score minimums start at 620 or 640. Now, many lenders won’t take anyone with lower than a 680 or 700 score. Six months from now, that could become even tighter.

If you’ve been investing for a while, you’ll need to change how you look at leverage. For the past ten years, lenders have been seeking you. Now, you’ll have to proactively find your money. It’s more important than ever to plan your funding.

Rates on Loans for Fix-and-Flips

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

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

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.

We Can Help with Loans for Fix-and-Flips

We’re always looking for the best loans. We spend time talking to lenders on your behalf, getting loans with the best terms and requirements, that best fit the current market.

If you have or want a flip, reach out to us. We have many sources that are still looking to lend – capital funds and hard money.

You can also bring us your questions on OPM – from finding lenders, to attracting them, to closing with them.

With any of these questions or more, email us at Info@TheCashFlowCompany.com.

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