Refinancing: DSCR Loans vs Bridge Loans

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Refinancing can save you from a bad fix-and-flip. But which is better: DSCR loans vs bridge loans?

This market could force you to sell your fix-and-flip for much less than anticipated. Or – it could not sell at all.

When your lender asks for the money from your flip loan, a refinance could be the solution. Refinancing buys you time. With the right refinancing loan, you can safely wait for a better market to sell the property.

Let’s take a look at DSCR loans vs bridge loans for this type of refinancing.

DSCR Loans

Are you open to keeping your flip for a little longer term? Would you convert it to a rental in the meantime? If so, a DSCR loan is a great way to refinance out of a fix-and-flip.

A DSCR loan is a type of rental loan, based only on:

  • Your credit
  • Rental income from the property (not your personal income)
  • LTV (appraisals, listing price, etc that show the value of the home)

If you’re considering a DSCR loan, let’s look at the pros and cons of shifting gears from a flip to a rental.

DSCR Loan Pros

A DSCR lender will loan you up to 80% of the value of the home.

Cash Flow Opportunity for Your Flip

Your options for a DSCR loan product are broad. You can get anything from an interest-only to a 40-year loan.

With these options, you can spread the payments out. With lower payments and a potential tenant, you can match the cash flow to break even on the property (or maybe even bring in positive cash flow!).

This cash flow frees up your money to buy more flips and keep your business going. With that free money, you can jump on the good deals that will pop up in the next few months.

“Easy” Loan

Some of the biggest advantages of a DSCR loan is how easy it can be to apply and qualify.

For this type of loan, there are no income requirements. You just need good credit and rent that covers the monthly loan payment.

DSCR Loan Cons

There’s one important trick to refinancing a house that’s been on the market:

The appraiser is going to use the last price the house was listed for in their appraisal.

It’s tempting to drop the price when you have a flip on the market to try and attract a buyer. But once you decide to refinance, your house won’t appraise for higher than that lowest listed price.

So, it’s important to decide what you want to do with a flip ASAP. If you know you may want to refinance, you don’t want to keep lowering the list price, or it will negatively impact you.

Pre-payment Penalty

All DSCR loans have some kind of pre-payment penalty. Many are for around 3 years.

This means you have to keep the loan for that period of time, otherwise you’ll be charged a percentage fee for paying off the loan early.

If you want to keep this loan on your property for less than 3 years, you’ll be stuck paying that pre-payment penalty with a DSCR loan.

Not Available for Rural Areas

Also, DSCR loans are not designed for smaller towns. They can be great if you’re in a larger community, but they’re just not available in small ones.

And as money tightens up overall in the real estate lending space, DSCR programs are tightening up too. Rates will go up, LTVs will go down, and they will concentrate more on city centers. 

Most DSCR loan programs go as far as 25 miles from a city. But anything that shows up rural on an appraisal will likely not qualify for DSCR.

Bridge Loans

A bridge loan is a short-term loan that’s designed to give you flexibility on flips that are slow to sell.

With a bridge loan, you’re free to keep the house on the market, or convert it to a rental. The main purpose of a bridge loan is to get you out of a tough situation with the lender of your flip. What you choose to do with the house afterward is flexible with a bridge loan.

Bridge Loan Pros

Bridge loans are designed to help you refinance out of a flip. It gets you out of your original loan quickly –which is crucial when you’re getting calls from your lender. Plus, it helps you from paying high monthly payments with no cash coming in.

Additionally, bridge loans:

  • have no pre-payment penalty
  • can be interest only
  • close very quickly.

Bridge Loan Cons

Too Short-Term?

Bridge loans are short-term – varying between 1 and 3 years. 

In our market, we don’t expect interest rates to trend down for at least another year. If your bridge loan only covers you for a year, that might not be enough time to carry you into a better market.

You’ll want your refinance bridge loan for at least 2 years to give you some flexibility with the property.

You may need to shop around – 3-year bridge loans can be difficult to find, and many are limited to 1 year only.

Low LTV

Bridge loans are usually only 65% to 70% of the house’s current appraised value. 

Again, remember that your listing price will have a direct impact on that appraised value. If you slide the price down on the market to attract buyers, your refinance loan will be lower.

DSCR Loans vs Bridge Loans to Refinance

When we meet with a client about how to refinance out of a fix-and-flip, we weigh DSCR loans against bridge loans.

There’s always a tipping point – usually somewhere between the 14th and 17th month of a DSCR loan – where the pre-pay fee becomes cheaper than a bridge loan.

Bridge loans typically have 2% to 4% higher annual rates over a DSCR loan. Always analyze this tipping point, and choose the right loan (DSCR loans vs bridge loans) for you based on the length you’ll need it.

Read the full article here.

Watch the video here:

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How DSCR Loans Work in Today’s Real Estate Market

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Here are the basics of how DSCR loans work for your real estate investment.

Finding the right loan isn’t as easy as it used to be.

We’re getting more and more calls asking about different loans. And the most common loan investors want to know about? DSCR loans.

How are DSCR loans changing in this current market? Where will rates go? Who is still offering them? Is a DSCR loan even still a good option for investors right now?

Let’s go over those answers and see how DSCR loans work in today’s real estate market.

The Basics of How DSCR Loans Work

To begin with, 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 lenders in your area.

Conventional conforming loans are different – they have one main underwriting guideline all lenders follow. For DSCR loans, every lender creates their own requirements, offers, and processes.

How DSCR Loans Differ

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, you need to become a master of which lenders offer what in your area.

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

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 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.

How DSCR Loans Work – What is the “DSCR”?

“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 Debt Service Coverage 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.

DSCRs Lower Than 1:1

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. 

There’s one main circumstance when investors would take a loan with no ratio. If you have a fix-and-flip in a tough spot and need to refinance it into a rental for a short time, a no ratio DSCR loan could make sense.

Making $2,500 rent on a $3,000 per month property is better than spending $3,000 every month for a house that’s just sitting on the market. Some income is better than none.

DSCRs Higher Than 1:1

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.

Some lenders require a ratio of 1:2. This requires a much bigger gap between what your tenant pays for the property and what you pay. Hitting this ratio can be unrealistic for many markets. Rents are steadily increasing, but not by that much.

You should verify what ratio lenders use before you even consider closing on a DSCR property. Do your research, learn your lending options, and find out each DSCR lenders’ minimum requirements.

How DSCR Loans Work – How Do You Calculate the DSCR?

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

You need 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.

If you don’t want to worry about doing the math yourself, you can download our free DSCR loan calculator at this link.

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.

Short-Term Rental Options with DSCR Loans

It’s still possible to use DSCR loans for short-term rental units (like Airbnb or VRBO).

However, the requirements may be different for a short term-rental. You can get your DSCR loan for a short-term rental one of two ways:

  1. You’ll need to have 2+ years of experience with the property, with proof of income for that time. The rental will be treated as “no ratio,” so you’ll get higher rates and lower LTVs.
  2. They’ll go off of market rent of traditional rentals in the area. If the DSCR with that market rent qualifies, you can get a decent loan.

In either case, DSCR loans for short-term rentals don’t count the rent you receive from guests as the income. The ratio has to be calculated using regular rent rates.

Get Someone On Your Team Who Knows How DSCR Loans Work

You may be stepping into unfamiliar waters with this market, unsure of where or how to get investment loans. Yet leverage will still be vital for your real estate career.

The Cash Flow Company searches every day for the best loans for real estate investors.

If you have a DSCR loan or a deal you need a loan for, reach out to us at Info@TheCashFlowCompany.com.

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How to Maximize Your Leverage in Real Estate Investing

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Text: "How to Maximize Leverage"

Leverage is a powerful investing tool. How does it look to maximize your leverage?

A real estate investor’s goal is to maximize leverage – get the best, cheapest, easiest leverage available.

This means going an extra step:

  • Having great credit.
  • Having great income.
  • Coming to the lender prepared.
  • Having investment experience.

In a previous blog post, we broke down the difference using leverage makes for your income and net worth.

Now, let’s say you’ve done everything right, and you’ve earned yourself better leverage from your lender.

What happens when the same scenario is taken to the next level with top-tier leverage?

80% Leverage

To start, we’ll say you meet the bank’s criteria, and they agree to lend you 80% (or $80,000) on each $100,000 house you purchase.

Income with Maximized Leverage

Your down payment per property is now only $20,000, so you can afford 5 properties. But since you borrowed more money, the mortgage payment is higher, and the net rent goes down to $750/month.

Five properties with an income of $700 per month is $3,500 per month. This works out to be $42,000 per year. Annually, that’s $6,000 more than using a 75% loan, and $27,600 more than using no leverage at all.

Equity with Maximized Leverage

Lastly, let’s look at the wealth side with maxed-out leverage.

Thirty years adds $750,000 to the value of the 5 homes. All that money is added to your net worth.

As a result of the $750k of equity plus the $500k of the original purchase of the homes, your net worth increases by $1,250,000.

Once your mortgage is paid off and you own all 5 properties free and clear, you earn the full amount of rent per month. This is $1,200 × 5 properties, or $6,000 per month!

Using good leverage has the potential to make you literal millions of dollars over buying investment properties in cash.

Read the full article here.

Watch the video here:

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What Is a Bridge Loan?

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How do real estate investors use these short term loans? What is a bridge loan?

A bridge loan is a very short-term loan – even shorter than the typical hard money loan. It’s used in real estate investing to fill any gaps left by a lack of funding. 

Most popularly, these loans help you bridge the space between one project and another.

Let’s say you’re just finishing up a flip. The house is on the market, buyers are showing interest, and now you’d like to get another property bought so you can jump right in to your next flip.

A true bridge loan covers up that gap between projects. You get the money to close on a new property before the first one is completely sold. A bridge loan lets you overlap from an old project to a new one.

When to Use a Bridge Loan

Real estate investors use bridge loans for all kinds of situations:

  • When you’re buying a new property and already have one listed for sale
  • When you need to cover down payment on a new property
  • When you find a great deal but your bank’s financing won’t be ready in time
  • When a wholesaler waits for a buyer’s money to come into the title company
  • When a hard money or traditional loan leaves gaps in a project
  • When you need to refinance a hard money loan.


Read the full article on bridge loans here.

Watch the video here:

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Why Are Bridge Loans So Popular Right Now?

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Everything you need to know about bridge loans right now in the current market.

The demand for bridge loans is up in the real estate investment community. Yet the availability of loans is decreasing every day.

Why is this? Who is still lending?  What are the current costs? And how do you find these lenders?

Let’s dive in.

Why the Real Estate Market Has Changed

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

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. Presently, 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 – including bridge loans.

Why Bridge Loans are Needed

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?

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.

What Is the Cost of Bridge Loans Right Now?

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:

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

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 of 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.

How Do You Find Bridge Loan Lenders?

For bridge loans right now in these changing times, you need to be proactive.

Where to Search for Bridge Loan Lenders

Check with local real estate communities (REITs in your area, biggerpockets.com, etc). Once you get some lender names, call around. Overall, it may take 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.

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3 Ways to Refinance Out of a Fix-and-Flip

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This market can put your flips in a bad spot – here are 3 ways to refinance out of a fix-and-flip!

As a flipper, you’ve probably noticed the change in the market.

Properties are sitting on the market longer, and price decreases are not helping. When your flip lender comes calling for their money back, what are you supposed to do?

You have two options:

  • Take the price hit, sell, and cut your losses.
  • Refinance.

Often, refinancing can get you out of a bad spot and still let you come out with a profit. Let’s go over your options and review 3 ways to refinance out of a fix-and-flip.

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 these 3 unique loans to refinance out of a fix-and-flip come in handy.

1. DSCR Loan

Are you open to keeping your flip for a little longer term? Would you convert it to a rental in the meantime? If so, a DSCR loan is a great way to refinance out of a fix-and-flip.

A DSCR loan is a type of rental loan, based only on:

  • Your credit
  • Rental income from the property (not your personal income)
  • LTV (appraisals, listing price, etc that show the value of the home)

If you’re considering a DSCR loan, let’s look at the pros and cons of shifting gears from a flip to a rental.

DSCR Loan Pros

A DSCR lender will loan you up to 80% of the value of the home.

Cash Flow Opportunity for Your Flip

Your options for a DSCR loan product are broad. You can get anything from an interest-only to a 40-year loan.

With these options, you can spread the payments out. With lower payments and a potential tenant, you can match the cash flow to break even on the property (or maybe even bring in positive cash flow!).

This cash flow frees up your money to buy more flips and keep your business going. With that free money, you can jump on the good deals that will pop up in the next few months.

“Easy” Loan

Some of the biggest advantages of a DSCR loan is how easy it can be to apply and qualify.

For this type of loan, there are no income requirements. You just need good credit and rent that covers the monthly loan payment.

DSCR Loan Cons

There’s one important trick to refinancing a house that’s been on the market:

The appraiser is going to use the last price the house was listed for in their appraisal.

It’s tempting to drop the price when you have a flip on the market to try and attract a buyer. But once you decide to refinance, your house won’t appraise for higher than that lowest listed price.

So, it’s important to decide what you want to do with a flip ASAP. If you know you may want to refinance, you don’t want to keep lowering the list price, or it will negatively impact you.

Pre-payment Penalty

All DSCR loans have some kind of pre-payment penalty. Many are for around 3 years.

This means you have to keep the loan for that period of time, otherwise you’ll be charged a percentage fee for paying off the loan early.

If you want to keep this loan on your property for less than 3 years, you’ll be stuck paying that pre-payment penalty with a DSCR loan.

Not Available for Rural Areas

Also, DSCR loans are not designed for smaller towns. They can be great if you’re in a larger community, but they’re just not available in small ones.

And as money tightens up overall in the real estate lending space, DSCR programs are tightening up too. Rates will go up, LTVs will go down, and they will concentrate more on city centers. 

Most DSCR loan programs go as far as 25 miles from a city. But anything that shows up rural on an appraisal will likely not qualify for DSCR.

2. Bridge Loan

A bridge loan is a short-term loan that’s designed to give you flexibility on flips that are slow to sell.

With a bridge loan, you’re free to keep the house on the market, or convert it to a rental. The main purpose of a bridge loan is to get you out of a tough situation with the lender of your flip. What you choose to do with the house afterward is flexible with a bridge loan.

Bridge Loan Pros

Bridge loans are designed to help you refinance out of a flip. It gets you out of your original loan quickly –which is crucial when you’re getting calls from your lender. Plus, it helps you from paying high monthly payments with no cash coming in.

Additionally, bridge loans:

  • have no pre-payment penalty
  • can be interest only
  • close very quickly.

Bridge Loan Cons

Too Short-Term?

Bridge loans are short-term – varying between 1 and 3 years. 

In our market, we don’t expect interest rates to trend down for at least another year. If your bridge loan only covers you for a year, that might not be enough time to carry you into a better market.

You’ll want your refinance bridge loan for at least 2 years to give you some flexibility with the property.

You may need to shop around – 3-year bridge loans can be difficult to find, and many are limited to 1 year only.

Low LTV

Bridge loans are usually only 65% to 70% of the house’s current appraised value. 

Again, remember that your listing price will have a direct impact on that appraised value. If you slide the price down on the market to attract buyers, your refinance loan will be lower.

DSCR vs Bridge Loan to Refinance Out of a Fix-and-Flip

When we meet with a client about how to refinance out of a fix-and-flip, we weigh DSCR loans against bridge loans.

There’s always a tipping point – usually somewhere between the 14th and 17th month of a DSCR loan – where the pre-pay fee becomes cheaper than a bridge loan.

Bridge loans typically have 2% to 4% higher annual rates over a DSCR loan. Always analyze this tipping point, and choose the right loan for you based on the length you’ll need it.

3. Real OPM

When it comes to real estate investing, 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, they may be willing to become your lender. OPM isn’t as concerned about typical loan qualification requirements. Done right, OPM is a win-win for both parties.

OPM is the fastest, easiest, cheapest way to refinance out of a fix-and-flip. Real OPM 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 can help you find your tipping point between DSCR or bridge loans.

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.

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How to 5X Your Real Estate Investments

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Text: "How to 5X Your Real Estate Investments"

Leverage can 5x your real estate investments. Let’s look at how.

Should a real estate investor ever avoid leverage? Should they always use cash when possible?

Short answer: nope.

Using leverage can help you 5x your real estate investments. Let’s take a simple example to show how it works.

Cash vs Leverage

First off, we’re going to use simple numbers in this example.

Of course, home costs and rent costs will change in different markets and different areas. But we’ll run with these numbers – even if they aren’t 100% accurate, they’ll paint a good picture of the math that backs up leverage.

Let’s say you have $100,000 at your disposal that you want to invest in real estate.

Income Real Estate Investing with NO Leverage

To begin with, you could take all the money and buy one property valued at $100,000 outright. You’d invest the full $100k, own the house free and clear, and receive $1,200 of net rent income per month.

This adds up to $14,400 per year you’d earn from a house you fully own.

Income Real Estate Investing WITH Leverage

Now let’s see how it plays out when you involve a lender rather than buying outright.

You could offer to put down $25,000, and the lender might agree to loan you the other $75,000. That $75,000 covered by the lender would be your leverage.

And now, instead of pouring all your money into one property… you only have to put in $25,000.

Take your $100,000 and divide it by 25,000. That’s 4 properties you could buy with leverage. For the same out-of-pocket amount as buying 1 property outright.

However, because you’re now paying a mortgage on these rental properties, your monthly net rent goes down.

Your income is now $750 per property. Multiplied by 4 properties. So this brings in $3,000 per month, or $36,000 per year.

You have the potential to make an additional $21,600 per year – just from using leverage.

No matter what amount you start with (in this case, $100,000), using leverage brings in more income.

How Does Leverage Change Your Net Worth?

Monthly rent income isn’t the only way a rental property makes you money. It will also increase in value.

When a home appreciates, it increases your total net worth. The average yearly appreciation rate for real estate across the country is 5%.

It’s clear that leverage impacts income, but what about wealth?

Let’s throw this 5% number into our equation and see what happens with leverage.

Net Worth No Leverage

If a property was purchased for $100,000, that one home would increase in value by an average of $5,000 per year.

So, the one home you bought outright would give you $150,000 in equity after 30 years.

You bought it for $100,000. After 30 years, you’re adding $150,000. So that’s a net value of $250,000.

Net Worth with Leverage

Next, let’s see the equity of the 4 properties purchased with leverage.

Multiply your 4 properties by the $5,000 in value they each increase every year. Your portfolio will appreciate $20,000 per year.

Over a 30-year span, your 4 properties would add $600,000 to your net worth. Add the original values of the homes (4 × $100,000), and your net worth increases by $1,000,000.

A million using leverage definitely beats the $250k you got from buying 1 home outright.

Read the full article here.

Watch the video here:

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Why You Need More Bridge Loans in 2022

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Text: "Bridge Loans"

The real estate market is changing. Here’s what you need to know about bridge loans in 2022.

Have you used bridge loans for your portfolio in the past? 

In 2022, all money sources are tightening for real estate investors. Interest rates are rising, banks are reluctant to lend, and lender requirements have shot up.

You might find you’ll need more bridge loans than ever before.

Here are 3 ways you can use bridge loans for real estate investing in 2022.

1. Gap Loans to Supplement Hard Money

In the current market, lenders’ priority is to lower their risk. Many hard money lenders are limiting loans to 65% of the after-repair value (ARV).

If you could still complete a project under-budget at 65%, you’ll be able to find a lot of funding options. But if your project will take more than 65% of the ARV to complete, you might need to bring in a bridge loan.

A bridge loan can fill the gaps left by a hard money loan – whether for a down payment, rehab expenses, or carry costs.

You can get a bridge loan from:

  • A hard money lender
  • A hedge fund
  • Real OPM

OPM (Other People’s Money) is the ideal option for this type of gap funding. OPM is real money from people you know. It can be used to bridge gaps in investments, refinance hard money, and more.

2. Buy a New Property with Bridge Loans in 2022

Another effect of the upcoming market is the amount of time houses will take to sell.

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.

Bridging from one property to the next like this is the number one way investors use bridge loans.

3. Bridge Loans for Wholesalers

Wholesalers use bridge loans, too. Sometimes called “transactional” or “wholetailing” loans, these short-term funds are also a type of bridge loans.

This type of loan bridges a very small gap. Usually, it’s just the money needed for one day until the buyer’s money comes into the title company.

With these types of bridge loans, it’s important for wholesalers to find a lender who will give 100% financing, without overcharging.

What to Look For In Bridge Loans in 2022

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

Terms of a Bridge Loan

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.

How The Cash Flow Company Can Help

The Cash Flow Company offers DSCR loans, traditional loans, and blanket loans. Plus, we have the flexibility of hard money.

If you have any questions about bridge loans in general or our bridge loans in particular, reach out!

Email us with a specific deal or question at Info@TheCashFlowCompany.com.

Join our weekly call where we work with investors’ deals in real time, every Thursday from 1:15 PM – 2:15 PM MST.

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The Most Important Step in Real Estate Investing: Leverage

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How to turn $100,000 into $1.25 million by real estate investing with leverage.

A real estate investor’s most valuable tool is leverage.

Without it, you can’t buy, can’t hold, and can’t profit from your properties.

To prove our point that leverage is the most important step in real estate investing, let’s ask the question:

If you had the free capital to spend, would you make more money by buying a home outright or by using debt (leverage)?

Let’s break down a simple transaction to answer this question.

How Far Can You Get with $100,000?

First off, we’re going to use simple numbers in this example.

Of course, home costs and rent costs will change in different markets and different areas. But we’ll run with these numbers – even if they aren’t 100% accurate, they’ll paint a good picture of the math that backs up leverage.

Let’s say you have $100,000 at your disposal that you want to invest in real estate.

Income Real Estate Investing with NO Leverage

To begin with, you could take all the money and buy one property valued at $100,000 outright. You’d invest the full $100k, own the house free and clear, and receive $1,200 of net rent income per month.

This adds up to $14,400 per year you’d earn from a house you fully own.

Income Real Estate Investing WITH Leverage

Now let’s see how it plays out when you involve a lender rather than buying outright.

You could offer to put down $25,000, and the lender might agree to loan you the other $75,000. That $75,000 covered by the lender would be your leverage.

And now, instead of pouring all your money into one property… you only have to put in $25,000.

Take your $100,000 and divide it by 25,000. That’s 4 properties you could buy with leverage. For the same out-of-pocket amount as buying 1 property outright.

However, because you’re now paying a mortgage on these rental properties, your monthly net rent goes down.

Your income is now $750 per property. Multiplied by 4 properties. So this brings in $3,000 per month, or $36,000 per year.

You have the potential to make an additional $21,600 per year – just from using leverage.

No matter what amount you start with (in this case, $100,000), using leverage brings in more income.

How Does Leverage Change Your Net Worth?

Monthly rent income isn’t the only way a rental property makes you money. It will also increase in value.

When a home appreciates, it increases your total net worth. The average yearly appreciation rate for real estate across the country is 5%.

It’s clear that leverage impacts income, but what about wealth?

Let’s throw this 5% number into our equation and see what happens with leverage.

Net Worth No Leverage

If a property was purchased for $100,000, that one home would increase in value by an average of $5,000 per year.

So, the one home you bought outright would give you $150,000 in equity after 30 years.

You bought it for $100,000. After 30 years, you’re adding $150,000. So that’s a net value of $250,000.

Net Worth with Leverage

Next, let’s see the equity of the 4 properties purchased with leverage.

Multiply your 4 properties by the $5,000 in value they each increase every year. Your portfolio will appreciate $20,000 per year.

Over a 30-year span, your 4 properties would add $600,000 to your net worth. Add the original values of the homes (4 × $100,000), and your net worth increases by $1,000,000.

A million using leverage definitely beats the $250k you got from buying 1 home outright.

What If You Maximize Your Real Estate Investing Leverage?

A real estate investor’s goal is to maximize leverage – get the best, cheapest, easiest leverage available.

This means going an extra step:

  • Having great credit.
  • Having great income.
  • Coming to the lender prepared.
  • Having investment experience.

Let’s say you’ve done everything right, and you’ve earned yourself better leverage from your lender.

What happens when the same scenario is taken to the next level with top-tier leverage?

80% Leverage

You meet the bank’s criteria, and they agree to lend you 80% (or $80,000) on each $100,000 house you purchase.

Income with Maximized Leverage

Your down payment per property is now only $20,000, so you can afford 5 properties. But since you borrowed more money, the mortgage payment is higher, and the net rent goes down to $750/month.

Five properties with an income of $700 per month is $3,500 per month. This works out to be $42,000 per year. Annually, that’s $6,000 more than using a 75% loan, and $27,600 more than using no leverage at all.

Equity with Maximized Leverage

Lastly, let’s look at the wealth side with maxed-out leverage.

Thirty years adds $750,000 to the value of the 5 homes. All that money is added to your net worth.

As a result of the $750k of equity plus the $500k of the original purchase of the homes, your net worth is increased $1,250,000.

Once your mortgage is paid off and you own all 5 properties free and clear, you earn the full amount of rent per month. This is $1,200 × 5 properties, or $6,000 per month!

Using good leverage has the potential to make you literal millions of dollars over buying investment properties in cash.

How to Start Maximizing Your Leverage as a Real Estate Investor

Our goal is to help you understand and use the power of leverage. We scour the markets looking for debt with the best terms – the lowest down payments, the lowest credit requirements, and the lowest rates.

If you’re looking to maximize your leverage, email us at Info@TheCashFlowCompany.com. We’ll help you with questions and deals, and get you headed in the right direction.

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Hard Money Basics

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Real Estate Funding Solutions: Welcome to The Cash Flow Company

Hard money basics you need to know before real estate investing.

We’ve been in the hard money loan business for 20 years. Half the calls we receive are still beginner real estate investors trying to learn the money side of investing.

If that’s you, you’ve likely applied for, heard of, or thought about using hard money lenders. But maybe you don’t fully understand the private lending world yet. How does a hard money loan work? How much interest do private lenders charge? Do hard money lenders require a minimum credit score? Should you just wait until you qualify for better bank loans?

This guide will help answer:

  • What is hard money?
  • What do hard money lenders look for?
  • How is hard money different than other loans?
  • How do you qualify for hard money?
  • Is hard money better than banks?

Becoming hard money proficient will put you miles ahead as an investor.

Ready to nail the basics?

Real Estate Funding Solutions: Welcome to The Cash Flow Company

What is Hard Money?

Hard money is a short-term loan designed for real estate investors. HM lenders focus on lending money on undervalued properties in need of rehab.

HML are short term – usually around six months or a year – and are designed to help buy properties to fix up.

While “easier” than traditional bank loans, hard money loans are also more expensive due to higher interest rates. Which brings us to the most important quality of hard money loans: they’re fast.

In real estate investing, discounted properties typically require fast-closing deals. Hard money loans can help you take advantage of prices while they’re low, and:

  • Save on the property cost to begin with
  • Get more from selling or refinancing the property.

These savings more than cover the costs of a hard money loan for most investors.

The speed of hard money makes it valuable for newbie and seasoned investors alike. Hard money loans are made for real estate investors.

How Does A Hard Money Loan Work?

What do hard money lenders look at? There are two main factors lenders of hard money consider.

Loan-to-Value Ratio

An important number a lender takes into account is the cost of the property. The ratio of the loan they offer and the cost is important for you to know.

Let’s say you have a property with a current appraisal of $200,000. Then you get a loan for $100,000. The loan is half of the value of the home, so your loan-to-value is 50%.

After Repair Value (ARV)

ARV, after repair value, is another important factor hard money lenders consider. The properties targeted by real estate investors are undervalued. They need work to be brought up to the standards of the surrounding community.

So, lenders look at not only the current value of the house, but also the future value of the house, after it’s all fixed up.

Many hard money loans are based on after repair value rather than loan-to-value. Your lender might offer you up to 75% – not of what you’re buying it for, but what you could sell it for by the end.

What Does ARV Cover?

A key factor to ARV is that lenders will lend not only for the initial purchase, but for the fix-up costs.

Many lenders will put money aside in escrows to use throughout the project to pay contractors and cover other renovation costs.

If your loan considers ARV, it’s possible for you, with ZERO money down, to:

  • Buy a property.
  • Fix it up.
  • Either sell it (fix-and-flip) or refinance it (BRRRR).

After selling or refinancing, you use that money to pay the loan back.

Hard money is designed to build value into real estate. Understanding the role of the after repair value will help you immensely in your hard money investments.

How Is Hard Money Different from Other Loans?

Interest rates on hard money are between 2-5% higher than what you’ll find at banks. You can expect origination fees to be about twice as much. Appraisals will be close to the same.

So on paper, the rates and fees are higher, so it feels like you’re spending more. Which you are! But with hard money loans, you’re paying for:

  • Accessibility
  • Convenience
  • Flexibility
  • The opportunity to purchase properties you’d never be able to while relying on bank loans.

While hard money costs more than other loans, the potential value is also way higher. When sellers have discounted real estate, they want it sold fast. Banks can take 25-30 days to close. You can receive hard money in a matter of days.

Every week, we see hard money work to save people money.

When a recent client of ours bought a property, he saved 10% – just because he could close faster than the other five bidders. His savings on that purchase were $30,000: much more than double what he’ll spend on the loan transaction.

How Do You Qualify for a Hard Money Loan?

There are two kinds of hard money lenders. They each have different qualification requirements.

National Hard Money Lenders

National lenders lend in almost every state. They are larger organizations, backed by hedge funds and private equity.

National hard money lenders require:

  • A credit score check, and a good score.
  • Experience – at least five deals in the last three years.
  • Properties to be in specific larger communities.

So if you’re new to investing, need to improve your credit score, or are looking at more rural properties, you may need to look into local lenders.

Local or Private Hard Money Lenders

A local, or private, lender will specialize in your state or area. Local lenders are much more likely to:

  • Not ask for a credit score.
  • Not require experience.
  • Lend for rural areas.

Local lenders are focused on the deal itself and whether it has good value.

When deciding which lender to use for hard money, always shop around to see what fits your situation now. And be aware that another lender may fit you better in the future.

Are Private Lenders Better Than Banks?

It’s impossible to say whether hard money lenders or banks are “better” for real estate. It all depends on your deal and where you are in your investment career.

When to Use Bank Loans vs Hard Money Loans

Bank loans will have lower rates and may be the better route if you:

  • Have had a successful investment business for over two years.
  • Make a lot of money at a W-2 job.
  • Have 3-4 weeks to close.

Hard money loans will be easier, faster,  and may work better if you:

  • Are newer to real estate investing.
  • Don’t have money up-front to invest.
  • Don’t want to put your own money into a deal.
  • Need to close within a week or two.

As long as a property promises income, hard money more than makes up for its higher rates with the speed and greater potential savings. Starting in hard money paves the way for you to work up to bigger funding opportunities.Hard more

 

 

Find out more on how to leverage up your real estate investments on our Youtube channel.

The Cash Flow Company can help you with all real estate investor loans.

We also can help you find and set up real private money from those around your area.

We scour 100’s of loan programs across the country every month locating the best investor friendly loans.

 

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