Breaking Down the Numbers: How Rates Impact Your Cash Flow

Today we are going to break down the numbers in order to paint a picture of how rates impact your cash flow. Specifically, we want to illustrate how rates, credit scores, and LTV can affect your ability to cash flow on a property. While we are aware that the Fed is impacting us, it is important that we see what that looks like on paper. The example we are reviewing today will provide an excellent visual of how everything plays a role in the real estate game. DSCR is the product we are using today because it is one of the most popular out there.

Type of property	Purchase price	Appraisal average rents in area	Amount down	Financing 30 year loan	Fees Taxes Insurance HOA	DSCR (LTV)
Rental	$250k	$1,950	20%	80% ($200K loan)	$300	75%

	Credit Score	DSCR rate	Payment amount principle and interest	Payment amount plus fees	Cash flow based on appraisal
Client 1	680	9.75%	$1,718	$2,018	-$68.00
Client 2	720	8.99%	$1,608	$1,908	+$42.00
Client 3	780	8.75%	$1,573	$1,873	+77.00

What about Conventional and Fix and Flips?

This example is also representative of a conventional, and fix and flips as well. In a nutshell, the more you pay on interest, the less properties you can handle.

What is the appraisal?

An appraisal determines the average of rents in the neighborhood and uses this amount in the underwriting. The amount can change depending on if you have a couple years of history with rents that exceed the determined amount. The increasing rates are making it extremely difficult for properties to hit the expected rent amount.

What is the DSCR rate?

DSCR rates are determined based on your LTV. A credit score below 680 typically lowers the LTV from 80% to 75%. Therefore, you would need to put in more money up front on each purchase. If you’re looking at a DSCR with a credit score of 679, you will either be declined or it will flip you into a non ratio DSCR. Which means that your rates are going to be higher. Is a DSCR loan right for you? Visit our website to find out more.

How do rates affect cash flow?

As rates continue to rise, your payments are going to increase as well. This in turn causes your cash flow to suffer, and in most cases it will be a negative. Cash flow positive on the other hand, means that there are going to be more properties available for more investors. So keep your eye out for this change!

In Conclusion.

It is vital that you understand how rates, credit scores, and LTV can all affect your ability to cash flow on a property. Today we painted a picture that provided a side by side comparison of 3 different people. This allowed us to illustrate how all of these components work together and impact the overall cash flow. Let today’s example empower you to take a closer look at your numbers in order to create more cash flow in 2024!

Check out our website to find ways to positively impact your credit, as well as a weekly newsletter. We are here to help you get on the path to success.

Watch our most recent video to find out more on How High Interest Rates Impact Real Estate Investments.

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.

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