Tag Archive for: break even point

Why Your DSCR Loan Will Get Accepted

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Why Your DSCR Loan Will Get Accepted

Get your DSCR loan accepted today! DSCR loans are based off of LTV, which is 75% for rate and term and 80% for purchase. However, you need to calculate the break even point as well before purchasing the property. The break even point can limit how much you can get out of the property, as well as requires you put more money in at purchase. Let’s take a closer look at the numbers to see how you can get your DSCR loan accepted! 

What do you need to know before purchasing a property?

Investors use the BRRRR strategy for rental properties and creates an easy way to build a portfolio. However complications arise when refinancing the property. While investors expect to refinance out at 75% to 80%, it doesn’t always work as planned. This is due to the fact that the DSCR ratio comes into play. The DSCR ratio limits the amount that you can get out of the property. That is why it is important to know your numbers before purchasing the property or prior to refinancing. By calculating the break even point on your DSCR ratio you will create the cash flow you need to succeed.

Example: One property qualifies and one does not.

It is important to take everything into consideration to see whether or not the property qualifies. The numbers that you need to consider include taxes, property insurance, flood insurance (when applicable), and HOA (when applicable). Remember, in order to qualify for a DSCR loan the rent needs to be greater than or equal to the expenses. To demonstrate the break even point today we will compare two properties that have the same property value, loan amount, and monthly payment.

Value of the property Loan amount  Monthly payment 
$200K $150K $1,050
Property A Property B 
Taxes: $1,800 $3,600
Property insurance: $1,200 $3,600
Flood insurance: $0 $0
HOA:  $0 $0
Total $3,000 $7,200

In conclusion,

Always run the numbers prior to purchasing the property to find the break even point.  The break even point affects your ability to refinance the property later on. Keep in mind that every property will be different and every location will be different as well.

Do you have any questions or want to run through some numbers reach out to us! We are happy to work through the numbers with you to ensure that the property will be a good investment.

Watch our most recent video to find out more about Why Your DSCR Loan Will Get Accepted!

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DSCR Loans: 3 Most Common Questions Answered

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DSCR Loans: 3 Most Common Questions Answered

Here at The Cash Flow Company we receive questions daily regarding DSCR loans. Today we are going to focus on the 3 most common questions and give you the answers you need to succeed. 

First, can you use a DSCR loan for a multiplex?

While there are fewer lenders who offer loans for multiplexes, there are still options available to you. DSCR loans do exist for 5 or more units and include commercial properties as well. However, you need to make sure that at least 50% of the property is residential. 

Second, what documents do you need for a DSCR loan?

Unlike traditional loans, DSCR loans are easy to process. The items that you will need for a DSCR loan include a lease agreement, operating agreement, appraisal, expenses, and reserves. To clarify, expenses include taxes, insurance, HOA, and flood insurance. Reserves on the other hand include bank statements, retirement funds, and investments. 

Finally, what happens if the rental doesn’t break even?

Most lenders want the properties to break-even. Breaking even means that your income can cover your expenses. Income is the rent that you are receiving for the property. Expenses included the mortgage, insurance, taxes, HOA, and flood. If you divide the income by the expenses, it should equal 1, which is the break-even point. However some lenders are okay with deals that have a ratio that is less than 1. Lenders understand that sometimes investors just need to get out of a bad loan. In this case, they offer higher rates and lower LTV’s. 

Do you have any questions regarding DSCR loans? Contact us today to find out how a DSCR loan can help you succeed in real estate investing! 

Watch our most recent clip to find out more about DSCR Loans: 3 Most Common Questions Answered.

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Why You’ll Get Rejected for a DSCR Loan

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Why You’ll Get Rejected for a DSCR Loan

Today we are discussing why you’ll get rejected for a DSCR loan. DSCR loans are based off of LTV, and are 75% for rate and term and 80% for purchase. However, there is another factor that you need to take into consideration. That factor is the break even point. This amount limits how much you can get out of the property, and requires more money for the purchase. In today’s example we will be comparing and contrasting two properties to show how you can easily be rejected for a DSCR loan.

What do you need to know before purchasing a property?

Investors use the BRRRR strategy for rental properties and creates an easy way to build a portfolio. However complications arise when refinancing the property. While investors expect to refinance out at 75% to 80%, it doesn’t always work as planned. This is due to the fact that the DSCR ratio comes into play. The DSCR ratio limits the amount that you can get out of the property. That is why it is important to know your numbers before purchasing the property or prior to refinancing. By calculating the break even point on your DSCR ratio you will create the cash flow you need to succeed.

Example: One property qualifies and one does not.

It is important to take everything into consideration to see whether or not the property qualifies. The numbers that you need to consider include taxes, property insurance, flood insurance (when applicable), and HOA (when applicable). Remember, in order to qualify for a DSCR loan the rent needs to be greater than or equal to the expenses. To demonstrate the break even point today we will compare two properties that have the same property value, loan amount, and monthly payment.

 

Value of the property Loan amount  Monthly payment 
$200K $150K $1,050
Property A Property B 
Taxes: $1,800 $3,600
Property insurance: $1,200 $3,600
Flood insurance: $0 $0
HOA:  $0 $0
Total $3,000 $7,200
Monthly amount $3,000/12 months = $250 $7,200/12 months = $600
Break even point (mortgage payment + taxes and insurance) $1,050 + $250 = $1,300 $1,050 + $600 = $1,650
Rent is $1,400 a month  This property will qualify for the full $150K refinance This property will NOT qualify for $150K because the rent is less than the break even point

In this example it is clear to see that even though you qualify for the DSCR loan, the property doesn’t always qualify. This example is all based on the DSCR ratio and shows how the income and expenses compare. 

In conclusion,

It is important to run the numbers prior to purchasing the property to find the break even point.  The break even point will affect your ability to refinance the property later on. Always keep in mind that every property will be different and every location will be different as well. 

If you have any questions or want to run through some numbers reach out to us! We are happy to work through the numbers with you to ensure that the property will be a good investment. 

Watch our most recent video about Why You’ll Get Rejected for a DSCR Loan.

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How to Calculate Your Maximum DSCR Loan Amount

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How to Calculate Your Maximum DSCR Loan Amount

Today we are going to go over how to calculate your maximum DSCR loan amount. Most DSCR loans are based off of LTV. Just to clarify, LTV is normally 75% for rate and term and 80% for purchase. However, there is another factor that you need to take into consideration. That factor is the break even point. The break even point can either limit how much you can get out of the property, or make you put more money in at purchase. Let’s take a closer look at the numbers to ensure that you can calculate your maximum DSCR loan amount prior to purchasing a property. 

What do you need to know before purchasing a property?

Many investors use the BRRRR strategy when investing in real estate properties. While this is an excellent method to use to build a portfolio, investors are often faced with issues when it comes to refinancing the property. While investors expect to refinance out at 75% to 80%, it doesn’t always work as planned. This is due to the fact that the DSCR ratio comes into play. The DSCR ratio can limit the amount that you can get out of the property. That is why it is important to know your numbers before purchasing the property or prior to refinancing. By calculating the break even point on your DSCR ratio you will be able to create the cash flow you need to succeed.

Example: Calculating how much you would qualify for. 

Value of the property is $200K

Refinance is 75% rate and term

$200K x .75 = $150K (this is the loan amount you would qualify for)

Keep in mind that this example is with a good credit score and a good rate at 75%. 

Example: Calculating monthly payment.

At 75% we are going to use a 7.5% rate.

$150K x .075 = $1,050 monthly payment (includes principal and interest)

If we have the same property in a different area, different zip code, or different state, then this property may or may not qualify for the 75% loan.

Example: One property qualifies and one does not.

It is important to take everything into consideration when determining whether or not the property qualifies. The numbers that you need to consider include taxes, property insurance, flood insurance (when applicable), and HOA (when applicable). Remember, in order to qualify would mean that the rent needs to be greater than or equal to the expenses for the property.

Property A Property B
Taxes: $1,800 $3,600
Property insurance: $1,200 $3,600
Flood insurance: $0 $0
HOA: $0 $0
Total $3,000 $7,200
Monthly amount $3,000/12 months = $250 $7,200/12 months = $600
Break even point (mortgage payment + taxes and insurance) $1,050 + $250 = $1,300 $1,050 + $600 = $1,650
Rent is $1,400 a month This property will qualify for the full $150K refinance This property will NOT qualify for $150K because the rent is less than the break even point

In this example it is clear to see that even though you qualify for the DSCR loan, the property doesn’t always qualify. This example is all based on the DSCR ratio and shows how the income and expenses compare. Keep in mind that every property will be different and every location will be different as well. 

In conclusion,

Before you purchase a property or get into BRRRR make sure that you run the numbers to determine if the property breaks even. This is done by finding out what the rents are for similar properties in the area, along with collecting quotes for the taxes and insurance on the property. In doing so, you will be able to ensure that the property is going to hit the LTV that you want when refinancing. 

If you have any questions or want to run through some numbers reach out to us! We are happy to work through the numbers with you to ensure that the property will be a good investment. 

Watch our most recent video How to Calculate Your Maximum DSCR Loan Amount to find out more!

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