Here’s how you can tell whether a DSCR loan is cheaper than a bridge loan for a flip on the market.
When a flipped house isn’t selling, many investors resort to converting the house into a rental while they wait out the market. You can use a bridge loan or DSCR loan to do this.
But how do you tell which loan you should use? What are the qualities of each one? Is the DSCR loan cheaper than a bridge loan? Here’s what you need to know.
Using a DSCR Loan to Turn a Flip Into a Rental
A DSCR loan is the perfect longer-term option if you need to switch your fix-and-flip property to a rental.
First of all, a DSCR loan is based only on:
Your credit score (640-680 minimum).
The LTV (maximum of 80%).
Whether the property’s rent covers monthly expenses (including mortgage, insurance, taxes, and HOA fees).
There’s a variety of DSCR loans available – interest-only, 40-year amortization, regular 30-year, etc. Whatever loan you get, there’s an important detail to consider for all DSCR loans…
The DSCR Prepayment Penalty
The downside of a DSCR loan is the prepayment penalty.
Each loan has a term set for this penalty. If you pay off the loan before that term ends, you’re charged an exit fee. However, the fee amount does decrease each year.
As an example, one common structure for DSCR loans is a 5-year prepay penalty with a 5% fee. If you pay 4 years early, the fee goes down to 4%, 3 years, 3%, etc.
Additionally, there’s always a point where a DSCR loan, despite the prepay fee, becomes cheaper than a bridge loan.
Is a DSCR Loan Cheaper Than a Bridge Loan?
We’ve covered that the DSCR loan comes with the prepayment fee. Sounds pricey. But we also have to consider that the bridge loan will have a much higher interest rate.
Difference in Cost
If you intend to keep a property for more than 2 years, then a DSCR loan will always end up costing less, despite the fee.
But if you only want the property for 1 year or less, then the bridge loan will always be cheaper.
The gray area is the 1-2 year range. It varies with each loan, but there’s a tipping point somewhere in that timeframe where the bridge loan (with interest) becomes more expensive than a DSCR loan (with prepay fee).
Difference in Time
An underrated aspect of a DSCR loan is its built-in peace of mind. We have our educated guesses about how the market will go, but at the end of the day – things don’t always go as planned.
With a DSCR loan, if you end up needing to keep the property for 3, or even 30 years, you already have a product in place.
After one year with a bridge loan, you commit to either getting rid of the property or putting another loan (like a DSCR) in place.
https://thecashflowcompany.com/wp-content/uploads/2022/10/DSCR-cheaper.png6981048Mike Bhttps://thecashflowcompany.com/wp-content/uploads/2022/09/The-Cash-Flow-Company-logo.pngMike B2022-11-03 11:00:502022-10-28 16:23:05When Is a DSCR Loan Cheaper Than a Bridge Loan?
These numbers show you when it’s time to turn your flip into a rental.
What do you do with a flip that won’t sell?
The question is: is it smarter to leave the house on the market and keep dropping the price? Or take it off and turn it into a rental now before rates go further up and prices further down?
You don’t want to sell for a price that loses you money. But if you refinance into a rental, you know it’ll be negative cash flow.
It can feel lose-lose. But we can show you the better way out.
Let’s go over the numbers behind this, so you can look at this problem clearly. Here’s what it will look like if you turn your flip into a rental now.
How Bad Is the Negative Cash Flow?
The hesitation for many investors in this situation is: if you take the property off the market, the house has negative cash flow. The price is too high, and the rent probably won’t cover the costs. Why would you intentionally put yourself in a situation where you’re losing money?
But the reality is: the house is a negative cash-flowing property now. Every month the house is on the market, you pay interest. That money adds no value to the property – you’re just draining your money straight into your lender’s pocket.
Even if you don’t refinance with a rental loan, you already have a negative cash flow property.
Why not take the step to turn your flip into a rental now and reduce the amount of money you’re losing each month?
Refinance a Flip To a Rental
Typically, people spend more money leaving a house on the market for 2 or 3 months than they would turning it into a negative cash flowing rental for 2 years.
Would you rather pay $2,500 per month on a house with a for sale sign on it? Or get $2,200 in rent and only pay $300 of your own money per month? This is the question you’re left with when your flip isn’t selling in this market.
Turning a Flip to a Rental in Past Down Markets
Take a lesson from 2008 and 2009. Many investors who sold during the crash later realized that if they had waited 3 or 4 years, they could have made their money back on those properties.
Not only would their property values have gone up, but rates would have come down. Those properties would have become major assets. Instead, investors took a big hit selling in a down market.
Negative DSCR and No-Ratio Loans
So if you decide to go with this negatively cash flowing property, what are your options for a loan?
Let’s go over the negative DSCR and the no-ratio loan programs.
These loans allow you a 30-year fixed product that’s interest-only. These DSCR loans work even on properties that aren’t cash flowing.
Typically for a DSCR loan, the rent from the property has to at least cover the monthly expenses (principal, interest, taxes, and insurance). Outflow has to equal inflow.
But these negative DSCR and no-ratio options allow you to refinance rental properties even when you bring in less rent than you pay out per month.
Refinancing with Bridge Loans vs DSCR
Getting a DSCR or no-ratio loan from a new lender is typically a better move than continuing to refinance with bridge loans from your current lender.
You don’t know where the market will be in 12 to 24 months. We know that long-term, the markets will come back, but what if that doesn’t happen for 3 years? You could get stuck refinancing with a bridge loan year after year, charging points with each refinance.
DSCR loans are often a better option in this situation. You just have to know your numbers.
Let’s go through an example so you know exactly how to calculate a DSCR loan and see if it’s the smart choice for you.
Using a DSCR Loan to Combat Negative Cash Flow: The Numbers
Let’s look at an example with a $300,000 loan. We’ll assume that both the original flip loan and the DSCR loan you’re refinancing into are interest-only.
This $300,000 flip loan has a 10% interest rate. That means you’re paying $2,500/month just for interest. This is the current negative cash flow of the property.
On the other hand, if you can get a DSCR loan for a 7% interest rate, you’d be paying $1,750/month instead. Plus, you could get a tenant renting for $1,800/month.
At this point, $1,800 would be coming in, and $1,750 would be going out for mortgage payments. This is actually a positive cash flow of $50/month.
However, your mortgage isn’t your only expense on this property. We still have to take taxes and insurance into consideration. Let’s say both of those costs add up to $300 per month.
This raises the total expenses with a DSCR loan to $2,050 per month, bringing the cash flow to a -$250 every month.
Flip Loan vs DSCR Loan Compared
Obviously, you never like to lose money on a property. But that $250 of negative cash flow multiplied by 12 months is only $3,000. After 2 years, it’s $6,000. That may seem like a lot, but let’s look back at what you’d spend with the original flip loan.
If we go back to our example, remember we’d be paying $2,500 per month in interest, plus $300 in taxes and insurance with the original flip loan. That’s $2,800 spent for 1 month with the flip loan – close to the $3,000 for the full year with a DSCR loan!
If you keep the house on the market with this flip loan for 2 months, it’s $5,600. That’s comparable to 2 years of out-of-pocket costs if the same property was converted into a rental.
This is how you have to look at the numbers in this scenario. It will help you determine what’s right for your flip. Is it better to wait for the market and shell out thousands of dollars in the meantime? Or rent the property with a little negative cash flow for 2-3 years in hopes of recouping an extra $100k in equity when the markets come back? (Or at least until rates come back down so you can refinance?)
In many cases, it makes more sense to turn your flip into a rental ASAP with a negative DSCR or no-ratio loan.
What Should You Do Next?
If you feel ready to refinance your flip into a rental, act quickly. Rates are going up, prices are going down.
There are some downsides to no-ratio and DSCR loans. Let us know you’re looking, and we’re happy to help you find the best loan for your situation.
The Cash Flow Company looks at hundreds of loans every month to find the best terms for investors, with the lowest down payments, highest LTVs, and best rates. Let us run the numbers on your property, and we’ll let you know what product will be best for your situation.
We want to get you to a place where you reduce negative cash flow and get back into some profitable flips. Email us at Info@TheCashFlowCompany.com.
https://thecashflowcompany.com/wp-content/uploads/2022/10/Oct-22-Fix-to-Rental-Blog-Thumbnail.png6001800Mike Bhttps://thecashflowcompany.com/wp-content/uploads/2022/09/The-Cash-Flow-Company-logo.pngMike B2022-11-01 08:00:102022-10-31 22:13:26Numbers Don’t Lie: Turn Your Flip into a Rental Now
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 $625more 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:
Get a DSCR loan for the property.
Take a 12-month tenant.
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.
https://thecashflowcompany.com/wp-content/uploads/2022/10/Oct-22-Flip-or-Rent-Blog-Thumbnail.png6001800Mike Bhttps://thecashflowcompany.com/wp-content/uploads/2022/09/The-Cash-Flow-Company-logo.pngMike B2022-10-27 08:00:292022-10-25 20:18:47How to Turn a Flip Into a Rental
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.
https://thecashflowcompany.com/wp-content/uploads/2022/10/bridge-loans-current-market.png5891048Mike Bhttps://thecashflowcompany.com/wp-content/uploads/2022/09/The-Cash-Flow-Company-logo.pngMike B2022-10-21 08:00:462022-10-13 12:40:50How This Real Estate Market Is Impacting Bridge Loans
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.
https://thecashflowcompany.com/wp-content/uploads/2022/10/how-to-use-bridge-loan4.png5991048Mike Bhttps://thecashflowcompany.com/wp-content/uploads/2022/09/The-Cash-Flow-Company-logo.pngMike B2022-10-20 08:00:432022-10-17 21:43:10How to Use a Bridge Loan to Buy a New Property
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.
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
https://thecashflowcompany.com/wp-content/uploads/2022/10/what-is-a-bridge-loan2.png6991048Mike Bhttps://thecashflowcompany.com/wp-content/uploads/2022/09/The-Cash-Flow-Company-logo.pngMike B2022-10-13 08:00:312022-10-06 10:27:34What Is a Bridge Loan?
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.
https://thecashflowcompany.com/wp-content/uploads/2022/10/Oct-22-How-to-Get-Bridge-Loan-Blog-Thumbnail.png6001800Mike Bhttps://thecashflowcompany.com/wp-content/uploads/2022/09/The-Cash-Flow-Company-logo.pngMike B2022-10-13 08:00:272022-10-11 18:49:18Why Are Bridge Loans So Popular Right Now?
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!
https://thecashflowcompany.com/wp-content/uploads/2022/10/Oct-22-Bridge-Loans-2022-Blog-Thumbnail.png6001800Mike Bhttps://thecashflowcompany.com/wp-content/uploads/2022/09/The-Cash-Flow-Company-logo.pngMike B2022-10-06 08:00:092022-10-05 20:36:42Why You Need More Bridge Loans in 2022
For a successful investment career, start with these 7 Fundamentals of a Real Estate Deal
Are you “money wise”? It’s not hard to get there. And it will save you a lot of cash down the line.
It’s like when a person who knows about cars goes to a mechanic – they have peace of mind because they understand what’s going on. If you’re not a “car person,” at the mechanic’s it’s harder to figure out if they’re telling you the truth, or just trying to sell you more than you need.
As a real estate investor, leverage is at the center of what you do. It’s like a foreign language when you first start out. But when you become money wise, the leverage in your real estate investment career is fully in your hands.
Here are 7 real estate loan fundamentals that will make you money wise.
Fundamentals of a Real Estate Deal
There’s certain information you’ll need to bring to your lender when you need a loan. If you know the answers to their questions, the time with your lender will be much more productive.
At the end of the day, lenders want to know: Do you have a good deal? (And you should want to know the answer, too!)
We’re going to dive into 7 main concepts to answer that question:
Strategy
Purchase Price / Contract
Scope of Work
Budget
Estimated Profit / Equity
Comps / ARV
Exit Strategy
I. Strategy – What Is a Real Estate Strategy?
When your lender asks about your strategy, they want to know whether you’ll use the property as a
fix-and-flip
a rental
or if you’re not sure yet.
What is a real estate strategy dependent on? 1) your goals, and 2) the property.
You’ll have to know the numbers to know if the property will make a good flip with carry costs you can afford, or if it would cash flow well as a BRRRR-style rental.
But how do you “know the numbers”? Let’s start with the cost of the property.
II. Purchase Price / Contract – What Are the Fundamental Numbers of a Real Estate Loan?
Your lender could refer to this as purchase price, contract, or as-is value.
In real estate investment, there’s a distinction between what you’re paying for a property and what it’s worth. The purchase price isn’t necessarily what the value of the home is.
This is the number on the contract, the number you’ve agreed to buy the property for. And this number is foundational to whether or not your project will turn a profit.
III. Scope of Work – How Do You Fix Up a Real Estate Investment?
Many beginner investors mistake “scope of work” for the budget. Scope of work is what you’re going to do to the property, not the number of what that work will cost.
Will you add a bedroom? Re-do the garage? Are you going to convert the porch to additional square footage? Or add egress windows to the basement?
Scope of work is your rehab plan. Lenders need this info to find out what kinds of properties they should compare to yours to estimate an after repair value.
IV. Budget – What Is a Real Estate Budget?
During the conversation with your lender, have a high overview of your construction budget. You don’t necessarily need all the details ironed out quite yet.
For example, you can estimate that the kitchen will cost $10,000, siding $6,000, windows $4,000, and new paint $2,000. At this point, you don’t need to share a breakdown of the cost of each new appliance, labor and materials, etc.
You just need a realistic estimate of how much it will cost to get into the property. Having your scope of work lined out helps you with an estimated budget. When you know the purchase price an your budget, then you know how much the entire project will cost.
V. Estimated Profit (Flips) / Estimated Equity (Rentals) – How Much Will a Deal Make?
Estimated profit is what you expect to make on the transaction, between buying the property, fixing it up, and selling it again.
Equity is the difference between the amount you owe and what the property is worth. You build equity on your rentals by successfully refinancing after a flip and paying down the mortgage with rent income.
The number one reason to be in real estate investment is to make money and create wealth – it’s true for lenders, and it’s true for you. So, it’s important to both you and your lender that your properties make profit or build equity.
You’ll need your estimated profit / equity when you bring a deal to your lender.
V. Comps / ARV – What Does ARV Mean in Real Estate Investing?
ARV is the after repair value. It’s what the property will appraise for, or sell for, on the current market once the scope of work is completed.
You estimate a property’s ARV by looking at the prices of similar homes in the current market.
Comps (comparables) are those similar homes you look at. It’s important that your comps have the same value as your property.
For example, if your deal is for a 950 square-foot home, you’ll compare it to other 900 to 1,000 square-foot homes on the market, not a 2,000 square-foot one. A 2-bedroom, 1-bath house will be compared to houses of the same specifications, and not compared with 4-bedroom, 2-bath homes.
For your ARV to be accurate, you need to stay true to your scope of work. If you only repaint and re-carpet a house that needed much more work, you won’t get top-of-the-market value when you try to sell or refinance.
On the other hand, if your scope of work is a full remodel, your comparables should be homes that are fully remodeled, so you don’t miss out on any profit.
The money you put into fixing up a house isn’t a direct indicator of how much the house will be worth. What the property looks like when it’s finished has nothing to do with how much it cost to get it there.
To find the true profitability of a deal, your ARV and comparables help:
ARV – (Purchase Price + Budget) = Profit Amount
VII. Exit Strategy – How Will You Pay Your Real Estate Loans?
When a lender asks for your exit strategy, they want to know your plan for paying off the loan. For hard money loans, your exit should be fast.
If it’s a flip, your exit strategy is to sell the property, then pay off the loan.
If it’s a rental, your exit strategy is to refinance into a long-term loan, which will pay off the hard money loan.
The Why Behind Money Wise – Real Estate Investing Definitions
When you come to the table prepared, with strategies, numbers, and knowledge, you can speak the same language as your lender.
This is key to ensuring you have a safe transaction with a lender that is working in your best interest. 7 Fundamentals of a Real Estate Deal
Curious About Other Real Estate Loan Fundamentals?
If you have any questions, or want coaching through a deal, we’re happy to help. You can contact us here.
For more info on real estate loan fundamentals, keep up with our Hard Money 101 series on our blog, or visit our YouTube channel here.
https://thecashflowcompany.com/wp-content/uploads/2021/06/YouTube-Thumbnails-1.png7201280The Cash Flow Companyhttps://thecashflowcompany.com/wp-content/uploads/2022/09/The-Cash-Flow-Company-logo.pngThe Cash Flow Company2022-01-23 10:45:132022-09-23 12:22:227 Fundamentals of a Real Estate Deal
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