Tag Archive for: cash flow

DSCR Loan: Why Rental Properties Fail to Cash Flow

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DSCR Loan: Why Rental Properties Fail to Cash Flow

Today we are going to dive into an example illustrating why rental properties fail to cash flow using a DSCR loan. A DSCR loan are loans focused on the rents from a rental property and the credit worthiness of the borrower. In today’s market, the increasing interest rates are truly affecting payments and more importantly they are impacting cash flow. As a result, it has become harder and harder to qualify for a DSCR loan. Likewise, DSCR ratios are changing also. What used to be a 1:1 ratio (rents compared to expenses), has now increased depending on your LTV. Therefore, many investors can no longer qualify because there is no cash flow for the property. So, what does this look like numbers wise? Let’s take a closer look.

Example:

$250K Loan 
Time Frame Percentage Expected Payment Change Over Time
Couple years ago 3.75% $1,158
Now 9% to 11% 

(depending on LTV)

 $2,011 $853 

Payment Increase 
In the Future 7% 

(you refinance $2,011 principle)

 $1,663 $348

Cash flow increase 
The Optimus  5%

(Looking if it dropped from 9% to 5%)

 $1,342 $669 

Cash flow increase 

In this example it is clear to see why rental properties fail to cash flow, especially with a DSCR loan. The increasing rates have caused payments to increase as well. When combined with ever rising taxes and insurance expenses, investors are struggling to break even, let alone create cash flow. All of these pressures are making it harder to be successful in real estate investing. 

Why is it a good time to buy?

So, why is it a good time to buy? My suggestion for investors is that they need to find something that has good equity and at 25% to 30%. As long as it is breaking even, then in a year or two when rates go back down, you will be able to refinance to increase your cash flow without buying another property. The more affordable the homes are, the bigger the market becomes. The good news is that buyers are going to start buying again, and the values around you are going to increase.. While no one can predict that the interest rates will go back down to 2.5% for owner occupied and 3.75% for investors, there are indications that interest rates will drop in 2024. 

What’s next?

I will be doing a follow up video that will further show you the effect that interest rates have on cash flow. This will include a look from the buyers side, and how the market is going to push up your values. If you can find a good undervalued property now, then you are going to not only create cash flow, but create generational wealth as well. You’re not alone! There are a lot of people who are questioning if they should buy now. 

Watch our most recent video about why rental properties fail to cash flow and how you can set yourself up for success by investing now.

Do you have questions about DSCR loans or how you can create generational wealth? Contact us today!

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Are You Making These Common Real Estate Investing Mistakes?

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Are You Making These Common Real Estate Investing Mistakes?

There are a number of common real estate mistakes that investors are facing. These mistakes occur when buying and holding rentals, flipping properties, and dividing land. Nowadays, these common real estate investing mistakes undoubtedly create frustration and can lead to defeat. With this in mind, let’s take a closer look at the five major roadblocks to make sure that they don’t affect you!

First, Cash Flow 

The first mistake that real estate investors make is immediately purchasing a property before evaluating the cash flow. To put it briefly, you want to make sure your profits are in fact greater than your expenses. Avoid this mistake by making a plan and know your numbers upfront! 

Second, Understanding Escrow

The second mistake is not understanding escrow, let alone what is needed to receive the escrow funds. Escrow is a portion of the loan that a lending company puts aside for repairs to the property. By understanding your lenders policies, you can optimize your profits by completing repairs quickly and correctly. 

Third, Too Many Projects

The third mistake is having too many projects. From multiple property costs to paying contractors, investors can get too big too fast. It is important to “err on the side of caution” to prevent the “finance crunch” that often occurs. 

Fourth, Rentals

The fourth mistake is not properly navigating rental cash flow. The deal needs to be a positive investment not a negative one after considering all costs. In real estate investing, you cannot afford losses or simply break even.

Fifth, Personal Credit Usage

The fifth and final mistake is the misuse of personal credit cards for business expenses. If you want to avoid spiraling into debt, then quickly set up your business and begin using a business credit card. 

By understanding these common real estate investing mistakes, you can ease your frustration, prevent a finance wall, and learn how to create a constant cash flow.

Watch our latest interview to discover more about the 5 Major Roadblocks

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5 Major Roadblocks in Real Estate Investing Solutions Revealed

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5 Major Roadblocks in Real Estate Investing

Did you know there are 5 major roadblocks in real estate investing? From buying and holding rentals, to flipping properties, to dividing land, investors face numerous roadblocks that create frustration, and lead to defeat. But fear not! When investors identify these 5 roadblocks, they can ease their frustration, prevent a finance wall, and learn how to create consistent cash flow.

We work with many clients, including those who are just starting out on their real estate investment journey, to those who have become experts. Every day, our company receives numerous calls  from people saying, “I wish I would have,” or “I wish I did that too.” Therefore, we’ve  created a guide to help others skip bumps in the road that can impact their success. When you’re aware of these 5 roadblocks, do your research before embarking on your real estate journey, and reevaluate quarterly, the sky’s the limit.

So, what are the 5 Major Roadblocks that cause burn out, financial hemorrhaging, and, unfortunately, defeat? Well, here’s what you need to know to make your real estate investments successful.

5 Major Roadblocks:

1. Cash Flow 

The first roadblock that can greatly affect your success is not understanding the importance of cash flow. If your property’s expenses outweigh your profits, then that’s going to hurt you and your business. You want to make sure your profits are always greater than your expenses. The best way to avoid this roadblock is to make a plan and know your numbers upfront! Don’t dive into an investment before you know if your property will cash flow. 

2. Escrow 

The second roadblock every investor should understand is escrow. Escrow is a portion of the loan a lending company puts aside for repairs to the property. The only way to access these funds is to submit receipts, photos, and other proof to your lender that the repairs are underway. So, if you want to optimize your profits and avoid missing the market when it’s “hot,” you need to take all repair costs into consideration, make sure you have money to get the repairs started without your lender’s help, and complete repairs quickly and correctly.

3. Too Many Projects

The third roadblock is having too many projects. From multiple property costs to paying contractors, investors can get too big too fast. It is important to “err on the side of caution” to prevent the “finance crunch” that often occurs. So, slow down, be realistic, and limit your losses. 

4. Rentals

The fourth roadblock is navigating rental cash flow. The deal needs to be a positive investment not a negative one after considering all costs. These costs include rents, taxes, and insurance. In real estate investing, you cannot afford losses or simply break even. The numbers game is intense! It is vital that you are prepared and learn the ropes!

5. Personal Credit Usage

The fifth and final roadblock is the misuse of personal credit cards to cushion purchases or expenses. If you want to avoid spiraling into debt, then quickly set up your business and begin using a business credit card. Business credit cards are easy, fast, and make every investor’s life easier. 

At the end of the day, the ultimate goal is keeping personal and business expenses separate. It’s vital to a successful real estate investing.

Watch our latest interview to discover more about the 5 Major Roadblocks

 

Want more information on real estate investment roadblocks or have any other questions? Contact us today! 

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DSCR Loan and Your Credit Score

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DSCR Loan and Your Credit Score

Today we are going to discuss why getting a DSCR loan can be easy and rewarding with the right credit score. By ensuring that your credit is in the best position, you’ll be on your way to success!  Not only would you be getting a loan that’s perfect for you, but you would also increase your cash flow.

First and Foremost, Review Your Credit Score

Next, consider your credit score. You can get a DSCR loan with a score in the low 600s, but it will cost you more. To clarify, a lower credit score can add up to one or more percentage points. This can in turn increase your interest rate, which can increase your monthly payment by $200 to $400.

Example: Let’s say you have a credit score of 620. You might get a loan with a 7% interest rate instead of 6%. On a $200,000 loan, that extra 1% could mean paying $2,000 more per year in interest.

If you need tips to raise your score, check out resources like our YouTube channel for advice on improving your credit.

Conclusion

By reviewing your credit score and getting yourself in the best position, you will in turn get a better interest rate! If you find any step challenging, don’t worry. Our team is here to help you. We’re eager to set you on a path that helps you make the money you need to live the life you want.

Watch our most recent video to find out more about: DSCR Loan and Your Credit Score

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Real Estate Investing: Points and Interest Explained

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Real Estate Investing: Points and Interest Explained

Today we are going to explain what points and interest are in regards to real estate investing. This is something that needs to be considered when you are applying for a loan in order to ensure that you get the best deal. Whether it’s a hard money loan, a private loan, a bank loan, or even OPM (Other People’s Money)? Each situation is different! It’s essential to know what works best for you. Let’s get started!

Factors to Consider

Speed of Funding

In real estate, speed can make or break a deal. Sellers prefer buyers who can close quickly with no hassle. So, you need to know which lender can fund the fastest.

Down Payment

Down payments can vary. With hard money, you might get 100% financing, but usually, you’ll need 10-20% down.

Example: If you’re buying a $300,000 property, a 10% down payment means you need $30,000 upfront.

Points and Interest Rates

Points are fees paid to the lender, usually as a percentage of the loan amount. Interest rates can range from 10% to 12% or more.

Example: On a $270,000 loan with 1 point, you’ll pay $2,700 upfront. At 12% interest, you’ll pay $2,700 monthly.

Additional Fees

Lenders may charge other fees like escrow fees, draw fees, underwriting, and appraisal fees. These can add up, especially on smaller loans.

Example: A $200,000 loan might come with $1,900 in fees, affecting your overall cost.

How to Choose the Best Loan

  1. Compare Costs: Use our free Loan Cost Optimizer tool on our website to compare lenders and see who offers the best deal.
  2. Check Funding Speed: Make sure your lender can close the deal quickly to avoid losing it.
  3. Evaluate All Fees: Look at points, interest rates, and other fees to get the full picture.

Conclusion

In sum, the best loan for your fix and flip is the one that costs you the least and funds on time. At The Cash Flow Company, our goal is to help you get the best lending options available. If you have a question or a deal to discuss, reach out to us. Visit our website, download our Loan Cost Optimizer, to not only compare lenders, but to also find the best deal for you.

Watch our most recent video to discover more about: Real Estate Investing: Points and Interest Explained

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Why You Need the Loan Cost Optimizer

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Why You Need the Loan Cost Optimizer

Today we are going to discuss why you need the loan cost optimizer! When taking into consideration which loan is best for your fix and flip, it is imperative that you compare everything side by side. Whether it’s a hard money loan, a private loan, a bank loan, or even OPM (Other People’s Money), each situation is different. That is why it’s essential to know what works best for you. Let’s get started!

Understanding Leverage

Leverage is key in real estate investing to create wealth. Think of leverage like a tool. When used right, it helps you build faster and better. Here’s what you need to know to ensure you get the best leverage:

Consider the Cost and Value

Just like hiring a contractor, you need to look at what you’re paying for and what you’re getting. It’s not always about the cheapest option but the best value. Typically, you might hear that hard money is more expensive than private money, but let’s dig deeper to see if that’s true.

How to Choose the Best Loan

  1. Compare Costs: Use our free Loan Cost Optimizer tool on our website to compare lenders and see who offers the best deal.
  2. Check Funding Speed: Make sure your lender can close the deal quickly to avoid losing it.
  3. Evaluate All Fees: Look at points, interest rates, and other fees to get the full picture.

Conclusion

In sum, the best loan for your fix and flip is the one that costs you the least and funds on time. By using the cost loan optimizer you can see everything side by side before making a decision. At The Cash Flow Company, our goal is to help you get the best lending options available. If you have a question or a deal to discuss, reach out to us. Visit our website, download our Loan Cost Optimizer, and compare lenders to find the best deal for you.

Watch our most recent video to discover more about: Why You Need the Loan Cost Optimizer

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10 Things You Should Know About a DSCR Loan for Rental Property Deals

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How do you know if you’re the right type of person for a DSCR loan on a rental property?

What makes a good DSCR loan? What makes a good DSCR property?

We get hundreds of people asking these questions. While traditional loan offerings will be more or less the same from lender to lender, DSCR loans are more like the wild west. Every lender will have slightly different requirements, expectations, and terms.

But DSCR loans are an amazing option when used in the right place, on the right property, from the right borrower.

Let’s go over 10 things that will help you understand what’s right for a DSCR loan on a rental property.

What’s a DSCR Loan for a Rental Property?

Debt service coverage ratio loans are loans designed for real estate investors. They’re most often 30-year products, but some lenders will offer other types.

The debt ratio in a DSCR loan is based on two things: the property’s income and the property’s expenses (mortgage, interest, taxes, and insurance). Cash flow is a vital piece to DSCR lending.

Let’s look at 10 things to keep in mind for DSCR loans.

1. Income

DSCR loans are best for borrowers whose current income over the last two years doesn’t qualify for either a conventional loan or a loan from a local bank.

If your tax returns are low over the last two years, that’s where a DSCR loan might come in for your rental property.

2. Business History

Many real estate investors are new, so they don’t have two years’ worth of tax returns for their business.

With DSCR loans, the length of your business does not matter. You could have opened the LLC the morning you close on the loan. Banks need your business information because they’re lending based on you. DSCR lenders don’t because they’re lending based on the property.

3. Employment Gaps

In the same vein as the first two items, DSCR loans are great for people who just changed jobs, moved, or haven’t had a continual work history for the past two years.

A conventional bank won’t be understanding about career shifts or gaps in work. But they won’t impact your ability to get a DSCR loan.

4. Investing History

Traditional lenders can be hard on new real estate investors. They want to see past successful projects in order to trust you. DSCR loans, though more designed for investment properties, don’t care about your past real estate investing history.

5. Cash Flow on a DSCR Loan Property

To get a great DSCR loan, the rental property must cash flow. While there are some DSCR loans available for negative cash-flowing properties, you’ll only get the best rates and terms when you have positive cash flow.

6. Loan Limit

DSCR loans are also good for people who have maxed out the amount of conventional loans they can get.

Conventional loans have a limit of 10 per person. Once you’ve reached that limit, you need to start looking for alternative options (like DSCR loans).

7. Credit Score

The higher your credit score, the better. However, even people with lower credit scores (660 and below) have options with DSCR.

Keep in mind, a lower credit score means a more expensive loan. A more expensive loan will lower your cash flow. Lower cash flow might disqualify you for the loan.

Instead of a 7.5% interest rate, a poor credit score could only get you a 9.5%.

8. Holding a Property with a DSCR Loan for 3-5 Years

This is another area where DSCR loans differ from conventional loans: DSCRs come with prepayment penalties. This means if you pay them off before 3 or 5 years (whatever period is decided by the lender), then you get charged a hefty fee.

DSCR loans are best for people who want to hold the property, and not refinance or sell within the prepay period.

9. Property Is Turnkey

DSCR loans aren’t good for fix and flip properties. A DSCR property should need no work – it should be turnkey, totally ready.

This means you should use a DSCR loan on either rental-ready purchases or a refinance on a completely renovated BRRRR-style rental.

10. Interest-Only

Lastly, DSCR loans are good for someone looking for interest-only payments. Banks and conventional loans don’t offer interest-only options.

Doing interest-only improves your cash flow, giving you 5-10 years where you don’t have to pay principal.

The Right DSCR Loan for a Rental Property

When you’re looking for cash flow, always look at all of your options before you jump into a loan.

We hope this article gives you an idea of what you should look for when you shop around.

Download this free DSCR calculator for the next time you’re shopping for rentals, and send any questions our way at Info@TheCashFlowCompany.com.

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What’s Your Cash Flow: Interest Rate by Credit Score

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Lenders decide your interest rate by credit score. Here’s how it shakes out…

Leverage is the lifeblood of investing… Using other people’s money (loans) to create income and wealth for you and your family.

The largest source of funding is both small and large lending institutions. One of the top (if not the top) determining factors for lenders getting you the best funding possible… is your credit score.

Let’s look behind the scenes and see how these lenders use credit scores to determine your rate.

How Lenders Decide Interest Rate by Credit Score

Full disclosure: sometimes your rate gets jacked up just because you’re working with a greedy loan officer.

However, once you’ve found a lender you trust, you can be assured they’re using an internal system that looks something like this:

These credit boxes are what the lender uses to determine the cost of a good vs not so good credit score. (If your score is too low, you more than likely will just not get a loan).

The above example is what we would see from a typical DSCR lender. A conventional lender’s would look very similar.

The negative price adjustments are not a direct change to a rate but they are added to the cost to calculate the rate. In layman’s terms: the higher the cost, the higher the rate.

From the highest score to the lowest, you would expect to see around a 1.5% increase in interest rate. So, if the best rate was 7% at a 740+ credit score, then you may expect a rate of 8.5% with a 640 score.

Example: How Interest Rates and Credit Score Changes Your Cash Flow

As an example, let’s say we need a $300,000 loan for either a purchase or refinance. The cost of our funding, depending on interest rate, would be:

  • At 7%, the monthly payment would be $1,996
  • At 8.5%, the monthly payment would be $2,306

How does that look in credit terms? A 640 score would cost you the $2,306. On the other hand, a 740 score would cost you $300 less, at $1,996.

This is a $300 difference per month in your cash flow. Aka: a bad credit score could cost you $3,600 per year in cash flow!

An investor with a great credit score and 10 properties would be paying $1 million less over the life of their loans than an investor with the same amount of properties and bad credit.

Help with Your Cash Flow

This is why investing is easier for some people and harder for others:

Cash flow is king.

Credit will control that cash flow.

 

Want to find out how to get your credit score up and your rates down?

To get our report on the best rates, reach out to us at Info@TheCashFlowCompany.com. You can also get more info on real estate investing on our YouTube channel.

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DSCR ratio and interest rates explained

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DSCR ratio and interest rates explained

Today we are going to discuss the DSCR ratio and explain interest rates. Many investors are intimidated by DSCR loans and are unsure as to where to start. However, the main thing that you need to take into consideration is whether or not the property cash flows. This in turn will have a significant impact on the interest rates for you DSCR loan. Let’s take a closer look! 

Calculating a DSCR ratio. 

Let’s go over how to calculate DSCR quickly and understand what it means for your property. The DSCR ratio is found by comparing a property’s income to its expenses. To clarify, the property’s income is the rent that is received for the property. On the other hand, the expenses include the monthly mortgage payment, taxes, insurance, and HOA. A ratio of greater than 1 means the property is cash flowing, which is what both you and your lender want to see. Also, for a DSCR loan, the higher this ratio is, the better the terms your loan will have.

Negative DSCR Loans

Contrary to popular belief, you can still find a DSCR product for negative cash flow properties. However, these loans come at a higher interest rate.To clarify, a negative DSCR loan is used when someone gets stuck with a property they can’t sell. Under these circumstances, having very little income on the property would be better than none at all. This is why it is imperative that you have a cash flowing property from day one! By taking your time and working through the numbers, you can in turn avoid being stuck with a property that is not helping you to move forward.

Knowing your thresholds! 

There are certain thresholds when you calculate DSCR loans. When you break these thresholds, you get a better rate. And better rates mean… more cash flow! Your monthly payments will lower.Let’s go over what some of these thresholds will look like.

Property Income Property Expenses DSCR ratio  Profit  Interest Rate for DSCR
$2,000 $1,590 1.25 25% 7.25%
$1,500 $1,590 .94 9%+

Remember, anytime you can lower the rate, that’s cash flow that goes into your pocket. In this example, the difference between a negative DSCR and a 1.25 is about $220/month on your payment. Over the course of a year, that adds up to $2,600. If you have 5 rental properties, that’s $13,000/year. At 10 rental properties, it’s a $26,000 difference!

Know your numbers to get ahead! 

If real estate investing is going to be your career or retirement plan, buying properties that you know will cash flow is vital. A couple hundred bucks a month can snowball into hundreds of thousands over time.This is why it’s important to know how to calculate DSCR quickly when you’re looking at buying a new property. Never put a contract on a rental property when you’re not sure if the cash flow fits your goals.

How can you calculate a DSCR ratio quickly?

To help keep the numbers straight when you calculate DSCR, you can download our free, simple DSCR calculator at this link.

Watch our most recent video to find out more about: How to calculate a DSCR ratio

If you have any other questions about how to calculate DSCR (or how to get a DSCR loan!), send us an email at Info@TheCashFlowCompany.com.

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How to calculate a DSCR ratio

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How to calculate a DSCR ratio

Today we are going to discuss how to calculate a DSCR ratio. Many investors are intimidated by a DSCR loan and are unsure as to where to start. However, the main thing that you need to take into consideration is whether or not the property cash flows. Properties that do cash flow will in turn have a pretty good shot at getting approved.

Where do you start? 

To clarify, DSCR stands for the debt service coverage ratio. This ratio is used by underwriters to determine if a property is positively cash flowing. It’s an important metric to understand how to maximize your leverage by getting the most out of your investments.

Calculating a DSCR ratio. 

Let’s go over both how to calculate DSCR quickly, as well as discovering what it means for your property. The DSCR ratio is found by comparing a property’s income to its expenses. The property’s income is the rent that is received for the property. On the other hand, the expenses include the monthly mortgage payment, taxes, insurance, and HOA. If the ratio of greater than 1, that means the property is cash flowing. This is good for not only you, but your lender as well. The better the DSCR ratio the better the loan terms.

Example 1:

Property Income Property Expenses DSCR ratio
$1,700 Mortgage payment $1,290

Taxes: $100

Insurance: $100

HOA: $100

 Income / Expenses

$1,700 / $1,590
$1,700 $1,590 Total: 1.07 

In this example the ratio is great! The break-even point for a DSCR is a ratio of 1. Underwriters and lenders like to see a ratio of at least 1 because it ensures that the property can take care of itself. In doing so, the lenders know that you won’t need to take money out of your pocket to cover the expenses. This is assurance for them, and makes them more likely to approve the loan with good terms. In sum, a 1.07 ratio means the property is positively cash flowing, and it’s a good investment.

Example 2:

Property Income Property Expenses DSCR ratio
$1,500 Mortgage payment $1,290

Taxes: $100

Insurance: $100

HOA: $100

 Income / Expenses

$1,500 / $1,590
$1,500 $1,590 Total: .94

In this example the DSCR ratio is less than 1, which means that the property is negatively cash flowing. This is why it is imperative that you estimate the rent on a property before purchasing it. By having a property with a $1,500 income, it wouldn’t be a good investment. Also, it wouldn’t qualify for a good DSCR loan. However, the same property with a rent of $1,700 would be a good investment because it cash flows..

Know your numbers to get ahead! 

If real estate investing is going to be your career or retirement plan, buying properties that you know will cash flow is vital. A couple hundred bucks a month can snowball into hundreds of thousands over time.This is why it’s important to know how to calculate DSCR quickly when you’re looking at buying a new property. Never put a contract on a rental property when you’re not sure if the cash flow fits your goals.

How can you calculate a DSCR ratio quickly?

To help keep the numbers straight when you calculate DSCR, you can download our free, simple DSCR calculator at this link.

Watch our most recent video to find out more about: How to calculate a DSCR ratio

If you have any other questions about how to calculate DSCR (or how to get a DSCR loan!), send us an email at Info@TheCashFlowCompany.com.

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