Tag Archive for: DSCR loan

DSCR Loans: Does Your Rent Cover Your Costs?

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DSCR Loans: Does Your Rent Cover Your Costs?

Today we are going to discuss the importance of asking “does your rent cover costs” when considering a DSCR loan. Getting a DSCR loan can be both easy as well as rewarding. Let’s take a closer look! 

First and Foremost: Check Your Rent Coverage

First, ask yourself: does your rent cover all your costs? This includes:

  • Mortgage payment
  • Taxes
  • Insurance
  • HOA fees

While it’s not always necessary, by having your rent cover these costs can in turn help you get better rates as well as higher loan-to-value products. At the very least, aim to charge rent that covers your monthly payments. However, if it does, then you’ve passed the first step!

Example: Begin by imaging that you own a rental property. Your mortgage payment is $1,200, your taxes and insurance are $200, and your HOA fee is $100. Therefore, your total monthly cost is $1,500. However, if you charge $1,600 in rent, you are even able make a little extra.

Conclusion

In sum, determining your DSCR ratio you can determine if a DSCR loan is right for you. And that’s it! 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. Here at The Cash Flow Company we want to ensure that all of your questions are answered prior to purchasing a property. Contact us today to find out more! 

Watch our most recent video to find out more.

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Why a DSCR Loan is Perfect for Real Estate investors

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Why a DSCR Loan is Perfect for Real Estate investors

Many investors ask why a DSCR loan is perfect for real estate investing. To clarify, a DSCR loan stands for Debt Service Coverage Ratio loan and is designed specifically for real estate investors. This type of loan helps you buy rental properties, whether they are long-term or short-term rentals. However, It’s not for flips or homes you plan to live in.

Why Choose a DSCR Loan?

Choosing a DSCR loan can be a smart move for several reasons:

  1. Easy Qualification: You don’t need to worry about how long you’ve been in business or your personal income. Even if you started your business yesterday, you could qualify.
  2. Focus on Property Income: The loan qualification is based on the income generated by the property, not your personal income.
  3. 30-Year Loan Options: You get a good 30-year loan product, which can provide stability and predictability.

How Does a DSCR Loan Work?

The key to a DSCR loan is that it focuses on the property’s ability to generate enough income to cover its expenses. Here’s how it works:

  1. Property Income: The income from the rental property should at least cover the mortgage, property taxes, insurance, and any HOA or flood insurance fees.
  2. Credit Score: Your personal credit score is important. The higher your score, the better the terms and rates.
  3. Loan-to-Value Ratio (LTV): This is the amount of the loan compared to the property’s value. Lower LTV means less risk for lenders and better terms for you.

Who Can Benefit from a DSCR Loan?

DSCR loans are perfect for:

  • New Investors: If you’ve just started your real estate investment journey, you can qualify even without a long business history.
  • Tax Savvy Investors: If you write off a lot of expenses on your taxes, which can reduce your reported income, this loan can still work for you.
  • Expanding Portfolios: Investors looking to add more rental properties can benefit from the flexible qualification criteria.

Example

Imagine you are an investor who just started a year ago. You found a great rental property, but traditional lenders won’t approve your loan because you don’t have two years of business income. A DSCR loan can help. As long as the rental income covers the mortgage and other expenses, you can get the loan and grow your investment portfolio.

Get Started with a DSCR Loan Today

A DSCR loan is an excellent loan for real estate investors. Is it right for your investment needs? Contact us at The Cash Flow Company. We have the tools and expertise to help you understand your options and find the best loan for your needs.

Watch our most recent video to find out more about: Why a DSCR Loan is Perfect for Real Estate investors

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3 Factors to Think About When Considering a DSCR Loan

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3 Factors to Think About When Considering a DSCR Loan

What is a DSCR Loan?

There are 3 factors to think about when considering a DSCR loan that we are going to discuss further today. First and foremost, a DSCR loan stands for Debt Service Coverage Ratio loan and is an excellent loan for real estate investment. It’s designed specifically for real estate investors. This type of loan helps you buy rental properties, whether they are long-term or short-term rentals. However, it’s not for flips or homes you plan to live in.

Why Choose a DSCR Loan?

Choosing a DSCR loan can be a smart move for several reasons:

  1. Easy Qualification: You don’t need to worry about how long you’ve been in business or your personal income. Even if you started your business yesterday, you could qualify.
  2. Focus on Property Income: The loan qualification is based on the income generated by the property, not your personal income.
  3. 30-Year Loan Options: You get a good 30-year loan product, which can provide stability and predictability.

Important Considerations

Before jumping into a DSCR loan, consider these factors:

  1. Prepayment Penalties: These loans often come with penalties if you pay them off early. Make sure to understand these terms before committing.
  2. Higher Interest Rates: DSCR loans can have slightly higher interest rates compared to traditional loans. This is because they are easier to qualify for.
  3. Not for Flips or Personal Use: These loans are strictly for rental properties, not for homes you plan to flip or live in.

Is a DSCR Loan Right for You?

If you’re a real estate investor looking for a flexible loan option that doesn’t rely heavily on your personal income, a DSCR loan could be the perfect fit. It’s especially useful if you’re new to the business or if you maximize your tax deductions. Always run the numbers and shop around for the best terms.

Get Started with a DSCR Loan Today

A DSCR loan is an excellent loan for real estate investors. Is it right for your investment needs? Contact us at The Cash Flow Company. We have the tools and expertise to help you understand your options and find the best loan for your needs.

Watch our most recent video to find out more about: 3 Factors to Think About When Considering a DSCR Loan

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DSCR Loan Calculator: Understanding Monthly Payments

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Looking at a DSCR loan calculator and wondering what numbers you need to plug in to make everything come out even? 

If you’re new to the DSCR game, you’ve likely heard people talking about the DSCR ratio and how that number helps you set rents. But how do you actually calculate all of that? 

There are quite a few numbers that go into calculating a DSCR ratio (which is then often used to calculate rents).

What is a DSCR Ratio?

A DSCR ratio is simply the break even point. 

Essentially, you start by adding up all of your monthly expenses (mortgage payments, taxes, insurance, HOA fees, etc.). If you compare that number to the amount you’re charging for rents and those numbers are the same (you’re putting out and bringing in the same $$ amount), then you have a DSCR ratio of 1.

You never want a DSCR below 1 (spending more than you’re bringing in). However, a ratio of 1 simply means that you’re breaking even. In other words, you’re not actually making money unless you can raise the ratio (and raise rents) in order to bring in more money than you’re spending.

Lenders like to see positive cash flow, so it’s typically good to aim for a DSCR ratio of 1.25. That means you’ll make 25% more than you’re spending. 

How To Calculate Monthly Loan Payments

One of the most significant outflows of cash is the loan payment. In addition to fixed costs (think taxes, insurance, etc.), these payments are a significant factor of a DSCR plan. Once we know how much money is going out every month, we can figure out how much we need coming in.

The property in our example cost $250K and the investor paid a 20% down payment. 

  • Purchase Price = $250,000
  • Down Payment = 20%
  • 30-Year Fixed-Rate (8.5%) DSCR Loan = $200,000

The easiest way to calculate your monthly payments is to use a calculator designed for these numbers. We recommend using a site like calculator.net and selecting their amortization calculator. 

You can plug in the numbers, and it will do the work for you.

Once you plug in the numbers and hit calculate, you’ll see that your monthly loan payments are just under $1,538.

Updated Monthly Costs:

  • Fixed Costs Approximate Estimate = $450
  • Approximate Loan Payments = $1,538
  • Total = $1,988

Now that you know all of the money you’re paying each month, you know that to hit a DSCR ratio of 1, you’ll need to have rents of at least $1,988 in order to break even.

When working with your DSCR loan calculator, the monthly payments are a critical component to set you up for success.

 

Read the full article here.

Watch the full video here:

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How to Calculate DSCR Loan Amount

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How can you use the DSCR ratio to calculate DSCR loan amounts?

When getting into the DSCR game, it’s important to run some numbers on the front end to evaluate potential deals. 

How do you know if your property is going to meet DSCR requirements? What’s the minimum loan you’ll need, and what’s the maximum you can shop for the purchase price?

Easy. Start with the DSCR ratio, and then walk through these steps to figure out your payments.

Calculating DSCR Loans

1. Figure Out Local Rents

Using resources like Zillow or rent.com, you can look around to find standard rents for your area. This is the first step in getting future estimates (such as loan total, purchase price, etc.). 

Don’t start spending money before calculating whether or not you’ll actually be able to pay those costs back.

Let’s say standard rent in the area is around $2,500. This means that, in order to break even, we need to keep all of our monthly expenses below that $2,500. 

  • Rents = $2,500
  • Expenses ≦ $2,500

2. Monthly Expenses

For this example property, there are three monthly expenses. Taxes, insurance, and HOA fees. Other properties might have additional insurance or fees, so make sure you look at the neighborhood.

Here’s what we’re looking at for this example:

  • Taxes: $1,200/year ($100/mo)
  • Insurance: $2,400/year ($200/mo)
  • HOA: $200/month
  • Total Monthly Expenses: $500

Obviously at this point in the process, these numbers are only estimates. However, if you do research to have informed estimates, you can save a lot of money and headache down the road.

3. The Leftover = Maximum Mortgage Payments

If our estimated rent is $2,500/month and we subtract our $500 of monthly expenses out of that number, we’re left with $2,000/month. 

  • $2,500 (income: rent) – $500 (expenses) = $2,000 (leftover)

Now we’re ready to talk about the mortgage.

The leftover $2,000 is the maximum you could pay each month towards a mortgage. 

If we want to qualify for a DSCR and keep our ratio at 1, this gives us our upper limit.

Translating Expected Expenses Into Your DSCR Loan

So, how do we take this $2,000/month number and translate it into DSCR loan requirements?

How much could you afford in a loan?

The easiest way is to use our updated DSCR calculator. It’s free to download and easy to use!

By inputting the current estimates, you can use this download to calculate DSCR loan requirements. What do you qualify for? What terms can you expect?

Our current estimate would likely qualify for an 8% interest rate on a 30 year mortgage.

With those numbers, we can now really start planning.

The Maximum Loan Amount

As we mentioned above, we recently updated our DSCR calculator to include a worksheet that helps you figure out your maximum loan. Even if you’ve downloaded the calculator before, you can redownload to get the updated version.

You can also use sites like calculator.net, input the numbers, and see what you’re working with.

Once we use our DSCR calculator, we discover that the maximum loan we can get and still keep our DSCR ratio at 1 is around $272,500.

 

Read the full article here.

Watch the full video here:

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DSCR Loan Calculator: Understanding Fixed Costs

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Looking at a DSCR loan calculator and wondering what numbers you need to plug in to make everything come out even? 

If you’re new to the DSCR game, you’ve likely heard people talking about the DSCR ratio and how that number helps you set rents. But how do you actually calculate all of that? 

There are quite a few numbers that go into calculating a DSCR ratio (which is then often used to calculate rents).

What is a DSCR Ratio?

A DSCR ratio is simply the break even point. 

Essentially, you start by adding up all of your monthly expenses (mortgage payments, taxes, insurance, HOA fees, etc.). If you compare that number to the amount you’re charging for rents and those numbers are the same (you’re putting out and bringing in the same $$ amount), then you have a DSCR ratio of 1.

You never want a DSCR below 1 (spending more than you’re bringing in). However, a ratio of 1 simply means that you’re breaking even. In other words, you’re not actually making money unless you can raise the ratio (and raise rents) in order to bring in more money than you’re spending.

Lenders like to see positive cash flow, so it’s typically good to aim for a DSCR ratio of 1.25. That means you’ll make 25% more than you’re spending. 

How to Calculate Your Fixed Costs

The first step of figuring out the ratio is to get a really clear picture of your expenses. Expenses come in two parts: fixed costs and monthly payments for loans. 

Let’s look at fixed costs right now.

These fixed monthly expenses consist of things like HOA fees, insurance, taxes, and other exciting things.

For Example…

Let’s take a peek at some numbers based on a property we reviewed recently:

  1. Taxes. This property had $1,200/year in taxes. Divide that by 12 and you have $100/month. 
  2. Property Insurance. We’re going to look at $1,800/year or $150/month.
  3. Flood Insurance. This property didn’t have any HOA fees, but it did need flood insurance. That comes to $2,4000/year or $200/month.

In total, you have $450/month in expenses for this property before factoring in your mortgage payment.

When working with your DSCR loan calculator, don’t forget about the fixed costs. It’s a critical number in calculating the ratio that’s going to set you up for success.

 

Read the full article here.

Watch the full video here:

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Don’t Kickstart Your BRRRR With a DSCR Loan

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A DSCR loan is great, but they’ll come into play at a later part of the BRRRR process. 

Let’s start with a real scenario we encountered a few weeks ago. A client from Michigan called. He’s done flips before and even kept a few rentals, but he’s new to the BRRRR method. 

In the past, he’s always used partners or cash to fund his investing. However, this property needs more money.

He’s buying it for $200,000, putting approximately $22,000 of rehab into it, and we’ll estimate closing costs around $7,000. That’s a total of $229,000 for a pretty basic investment property. 

Where can this client find the money, and how can he leverage it to his advantage?

He wanted to know if he could take out a DSCR loan to kickstart the BRRRR process.

Can You Use a DSCR Loan to Begin the BRRRR Method?

The short answer is technically yes. However, since you don’t currently own the property, you can’t claim the equity in it just yet which makes it a not-so-great deal.

For our example client above, a DSCR loan will only cover up to 80% of the purchasing costs. This leaves 20% leftover — a large amount of cash that our client and a lot of newer investors simply don’t have.

Additionally, a DSCR loan won’t cover renovations or closing costs.

If you’re trying to exclusively use a DSCR for a BRRRR, you’re going to see the payments begin to add up really quickly.

It’s typically better to wait until later in the process to bring in the DSCRs.

 

Read the full article here.

Watch the full video here:

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DSCR Calculator: How to Determine Your Rental Income

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What do you need to know in order to effectively use a DSCR calculator?

If you’re new to the DSCR game, you’ve likely heard people talking about the DSCR ratio and how that number helps you set rents. But how do you actually calculate all of that? 

What is a DSCR Ratio?

A DSCR ratio is simply the break-even point. 

Essentially, you start by adding up all of your monthly expenses (mortgage payments, taxes, insurance, HOA fees, etc.). If you compare that number to the amount you’re charging for rents and those numbers are the same (you’re putting out and bringing in the same $$ amount), then you have a DSCR ratio of 1.

You never want a DSCR below 1 (spending more than you’re bringing in). However, a ratio of 1 simply means that you’re breaking even. In other words, you’re not actually making money unless you can raise the ratio (and raise rents) in order to bring in more money than you’re spending.

Lenders like to see positive cash flow, so it’s typically good to aim for a DSCR ratio of 1.25. That means you’ll make 25% more than you’re spending. 

How to Calculate Your Fixed Costs

The first step of figuring out the ratio is to get a really clear picture of your expenses. Expenses come in two parts: fixed costs and monthly payments for loans. 

Let’s look at fixed costs first.

These fixed monthly expenses consist of things like HOA fees, insurance, taxes, and other exciting things.

For Example…

Let’s take a peek at some numbers based on a property we reviewed recently:

  1. Taxes. This property had $1,200/year in taxes. Divide that by 12 and you have $100/month. 
  2. Property Insurance. We’re going to look at $1,800/year or $150/month.
  3. Flood Insurance. This property didn’t have any HOA fees, but it did need flood insurance. That comes to $2,4000/year or $200/month.

In total, you have $450/month in expenses for this property before factoring in your mortgage payment.

How To Calculate Monthly Loan Payments

Once you know your fixed costs, there are a few other numbers to take into consideration before setting your rents. Once we know how much money is going out every month, we can figure out how much we need coming in.

The property in our example cost $250K and the investor paid a 20% down payment. 

  • Purchase Price = $250,000
  • Down Payment = 20%
  • 30-Year Fixed-Rate (8.5%) DSCR Loan = $200,000

The easiest way to calculate your monthly payments is to use a calculator designed for these numbers. We recommend using a site like calculator.net and selecting their amortization calculator. 

You can plug in the numbers, and it will do the work for you.

Once you plug in the numbers and hit calculate, you’ll see that your monthly loan payments are just under $1,538.

Updated Monthly Costs:

  • Fixed Costs = $450
  • Approximate Loan Payments = $1,538
  • Total = $1,988

Now that you know all of the money you’re paying each month, you know that to hit a DSCR ratio of 1, you’ll need to have rents of at least $1,988 in order to break even.

Using the DSCR Ratio to Set Rents

As we mentioned before, a DSCR ratio of 1 is fine – you won’t be losing money. But it’s not an optimal investment strategy. 

Lenders like to see you turning a profit, and you should too!

Returning to our above example, let’s say your outgoing expenses are $1,988. If you raise your rents by 25% (raising that DSCR ratio to 1.25 instead of 1), you’ll suddenly be making a 25% profit. 

Here’s how you get those numbers:

Breaking even on your real estate investing projects is great, but making money is the goal. Understanding how to calculate these numbers is a critical step towards successful investing

Check Out Our DSCR Calculator

To help you get an even clearer understanding of DSCRs, check out our DSCR calculator. It’s free to download and easy to use.

You’re also welcome to email us at Info@TheCashFlowCompany.com. We’re more than happy to answer questions and help you find the right deal.

We’re always looking for ways to help you succeed in your investment journey by giving you the knowledge and tools to win.

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The BRRRR Method: When to Use DSCR and Bridge Loans

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How can you use the BRRRR method to get you in and out of a property with little-to-no money down?

Let’s start with a real scenario we encountered a few weeks ago. A client from Michigan called. He’s done flips before and even kept a few rentals, but he’s new to the BRRRR method. 

In the past, he’s always used partners or cash to fund his investing. However, this property needs more money.

He’s buying it for $200,000, putting approximately $22,000 of rehab into it, and we’ll estimate closing costs around $7,000. That’s a total of $229,000 for a pretty basic investment property. 

Where can this client find the money, and how can he leverage it to his advantage?

What is the BRRRR Method?

BiggerPockets launched the BRRRR acronym a few years ago. BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. This acronym outlines a helpful strategy for successful real estate investing. 

It centers around buying properties with built-in equity. After renovations, the investor can refinance therefore creating a sustainable cycle of investments. 

Can You Use a DSCR Loan to Begin the BRRRR Method?

The short answer is technically yes. However, since you don’t currently own the property, you can’t claim the equity in it just yet which makes it a not-so-great deal.

For our example client above, a DSCR loan will only cover up to 80% of the purchasing costs. This leaves 20% leftover — a large amount of cash that our client and a lot of newer investors simply don’t have.

Additionally, a DSCR loan won’t cover renovations or closing costs.

If you’re trying to exclusively use a DSCR for a BRRRR, you’re going to see the payments begin to add up really quickly.

A Better Plan

Instead of throwing a DSCR at the whole thing from the start, we suggest a different strategy of kickstarting your BRRRR cycle. 

1. Start with a bridge loan.

The BRRRR method is all about sustainable investing. How can you use other people’s money to keep cash flowing in and out of your projects?

This means beginning with a loan that’s going to cover those starting costs so you can get ownership and claim that equity!

A bridge loan is more flexible than a DSCR so you can cover the purchase, rehab, even the closing costs. 

2. Add the DSCR.

Once you’re actually starting to rent out the property, that’s the time for the DSCR. DSCRs have more restrictions anyways, so they’re most effective when used for renting.

The DSCR can pay off the bridge loan and you can refinance the property for an even better outcome. 

The Beauty of the BRRRR Method

By using this loan strategy with the BRRRR method, our client was able to come up with a plan that should easily generate over $1,000/month of positive cash flow for himself. 

And it all started with strategically using other people’s money to enter the BRRRR cycle. 

This is the beauty of real estate investing. It’s accessible and profitable, even for beginners. 

We’re Here For You

If you have any questions or want to discuss a project, reach out to us at Info@TheCashFlowCompany.com.

Please also check out the free tools on our website for downloads that can help set you up for success. Additionally, if you’re interested in the BRRRR method, make sure to explore our BRRRR roadmap. 

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Rental Loans Compared: Traditional vs. DSCR vs. Local Banks

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Which rental loans are the BEST for your rental property?

There are three main loans that cover rental property loans: traditional, DSCR, and small bank loans.

Whenever we’re talking about rentals, we’re always going to come back to cash flow, and it’s important to find the best cash-flowing loan. 

If you’re deep in the real estate investing game, then you’ll probably utilize all three of these types of loans at some point. They all have their place. However, if you’re a newer investor, it can be tricky to figure out which loan is right for you.

We want to look at the pros and cons of each type of rental loan to help you understand which might be the best option to help your cash flow for a specific deal. 

Traditional Rental Loans

Pros of Traditional Loans

1. It’s a 30 Year Mortgage. This standardized timeline is reliable and consistent across most traditional loans.

2. No Prepay Penalty. Without a prepayment penalty, you can get out of the loan whenever you want. This is great if you anticipate a changing market and might want to sell early.

3. Lower Interest Rates. Between DSCR and traditional rental loans, you’re often looking at at least a whole point difference in the interest rates. While a single percentage might seem small, when you’re dealing with hundreds of thousands of dollars, the interest adds up very quickly. 

Interest rates affect everything from your cash flow to your credit score to your debt ratio. Depending on where you’re at financially, lower interest rates can be a huge point in favor of these traditional loans.

4. Home Hacking. With traditional rental loans, you’re actually able to do an owner-occupied loan. This allows you to live in one of the units you’re working on. Especially if you’re working on multiple units, you can move from one to another as needed.

Sometimes these owner-occupied loans have lower down payments and better rates, so they’re often worth looking into.

5. Same Rules Nationwide. Traditional loans are consistent across the country. No matter where you go, the guidelines are the same. This makes them predictable although they often have stricter guidelines than other loan types.

Cons of Traditional Loans

1. Property Limits. With traditional loans, you’re limited to 10 properties or 10 units. So while they do often have the best rates, you’re limited in how many properties they cover.

2. Need Income Proof and Good Credit. Not all loans need proof of income, but traditional loans certainly do. Your rates will also be limited by your credit score.

3. Cannot Close in an LLC. Unlike other loan options, traditional loans require you to close in your personal name because you cannot own the property when you’re going through a purchase or refinance in an LLC.

An LLC typically works to protect individuals from the financial effects of a business. However, because of the limits of traditional loans, you can’t use that protection in this scenario.

4. One Year Seasoning. You’re not allowed to refinance until after a full year has passed. This is especially important to consider if you’re doing a BRRRR and want to tap into some equity with a full refinance or purchase.

DSCR Rental Loans

DSCR stands for debt-service coverage ratio. You’ll often see these loans come up for anything from a single family home to a larger multi-unit property.

Pros of DSCR

1. Flexibility. While traditional loans find strength in their consistency, investors sometimes find themselves needed a lot more flexibility. That’s where DSCRs come in. 

DSCRs are significantly more flexible because lenders and investors can negotiate unique terms that fit a project’s specific needs.

2. Ease! The biggest benefit of DSCR is ease. It doesn’t matter if you’re employed, what your tax return says, or how much income you have flowing. DSCR lenders only care about the rental property and whether it has the potential to produce cash flow.

3. Close in an LLC. Another big thing in the real estate investor world is closing in an LLC. Unlike traditional bank loans, you can both buy and refinance in an LLC, so you’re protected all the way through.

4. Available in all 50 States. No matter where you are, you will be able to find available DSCR rental loans. However, the details might vary.

Each lender offering DSCRs have their own terms, guidelines, etc. This makes it incredibly important to shop around to make sure you find the right fit.

5. Unlimited Number of Properties. You will find so many options in the DSCR world. You can find loans for specific properties or do a blanket loan for $50 million that could cover as many units as you wanted.

Always make sure that the lender and loan are the right fit for you, and remember that there are a ton of options available!

Cons of DSCR

1. Prepayment Penalties. The number one downside of DSCR loans are the prepayment penalties. If you’re looking to get in and out of a property within the first three to five years, there’s a prepayment penalty unless you buy it out.

2. Higher Rates. Rates for DSCRs typically run anywhere from 1%-3% higher than traditional bank loans, depending on credit score, size of loan, etc.

3. Might Disappear or Change Quickly. DSCR loans are prone to change quickly. When shifts happen in the real estate market, they might even disappear for a brief time before showing up again.

While traditional bank loans are more slow-moving, DSCR moves quickly, and sometimes that can become an issue to real estate investors.

4. Can’t Home Hack. DSCR also does not allow you to live in any of the units you’re working on as you could with an owner-occupied traditional loan.

Local Banks for Rental Loans

Another option that fewer people consider is looking at loans from small, local banks. These local banks sometimes offer in-house products that can offer more flexible loans to people investing in their local area. 

Pros of Small Bank Loans

1. More Flexibility. Depending on your area, some local banks love real estate investors. If you shop around and find a small bank willing to invest, these loans often offer more flexibility than larger traditional loans. 

Because local banks are more likely to understand the area, unique properties that might seem strange to larger lenders might be more seriously considered by locals.

2. Decent Rates. Rates for local banks typically fall between traditional loans and the higher DSCR rates. However, you do keep more flexibility (the appeal of DSCR) for a lower rate.

3. No Prepay Penalties. Most local banks don’t have the extensive prepay penalties like DSCRs.

4. Good for Smaller Towns and Loans. Banks often want to invest in their local areas, and they’re often more willing to give out smaller loans for those areas as well. Of course, these banks still want to see good income and good credit.

Cons of Local Bank Loans

1. Each is Different. Every small bank makes their own rules. Because of this, its so important to shop around to find a bank that will offer you good rates for your specific project.

2. Lending Limits. Local banks also have lending limits. If you’re putting a portfolio together or doing multiple properties, you might hit up against that lending limit, and the bank might have to step away from offering you a loan.

3. Shop Around. As we already mentioned, one of the big negatives is you have to shop around. Small bank loans can also change like DSCR loans, so just because you talked to a bank at one point doesn’t exclude them from being considered again in the future.

4. Limited Areas/Regions. They also limit their areas and don’t want to go too far out of that market. Look for banks in the local area of your investment property.

5. Callable. Loans from small banks are callable. This means that, if they feel like the values have gone down, they could call the loan and make you pay it off or refinance it somewhere else. Neither traditional nor DSCR loans have this feature.

This gives small bank loans a bit more risk than other types of rental loans.

Which Loan is Right for Your Rental?

All three of these loans have their strengths and weaknesses. You can decide which is right for you based on your individual financial history and the needs of your project.

If you want help figuring out what loan is the best fit, we recommend checking out the tools on our website. We have our free DSCR calculator that can help you figure out your DSCR ratio. 

Our goal is to help you maximize the cash flow of your real estate investments. 

If you’re buying or refinancing a rental property and want to know if you’re getting the best terms, or if you have questions about comparing loan types, reach out to us at Info@TheCashFlowCompany.com.

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