Tag Archive for: fix and flip

How to Fund Your Fix and Flip

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When looking to fund your fix and flip, it’s important to understand where the money comes from.

In general, the money in your bucket comes from two places: lenders and your own pocket. It’s important to know how these funds work together to fund your project.

What Does “Lender Funding” Actually Mean?

When lenders talk about funding 90% of purchase or 100% of a renovation, it sounds like they’re paying for more than they actually are.

True, they’re taking care of a huge portion of the cost (that you will pay back eventually). However, you’re still going to encounter additional costs and fees that you’ll have to pay out of pocket to complete your fix and flip.

If you’re not prepared, it stalls your project, and you might end up paying even more than you otherwise would have.

Reimbursable Fix and Flip Costs

This is a sub-category of money you’ll need for your fix and flip. You should also have extra funds in your money bucket to pay for certain projects up front. Even for costs that will be reimbursed!

Because most lenders only reimburse you for completed work, you’ll need out of pocket money to fund the first one or two draws to keep the project going. 

These can be expensive and could cost around $15,000 each. You can find more information about how to pay for these first draws in this article from Hard Money Mike.

These draws will be reimbursed eventually, but you need the funds available up front to get your fix and flip moving. This isn’t technically an out of pocket expense, but it can feel like it while you’re waiting for those first renovations to be completed.

How to Fund Out of Pocket Costs

It can be overwhelming to look at the out of pocket costs adding up for your fix and flip. You can easily expect to pay an additional $20,000 in expenses alone, and that number can rise to $50,000 if you include the funding you’ll need for draws.

It’s best to have these funds available in a savings account, but you can also use gap financing. 

It’s also important to build your credit and be smart about how you’re using credit cards. Some business credit cards let you draw beyond the cash limits. This can be helpful in covering some out of pocket expenses. 

You can also look into hard money loans. Depending on your project, different loan options could better fit your needs. Shop around on the front end to avoid delays in your fix and flip projects. You can also use our loan cost optimizer to help you find the right deal for you.

Read the full article here.
Watch the full video here:

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Fix and Flip Out of Pocket Costs Explained

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How much in out of pocket costs should you expect for your fix and flip?

For every fix and flip or investment property you buy, money is going to come from two places: lenders and your own pocket. 

We know lenders can lend up to 90% to 85% of the purchase and 100% of the rehab. But even with these big numbers, it’s important to know what out of pocket costs you’re on the hook for as a real estate investor.

What Does “Lender Funding” Actually Mean?

When lenders talk about funding 90% of purchase or 100% of a renovation, it sounds like they’re paying for more than they actually are. 

True, they’re taking care of a huge portion of the cost (that you will pay back eventually), but you’re still going to encounter additional costs and fees that you’ll have to pay out of pocket.

We’re here to explain these costs so you’re ready for them. If you’re not prepared, it stalls your project, and you might end up paying even more than you otherwise would have.

So What Are Your Out of Your Pocket Costs?

1. Initial Deposit and Closing Costs

When you sign the contract, you’ll need to put down an initial deposit. This is part of what you see in a HUD-1 settlement.

Additionally, if a lender lends 90% of the purchase price and a 100% of the rehab costs, it looks like all you have to bring in is the remaining 10% of the purchase price.

However, you should also be prepared for additional closing costs and fees. Lenders will not cover those, and you’ll need to pay out of pocket.

2. Out of Pocket Lender Costs

Lenders also have additional fees. They often charge between 1% to 2.5% of the loan amount for appraisals, credit underwriting, and other services

For example, if the total purchase cost of a property is $200,000, and a lender covers 90% of that cost, you can expect to cover the remaining 10% ($20,000). Additionally, lender fees can quickly add an extra $2,800 to $5,600 that we owe to the lender as an out of pocket cost.

3. Title Costs

On top of that, we have title costs. Title costs are typically 0.5%f to 1% of the purchase price. 

Using the same example, if you have a purchase price of $200,000, title charges will likely be an additional $1,000 to $2,000 in out of pocket costs.

4. Mortgage Tax (In Some States)

Check your area to find out about your mortgage tax rates. You won’t have to worry about this in every state, but do your research so you’re prepared.

5. Insurance Costs

Insurance often costs somewhere between $1,000 to $2,000 and needs to be paid out of pocket upfront. 

6. Out of Pocket Monthly Interest

Interest rates depend on your particular loan. To add to our earlier example ($200,000 purchase price, covered 90% and $100,000 rehab price, covered 100%), let’s say your interest rate is 12% (1% a month). 

If you have a loan for $280,000 and they’re charging you interest on the full amount, you could expect a payment of $2,800 every month. If you have it for four months, that’s $11,200 out of your pocket. 

Essentially, after we add up all of these expenses, you can expect to pay a fair amount of additional out of pocket costs that the lender won’t cover. You should also look out for HOA fees or overages that will also have to come out of your own pocket.

Reimbursable Out of Pocket Costs

You should also have extra funds in your money bucket to pay for certain projects up front. 

Most lenders only reimburse you for completed work, and you’ll need out of pocket money to fund the first one or two draws to keep the project going. 

These can be expensive and could cost around $15,000 each. You can find more information about how to pay for these first draws in this article from Hard Money Mike.

These draws will be reimbursed eventually, but you need the funds available up front to get the project moving. This isn’t technically an out of pocket expense, but it can feel like it while you’re waiting for those first projects to be completed.

How to Fund Out of Pocket Costs

It can be overwhelming to look at the out of pocket costs adding up. You can easily expect to pay an additional $20,000 in expenses alone, and that number can rise to $50,000 if you include the funding you’ll need for draws.

It’s best to have these funds available in a savings account, but you can also use gap financing. 

It’s also important to build your credit and be smart about how you’re using credit cards. Some business credit cards let you draw beyond the cash limits. This can be helpful in covering some out of pocket expenses. 

You can also look into hard money loans. Depending on your project, different loan options can be a better fit. Shop around on the front end to make sure your projects won’t be delayed. You can also use our loan cost optimizer to help you find the right deal for you.

If you have a deal you’d like us to price out, we’d be glad to help. Just reach out to us at Info@TheCashFlowCompany.com. 

If you want more information about real estate investing in general, check out our YouTube channel.

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Fix and Flip Loan Costs: Reserves Requirements

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There are a few key fix and flip loan costs: here’s a brief breakdown.

In addition to understanding LTVs and down payment amounts, there’s another important cost to know about for fix and flip loans: reserves.

Reserves Requirements

Reserves are the other amounts of money a fix and flip lender might require you to have. Here are the most common reserves requirements:

  • 6 months of interest payments in an account. They want to be sure if anything comes up, you’ll have the funds to make those payments.
  • Closing costs. You’re purchasing a property that’s going through a closing agent. You’ll have to pay the costs for that closing agent, plus any lending closing cost.
  • Monthly payments. Loan costs and other “carry costs” will come up monthly for the property while you’re fixing it up. Don’t forget to include these in your budget.
  • Other lender requirements. Every fix and flip lender might have slightly different cost and reserve requirements.

Know Your Fix and Flip Costs

Remember, if your lender tells you they’ll give you 70% of the ARV, there’s more to the story than that.

Know your actual fix and flip costs, and always look for the highest LTV lenders. 70% is the average in the current market, but some lenders can offer closer to 75% or give you 90%+ for the purchase.

Want to be able to compare these costs from multiple lenders at once? Download this free loan analyzer.

Have more questions about fix and flip loans? You can reach out at Info@TheCashFlowCompany.com.

Read the full article here.

Watch the video here:

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Fix and Flip Loans Explained: Get More Money For Your Deals

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How much do fix and flip loans cost? Here’s a quick breakdown.

There’s a way to set up a fix and flip project to minimize financial surprises.

It all comes down to your loans and understanding the money side.

Here’s a breakdown on how fix and flip loans work – and how you can get more money for your deals.

What Is ARV?

The first number to know in a fix and flip loan is called ARV, or after-repair value. This is the amount you could sell the property for after it’s been fixed up.

Why is this number so important? While loans on regular properties are based on the purchase price, fix and flip lenders loan based on the ARV.

For example, most fix and flip lenders in this market lend 70% of the ARV. As an example, on a property with an ARV of $200k, you could get $140k in your fix and flip loan (aka, 70% of $200k).

On a property that will be worth $500k after rehab, you could likely get a maximum of $350k on a fix and flip loan.

Other LTV Requirements for Fix and Flip Loans

Generally, the loan you get is based on LTV. However, that doesn’t mean that’s the exact amount the lender is going to give you.

In a fix and flip, there are two major costs: the purchase price and the rehab costs. How much the property is and how much it will take to fix it up.

Your fix and flip loan will cover a certain percentage of these two costs.

For example, in this market, if you’re a seasoned investor, they’ll lend you 85% of the purchase and 100% of rehab. This means that with any project, you’ll have to find a way to fund a 15% down payment on the purchase. But the fix and flip loan will pay for all the rehab.

As a quick example, let’s look back at that $200k ARV house. The lender will give you 70% of that amount (so $140k), but they’re still restricting purchase to 85% and rehab to 100%.

So this example might play out like this:

  • ARV: $200k
  • Maximum LTV: $140k
  • Actual as-is purchase price: $120k
  • Rehab budget: $20k
  • Actual LTV for purchase: $102k
  • Actual LTV for rehab: $20k
  • Total actual LTV: $122k
  • Amount needed for down payment on purchase: $18k

Reserves Requirements for Fix and Flip Loans

In addition to understanding LTVs and down payment amounts, another important cost to understand for fix and flip loans is reserves.

Reserves are the other amounts of money a fix and flip lender might require you to have. Here are the most common reserves requirements:

  • 6 months of interest payments in an account. They want to be sure if anything comes up, you’ll have the funds to make those payments.
  • Closing costs. You’re purchasing a property that’s going through a closing agent. You’ll have to pay the costs for that closing agent, plus any lending closing cost.
  • Monthly payments. Loan costs and other “carry costs” will come up monthly for the property while you’re fixing it up. Don’t forget to include these in your budget.
  • Other lender requirements. Every fix and flip lender might have slightly different cost and reserve requirements.

How to Maximize Your Fix and Flip Loans

Remember, if your lender tells you they’ll give you 70% of the ARV, there’s more to the story than that.

Know the actual criteria you need for each flip, and always look for the highest LTV lenders. 70% is the average in the current market, but some lenders can offer closer to 75% or give you 90%+ for the purchase.

Want to be able to compare these costs from multiple lenders at once? Download this free loan analyzer.

Have more questions about fix and flip loans? You can reach out at Info@TheCashFlowCompany.com.

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How Income Impacts Your Real Estate Loan Options

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How income impacts your real estate loan options (and other requirements you need to know in this market).

The mortgage industry is constantly changing, and not to the advantage of borrowers.

If you’re in a situation with a property that isn’t cash-flowing, you want to get locked in somehow – whether with a 30-year product or a 3-year one.

Loan options are changing just about daily – to the detriment of buyers. Credit score requirements are going up, loan-to-values are going down, and rates are steadily rising.

Here’s what you need to know (especially to refinance a property that has negative cash flow).

Credit Requirements for Loans

Just as you care about the financial health and responsibility of your tenants, the bank cares about the same for you. The expectations from banks become stricter when money is as tightened like it is now.

Credit requirements specifically have increased. You’ll have a hard time finding any loan at all in this market if your score is below a 680. To get better terms and rates, you’ll have to have a score in the mid-700s.

Income Impacts Your Real Estate Loan Options

Income is an important part of the underwriting process for any loan, but especially so on a property that isn’t cash flowing. Different types of loans will have different income requirements.

How Income Impacts Traditional Loans

Your income matters most if you’re attempting to get a traditional loan or other bank loan. Even if a property is negatively cash flowing, you can still get a traditional loan based on your income. If you make enough money (from a W2 job, other investment properties, etc.), banks will gladly offer you a loan.

As long as your income can cover the property’s costs, then the rent income doesn’t matter so much for a traditional loan.

Income for Bridge and DSCR Loans

Let’s say the property has no or negative cash flow and you don’t have a strong enough income for the banks’ requirements. In that case, a bridge or DSCR loan is a better option for your property that isn’t cash flowing.

Neither a bridge loan nor a DSCR loan rely on your personal (or business) income at all. A DSCR loan typically works based on the ratio of your rent and your expenses, but there are also no-ratio or negative DSCR loans available.

Terms and LTVs: Your Real Estate Loan Options

The length of time, or term, of your loan is important to consider when you have a property that isn’t cash flowing.

Why you need a loan in this circumstance comes down to two reasons:

  1. You need to lock in a loan before the market gets worse.
  2. You need that loan to carry you until the market improves.

LTVs are also important, and will dictate whether or not you can afford this new loan.

Traditional Loans

There are a lot of options for a traditional loan on a property that’s not cash flowing. Some will work better for your property than others.

Many bank terms are between 3- to 7-years fixed, amortized over 20 or 30 years. These loans are useful for non-cash-flowing properties because that three, five, or seven years can bridge you into the next season where rates will come down.

If you can qualify for one of these traditional loans, your maximum potential loan-to-value in this market is 75%. Bank loans will offer the highest LTVs out of all of your real estate loan options in this situation.

Bridge Loans

The term of a bridge loan is typically one or two years. If you know you’ll have an exit after that year or two, bridge loans are a great option.

Bridge loans are easy and fast. However, it’s possible interest rates won’t go down within that 1- to 2-year term, so you may be stuck refinancing into a second bridge loan, or other loan.

Additionally, the LTVs on bridge loans average 60-70% maximum.

DSCR Loans

There are many different types of DSCR loans available, with varying terms.

They traditionally go for 30 years. However, there are other options, including interest-only 40-year or 3- to 7-year fixed loans.

LTVs also take a hit with DSCR loans, averaging around 65-70%. 

How Income Impacts Real Estate Loan Options

If you need a loan for a non-cash-flowing property, see if you can qualify for a traditional loan first. Their high LTVs make them the best, but their income requirements may be tough to meet.

Read the full article here.

Watch the video here:

https://youtu.be/AQ-zcRBQB9c

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How to Calculate the Uncertainty of Real Estate Investing

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If you keep your house on the market until it sells, just how much are you paying for the uncertainty of real estate investing?

If you’re deciding whether to sell at a loss or keep fighting a declining market, the question comes down to whether you want a certain loss or an uncertain loss.

Let’s dig through the numbers to see how much a client of ours was paying every month to keep a property on the market with no in-flow.

How Much Are Carry Costs?

Our client with a $600,000 loan could only sell at $570,000 in the current market.

This is a $30,000 loss. But the number is certain.

Remember their alternative is covering the costs while holding the property for an indefinite period of time. In a market that’s not seeing higher property values for potentially a long time.

The list of costs adding up month after month gets long fast:

  • Mortgage
  • Interest
  • Insurance
  • Taxes
  • Staging
  • Utilities
  • An extension fee if you go too long with your short-term loan
  • And more.

On a $600,000 house, these costs add up rapidly. The market could take 2+ years to get to a point where they can sell for more than $600,000… This client would be losing much more than $30,000. And still, even that is not a promise.

What Does Uncertainty in Real Estate Investing Cost?

Here’s the breakdown for this client’s property’s costs:

  • Mortgage (in this case, interest-only payments): $4,900
  • Taxes: $300
  • Insurance: $200 (Paid up-front for the period of time they thought they’d sell by. That period has passed, so this became a monthly charge.)
  • Staging & Utilities: $325 (Since it was a larger, higher-quality house, they added some furniture and decor to help it sell. Utilities also stayed on while the house was on the market.)

That’s a grand total of $5,725 per month to keep this house on the market. 

This is money that adds no true value to the property. It’s cash flying out of their pockets and getting them nowhere fast.

These costs are a necessary evil in normal real estate investing. The kicker here is that there’s truly no end in sight.

The market is not expected to get better (especially for higher-end properties) for quite some time. In fact, interest rates are actually anticipated to go up.

Interest rates rising just one more point could impact buying power so much that the house’s market value could go down another $50,000.

Read the full article here.

Watch the video here:

https://youtu.be/NaWRQXoD8ZM

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No Cash Flow on a Property? Here Are Your Best Loan Options

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What kind of loans can you get when you have no cash flow on a property?

You have a flip. The only way it will sell is at a steep loss. Carry costs are draining thousands from your bank. What’s your other option? Turn it into a rental.

This is a typical scenario where you end up with no cash flow on a property. Rent isn’t set up as a source of cash flow here. Rather, it’s a last-ditch effort to hold a house in a bad market.

Let’s look over your options for loans if you have no cash flow on a property.

Why You’d Need a Loan for No Cash Flow on a Property

There are a couple other common reasons real estate investors need a negative cash flow loan on their properties:

  • The property can’t be rented yet, so there’s $0 coming in.
  • People want to lock in an interest rate. Although rates are much higher than they were earlier this year, they’re still anticipated to rise another 4 or 5% in the next year or so. Properties that are in a bad spot now will only get worse and worse. Opting for certain, planned payments now over uncertain future ones is choosing the lesser of two evils.
  • If a property has equity but no cash flow, you can get money from that equity by using a loan. We’ve helped people get cash to put back into their real estate investments or business this way.
  • Banks might start calling loans soon. So a new loan for a property that isn’t cash flowing could keep you out of an uncomfortable payoff on the old loan.

Overall, flip owners want to get locked in to a longer-term loan before it’s too late. Banks are tightening more and more. Soon, they’ll turn down loans for properties that don’t cash flow, or refuse to extend their loans.

Working with a property that isn’t cash flowing comes down to one question: How can I get certainty while I wait out the next two or three years?

Best Loan Options for Negatively Cash-Flowing Properties

There are three main types of loans you can get for a property that doesn’t cash flow: traditional, bridge, or DSCR loans.

Using a Traditional Loan for a Property That Isn’t Cash Flowing

You can still get into a traditional loan in this market for a property that doesn’t cash flow.

This could look like a 30-year fixed Fannie or Freddy, or even a regular bank loan. Many banks are offering, three, five, or seven year fixed products. That term length could get you past the anticipated market downturn, into an environment where rates start improving.

Bridge Loans for No Cash Flow Properties

Bridge loans span just one or two years. These loans are fast, flexible, and easy, but they’ll likely cost you more money.

Additionally, you’ll have to be careful about the length of a bridge loan for your non-cash-flowing property. One or two years won’t guarantee to carry you into a time of better interest rates.

No-Ratio DSCR Loans

DSCR loans are designed for properties with rental payments. To use a DSCR loan, you don’t necessarily need to have active rent income on the property. DSCRs can be based off the market rent for the area of the property, rather than the literal rent income.

Read the full article here.

Watch the video here:

https://youtu.be/AQ-zcRBQB9c

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How to Create Certainty in Real Estate Investing (Why Smart Investors Do THIS)

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Do you sell at a loss, or wait out the market? Which is right?? Sometimes it’s best to go for certainty in real estate investing.

A real estate horror story:

You buy a big, pricey house in early 2022 for a quick flip. Seven months of carry costs later… It still hasn’t sold, with never-ending price drops, and no profit in sight.

We’ve had a lot of clients in this spot. They have flips on the market that just aren’t selling. They come to us overwhelmed, feeling crazy for paying a constant stream of outflow every month.

The property becomes a giant anchor they’re dragging behind them. They just want to figure out – How do you make it stop??

We have a plan we work through with people in this situation. We call it: “Certainty.”

Let’s walk through an example of how we’ve helped a client create certainty in their real estate investment.

What Is Certainty in Real Estate Investing?

Certainty in real estate investing is about coming up with a conclusion. This conclusion is whatever path:

  • Gets the property somehow moving along.
  • Offers the least out-of-pocket cost for the client.
  • Provides a clean slate to get them back on track to take advantage of the upcoming better market.

Certainty in Real Estate Investing by Taking a Short

In a market like this, you often end up with two options:

  1. Continue paying carry costs, with no sale in sight.
  2. Sell at a loss, for certainty about how much you’ll lose and the freedom to move on.

Taking the first option involves high monthly payments for 6-9 months, or longer. Once the end is finally in sight, it’s possible you’ll find out you’ll have to pay even more and take a huge loss anyway.

With the second option, you accept what the market is giving you. You take the short, then you move on. Money will still be lost, but the timeline of the payouts has a clear end. It becomes certain.

The first option is a gamble with the cards stacked against you. The second option is a clean slate to start fresh.

If you’re trying to find the best route to certainty for your property, we’ll go over some examples. You can follow along with the numbers for your own situation. Running these numbers will help you find out if it’s smart to opt for certainty in your real estate investment.

How to Calculate the Certainty of a Real Estate Investment

One client owed (and were paying interest on) $600,000 for their loan. When they first took out this loan in early 2022, they were expecting to sell the property within a month or two for $800,000+.

This property was supposed to be a quick cleanup – get in, get out, and make a quick couple hundred thousand dollars. Then the market changed, especially for higher price point homes in their area.

Now, five months later, they’re desperate to get out of the property.

What Is the Cost of Certainty?

If sold now in the current market, they could get $570,000.

That’s $230k less than they had originally hoped to get for this property – enough of a gut-punch as-is. But to sell for $30,000 less than you owe on the loan itself? Not ideal.

Although selling right now would mean a $30,000 loss for this client… At least that number is certain.

They’ve already spent close to that much on carry costs alone since purchasing the property. If they can’t get a better price for another several months… Which option is more worth it?

Would you rather lose $30k for sure? Or pay dollar signs with question marks and no end in sight?

How Do You Pay for the Loss?

So, say you’re in this client’s position, and you’ve decided to sell for $570k. How do you go about paying off the remaining $30,000?

 In this specific instance, we as a lender worked flexibly with our client. Since they were already locked into making payments indefinitely, we trusted them to also pay in a definite amount of time. So we put a term on the remaining $30k for the same payment amount.

Now, the client has the property out of their hands and a much smaller loan to pay off. They will make the same payments as they were on the larger loan, and they could pay the full loan off in 5 months and be done with it.

$30,000 isn’t a little money. Five months isn’t a short amount of time. But paying that much for certainty can beat paying 2x or 3x as much for uncertainty in this market.

What If Your Lender Isn’t Flexible?

Most lenders will be open to working something out with you. They want certainty, too. It does them good in the long-term for you to get this property out from over your head.

Opting for a shorter term loan is a great way for a lender to clear the decks and get ready for the next wave of great purchases.

However, even if your lender is unwilling to work out a shorter term, you still have a couple options for paying off the loan when you sell at a loss:

  • Cash – The obvious answer is you pull this cash right out of your own bank account. Not everyone has that luxury (or wants to take that path if they do), so there are a few other options.
  • Private money – In a bind like this, the flexibility of OPM is useful. If you borrow money from family, friends, or people in REI groups in your area, you can pay them back at a rate better than they’d get in the stock market or a bank right now.
  • Gap funding – You could also do a lien on another property to provide some gap funding. If your original lender won’t do this, we can help.
  • Use another lender – If the property’s original lender won’t agree to a short-term loan, someone else might.

How to Calculate the Uncertainty of Real Estate Investing

If you’re deciding whether to sell at a loss or keep fighting in a declining market, the question comes down to whether you want a certain loss or an uncertain loss.

Let’s dig through the numbers to see how much a client of ours was paying every month to keep a property on the market with no in-flow.

How Much Are Carry Costs?

Our client with a $600,000 loan could only sell at $570,000 in the current market.

This is a $30,000 loss. But the number is certain.

Remember their alternative is covering the costs while holding the property for an indefinite period of time. In a market that’s not seeing higher property values for potentially a long time.

The list of costs adding up month after month gets long fast:

  • Mortgage
  • Interest
  • Insurance
  • Taxes
  • Staging
  • Utilities
  • An extension fee if you go too long with your short-term loan
  • And more.

On a $600,000 house, these costs add up rapidly. The market could take 2+ years to get to a point where they can sell for more than $600,000… This client would be losing much more than $30,000. And still, even that is not a promise.

What Does Uncertainty in Real Estate Investing Cost?

Here’s the breakdown for this client’s property’s costs:

  • Mortgage (in this case, interest-only payments): $4,900
  • Taxes: $300
  • Insurance: $200 (Paid up-front for the period of time they thought they’d sell by. That period has passed, so this became a monthly charge.)
  • Staging & Utilities: $325 (Since it was a larger, higher-quality house, they added some furniture and decor to help it sell. Utilities also stayed on while the house was on the market.)

That’s a grand total of $5,725 per month to keep this house on the market. 

This is money that adds no true value to the property. It’s cash flying out of their pockets and getting them nowhere fast.

These costs are a necessary evil in normal real estate investing. The kicker here is that there’s truly no end in sight.

The market is not expected to get better (especially for higher-end properties) for quite some time. In fact, interest rates are actually anticipated to go up.

Interest rates rising just one more point could impact buying power so much that the house’s market value could go down another $50,000.

Uncertainty vs Certainty in Real Estate Investing

Uncertainty: You know you’ll pay $5,725/month. But you have no clue how long.

Certainty: You know you’ll owe $30,000 on the short. But you also know the payments will be done in 5 months.

–

Uncertainty: You know money will be leaving your investment business, but you don’t know for how long.

Certainty: You know you’ll go into the next market without this property and its almost-$6,000 monthly payment hanging over your head.

–

Uncertainty: You don’t know what the selling price will be next year. It could be $520k or lower.

Certainty: You know the house could sell for $570k now.

–

Uncertainty: You don’t know where the market is going. But it’s probably going to be rough for sellers.

Certainty: You know that wherever the market goes from here, better deals are likely to become available for buyers.

Do You Want Certainty or Uncertainty?

Our client took a property that was uncertain, and they found a path with a doable, certain number.

Despite the financial loss, the certain option allowed them more freedom. They knew when the payments would end, and they could plan for the future. 

Property values are anticipated to keep going down. Terrible if you have a bunch of properties sitting on the market eating up your cash flow… but great for buying.

If you have any questions, or want to run through some numbers, we’d love to help. Even if we’re not your lender, we can give you guidance or gap funding.

Send us an email at Info@TheCashFlowCompany.com. For more info on real estate investing in this market, check out our YouTube channel.

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How Dropping Listing Price Hurts a Refinance

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Here’s an example of just how much dropping listing price hurts a refinance.

A recent client of ours came across a common issue in today’s market:

He got caught in the market with a big flip project. After weeks on the market, he just couldn’t sell. Negative cash flow pushed him to continually drop his asking price.

Here are the numbers of his deal and what happened to his chances at a refinance.

How Dropping Listing Price Hurt a Refinance

This client listed his property in late July, early August of this year. Everything had been going well for his investments in the last 7 or 8 years, so he took his time on a couple recent flips. But it took him a little too long on this one, and the timing is now killing him.

Let’s look at his numbers.

The First Price

This client owed $425,000 on the loan for this property. His initial listing price for was $769,000.

So far, so good. These numbers are great. He has a low loan-to-value. Sixty-five percent is a major threshold for LTVs. Being under 65%, this would be a great position for a refinance.

He would have had a lot of options available to him at this point, even if his income didn’t suffice for a conventional loan.

Price Drop #1

A couple weeks later, like most people would do when their property hasn’t sold, he decided to lower the price.

The new price was $725,000. His LTV crossed the threshold to above 65%.

Although not as great as before, he still would have plenty of loan options. Everything still looking good.

Third and Fourth Price Drops

One week later, he decided to drop price again. His realtor talked him into dropping below $700,000.

Now at $699,800, he’s lowered the price three times. When the appraiser looks at this, they’re going to see the continual drops, making it clear that the property is not selling at these prices.

Eight weeks in, this client started getting desperate. Remember, he’s making monthly payments on this property. The house has a high negative cash flow. So he drops the price to $649,000 in hopes of selling.

He’s crossed another major LTV threshold into 70-75%. He’s created a big hurdle for refinancing by dropping the property 4 times over the last 8 weeks.

Dropping Listing Price Hurts Refinance

The appraiser will see the property isn’t selling at $649,000. So based on the current market rates, they’ll appraise it 1-10% less than that number. With this low appraisal, our client could get trapped above a 75% LTV. Getting a decent refinance loan just became way harder, with a nearly guaranteed negative cash flow.

The LTV has gone up, so now his refinance rates will go up. Additionally, he’s backed into a corner where he’ll need a higher credit score to get the loan. At a 65% LTV, there are options for almost any credit score. At 75%, you need a much higher score to get anything.

Every time you drop the price, you’re putting yourself at a higher risk of a worse rental refinance loan. Dropping price gets you lower LTVs, worse cash flow, and potentially takes away the option to refinance altogether.

Read the full article here.

Watch the video here:

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Numbers Explained: DSCR Loan vs Bridge Loan

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Let’s break down an example of a loan comparison: DSCR Loan vs Bridge Loan.

DSCR loans and bridge loans are the main ways you can turn a flip into a rental.

Each loan has its pros and cons. When it comes to cost, a bridge loan is better for rentals you’ll keep for less than a year. DSCR loans, on the other hand, are best for rentals you want for two or more years.

But what about a rental you plan to have for between one and two years? Where’s the tipping point?

Let’s look at an example to see how it works.

A 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%

DSCR Loan vs Bridge Loan: Year One

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 $625 more 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. 

DSCR Loan vs Bridge Loan: Month 15 & 16

Here’s how things change by 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:

  1. Get a DSCR loan for the property.
  2. Take a 12-month tenant.
  3. 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.

Read the full article here.

Watch the video here:

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