Tag Archive for: lenders

What is ARV and Why is it Important?

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Today we are going to answer the question “what is ARV and why is it important?” ARV, or After Repair Value, is a term every real estate investor should know. It’s the estimated value of a property after all repairs and upgrades are complete. In simple terms, it’s what your property could sell for when it’s in top-notch shape.

Why is it so important? It’s your road map to a profitable deal. Knowing the this number helps you figure out how much you should spend on a property and its repairs. It also shows if your investment is worth it in the end.

Here’s an example: Imagine you find a fixer-upper listed at $150,000. After some research, you learn similar homes in great condition sell for $250,000. That’s your ARV. Now, let’s say the repairs will cost $50,000. If you buy the property, your total investment would be $200,000. With an ARV of $250,000, you could make a $50,000 profit, before any extra costs like loan interest or closing fees.

It also matters when you’re looking for financing. Lenders often use ARV to decide how much they’ll loan you. The better your numbers, the more likely you’ll secure funding for your project.

In short, ARV is your guide to smart investing. It keeps your plans realistic and helps you stay on budget. Want to dive deeper? Check out our website today! 

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DSCR: You Must Own a Property THIS LONG Before Refinancing

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If you’re diving into real estate investing and using DSCR (Debt Service Coverage Ratio) loans, you’ve likely heard the term “seasoning.” Understanding seasoning is essential, especially if you’re following the BRRRR method (Buy, Rehab, Rent, Refinance, Repeat) and want to know when you can pull your money back out to fund your next project. What is seasoning and how can it affect you? Lets take a closer look!

What is Seasoning?

In simple terms, seasoning is how long you need to own a property before refinancing it. If you bought a property one month ago, it’s been “seasoned” for one month. Each lender has its own requirements, and they vary depending on the type of loan and lender.

For example:

  • Traditional Lenders: Often require at least 12 months of ownership before allowing a cash-out refinance.
  • DSCR Lenders: Typically require a 6-month seasoning period, though some allow as little as 3 months—or even none!

Why Does Seasoning Matter for DSCR Loans?

With DSCR loans, this affects your ability to use the appraised value of the property rather than the purchase price. This can be a big deal for investors aiming to get back their investment and move on to the next project. Here’s how it works:

  • After Rehab Value: When you’ve put work into a property, it often increases in value. These rules impact whether you can refinance based on this new, higher appraised value.
  • Cash-Out Timing: The sooner you can refinance based on the higher value, the faster you can reinvest in more properties.

Example:
Let’s say you bought a property for $275,000, put $25,000 of work into it, and now it’s worth $400,000. To pull your money out at this new value, you’ll need to meet the lender’s seasoning requirement.

DSCR Loan Seasoning Requirements: What to Expect

While each lender has its own rules, here’s a typical breakdown of the requirements:

  1. 6-Month: Most DSCR lenders require you to own the property for at least six months.
    • Example: If you bought the property on January 1st, you could refinance it as early as July 1st.
  2. 3-Month: Some lenders allow a shorter 3-month seasoning period.
    • Example: If you closed on January 1st, you could potentially refinance by April 1st, depending on the lender.
  3. No Seasoning: A few lenders have no seasoning period at all. These lenders allow you to refinance based on the current appraised value as soon as the rehab is complete.

Tips for Choosing a Lender Based on Seasoning

Every lender has a “box” of rules, and not all lenders are the same. Some are flexible with shorter seasoning periods, while others stick to strict timelines. Here’s how to find the right lender for your goals:

  • Know Your Timeline: If you’re in a rush to get your cash back, look for a lender with shorter seasoning requirements.
  • Shop Around: Different lenders offer various seasoning terms, so it pays to shop around. Brokers can be a big help here, as they have access to multiple lenders.
  • Use Tools Like the Loan Cost Optimizer: A tool like The Cash Flow Company’s Loan Cost Optimizer can help you compare costs and find the best fit for your loan needs.

Why Shorter Seasoning Matters in the BRRR World

If you’re using the BRRR strategy, shorter seasoning periods allow you to:

  1. Get Your Cash Out Faster: Quickly pull your investment back to fund the next deal.
  2. Maximize Profitability: Refine properties quickly, avoid delays, and keep projects moving.
  3. Stay Flexible: Adapt your lending strategy to different project timelines and goals.

Example in Action:
You buy a property in January, renovate it in February, and get it rented by March. If your lender only requires three months of seasoning, you could refinance by April, freeing up your funds for your next purchase.

The Key Takeaway: Find a Lender that Matches Your Needs

When picking a lender, make sure their seasoning period aligns with your goals. Don’t be stuck waiting months to refinance when you’re ready to move on. Whether it’s a 6-month, 3-month, or no-seasoning requirement, the right lender can help you get your cash out faster, keep your BRRRR projects rolling, and ultimately reach your investing goals sooner.

For more guidance, check out The Cash Flow Company’s tools or reach out to talk through your options. With the right lender on your side, you can make the most of your DSCR loan—and your investments!

Watch our most recent video to find out more!

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DSCR Loan Approval: 3 Steps to Take with Your Property

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Today we are going to dive into DSCR loan approval by looking at the 3 steps you need to take with your property. Let’s take a closer look!

Step 1: Meet the DSCR Ratio Requirement

The property’s DSCR ratio is crucial. This ratio compares your rental income to the expenses. Most lenders want a ratio of at least 1:1, meaning your rental income should cover your mortgage, taxes, insurance, and other costs.

What to Do:

  • Calculate the ratio: Use a DSCR calculator to check that your property’s rental income meets or exceeds its expenses.
  • Know your numbers: Make sure the ratio is solid before you even make an offer on the property.

Example: If your property’s expenses total $1,500 per month, you’ll want your rental income to be at least $1,500 to hit the 1:1 ratio.

Step 2: Check the Location

Location matters for DSCR loans, especially if the property is in a rural area. Some lenders might hesitate to approve loans in areas with few comparable sales.

What to Do:

  • Verify the location: Make sure the property’s location is suitable for lenders.
  • Consider comps: Rural areas can make it harder to find comparable sales, which could affect loan approval.

Example: If your property is in a small town, double-check that there are enough recent sales in the area to support your loan.

Step 3: Ensure the Right Loan Size

The loan amount can also impact approval, especially if you’re dealing with a smaller property. Some lenders have minimum loan amounts that they require.

What to Do:

  • Check the loan size: Make sure the property’s value is high enough to meet the lender’s minimum loan amount.
  • Know your lender’s limits: Different lenders have different requirements, so find out their minimums.

Example: If you’re looking at a property valued at $80,000, confirm that your lender can finance this smaller amount.

Ready to Apply for a DSCR Loan?

Getting a DSCR loan approved involves two main steps: preparing yourself and checking that the property fits the requirements. Start by boosting your credit score, making sure you have the cash to close, and setting up your LLC. Then, focus on finding a property that meets the DSCR ratio, is in a suitable location, and fits the right loan size.

If you need help with the process, don’t hesitate to reach out to us at The Cash Flow Company or check out our DSCR calculator tool to see how your property measures up!

Watch our most recent video to find out more about: DSCR Loan Approval: 3 Steps to Take with Your Property

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What is a Point in Real Estate Investing?

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What is your lender talking about when they mention points on your loan? What is a point in real estate investing?

Real estate, like many fields, has its own vocabulary. This can make it extra challenging for people who are trying to enter the real estate investing world.

So many people come to us confused. Sometimes they don’t even know what to ask because the language is so unfamiliar.

Real estate is all about leverage. Understanding the lingo and how to calculate the most common rates will help you be money-wise and confident in your investment journey.

What is a “Point”?

When your lender mentions that something is “one point” or maybe “one and half points,” they’re talking about out-of-pocket cost. So what is a point in real estate investing?

“Points” are a percentage of the loan that the lender is going to charge you.

Hypothetically, let’s say your lender says your loan is a “two point” cost to you. That means they’re going to charge you 2% of the total loan amount.

  • Total Loan Amount: $200,000
  • Points: 2 (meaning 2% or 0.02)
  • Calculation: 200,000 x 0.02 = $4,000
  • Out-of-pocket Cost for the Loan: $4,000

The lower the points, the lower the cost; the higher the points, the higher the cost. Also, remember that the points are calculated off the loan amount, not the purchase price.

Always remember to look out for fees. Points are often only part of the upfront charges from your lender.

Make sure you ask ahead of time about additional fees, appraisals, underwriting, escrows, and escrow draws. 

 

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