Tag Archive for: real estate investing

Your credit score is key to gaining leverage. But usage is key to your score. So what is credit usage?

In simple terms, usage is the amount you have outstanding on your credit cards (and loans) compared to the maximum credit limit the banks have granted you.

Still confusing? Let’s break down exactly how credit usage works.

What Is Credit Usage?

Let’s look at an example with easy-to-follow numbers: 

  • You have a credit card with a limit of $2,000 and a balance of $1,000. (Aka, you’ve put $1,000 worth of purchases on this card. You’re allowed to put up to $2,000 on it.)
  • This means your credit usage is 50% ($1,000/$2,000). So you’ve borrowed 50% of the amount you’re allowed to borrow.

How Does Usage Impact Credit Score?

The higher your usage, the lower your credit score.

In other words, the higher your balances compared to your available credit, the worse your credit score.

If you put a lot of purchases on a credit card, or take a lot from a HELOC or other line of credit, compared to how much of that credit you can use up, then it will negatively impact your score.

What is the Best Usage for Your Credit Score?

Ideal usage is 20% or less. However, ideal usage is not 0%.

You should always use some credit, but never all. To get ideal usage on our example credit card with a $2,000 limit, you should keep around $400 on the card.

Does Credit Usage Matter to Investors?

Usage is the number one factor that holds back real estate investors from getting affordable loans. That’s because usage makes up 30% of what determines your credit score.

Note: Credit usage is not the only factor in your credit score. 35% of your score is determined by how you make (or do not make) your payments. If you’re paying late, or not making payments at all, then you will not have a good score or find affordable loans.

What Is Credit Usage? – How to Learn More

Concerned about your credit? Want to learn more about your credit score and your investing career?

Check out our YouTube videos about credit.

Send us an email anytime with questions about your credit and real estate investing loans at Info@TheCashFlowCompany.com.

by

Sounds like a gimmick, but it’s true – here’s how to get full financing on any real estate deal.

There’s a trick large developers use to finance their real estate projects all the way to 100%. Does the same strategy work on your real estate investing scale?

Sounds like a pipe dream, especially in a market where the Fed keeps tightening lenders’ funds.

Let’s go over how it’s actually possible. We’ll call the funding you need for your project your “money bucket.” We’ll show you how to fill that bucket with different funding sources just like they do on the biggest development projects.

The Money Buckets: How Financing Real Estate Works

Your money bucket is empty at the start of a project. Its size is determined by the costs. For successful investments, you need to fill up the bucket with money.

The financial term for filling the bucket is a “capital stack.” It’s when an investor stacks one loan on top of another until an entire project is funded to 100%. Let’s go over how to put your capital stack, or “money bucket” together.

How Big Is Your Bucket?

If we’re just starting a deal, then our money bucket is empty. How big is it? AKA, what costs do we need to cover?

There are four main costs in real estate investing:

  • Purchase price
  • Rehab
  • Carry costs
  • Interest payments and other miscellaneous

Financing Real Estate to Fill Your Money Bucket 

We need to see if we can fill our money bucket, so we start looking for other buckets of money to throw in. We begin with the loan from our primary lender.

In a typical market, a real estate investment lender (like hard money) would pay 75% of the ARV of the property. That 75% would cover 90% of the purchase price and 100% of the rehab costs.

With tightened money, however, the underwriting guidelines for this bucket have changed. Almost universally, you’ll see these same lenders only offering 70% of the ARV. This adds up to 80% on the purchase and 100% on the rehab. You’re getting less financing for real estate projects, so you’ll have to bring in more money out-of-pocket for this deal.

That’s not an insignificant amount of money, either. Down payments now, in early 2023, are sometimes double what they were six months ago.

Our money bucket might be around 80-90% full with our lender’s loan. But we have to get it filled to 100% somehow. Where do the funds come from so you can keep buying good properties when deals are getting great?

4 Money Buckets to Use When Financing Real Estate

There are 4 other buckets of money you might be able to dip into to complete your capital stack:

  1. Secured lines of credit
  2. Secured gap funding
  3. Unsecured lines of credit
  4. OPM

Word of Warning Financing Real Estate with Credit

Before we get into these 4 extra money buckets, we want to make one thing clear about financing: You have to pay credit sources back.

Treat your lines of credit like lenders that need to be paid in full at the end of your project. Treat your business like a business. What’s left over after you pay off your credit is the profit you get to keep for your project.

If you turn the financing for real estate into a personal piggy bank, these sources will only drain your bucket instead of filling it. Poor credit management will tank your investment business.

1. Secured Lines of Credit

In volatile markets, the most common starting place to complete your capital stack is secured lines of credit.

The most common secured line of credit is a HELOC. You can take out a HELOC on your personal home, or any of your investment properties.

A HELOC just takes good credit, good income, and owning a piece of real estate. If you meet these criteria, then you can take money from this credit line and drop it into the money bucket for your current project.

2. Secured Gap Funding

Another important bucket for financing real estate is secured gap funding from a private money lender (like The Cash Flow Company).

This is a good option if you:

  • Don’t have the income to qualify for a loan.
  • Don’t have the equity to qualify for a HELOC.
  • But do have a real estate property.

This funding can help cover the down payment, carry costs, or part of the rehab using another property to secure the loan.

3. Unsecured Lines of Credit

The appeal of a 0% line of credit is:

  • You can use it for a down payment or rehab costs.
  • Other types of credit can have rates up to 19-29%. Zero percent is a major advantage.
  • The right credit cards can be a great stepping stone to get your first few deals done so you can move on to better forms of financing.

The danger of unsecured credit is:

  • The temptation to use it outside of business expenses.
  • If you don’t pay them off at the end of the project, then you get into trouble fast.

4. Real OPM

Other People’s Money is one of the most powerful ways to boost your real estate career.

OPM is money from ordinary people. The biggest real estate investors always have multiple regular people who loan them money for projects. Borrowing in this way is the fastest, easiest, and cheapest way to fill your money bucket.

It may seem impossible to find someone who wants to give you money. But the reality is: people who have cash aren’t getting good returns from banks; they’ll get higher secured returns lending to you.

Fill Your Money Bucket with 100% Financing on Real Estate Deals

The market has changed. Your primary loan will leave your money bucket emptier. It takes a little more creativity to fill it up.

The bigger the pool of money you have in any market, the more options you’ll have. Financing makes your real estate investing easier and more profitable.

Want to build your capital stack? We have a free download about money buckets.

If you have any questions about a deal, getting funding, or setting up OPM, email us at Info@TheCashFlowCompany.com.

by

What can you expect to pay on your DSCR loan interest rates? Here’s what it is (and why it matters).

You can still find a DSCR product for ratio 1 or negative cash flow properties.

DSCR loans have certain ratio thresholds. When you break these thresholds, your rate gets better. And better rates mean lower monthly payments. Which means… more cash flow!

Let’s go over some of these thresholds for DSCR loan interest rates.

Loans for a 1.25 DSCR

Say we have a property with $1,590 worth of monthly expenses, which we can charge a $2,000 rent on. Divide the rent by the expenses, and we get a DSCR of about 1.26.

One way of thinking about this is that the property is profiting 25% over the expenses. That’s good for the underwriter (and it’s good for you), so you’ll get a lower interest rate.

1.25 is a major threshold for DSCR lenders. In the current market at the beginning of 2022, the rate for a 1.25 DSCR is around 7.25%.

DSCR Loan Interest Rates for a 1 or Lower Ratio

If a property has negative cash flow, say 0.94, then the average interest rate would be 9+% on a DSCR loan.

For a breakeven ratio of 1, the typical interest rate right now would be more like 7.75%.

The Difference in DSCR Loan Interest Rates

Anytime you can lower the rate, that’s cash flow that goes into your pocket.

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!

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.

Read the full article here.

Watch the video here:

https://youtu.be/o5js06y–qM

by

Quick ‘n Easy DSCR Calculation

Categories:

Your DSCR calculation made easy with our free loan calculator.

Don’t be intimidated by a DSCR loan. If the property cash flows, then you have a pretty good shot at getting approved.

And there’s a simple way to find out the cash flow of a rental property: the debt service coverage ratio.

Underwriters use this ratio to determine if a property is positively cash flowing. It’s an important metric to understand if you want to maximize your leverage and get the most out of your investments.

Now, let’s go over how to calculate DSCR quickly and understand what it means for your property.

What Is a DSCR in Real Estate?

Firstly, let’s define what DSCR is. It’s a ratio that compares a property’s income to its expenses.

You calculate DSCR by dividing the property’s income (rents) by its expenses (monthly mortgage payment, taxes, insurance, and HOA if applicable). A ratio of greater than 1 means the property is cash flowing, which is what both you and your lender want to see.

So, the higher the ratio, the better the cash flow, and the more money in your pocket.

For a DSCR loan, the higher this ratio is, the better the terms your loan will have.

Expenses & Income for DSCR Calculation

Next, to find out the expenses your DSCR loan will consider, you’ll add together four items:

  • Mortgage
  • Property Tax
  • Insurance
  • HOA Fees

Finally, to find out the income, you’ll need to check out what rents are in the area for comparable properties.

How to Calculate DSCR Quickly

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

Read the full article here.

Watch the video here:

by

Why You Need To Refinance a BRRRR

Categories:

Why can’t you just keep the first loan on your BRRRR? Here are the reasons to refinance a BRRRR.

The BRRRR strategy uses two loans. The second one is for the refinance – the third “R” in BRRRR.

You buy with a hard money or bridge loan, but eventually you need new funding for the property. There are 3 reasons why you need to refinance.

1. Term Length

Hard money and bridge loans are useful when used right, but only good for a couple of months. How BRRRR works is that renting your property will require a second, longer loan. However long you’ll want to hold the rental unit is how long your refinance loan will need to be.

2. Rate When You Refinance a BRRRR

Hard money loans won’t have a good long-term interest rate. This second refinance loan should give you a much lower rate. Not only should a refinance create net worth, but it should also give you good cash flow on the property.

3. Capture Equity

BRRRR refinances tend to grab at least 25% of the house’s purchase price in added net worth. Check out this post to see how the numbers break down on a BRRRR refinance.

When To Refinance a BRRRR

Want the greatest profit on your project? Have the refinance loan ready by the time you buy your under-market property.

If you need help finding the right refinance loan, send us an email at Info@TheCashFlowCompany.com.

Read the full article here.

Watch the video here:

by

Here’s how to calculate a property’s DSCR (and what it means for your loan).

Don’t be intimidated by a DSCR loan. If the property cash flows, then you have a pretty good shot at getting approved.

And there’s a simple way to find out the cash flow of a rental property: 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 if you want to maximize your leverage and get the most out of your investments.

Let’s go over how to calculate DSCR quickly and understand what it means for your property.

What Is a DSCR in Real Estate?

First, let’s define what DSCR is. It’s a ratio that compares a property’s income to its expenses.

You calculate DSCR by dividing the property’s income (rents) by its expenses (monthly mortgage payment, taxes, insurance, and HOA if applicable). A ratio of greater than 1 means the property is cash flowing, which is what both you and your lender want to see.

The higher the ratio, the better the cash flow, and the more money in your pocket.

For a DSCR loan, the higher this ratio is, the better the terms your loan will have.

How to Calculate Expenses & Income for a DSCR Loan

To find out the expenses your DSCR loan will consider, you’ll add together four items:

  • Mortgage
  • Property Tax
  • Insurance
  • HOA Fees

To find out the income, you’ll need to check out what rents are in the area for comparable properties.

How to Calculate the DSCR

To give you a better understanding of how to calculate DSCR, let’s look at a quick example.

Let’s say we have a property with rents coming in at $1,700 a month. 

The monthly mortgage payment is $1,290. Taxes are $100/ month, insurance is $100/month, and HOA is $100 /month. Added together, this gives us $1,590.

Now, to calculate the DSCR ratio, we divide the income ($1,700) by the expenses ($1,590). We get a ratio of 1.07.

This 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 to ensure that the property can take care of itself. Now lenders know you won’t need to take money out of your pocket to cover the expenses. This is assurance for them, making them more likely to approve the loan with good terms.

A 1.07 ratio means the property is positively cash flowing, and it’s a good investment.

Example of a Low Ratio

But what if we could only charge $1,500 in rent for this same property? 

Let’s look at the impact of a decrease in rent. In this case, we’d calculate the DSCR ratio by dividing $1,500 (income) by $1,590 (expenses), which gives us 0.94. You’ll need an extra $90 out-of-pocket just to breakeven.

This is less than 1, meaning the property is negatively cash flowing.

You need to estimate the rent on a property before you think about buying it. This property at $1,500 wouldn’t be a good investment (and wouldn’t qualify for a good DSCR loan). But remember – the same property at $1,700 rent would be a good investment.

Usually, the only time DSCR loans are used on a negatively cash-flowing property is when someone gets stuck with a property they can’t sell, and a little income on the property is better than none at all. It’s not wise to purchase a rental property that you know won’t cash flow from day 1.

Negative DSCR Loans

You can still find a DSCR product for negative cash flow properties.

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.

Loans for a 1.25 DSCR

Say we have a property with $1,590 worth of monthly expenses, which we can charge a $2,000 rent on. Divide the rent by the expenses, and we get a DSCR of about 1.26.

One way of thinking of this is that the property is profiting 25% over the expenses. That’s good for the underwriter (and it’s good for you).

1.25 is a threshold for DSCR lenders. In the current market at the beginning of 2022, the rate for a 1.25 DSCR is around 7.25%.

Rates for a Negative to 1 DSCR

If a property has negative cash flow, say 0.944, then the average interest rate would be 9+% on a DSCR loan.

For a breakeven ratio of 1, the typical interest rate right now would be more like 7.75%.

The Difference

Anytime you can lower the rate, that’s cash flow that goes into your pocket.

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!

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 to Calculate DSCR Quickly

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

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.

by

Using investor loans to make your BRRRR profitable.

The BRRRR strategy uses two loans. The first is the “B” of BRRRR – buy. Does it matter what kind of loan you use?

There are 3 problems this first loan needs to solve.

1. Under-Market Property

To make this strategy work, the property you buy must be under-market. This is different from retail investing, where you buy and rent an at-market, rental-ready property.

An undervalued BRRRR property holds the potential to bring your net worth up. It’s a property that closes quickly and cheaply – even if it’s in rough shape.

Ideally, your BRRRR buy loan covers the entire cost of the house. This eliminates the need for a down payment, making the process more repeatable (and profitable).

2. Quick Closing with Investor Loans for BRRRR

Why would there ever be a house selling for under-market? There are many conditions that bring a property to this point, such as a sudden move or foreclosure. Whatever the circumstance, the homeowner, wholesaler, bank, or whoever owns the house will want it gone and the money in their hand ASAP.

Your buy loan will need to close fast, with minimal underwriting, paperwork, or other hassles that come with traditional loans.

3. Rehab

Although profitable, an under-market property usually comes with a lot of necessary repairs. Many BRRRRs have construction budgets in the tens of thousands of dollars.

If that money comes out of your bank account, then it almost defeats the purpose of a value-add property. But if you use the buy loan to leverage all rehab costs on a BRRRR, more cash stays in your pocket.

The Best Investor Loans for BRRRR

An investor-specific loan, like a bridge loan or hard money, will check all three of these boxes.

While short-term investor-friendly loans make the perfect buy loan, you’ll need to refinance later in the BRRRR process.

Read the full article here.

Watch the video here:

https://youtu.be/_cdQkaaXxAw

by

Buy and refi: here’s how BRRRR works.

Say you buy a house and rent it. What’s the big deal? Hopefully, your rental income is a little more than your mortgage payment, and you’re able to pocket the extra cash or save it for future real estate purchases.

How does BRRRR differ from this?

There’s a driving power behind BRRRR, making it a more profitable and fun process than simple rental investments.

BRRRR uses a two-loan strategy to capture maximum equity in value-add properties. Let’s go through these two loans and see how BRRRR works.

Buy: How the First BRRRR Loan Works

The first loan is the “B” of BRRRR – buy. There are 3 problems this first loan needs to solve.

1. Under-Market Property

To make this strategy work, the property you buy must be under-market. This is different from retail investing, where you buy and rent an at-market, rental-ready property.

An undervalued BRRRR property holds the potential to bring your net worth up. It’s a property that closes quickly and cheaply – even if it’s in rough shape.

Ideally, your BRRRR buy loan covers the entire cost of the house. This takes less out of your pocket and makes the process more profitable and repeatable.

2. Quick Closing

Why would there ever be a house selling for under-market? There are many conditions that bring a property to this point, such as a sudden move or foreclosure. Whatever the circumstance, the homeowner, wholesaler, bank, or whoever owns the house will want it gone and the money in their hand ASAP.

Your buy loan will need to close fast, with minimal underwriting, paperwork, or other hassles that come with traditional loans.

3. Rehab

Although profitable, an under-market property usually comes with a lot of necessary repairs. Many BRRRRs have construction budgets in the tens of thousands of dollars.

If that money comes out of your pocket, it almost defeats the purpose of a value-add property. It’s best to use the buy loan to leverage all rehab costs on a BRRRR.

What’s the Best Buy Loan?

An investor-specific loan, like a bridge loan or hard money, will check all three of these boxes.

While short-term investor-friendly loans make the perfect buy loan, you’ll need to refinance later in the BRRRR process.

Refinance: How the Second BRRRR Loan Works

The third “R” in BRRRR stands for refinance. At this point, we need a new loan on the property. There are 3 reasons.

1. Term Length

Hard money and bridge loans are useful when used right, but only good for a couple of months. How BRRRR works is that renting your property will require a second, longer loan. However long you’ll want to hold the rental unit is how long your refinance loan will need to be.

2. Rate

Hard money loans won’t have a good long-term interest rate. This second refinance loan should give you a much lower rate. Not only should a refinance create net worth, but it should also give you good cash flow on the property.

3. Capture Equity

BRRRR refinances tend to grab at least 25% of the house’s purchase price in added net worth. Check out this post to see how the numbers break down on a BRRRR refinance. 

Diving Deep Into How BRRRR Works

BRRRR is a powerful real estate investing strategy. We want to take away the mystery of how BRRRR works.

Download our free BRRRR map to put you on the right track with your next deal. And email us at Info@TheCashFlowCompany.com with any questions.

by

A few reasons why DSCR loans are some of the best loans for real estate investors.

Not all loans are created equal when it comes to real estate investing.

A traditional loan doesn’t always cut it for a value-add property. But there’s no possible way hard money can work for a rental property for more than a few months.

So what are your long-term investor loan options?

This is where the DSCR loan comes in. Here are 3 quick reasons why DSCR loans work well for investors.

Less Paperwork

The investor’s dream: less paperwork. Applications and approvals are simple with DSCR loans. There are no income requirements, employment verification, or any other intensive qualifications.

Not only is it less hassle to skip some paperwork – it also means the entire loan process is much faster.

Short-Term Rentals

DSCR loans don’t just work for traditional rentals, but they work for all real estate investment properties. DSCR loans are flexible and work with a variety of rental options. This includes VRBO, Airbnb, or a traditional long-term property.

There are a few things to take into consideration with short-term rentals and DSCR. But it’s still a simple and often profitable loan for these types of properties.

Best Loans for Real Estate Investors Doing BRRRR

Many investors wonder – are DSCR loans good for BRRRR-style properties? The answer is yes.

DSCR loans are great for the long-term, refinance loan at the end of your BRRRR project. The combination of a quick and easy loan and a structure designed for rental properties makes DSCR and BRRRR the perfect pair.

DSCR – The Best Loans for Real Estate Investors

If you’re in the market for a long-term loan on a rental property, reach out to us for help with the numbers. Send us a deal or ask us a question at Info@TheCashFlowCompany.com.

Read the full article here.

Watch the video here:

by

It’s “the easy loan.” But are DSCR loans good for your investments?

DSCR loans are becoming one of the most popular investor tools out there. 

But why are they so well-loved? Let’s go over 5 reasons investors like DSCR loans. 

Are DSCR Loans Good?

Firstly, let’s go over what a DSCR loan is.

DSCR stands for “debt service coverage ratio.” They’re a loan for rental properties that are based on the debt ratio of rent income to the property’s expenses.

These loans can be flexible and hassle-free. This makes them the go-to choice for investors financing a rental property or turning a fix-and-flip project into a rental at the last minute in bad markets.

But are DSCR loans really as good as they seem? Let’s take a closer look at 5 reasons why DSCR loans are a solid choice for investors. 

#1: You can start investing now.

DSCR loans are great for new investors. Traditional loans often require you have two years of real estate investing experience.

Because there are no experience requirements, a DSCR loan is a great opportunity to get into your first investment rental property. Don’t wait to apply for your first DSCR loan.

#2: No income requirements.

With a DSCR loan, you don’t have to have a W2 job, or show any tax returns or other income documentation.

This means DSCR loans are good for minimizing your tax liability. You can write everything off, pay the IRS as little as you want, and still get a great loan.

#3: Less paperwork.

The investor’s dream: less paperwork. Applications and approvals are simple with DSCR loans. There are no income requirements, employment verification, or any other intensive qualifications.

Not only is it less hassle to skip some paperwork – it also means the entire loan process is much faster.

#4: DSCR works for short-term rentals too.

DSCR loans don’t just work for traditional rentals, but they work for all real estate investment properties. DSCR loans are flexible and work with a variety of rental options. This includes VRBO, Airbnb, or renting out a traditional long-term property.

There are a few things to take into consideration with short-term rentals and DSCR. But it’s still a simple and often profitable loan for these types of properties.

#5: Great for BRRRRs.

Many investors wonder – are DSCR loans good for BRRRR-style properties? The answer is yes.

DSCR loans are great for the long-term, refinance loan at the end of your BRRRR project. The combination of a quick and easy loan and a structure designed for rental properties makes DSCR and BRRRR the perfect pair.

Want to find out how a DSCR loan might work with your BRRRR rental? You can download our free DSCR loan calculator here. It can help you learn your ratio and get an idea of the kind of terms your property may qualify for.

Are DSCR Loans Good for Your Property?

If you’re in the market for a loan on a rental property, you can reach out to us to help with the numbers. Send us a deal or ask us a question at Info@TheCashFlowCompany.com.

by