Tag Archive for: real estate loans

What is Happening with Loans for Fix-and-Flips in 2022?

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Loans for fix-and-flips are changing fast. Here’s what you need to know.

There are two ways you might be thinking about loans for fix-and-flips right now.

First, maybe you have a property on the market now you’re trying to get rid of.

Second, maybe you’re planning for what’s going to happen with flips in the near future.

In about six to twelve months, the market is expected to have another shift. Prices should come down, and better properties will become available.

To be ready for those upcoming opportunities, here’s what you need to know about loans for fix-and-flips now.

Money Tightening on Loans for Fix-and-Flips

What does it mean for real estate investors when the Fed starts tightening money? Lenders start to pull back.

Lenders want to wait to figure out what will happen with the markets. Their money isn’t returned as fast as usual because investors’ properties take longer to sell. Less money becomes available overall.

This tightening of money results in many recent changes we’ve seen in loans for fix-and-flips.

Changes in LTVs

The loan-to-cost or loan-to-ARV on properties has lowered, and appraisals are being cut. The average LTV used to be 75%. Now, most lenders have pulled back to 65-70%.

Lower LTVs mean you need to bring more money into a deal. It’ll take more out-of-pocket to actually close on a property in the current market. 

With low LTVs and lenders being picky with transactions, it’s important to only take fix-and-flips you can obviously turn a profit on.

Home Value Changes

While loan-to-values are going down, credit score requirements are going up. Typically, lenders’ credit score minimums start at 620 or 640. Now, many lenders won’t take anyone with lower than a 680 or 700 score. Six months from now, that could become even tighter.

If you’ve been investing for a while, you’ll need to change how you look at leverage. For the past ten years, lenders have been seeking you. Now, you’ll have to proactively find your money. It’s more important than ever to plan your funding.

Rates on Loans for Fix-and-Flips

What do rates look like for fix-and-flip loans currently? 

You can probably guess – rates for all loans have gone up.

At The Cash Flow Company, we represent about five or six capital funds. We’re always looking for the ones with the best rates, but still – there’s nothing much available in capital funds lower than a 10-12% interest rate.

Six months ago, you could find these same loans for closer to 7-8%. This is the squeeze. This is the tightening the Fed wanted when they raised interest rates. Now it’s affecting your loans for fix-and-flips, but you can still get prepared for better opportunities.

Advice on Flips for the Next Few Months

There are a few things we recommend to set yourself up for success with flips in the next few months.

  • Smaller Projects – Smaller, lower price point homes tend to sell better in this type of market.
  • Bigger Neighborhoods – Outlier, rural properties were popular in the midst of the pandemic. But now those same properties are sticking on the market for a long time. Keep your flips inside a big, good neighborhood.
  • Aggressive Funding – Be proactive and relentless in your search for funding sources (or have someone searching on your behalf). When great new deals come, you’ll be one of the few investors who is ready.
    • Consider getting a HELOC on your home now so you have available funds when you need them.
    • Call banks and other lenders to stay updated on their requirements.
    • Find OPM lenders. Especially in an economy like this, people with money want safe, secure returns. Getting those people to fund your investments can help you take advantage of upcoming low prices.

We Can Help with Loans for Fix-and-Flips

We’re always looking for the best loans. We spend time talking to lenders on your behalf, getting loans with the best terms and requirements, that best fit the current market.

If you have or want a flip, reach out to us. We have many sources that are still looking to lend – capital funds and hard money.

You can also bring us your questions on OPM – from finding lenders, to attracting them, to closing with them.

With any of these questions or more, email us at Info@TheCashFlowCompany.com.

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How DSCR Loans Work in Today’s Real Estate Market

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Here are the basics of how DSCR loans work for your real estate investment.

Finding the right loan isn’t as easy as it used to be.

We’re getting more and more calls asking about different loans. And the most common loan investors want to know about? DSCR loans.

How are DSCR loans changing in this current market? Where will rates go? Who is still offering them? Is a DSCR loan even still a good option for investors right now?

Let’s go over those answers and see how DSCR loans work in today’s real estate market.

The Basics of How DSCR Loans Work

To begin with, the most important thing to know about DSCR loans right now is that they vary from lender to lender. You need to get to know lenders in your area.

Conventional conforming loans are different – they have one main underwriting guideline all lenders follow. For DSCR loans, every lender creates their own requirements, offers, and processes.

How DSCR Loans Differ

Each lender has their own nuances. Any number of these factors can change for a DSCR loan between different lenders:

  • Ratio requirements
  • Credit score requirements
  • Terms and products (interest-only, 40-year, etc.)
  • Interest rates

Lenders will also have different restrictions for properties, based on:

  • Location
  • Unit size
  • Short-term vs traditional rentals
  • Personal name vs LLC name

To be successful with DSCR loans, you need to become a master of which lenders offer what in your area.

You have to be proactive. Lenders won’t come knocking on your door to let you know what products they have available.

How to Connect with DSCR Lenders

With more investors asking for money and less money available, many lenders are overwhelmed. The best thing you can do is be proactive, educated, and prepared with your lenders.

It’s wise to get someone who can help connect you with lenders and products. A place like The Cash Flow Company can help with this aspect of real estate funding. They can advocate for you to make sure you get the best loan for your deal.

How DSCR Loans Work – What is the “DSCR”?

“DSCR” stands for “debt service coverage ratio.” It’s a number that explains cash flow, or money coming in vs money going out.

In a real estate rental situation, there are two important numbers to figure out this ratio:

  1. Income – rent from tenants.
  2. Expenses – mortgage principal and interest, taxes, insurance, and any HOA fees.

What Debt Service Coverage Ratio Do DSCR Lenders Take?

If your income 100% covers your expenses with none left over, that’s a ratio of 1:1. Most DSCR lenders require 1:1 as a standard minimum.

DSCRs Lower Than 1:1

Some lenders will go as low as .75, which is called no ratio. That’s if your income from your rental leaves 25% of the property’s expenses left over. 

There’s one main circumstance when investors would take a loan with no ratio. If you have a fix-and-flip in a tough spot and need to refinance it into a rental for a short time, a no ratio DSCR loan could make sense.

Making $2,500 rent on a $3,000 per month property is better than spending $3,000 every month for a house that’s just sitting on the market. Some income is better than none.

DSCRs Higher Than 1:1

But the ideal use of a DSCR loan is when you have a higher ratio. This would mean your rent is higher than your expenses, and your property has positive cash flow.

Some lenders require a ratio of 1:2. This requires a much bigger gap between what your tenant pays for the property and what you pay. Hitting this ratio can be unrealistic for many markets. Rents are steadily increasing, but not by that much.

You should verify what ratio lenders use before you even consider closing on a DSCR property. Do your research, learn your lending options, and find out each DSCR lenders’ minimum requirements.

How DSCR Loans Work – How Do You Calculate the DSCR?

So now you understand what the ratio is and how lenders use it… But how do you calculate your DSCR ratio?

You need two numbers:

  1. The rent you’ll charge (income)
  2. Mortgage principal and interest, taxes, insurance, and HOA fees (expenses)

Note: utilities and property management costs are not considered expenses on a DSCR loan.

Once you add up your expenses, you have to find out if your rent covers them. To get the ratio number, you divide income by expenses.

If you don’t want to worry about doing the math yourself, you can download our free DSCR loan calculator at this link.

DSCR Loan Calculation Example

Here’s a simple example.

Let’s say you have a single-family property, and the interest and mortgage is $1,000/month. Taxes are $250, property insurance is $150, and there are no HOA fees.

Your total monthly expenses adds up to $1,400.

Now let’s say the rent you can charge based on your property’s location is $1,600.

So, you can divide $1,600 (income) by $1,400 (expenses). You get a ratio of 1.14.

A 1:1 ratio (the typical minimum) can also be called 1. So our 1.14 is higher than the minimum. With a ratio higher than one, you’ll have a much better shot at finding a DSCR lender who will work with you.

If the market in our example went up, maybe you could charge $2,000/month for rent. If your expenses were still $1,400, your ratio would be 1.42. With that ratio, you could likely get a bigger loan and lower rate.

The higher your ratio, the better your opportunities for rates and terms. The lender sees it like this: the more income coming into the property, the more guaranteed it is you’ll pay them back.

Short-Term Rental Options with DSCR Loans

It’s still possible to use DSCR loans for short-term rental units (like Airbnb or VRBO).

However, the requirements may be different for a short term-rental. You can get your DSCR loan for a short-term rental one of two ways:

  1. You’ll need to have 2+ years of experience with the property, with proof of income for that time. The rental will be treated as “no ratio,” so you’ll get higher rates and lower LTVs.
  2. They’ll go off of market rent of traditional rentals in the area. If the DSCR with that market rent qualifies, you can get a decent loan.

In either case, DSCR loans for short-term rentals don’t count the rent you receive from guests as the income. The ratio has to be calculated using regular rent rates.

Get Someone On Your Team Who Knows How DSCR Loans Work

You may be stepping into unfamiliar waters with this market, unsure of where or how to get investment loans. Yet leverage will still be vital for your real estate career.

The Cash Flow Company searches every day for the best loans for real estate investors.

If you have a DSCR loan or a deal you need a loan for, reach out to us at Info@TheCashFlowCompany.com.

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