Tag Archive for: The Cash Flow Company

How to fund with lines of credit

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How to fund with lines of credit

Today we are going to discuss how to fund your real estate investments with lines of credit. With lenders cutting back, there is a greater need for investors to find alternative financing. Don’t let this lending squeeze affect you! Let’s take a closer look at your options and how you can ensure success.

What is a lending squeeze?

If you’re a real estate investor, you’re probably familiar with the concept of shrinkage in the loan business. During economically turbulent times, lenders cut back the amount of money they’re willing to lend. As a result, this affects how much money you get for your project (aka, your LTVs).

For example: If the typical bridge lender offers you 80-90% of the purchase, you’ll need something to help you cover the other 10-20%. It’s up to savvy investors to find alternative sources of funding to fill that gap left by your loan. 

What Determines Your Gap Financing in Real Estate?

Firstly, there are a few ducks you’ll need in a row before diving into gap financing. Most gap funding will determine whether to lend to you based on three things: credit, assets, and experience. Both the amount of primary funding you’ll receive from your lender and the amount of gap funding you’ll be able to get will be dependent on credit. Also, you can get other lines of credit by putting up your assets as collateral. Finally, having experience or knowing what you’re doing may incline some gap funding lenders to give you a loan.

1. HELOC

If you have good credit and real estate assets (owner-occupied or not), you should always have a line of credit called a HELOC available to you. HELOC stands for “home equity line of credit.” These funds will typically be the safest, easiest, and cheaper you can get. All real estate investors who have property and good credit should have a HELOC. This is going to be your safest, easiest, and cheapest source of funds because they’re always available to you.

2. Lines of Credit from Banks

But what if you have good credit but no real assets? In that case, you’ll need to look at other, unsecured options to fill the gap. One option is to use an unsecured line of credit from a local bank or national company. These lines of credit typically have higher interest rates than a HELOC, but they’re still a good option if you have good credit. 

Don’t Misuse Your Funds

One thing needs to be clear with gap funding: dDo not abuse it. If you use a line of credit that was intended for a real estate investing project, then make sure it’s used for that purpose. It should also be entirely paid off after each transaction is completed. Treat credit like a lender, and treat your investments like a business. Never use real estate lines of credit for personal use. It will kill your credit, your financial future, and your investing career.

How to Get Gap Financing in Real Estate

We’re happy to help with any questions you have about funding or gap financing on real estate projects.

We’ve helped with thousands of transactions worth millions of dollars using OPM. You can download our free OPM guide here.

Watch our most recent video to find out more about: How to fund with lines of credit

Any other questions? Send us an email at Info@TheCashFlowCompany.com.

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How to calculate a DSCR ratio

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How to calculate a DSCR ratio

Today we are going to discuss how to calculate a DSCR ratio. Many investors are intimidated by a DSCR loan and are unsure as to where to start. However, the main thing that you need to take into consideration is whether or not the property cash flows. Properties that do cash flow will in turn have a pretty good shot at getting approved.

Where do you start? 

To clarify, DSCR stands for 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 how to maximize your leverage by getting the most out of your investments.

Calculating a DSCR ratio. 

Let’s go over both how to calculate DSCR quickly, as well as discovering what it means for your property. The DSCR ratio is found by comparing a property’s income to its expenses. The property’s income is the rent that is received for the property. On the other hand, the expenses include the monthly mortgage payment, taxes, insurance, and HOA. If the ratio of greater than 1, that means the property is cash flowing. This is good for not only you, but your lender as well. The better the DSCR ratio the better the loan terms.

Example 1:

Property Income Property Expenses DSCR ratio
$1,700 Mortgage payment $1,290

Taxes: $100

Insurance: $100

HOA: $100

 Income / Expenses

$1,700 / $1,590
$1,700 $1,590 Total: 1.07 

In this example the ratio 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 because it ensures that the property can take care of itself. In doing so, the lenders know that you won’t need to take money out of your pocket to cover the expenses. This is assurance for them, and makes them more likely to approve the loan with good terms. In sum, a 1.07 ratio means the property is positively cash flowing, and it’s a good investment.

Example 2:

Property Income Property Expenses DSCR ratio
$1,500 Mortgage payment $1,290

Taxes: $100

Insurance: $100

HOA: $100

 Income / Expenses

$1,500 / $1,590
$1,500 $1,590 Total: .94

In this example the DSCR ratio is less than 1, which means that the property is negatively cash flowing. This is why it is imperative that you estimate the rent on a property before purchasing it. By having a property with a $1,500 income, it wouldn’t be a good investment. Also, it wouldn’t qualify for a good DSCR loan. However, the same property with a rent of $1,700 would be a good investment because it cash flows..

Know your numbers to get ahead! 

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 can you calculate a DSCR ratio quickly?

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

Watch our most recent video to find out more about: How to calculate a DSCR ratio

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.

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