Here are your current loan options for a property that isn’t cash flowing.
Our recent blog talked about one course of action when you have a property stuck on the market: selling at a loss.
There comes a point where the loss in a short sale is cheaper than the loss of carry costs for who knows how long while you wait for a better market.
But those aren’t your only two options.
Maybe you want to hold the property, see it through to the next seller’s market, and capture all the equity you know is there. In this case, selling isn’t the right answer. But carry costs still pose a problem.
The answer to the problem? Renting with negative cash flow.
This brings us to the question at hand: How do you get a loan for a property that isn’t cash flowing? What’s the best way for you to preserve as much money as possible? Let’s talk about what you can do with a property that isn’t cash flowing.
Why You’d Need a Loan for a Property That Isn’t Cash Flowing
No one in their right mind would choose to pay thousands in carry costs on a finished fix-and-flip project. So when you have a flip that won’t sell, it can be appealing to just clear the slate with a short sale.
But what if you want to cash in on the equity in that house? What if you know you just need the right market to finally recoup all these costs…?
This is a common way negative cash flow rentals are born. Losing just $500/month is much better than losing $2,000/month on the same property with no tenants.
Other Reasons to Have No Cash Flow Property
The most typical scenario where you need to figure out what to do with a non-cash-flowing property is when a flip needs to become a rental, and the rents won’t cover the loan payment.
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, this loan could be used to get money from that equity. 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?
Most Common Loan Options for Non-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 isn’t guaranteed 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.
Requirements for Loans on Negative Cash-Flowing Properties
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.
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.
How 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.
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.
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 on No Cash Flow Real Estate Loans
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:
- You need to lock in a loan before the market gets worse.
- 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.
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.
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.
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%.
Next Steps for Your Property That Isn’t Cash Flowing
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.
Have any questions about a property with negative cash flow? Looking for a different type of real estate loan? Send us an email at Info@TheCashFlowCompany.com. We’d love to help if we can, or refer you if we can’t.