Why to Take Action When Other Investors Run Away
Today’s market can be very daunting to real estate investors. Many are asking why take action when other investors are running away? Unlike years past, money for financing is just gone. This in turn is forcing investors to obtain more knowledge and leverage in order to win in this real estate game. While this is causing many to run away, it is actually the perfect opportunity to get into real estate investing. Are you ready to take advantage of this excellent opportunity? Let’s take a closer look at why you need to take action now!
How can investors prepare?
To get started, buy when property values are low and rates are high. This will guarantee your success when the market changes. When rates go back down over the next few years, you will already have your property, and can take advantage of the higher property value. Those who are positioned correctly, and stick with it, need to be set up correctly. Let’s look at the steps you need to take in order to take advantage of this current market.
- Understanding the market by going through knowledge based learning
- Set up your realtors
- Determine how you are going to find your deals
- Learn how to calculate your ARV
By getting all of the training completed over the next 90 days, it will allow you to confidently enter the market right away. If everything keeps going the way it is, then there are going to be more opportunities available compared to before, as well as a smaller pool of investors who can take advantage of this.
If things are tightening up, why does that create more opportunities?
When the Fed shrinks the money pool, it in turn decreases what’s available for everyone. This causes lenders and banks to swim upstream in order to look for the best of the best. Banks are being pushed to the point that they can only lend a portion of what they could before. Let’s take a closer look at the money side as a customer, and as an investor, to explain why these times are creating more opportunities. The customers are the ones who own their homes and are going to give it up for a discount. While investors are looking at the property as money to invest. Once again, leverage is the key to real estate investing and why we can make money from nothing. Anybody can do this and create generational wealth if you are set up correctly and financially prepared.
How lending has changed.
One of the largest private lenders used to lend on ARV. ARV stands for after repair value. Lending based on ARV allows investors to get more money, create more leverage, and buy more deals. So if you’re in real estate investing you need to focus on purchasing undervalued properties, fix them up, and either keep it or sell it. This will in turn create wealth for you to reinvest in another property. In today’s market however, lenders are lending off of LTV, or loan to value, instead of ARV. This is often a $50K to $75K difference from what they were lending before the market changed.
Let’s look at an example of ARV vs LTV
|Purchase a house for $250K with a rehab of $50K
|Worth when all said and done
|Amount they will lend
|Amount lenders want you to put in
|$400K at 75%
|Close to $300K
|Lenders don’t looks at this
|$300K at 75%
|Close to $225K
|10% to 30%
It is clear to see what a big difference it makes when lenders switch from ARV to LTV. They are becoming tighter on their lending, lending less, and charging more. This creates a smaller pool of investors, because many can no longer qualify for those deals. While the deal flow might remain the same, only 20% to 30% of investors are prepared to continue buying in this market. There are going to be better deals for those who can buy and buy quickly.
How rates are impacting DSCR
Rates are impacting a lot of things, including DSCR and the rental side of real estate investing. A DSCR ratio of 1 means that the expenses and the income are equal to each other. In the past, DSCR ratios were based on a 1:1 ratio. Nowadays, the ratio has increased to 1:1.1, which means that you need to create even more cash flow. Now if we layer that onto a credit score of 680 or 700, then the ratio will increase to 1:1.2. Therefore, the people with better credit scores often get the better deals.
Now is the time!
It is one of the most valuable times to get into real estate investing. This is because the Fed is tightening up and banks are starting to lend less. In doing so, it creates better deals that will in turn create wealth and income in the near future. One of the most important things to remember is that when there is fear in the street, that is when people start running. These are the times when you need to make your move.
At The Cash Flow Company we can help you find the funding you need and guide you through this market.
Watch our most recent video to find out more about Real Estate Investment Essentials for Today’s Market.