My Rental Property Isn’t Cash Flowing!

Finding out that why your rental property isn’t cash flowing can be frustrating. This is a common concern, especially as interest rates rise. Let’s dive into why this happens and how you can better understand it.

Rising Interest Rates and Cash Flow

In recent years, interest rates have increased significantly. This rise has made it harder for rental properties to cash flow, especially if you’re using DSCR loans.

Example: Two Years Ago vs. Now

Two years ago, if you took out a $250,000 loan at an interest rate of 3.75%, your monthly payment would have been about $1,158. Today, if you take out that same loan at 9%, your payment jumps to around $2,011. That’s an $853 increase per month on the same property.

This rise in interest payments directly affects your cash flow. Even if your rent has gone up, it often isn’t enough to cover the increased costs. For example, rents might have gone from $1,500 to $1,700, but that increase is much smaller than the jump in your monthly payment.

How DSCR Loans Have Changed

DSCR loans used to require a simple one-to-one ratio, meaning your rental income just needed to cover your expenses to qualify. Now, many DSCR lenders require a higher ratio, like 1.1 or more. This means your property must generate more income than before to qualify for the loan.

On top of that, other costs like taxes and insurance have also increased, putting even more pressure on your cash flow.

What Happens When Interest Rates Drop?

Here’s where the silver lining comes in. If interest rates drop, your cash flow improves.

Example: Interest Rate Drops to 7%

Let’s say the interest rate drops to 7%. In that case, your payment on the same $250,000 loan would decrease to about $1,663. That’s a $348 savings each month compared to the 9% rate.

Example: Interest Rate Drops to 5%

If interest rates drop even further to 5%, your payment could go down to $1,342. That’s a massive $669 improvement in cash flow compared to the 9% rate.

Why You Should Still Consider Buying

Even though cash flow might be tight now, buying properties with good equity can still be a smart move. If you find a property with 25-30% equity and it’s at least breaking even, you could see great returns in the future when rates go down.

Example: Break Even Now, Profit Later

If you buy a property now that breaks even or comes close, as rates go down, you could refinance and suddenly have a property that’s cash flowing by hundreds more each month. Plus, when homes become more affordable, more buyers will enter the market, driving up property values.

Conclusion

While it’s harder to cash flow with rising interest rates, there’s still potential for long-term gains. By understanding how higher rates impact your payments and planning for future rate drops, you can position yourself for success. Focus on finding good deals with equity, and as rates decrease, your cash flow will improve, and property values will rise. The key is patience and strategy. Do you need to find out why your rental property isn’t cash flowing? Contact us today!