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Purchase a Multi-Unit Property with a DSCR

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Are you considering buying a multi-unit property, like an apartment building, but want to avoid the hassle of personal income verification? A Debt Service Coverage Ratio (DSCR) loan could be the solution for you. Today we will be discussing how using a DSCR loan to purchase a multi-unit property can get you on the right track! 

What is a DSCR Loan?

A DSCR loan is a type of financing that focuses on the income of the property you’re buying rather than your personal income. It’s perfect for investors who want to streamline the process, especially if their personal financials aren’t ideal. With DSCR loans, lenders look at the property’s cash flow compared to its expenses. If the property brings in enough income, you’re good to go!

Example:

If your property expenses are $1,000 per month, your rental income should be at least $1,200 to meet the typical DSCR of 1.2. That means your income is 120% of your expenses.

Can You Use a DSCR Loan for Multi-Unit Properties?

Yes! While DSCR loans are often associated with single-family homes or duplexes, they can also be used for multi-family buildings with five or more units. Whether you’re looking at a small apartment building or a larger complex, the loan works the same way, focusing on the property’s income.

However, keep in mind that for commercial properties like this, there are a few differences:

  • Loan Size: For multi-unit properties, DSCR loans typically start at around $1 million. If you’re looking for something smaller, this might not be the best option.
  • Loan Terms: You can expect shorter fixed-rate periods, such as 5 or 7 years. After that, the loan either adjusts or you’ll need to refinance.

What Do Lenders Look For?

To qualify for a DSCR loan on a multi-unit property, lenders usually have a few specific requirements:

  1. Minimum Property Value: The property should be worth at least $50,000 per unit. If you’re looking at a 20-unit building, that means the building’s value should be at least $1 million.
  2. Occupancy Rates: Most lenders require that 75% to 90% of the units are rented. This ensures the property is already generating income.
  3. Cash Flow: As with all DSCR loans, the property’s income should be at least 1.2 times higher than its expenses.

Example:

If you’re buying a 10-unit apartment building with each unit worth $50,000, you’re looking at a $500,000 loan. If your total expenses for the property are $5,000 per month, your rental income should be at least $6,000 to meet the 1.2 DSCR requirement.

Benefits of DSCR Loans for Multi-Unit Properties

There are a few key reasons why DSCR loans are popular for multi-unit properties:

  • No Personal Income Verification: Since the loan is based on the property’s income, you don’t need to provide personal tax returns or income statements.
  • Non-Recourse: Many DSCR loans are non-recourse, meaning you’re not personally liable if something goes wrong. The lender can’t come after your personal assets.
  • Simplified Process: The DSCR loan process is straightforward. You won’t need to deal with the endless paperwork typical of traditional loans.

When Is a DSCR Loan NOT the Best Option?

While DSCR loans are fantastic for stabilized properties, they’re not always the best choice if you’re planning a value-add or major renovation project. Most DSCR loans require a high occupancy rate, so if you’re buying a property with a lot of vacancies or under-market rents, you might have trouble meeting the 1.2 DSCR.

Example:

If you’re buying a property that only has 50% of the units rented and you’re planning to renovate the rest, this loan might not be for you. You would need to bring up the occupancy and rental income before it qualifies.

Can You Use a DSCR Loan for a Portfolio?

Absolutely! DSCR loans aren’t just for individual properties. If you have multiple single-family homes or other properties, you can bundle them under one loan. The main requirement is that each property must meet the minimum value and occupancy thresholds.

Ready to Learn More?

A DSCR loan can be a powerful tool for purchasing multi-unit properties. By using a DSCR loan to purchase a multi-unit property you can get yourself set up for success! If you have any questions or want to explore your options, reach out to us. We’re happy to help you find the right financing for your next investment.

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What is the best option: Interest Only vs Amortized

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When deciding between DSCR interest-only vs amortized loans, it’s important to know the difference and how each option impacts your cash flow and long-term goals. Both types of loans have pros and cons, so let’s break them down.

What is an Interest-Only Loan?

With an interest-only loan, you pay just the interest on the loan for a set period. This means your monthly payments are lower during the interest-only phase. However, after that phase ends, you’ll need to start paying down the principal, which increases your payment amount.

Example:

Imagine you take out a loan for $100,000 with an interest-only period of 5 years at 5% interest. During that time, you’ll pay $417 per month. Once the 5 years are over, you’ll start paying the principal, so your payment will jump higher.

Pros:
  • Lower monthly payments at the start.
  • More cash flow for other investments or expenses.
  • Flexibility if you plan to sell or refinance before the principal payments kick in.
Cons:
  • No reduction in the loan balance during the interest-only period.
  • Payments can jump significantly after the interest-only phase.
  • If the property doesn’t increase in value or if you don’t sell, you could be stuck with a higher payment.

What is an Amortized Loan?

With an amortized loan, you pay both the interest and a portion of the principal from the beginning. This means your monthly payment stays the same, and over time, more of your payment goes toward reducing the loan balance.

Example:

Let’s say you have the same $100,000 loan with a 5% interest rate, but it’s amortized over 30 years. Your payment would be about $537 per month. While that’s more than the interest-only loan, each month you are paying down the loan, and your balance decreases steadily.

Pros:
  • Steady payments that stay the same over time.
  • You build equity in the property right away.
  • Lower total interest costs over the life of the loan.
Cons:
  • Higher payments upfront compared to an interest-only loan.
  • Less cash flow for other investments or expenses.

Which Option is Best?

The best option depends on your strategy and goals. Here’s how to decide:

  • Short-Term Strategy (Interest-Only): If you’re planning to hold the property for a short time, or if you need maximum cash flow now, interest-only might be the way to go. You get lower payments upfront and can use that extra money for other investments. But be careful! When the interest-only period ends, your payments will go up.
  • Long-Term Strategy (Amortized): If you’re in it for the long haul, an amortized loan makes more sense. You’ll build equity over time and won’t face a big payment jump later. It’s a safer bet if you plan to hold onto the property and want to slowly pay off the loan.

Final Thoughts

Choosing between interest-only vs amortized loans depends on your situation. If cash flow is tight and you expect to sell or refinance soon, interest-only might work better. But if you want stability and long-term equity, an amortized loan is usually the safer choice.

Now that you understand the difference, you can pick the loan that fits your goals best!

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My Rental Property Isn’t Cash Flowing!

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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! 

 

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Is a DSCR Loan Right for You?

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If you’re a real estate investor looking for an easier way to qualify for financing, a DSCR loan might be the solution. Unlike traditional loans, DSCR loans focus on the income from your rental property instead of your personal or business finances. Whether you’re new to investing or you like to keep your taxes lean with write-offs, this loan could be your ticket to growing your portfolio. Is a DSCR loan right for you? Let’s take a closer look!

What is a DSCR Loan?

A DSCR loan stands for Debt Service Coverage Ratio. It’s a mouthful, but simply put, it’s a loan for real estate investors. This type of loan focuses on rental properties and doesn’t require proof of your personal or business income. That means even if you started your business yesterday, you might still qualify!

Unlike traditional loans, the DSCR loan is based on whether your rental property will break even or better.

Who is a DSCR Loan For?

DSCR loans are designed for real estate investors looking to buy or refinance rental properties. If you:

  • Are just starting out in real estate investing
  • Don’t show much income on your tax returns (because you write off expenses)
  • Have a good credit score and want to focus on rental properties

Then, a DSCR loan could be a perfect fit for you.

This loan is ideal for people who don’t want to show income or haven’t been in business for two years. Many investors who just quit their jobs and started investing in real estate can benefit from this product because they can qualify without needing two years of income.

Key Benefits of DSCR Loans

  1. No Personal or Business Income NeededWith traditional loans, lenders often want to see two years of income history. But DSCR loans only care about the property’s ability to cover its debt.
  2. Rental Income is What Matters
    DSCR loans don’t rely on your tax returns. Instead, they check if the rental income will cover the property’s mortgage and expenses.
  3. Flexible Options
    You can use DSCR loans for single-family homes and even properties with up to four units. There are also portfolio options for multiple properties and mixed-use loans for special cases.

The DSCR Loan Formula

How does a DSCR loan work? It’s all about the numbers. The lender looks at the rent your property brings in or could bring in. This is called the Debt Service Coverage Ratio. If the rental income covers your mortgage, taxes, and insurance, you’re good to go!

Example:
If your property rents for $1,000 a month and your mortgage and property expenses total $900, you have a good DSCR ratio, and you’re in a solid position to qualify.

Three Things Lenders Look For

To qualify for a DSCR loan, lenders will check:

  1. Rental Income
    The property should break even or have positive cash flow. The lender will only consider five things: your mortgage payment, property taxes, insurance, HOA (if applicable), and flood insurance (if required).
  2. Credit Score
    Higher credit scores mean better rates. The higher your score, the better the deal you’ll get.
  3. Loan to Value (LTV)
    How much money are you borrowing compared to the value of the property? A lower loan-to-value ratio means less risk for the lender and better terms for you.

When is a DSCR Loan Not Right?

While DSCR loans are great for many investors, they aren’t for everyone. Here are a few cases where a DSCR loan may not be the best choice:

  • Owner-Occupied Properties: You can’t live in the property if you use a DSCR loan. It’s strictly for rental properties.
  • Fix and Flips: DSCR loans aren’t ideal for short-term investments like flips because they often come with prepayment penalties.
  • Other Options Available: If you have solid income and qualify for a traditional loan, you might want to explore that route for better rates and no prepayment penalties.

Conclusion: Is a DSCR Loan Right for You?

If you’re looking for a long-term rental property investment and don’t want to deal with showing income or tax returns, a DSCR loan is a great option. It allows you to invest in rental properties with fewer hurdles, focusing on the property’s performance instead of your personal finances.

To see if it’s the right fit, run the numbers, look at your credit score, and make sure the property will at least break even. And, as always, it’s wise to shop around and get the best rate possible!

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Compare different loan options today!

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When you’re investing in rental properties, choosing the right loan can make all the difference in your cash flow and overall investment success. Let’s compare three different loan options. Theses include DSCR loans, traditional loans, and local bank loans. Therefore, understanding both the pros as well as the cons is vital to finding the best loan for your investment success! 

Traditional Loans: Pros and Cons

Pros:

  1. 30-Year Mortgage Stability: Traditional loans offer the security of a 30-year mortgage. Therefore, they have predictable payments over a long period, which can help with long-term financial planning.
  2. No Prepayment Penalty: Unlike some other loans, traditional loans usually don’t have prepayment penalties. You can sell or refinance your property without worrying about extra fees.
  3. Lower Interest Rates: Generally, traditional loans come with lower interest rates compared to DSCR loans. As a result, this can significantly impact your cash flow, especially on larger loans.
  4. Home Hacking Opportunities: If you’re buying a duplex, triplex, or fourplex, you can live in one of the units and qualify for an owner-occupied loan. This often means a lower down payment and a better interest rate.
  5. Uniform Rules Across States: Traditional loans follow the same rules and guidelines across all 50 states. This makes them a consistent option no matter where your property is located.

Cons:

  1. Income and Credit Requirements: In order to qualify, you need to prove your income and have good credit. This can be a hurdle for some investors.
  2. Cannot Close in an LLC: Traditional loans require you to close in your personal name, not in an LLC. This can affect how you hold and protect your properties.
  3. Limited to 10 Properties: You’re limited to financing 10 properties with traditional loans, which can be restrictive if you’re planning to build a large portfolio.
  4. Seasoning Requirement for Cash-Out Refinances: If you want to cash out, you must wait one year after your last refinance or purchase.

DSCR Loans: Pros and Cons

Pros:

  1. Flexibility: DSCR loans are incredibly flexible. Therefore, they can be used for single-family homes, fourplexes, and even larger properties. They’re also great for unique properties like VRBOs, non-warrantable condos, as well as mixed-use properties.
  2. Ease of Qualification: You don’t need to prove your personal income or employment status. The loan is based on the cash flow of the rental property itself.
  3. Close in an LLC: DSCR loans allow you to buy and refinance properties under an LLC, offering better protection for your investments.
  4. No Limit on the Number of Properties: Unlike traditional loans, many DSCR lenders don’t limit the number of properties you can finance.
  5. Available in All States: While guidelines may vary slightly, DSCR loans are available across all 50 states.

Cons:

  1. Prepayment Penalties: DSCR loans often come with prepayment penalties, which can be costly if you plan to sell or refinance within the first few years.
  2. Higher Interest Rates: Interest rates on DSCR loans are typically higher than traditional loans, which can impact your cash flow, especially on larger loan amounts.
  3. Market Sensitivity: DSCR loans can be more sensitive to market changes. During uncertain times, these loans might disappear or change rapidly, which can be risky for investors.

Local Bank Loans: Pros and Cons

Pros:

  1. In-House Products: Local banks often offer in-house loans, which they fund, service, and keep. These loans usually come with shorter terms, like three, five, or seven years. There are also options to refinance or adjust afterward.
  2. Flexibility: Local banks are known for their flexibility. They may finance unique properties or smaller loans that larger lenders won’t touch. Therefore, this makes them a great option for small towns and rural properties.
  3. No Prepayment Penalties: Like traditional loans, many local bank loans don’t have prepayment penalties, giving you the freedom to refinance or sell without extra costs.
  4. Favorable Terms for Small Loans: Local banks often prefer smaller loans, which can be a perfect fit for lower-priced properties in smaller markets.

Cons:

  1. Varied Rules: Each local bank sets its own rules, which means you have to shop around to find the right fit. This can be time-consuming.
  2. Lending Limits: Local banks may have lending limits, which can be a barrier if you’re trying to finance multiple properties or larger portfolios.
  3. Geographic Limitations: Local banks tend to lend within specific regions or markets. If your property is outside their footprint, you might not qualify.
  4. Callable Loans: Some local bank loans are callable, meaning the bank can demand full repayment before the end of the term if market conditions change.

Conclusion: Choose the Right Loan for Your Situation

Each of these loan types—DSCR, traditional, and local bank loans—has its own strengths and weaknesses. The best choice depends on your current situation, investment goals, and the specific property you’re financing. When you compare different loan options you can maximize your cash flow and protect your investments.

Remember, it’s all about finding the right fit for each property and stage in your investment career. Whether you’re just starting out or adding to your portfolio, there’s a loan that can help you achieve your goals. Compare different loan options today to set yourself up for a successful future! 

 

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10 Ways That a DSCR Loan Can Be Good for Your Deals

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Are you looking for a loan that fits your real estate investment needs? A DSCR loan might be the perfect solution. Whether you’re just starting out or have hit a roadblock with traditional lenders, this loan focuses on the property’s income rather than your personal finances. Let’s explore 10 ways a DSCR loan can be good for your deals!

1. Helps When Your Income Is Low

If your income over the last two years is too low to qualify for a conventional loan or a loan from your local bank, a DSCR loan is a great option. It doesn’t rely on your personal income. Instead, it focuses on the property’s rental income.

2. Works for New Businesses

Just started your business? No problem! A DSCR loan doesn’t require two years of business history. Even if you’ve been in business for just one day, you can qualify. DSCR lenders don’t care when you started or how long you’ve been in business.

3. No Worries If You’ve Changed Jobs or Moved

Have you recently changed jobs or moved? Conventional lenders might see this as a red flag, but not with a DSCR loan. This type of loan doesn’t care about your job history or recent moves, making it easier to get financing.

4. Perfect for New Investors

If you’re just starting as a real estate investor, you might not have the experience conventional lenders look for. But DSCR loans are ideal for new investors because they don’t require a history of investing.

5. Focuses on Positive Cash Flow

For the best rates and terms, your property needs to cash flow positively. DSCR loans are designed to reward properties that generate strong cash flow. The more your property earns, the better the deal you’ll get.

6. A Solution When You Have 10+ Properties

If you’ve reached the limit of 10 conventional loans, it’s time to consider a DSCR loan. These loans don’t have the same restrictions and still offer 30-year fixed-rate options.

7. Rewards High Credit Scores

While DSCR loans are available to those with lower credit scores, the best deals go to those with higher scores. A strong credit score can secure better rates and terms.

8. Ideal for Long-Term Holds

If you plan to hold onto your property for at least three to five years, a DSCR loan is a smart choice. However, be mindful of prepayment penalties if you decide to sell or refinance within that period.

9. Best for Turn-key Properties

DSCR loans work best with properties that are ready to rent and require no additional work. They’re not suitable for flips, as they don’t provide funds for repairs and often come with prepayment penalties.

10. Offers Interest-Only Payments

If you’re looking to improve cash flow, DSCR loans can offer interest-only payments. This option isn’t available with conventional loans, making DSCR loans a great way to manage your finances while your property appreciates.

Is a DSCR Loan right for you?

In the world of real estate investing, finding the right financing is key. A DSCR loan offers flexibility, especially when your personal finances don’t meet conventional standards. By focusing on the property’s income, this loan opens doors for both new and experienced investors. Consider the 10 ways a DSCR loan can be good for your deals as you move forward in your real estate investment journey!

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