There is nothing worse than finding just the right investment property that you know will make you great income, only to have the opportunity fall through because you got turned down for financing. It’s even worse when you see someone else pick up the property and make a fortune. It’s a devastating feeling, but one that real estate investors face every day with all of the changing lending guidelines.
You located the perfect investment property, put in an offer, and got it under contract before anyone else even knew it was on the market. You thought you were prepared to close quickly and had the financials all lined up. Your financial statements were in order, the money was sitting in the bank for the down payment and reserves, you have good credit, and the financial underwriting of the property looks great. The banker even told you he loved the property and thought you were getting a great deal. But, he regretfully informed you that “they wouldn’t be able to make the loan.” To try and make you feel better, he even said they would have financed it a few years ago without blinking an eye.
It should have been a “no brainer,” so you ask the banker, “what happened?”
He explained that while the property met all of the previous lending guidelines, the bank had recently made some changes to their lending guidelines. “Your global cash flow just wasn’t strong enough and that is something the bank now relies heavily on for their loans.”
“Global cash flow?”
While you knew that lenders would underwrite the asset’s cash flow and its ability to cover the expenses and debt service, you may not be aware that lenders will spend just as much or more time focusing on your personal or your sponsor’s ability to cover ALL of your liabilities. Lenders call this underwriting the “global cash flow.” And it’s quickly becoming the new buzz word in real estate lending.
What is Global Cash Flow and Why Does it Matter?
Global cash flow is one of those lending guidelines that you may not have heard of yet, but you will soon. Global cash flow is a borrower’s net cash flow from all sources of income, minus all expenses and interest. Lenders will include all of your income including that from employment, dividends, investment income, real estate and businesses. Expenses will include all business as well as personal operating costs, including personal debt such as home mortgages, credit cards, and auto loans.
This means that you will have to provide the lender with information on all of your real estate and business holdings along with your personal financials. This includes tax returns, schedule of real estate owned, etc. The lender will then go through each asset to make sure each of your real estate holdings are performing (i.e. providing positive cash flow). You should anticipate this real estate schedule to include detailed cash flows and a summary of debt terms and payments for all of the properties in your portfolio.
Next, the lender will analyze each property focusing on the ability of its cash flow to cover its debt service or loan payments. The goal of this analysis is to determine what your total cash obligations are outside the loan on your new property. Basically, they want to make sure that even though this property “works,” that you don’t have other properties that could bring it down because they are losing money. That could affect your ability to make loan payments on the new property.
Once they have all of your income and expenses, the lender will calculate your global cash flow. They want to make sure a positive global cash flow exists so that you can live up to all of your financial obligations. They typically want a global income to expense ratio of 1.25 to 1, or it will be difficult for them to make the loan, no matter how good your new deal is.
So, the next time you get an investment property under contract and go to get financing, make sure you are prepared when you walk in the bank’s doors. Be ready to discuss your global cash flow and not just the property you’re trying to get financed. Being prepared will make sure that next “hot deal” closes with your name on the title instead of the other investor waiting around the corner.