I have found a deal and am in negotiations. We plan on using hard money to purchase and rehab. Once we have bought, rehabbed, and rented the property, what happens if we can't refinance?
Lenders/Banks will not use all of our income due to commission being less than 2 years. Also looking at my tax return it appears that the rental income divided by days rented get's me a negative cash flow (even when adding back in the depreciation). This will shoot our Debt to income ratio out of financing bounds.
Is our only choice to flip? How can I refi this deal to pay off the hard money debt?
There are asset-based lenders who will lend solely based on your cashflow and not your personal financials, so they don't care about things like DTI, pay stubs, tax returns, etc. So you can use these lenders to refinance instead of a traditional bank. They're going to be more expensive than your conventional lenders with rates ranging from 5% - 8%. The exact rate is based on things like LTV, credit, DSCR, and experience.
The comment about negative cashflow is concerning though... will it be cashflow positive once fully renovated and rented out?
What is DSCR? And who are these lenders?
We cash flow great (or what I think is great). About $350 after fees for a SFR with about $50k in equity. My CPA used incorrect days rented as it was our primary for a good portion of the year. I know lenders use a 25% vacancy factor as well that makes it look not so good.
Debt Service Coverage Ratio is a measure of how much cash flow are you getting in comparison to your monthly loan costs (how well can you cover your debt service costs). Obviously the more cash flow you have in relation to your loan payment, the less risky this will be to a creditor.
I will say that the BRRRR method poses the risks you talked about above. As is typical in real estate- the price you pay for the property is crucial. Although being invested in real estate is great, it's not worth jumping into a sub-par deal.
Hopefully you can get this worked out!
You could get a partner, or you can always just flip the property and make a profit. You should always be able to sell at a profit, so that's a great contingency.
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