What would you do next?

[Dave Kush]

Good afternoon everybody! 

I have recently reached a point in my investing where I could use some advice about what to do next. Interested to hear what people suggest. 

My situation:

I have been investing for a few years and recently acquired my fourth property (3 sfh and 1 duplex). 

I have been mostly focused on BRRRRs and long-term investing. I would like to start doing some flips to generate more cash. From my prior investing, I feel pretty confident that I can locate deals and get the rehab done, and I'm realistic that the first rehab or two might be more of a learning experience rather than a huge windfall. I have good credit and W-2 income, so I can typically qualify for financing, but I've run into a few properties now that are not going to qualify for traditional mortgages, and I don't have the cash to pull off the deal. 

In other words, if I was sitting on a huge pile of cash, I feel pretty confident that I would be able to continue growing it. Currently, most of my cash is tied up in the properties I already own. 

Curious to hear what other investors have done in this situation to solve this problem and continue moving forward. Any advice would be helpful. 

Thank you for your ideas!

Dave

[Stacy Raskin]

If you are going to do a flip you can do a hard money loan where you can finance up to 90% of the purchase price and 100% of the rehab price done on draws depending on your credit score and property location. Depending on the hard money loan, you can have up to a year or more to pay back the loan by either selling the property after the remodel and paying off the hard money loan then or refinancing it into a longer term loan such as a DSCR loan if it's going to be a rental.

More on DSCR loans: DSCR loans won't use your income to underwrite the loan. DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth. You also have a shorter seasoning or waiting period between transactions if you decide to keep the property as a rental and you would like to use the new appraised value for the LTV.

Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 760-780+ generally gets best pricing for investment property loans with most lenders. From there every 20 point increment affect pricing differently. So for example, a 761 credit score will be in the 760-779 credit category, then going down to 740-759 and so on.

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.

4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs.

I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350, Insurance = $100, Association Dues = $50

Total PITIA = $2200

Rent = $2000

DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250, Insurance = $100, Association Dues = $25

Total PITIA = $1875 Rent = $2300

DSCR = Rent/PITIA = 2300/1875 = 1.23

If a purchase, you also generally need reserves / savings to show you have 3-6 month payments of PITIA (principal / interest (mortgage payment), property taxes and insurance and HOA (if applicable). If a cash out refinance, many lenders will allow the cash out to satisfy the reserves requirement.

DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals. Happy to connect to discuss further.