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How to Invest in Airbnb and Other Short-Term Rentals: The Money Side

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Here’s your funding guide to invest in Airbnb, VRBO, or other short-term rentals.

You’ll find plenty of guides online about how to find good Airbnb locations or how to manage VRBO properties. 

Our expertise is in financing those short-term rentals. 

How can you find the easiest, fastest, cheapest funding for short-term rental properties? Let’s look at how to invest in Airbnb and get the money side right.

Why Do Airbnb Investments?

Maybe when you think of an Airbnb your mind still goes to the classic model: a family with a guest house rents out to tourists for a little extra money.

But short-term rental sites have evolved past that. Airbnb and VRBO properties can look a lot of ways, serve a lot of purposes, and generate a lot of income.

Airbnb Purposes

Airbnbs aren’t always for vacation rentals. The reasons people use short-term rentals are as diverse as the people themselves. 

Sometimes Airbnbs are used as an alternative to hotels for traveling professionals. Or insurance companies will use VRBOs as temporary housing for people displaced by a house fire. Or companies will host remote workers for onsite projects in an Airbnb.

Some renters will stay for one night, some for three months. Some come to experience the location, some to have a personal retreat, and some because they’re preferred to hotels for longer-term stays.

There’s a wide variety of ways and reasons to invest in an Airbnb, VRBO, or other short-term rental. They’re a worthwhile investment – as long as you know the best ways to finance them.

Airbnb Investment Income

Short-term rentals are a great investment from a cash flow perspective.

If you invest in something like an Airbnb, it can quadruple (or more) the income you would make from a traditional monthly rental agreement.

If a traditional renter generates $2000 per month, short-term rates could make up to $4000 to $6000 per month on the same exact property.

So… How do you get the money to start?

How to Buy Your First Airbnb with No Money Down

If an investor decides to use short-term rentals as an income stream, ideally, they wouldn’t want to pay a bunch of money up front for the property.

Is it possible to buy your first Airbnb with no money down? What steps does it take to get 100% financing on a property to convert into an Airbnb?

Using the BRRRR Strategy to Invest in an Airbnb with No Money Down

A possible way to get a short-term rental with zero money down is to use the BRRRR strategy. 

If you can buy a property undermarket, fix it up within budget, and refinance, you can set up an Airbnb for no money down. 

We’ve helped a lot of people use the BRRRR strategy to get into an Airbnb. They keep the purchase and rehab costs at 75% or below the ARV, then get into a long-term conventional loan or DSCR loan.

The process is mostly the same as for a traditional BRRRR rental property, with a few slightly different requirements.

Long-term Loan Requirements to Invest in Airbnb

You’ll find conventional lenders that will lend for an Airbnb. But they may require that you have:

  • Two years of experience with Airbnbs
  • Other real estate investment history
  • The income for the loan (from a W2 job or your own business) without any income from the property.

If you’d need a loan with fewer requirements for your first Airbnb, a DSCR loan may be right for you. A DSCR loan’s only major requirement is that the income from rent covers the expenses of the property.

What If You Can’t Get an Airbnb for Zero Down?

If you land a good BRRRR opportunity – find a property you can buy and fix up for under 75% of the ARV – you can get it with zero down. 

Otherwise, you’ll be asked to put 20-30% down, depending on:

  • Your credit
  • Your income
  • The income potential of the property

Later in this article, we’ll explore options for covering these down payments and other costs a loan won’t cover.

How to Invest an Airbnb Loan Without W2 Income

Many of these loans have income requirements. So what happens if you don’t have W2 income on your first Airbnb loan transaction?

If you need to get an Airbnb loan without W2 income, you can use a DSCR (Debt Service Coverage Ratio) loan.

Using a DSCR Loan to Invest in Airbnb

Maybe you started a business less than 2 years ago and you don’t yet have tax returns that qualify you for most loans. Or you just lost or left a job. Or maybe you recently moved.

In any of these circumstances, you probably won’t have the W2 income that qualifies you for most loans.

But DSCR loans will work for you because they only look at the potential or current rent for the property. Many, but not all, DSCR lenders will do Airbnb, VRBO, and other short-term rental loans. 

DSCR Airbnb Loan Requirements

With a DSCR loan for a short-term rental, however, you don’t use the actual income amount you receive from Airbnb or VRBO. Instead, you’ll use the average rent in the neighborhood to qualify for your loan.

This means you can get a DSCR loan if the standard, monthly rent in the neighborhood would cover the property’s costs. So, that average rent amount must be greater than or equal to the property’s:

  • Mortgage
  • Taxes
  • Insurance
  • HOA fees

If the property meets those requirements, you can get an Airbnb loan without all the W2 income documentation required by typical loans.

Find the Right DSCR Loan for You

With DSCR loans, it’s very important to shop around. Every DSCR lender will offer a slightly different type of loan, with slightly different requirements.

There is a loan that is perfect for your credit, your plan, and your property. You just have to find it.

What Are the Best Loans to Invest in Airbnb?

Which loans and terms are best to invest in Airbnb? What should you look for?

Unfortunately, there’s no simple answer. Your loan options for short-term rental investments will come down to your credit, your income, and your experience. 

Airbnb loans come in all shapes and sizes – 30-year fixed mortgages, adjustables, non-QM loans, interest-only, and more.

You’ll have to talk to lenders to see what’s out there. Here are a few things to keep in mind while you’re shopping around.

Down Payments

Every loan comes with different down payment requirements. These requirements are based on your situation, credit, income, location, size of property, and more.

Some Airbnb loans will only require 20% down, some up to 30%. If you’re not using BRRRR, you have to expect to put this extra money into the property.

Is that something you can afford? Will you be able to find alternative ways to fund that extra 20-30%?

Pre-pay Penalties

Most non-traditional loans and DSCR loans will come with pre-pay penalties.

You’ll agree to keep the loan on the property for, say, five years. So, if something comes up after two years and you sell, you’ll have to pay the lender an up to 5% penalty.

Getting a loan with a pre-pay can get you a better rate. But it becomes an expensive detail if you end up selling early.

Do you know how long you’ll keep the house? Is the rate on the loan with the pre-pay penalty worth it?

How to Get the Best Terms for Airbnb Loans

People get excited to invest in Airbnbs, but they fail to get sorted on the money side. You’ll have to search for the best terms. 

The easiest way to improve your terms is to have the income, and, more importantly, the credit score that lenders are looking for.

Good terms on your loans lower your cost of funds and increase your leverage. It leaves more money in your pocket and less to the bank. Good terms are vital if you want to expand your Airbnb and other investments into a business.

Grow Your Airbnb Faster with OPM

You can get short-term rental loans from banks and hard money lenders. But one of the best strategies for funding Airbnbs is to borrow money from real people.

Using OPM Loans to Invest in Airbnb

Other People’s Money comes from family, friends, or anyone else with money they’d like a better return on.

Maybe they’re only getting a 1% rate in their bank account and want more from a real estate investor. Maybe they’re nearing retirement and want to start getting their money out of the stock market. Whatever a person’s situation, there’s a lot of money out there looking for better returns. 

You can buy a VRBO with someone else’s money, then pay them back with interest at 5-6%. It’s cheaper for you, and double or triple what your lender would make keeping their money in a bank. Win-win.

OPM requires no credit or income qualifications, and it gives you a faster, more convenient money source to grow your Airbnb.

Setting Up an Airbnb Partnership with OPM

Instead of using OPM as a loan, there’s a way to structure it as a partnership. 

In this case, you have no debt requirements. You can return their money with a rate of 5%, but if there’s a bad income month, you’re not obligated to pay.

As far as cash flow, you can’t beat an OPM partnership or loan. It can help you invest in Airbnbs with no money out of pocket, no qualifications, and potentially no debt.

If you need help setting up the OPM process, we’ve done thousands of OPM transactions and can answer any questions you have.

Where To Go From Here

There are a lot of loan options to kickstart your Airbnb investment career. The less money you have to put into the property, the better off you’ll be.

There’s money in the money – for all investments, including short-term rentals. Getting the money right makes everything smoother and your profits bigger.

Contact us at HardMoneyMike.com with any questions about your Airbnb investment journey.

Happy Investing.

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What is a DSCR Loan?

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“The Easy Loan” – What is a DSCR loan all about?

DSCR stands for Debt Service Coverage Ratio, which is a term used in the mortgage industry.

In the real estate industry, a DSCR loan is more commonly known as an “easy loan.”

What is it that makes a DSCR loan so “easy”?

DSCR Loans’ Easy Reputation

DSCR loans are easy because they cut out 50 to 60% of the paperwork required for a typical loan of its kind. If you’ve ever done a loan for a rental property, you know the paperwork seems endless.

All a DSCR loan looks at is whether your property’s rent covers your monthly expenses. At the very least, your rent (income) needs to be higher than your expenses – payments, taxes, insurance, HOA, etc.

The only other consistent criteria for getting a DSCR loan is your credit score. But if you have a good to great credit score and a cash-flowing property, you can get one of these easy DSCR loans.

What Is Special About a DSCR Loan?

Every DSCR loan will be slightly different. You can find a DSCR loan in any shape or size.

Each lender puts their own nuance in their DSCR loans. There’s no national standard for underwriting for these loans. There are thousands of institutions offering these loans, so there are thousands of different versions of them.

For your investments, you can find DSCR 30-year loans, 3 to 7-year adjustables, interest-only loans, and more. DSCRs are useful for their range of options.

But you do have to shop around for each of your DSCR loans. Each lender will have different criteria, and your different rental properties will each meet a different set of criteria.

Take your time finding DSCR loans, and take advantage of their wide variety.

Other Common Requirements for DSCR Loans

As mentioned, DSCR loans can vary widely from lender to lender. But there are a few more common requirements for DSCR loans to keep in mind.

First, DSCR loans typically require 20% down for a purchase. Their refinance max is usually 75%. There are unique lenders out there that will offer more, but a lower down payment will be offset by higher interest rates.

Second, interest rates for DSCR loans are typically around 1.25 to 1.5% higher than other traditional conforming conventional loans.

Third – and this is an important one – DSCR loans almost always come with pre-pay penalties.

You have to keep the loan for a set amount of time, usually 3-5 years. Or else you have to pay the lender a penalty for paying it off early. That means if you sell or refinance, they’ll charge you a penalty.

Lenders will want these loans to stay on the property for a longer amount of time. So they penalize you for ending the loan before their minimum timeframe. Watch for these penalties, and be sure they fit into your guidelines for a project.

Read the full article here.

Watch the full video here:

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How to Create Wealth with Subject To Real Estate Investing

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Setting up a subject to deal right opens the gate to more money in your real estate investment career. Now, here’s how to take it from a system that generates cash flow to a way to create generational wealth in real estate investing.

To Make Money, Go Big

Volume is how to truly create wealth in real estate investing. Subject tos can be easy and relatively passive, so it’s possible to stretch yourself from five to ten properties to 50 to 100.

But to go for volume, you’ll have to be less picky with the amount of money you put in a deal.

You might have to bring in some money to help the seller move. You may have to fix up a few things in the property. Or you could need to carry the payments for a few months while you find a good renter.

Using OPM to Create Wealth in Real Estate Investing

The number one investment strategy we recommend here is to bring in an OPM partner. This will be a person who’s willing to put in $10,000 to $50,000 in exchange for a portion of rent.

This partnership will allow you to expand quickly. Your partner gets a 5-6% return on their money, there’s still no money down for you, and you get the speed and flexibility that cash gives a subject to.

We have a history of helping people with this part of the process. You can get the start-up cash that will allow your to create wealth by investing in real estate. Reach out at HardMoneyMike.com.

Read the full article here.

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Hard Money Loans – Know the Basics

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As a beginner investor, you need to know the basics about hard money loans.

The two most basic hard money answers you need are:

  1. What’s the difference between loan-to-value and ARV?
  2. How do you calculate them?

Know the Basics: Loan-to-Value

Firstly, what’s Loan-to-Value? Loan-to-value, or LTV, involves the:

  • appraised value of a property
  • as it sits right now
  • with nothing changed about it.

As a real estate investor, if a property costs $100,000 as it sits, you know you’re going to put work into it and make it worth more. But that as-is value, the $100,000, is what lenders base their loan amount on.

Know the Basics: After Repair Value

Secondly is After Repair Value. After repair value (ARV) is used more by hard money lenders and the real estate investment world. Banks and traditional lenders more often use LTV.

Because in real estate investing, we’re basing our numbers on what you can do to the property. What can the value be once you fix it up? That’s the number that determines profit, so that number is more important for hard money lenders.

ARV is the target value of what the house will be worth after all your renovations. This ARV should always be higher than the current price of the house when you buy it.

Calculating ARV and LTV for Hard Money Loans

Let’s say you found an undermarket property that’s selling for $100,000. If a lender says, “We’ll loan you 75%,” that could mean two things, and you’ll want to know the difference.

First, if they’re a bank, they’re likely talking about 75% of the value. In this example, that would be:

$100,000  ×  75%  =  $75,000 loan

Hard money lenders will care more about the value of the home after repairs, so they go off ARV. If they loan you 75%, that would be:

$150,000  ×  75%  =  $112,500 loan

If a loan is based on ARV, lenders might want to know – what are you doing to the property? Different renovations will affect the value of the property in different ways. What you will do and the quality of your work will affect the ARV.

When you know the basics about LTV and ARV, your hard money loans will be much smoother.

Read the full article here.

Watch the video here:

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How to Invest in Real Estate During Inflation: Your Credit Score Matters

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Let’s unpack what it means to invest in real estate during inflation.

Inflation is rising. Interest rates are rising. Lenders are looking at risk and reward, and they’re becoming much less lenient than they’ve been in the recent past. 

Think of this time like 2010: investors who aren’t ready will have a hard time continuing their business. Investors who are ready can jump in and take advantage of chances to build generational wealth. 

What will be the key to preparedness for this downturn in the market? Credit scores.

Let’s look at lender credit score requirements, lending options, and how to invest in real estate during inflation.

What Is the Credit Score Range?

Credit scores range from the 400s to the 800s. Lenders, though, look for 620 to 800 credit scores. 

Credit Score Ranges and LTV Expectations

In recent times, 640 used to be an average minimum score for lenders. But in the last several months, that’s risen to an average of 680.

Lenders are prioritizing quality over quantity in who they lend to, dropping off 15-20% of available borrowers.

In addition to changing credit score requirements, many lenders are also changing how much they’ll lend. 

We know some lenders who have raised their requirements from 640 to 680, and they’ll only loan out 65% LTV. To get 80% LTV, they used to require 690-700; now, that credit score range is 720-740.

How Interest Rates Impact Lender Credit Score Ranges

With rising interest rates, it will be harder to get cash flow on properties. If your rate goes from 3% to 6%, that’s doubled the amount of interest you pay every month.

Lenders will be concerned with cash flow. They want to make sure they lend to solid people who have a good history of making their payments.

As rates and inflation go up, you need to be prepared to take advantage of what will happen in the market as you invest in real estate. 

You’ll need to know what credit score range lenders are looking for, and you’ll need to know your score.

How Do I Check My Credit Score?

A good credit score is necessary for successful real estate investing. So it’s important to answer the basic question: How do I check my credit score?

Does Checking My Credit Affect My Score?

How can you check your credit without it impacting your score? If your credit is checked in the wrong way, it can impact you by 3-5 points. Not a big deal, right?

But if your lender requires a 680 credit score, and you go down to a 679… you just got squeezed out of the loan.

There are two kinds of credit checks: hard inquiries and soft inquiries. A hard inquiry will knock your score down temporarily. Luckily, most methods of checking your credit online are soft inquiries and shouldn’t impact your score.

Where Can I Check My Score?

You can start somewhere like CreditKarma.com and sign up for a free account. Even though it’s not FICO-score-driven, it can give you an idea of where you’re at. It’s a good way to check your credit score without affecting your credit.

You can also visit AnnualCreditReport.com for a yearly free copy of your credit report. Also, some banks and credit card companies will offer a free credit checking service with your account.

Use these free, online checks that don’t bother your credit to keep a pulse on your score. Check these three months before you need a loan. That gives you time to take (or avoid) certain actions to raise or maintain your score for when you apply for the loan.

Know Your Score to Get Ahead

We’ve been spoiled in the last decade with low rates, easy money, and wide options. That’s all slowly coming to an end. Lenders will be pickier, with higher rates and fewer options. 

But that means there will be fewer investors out there buying, so the opportunities are even better for you. As long as you’re credit-ready.

Loans for Real Estate Investing Amidst Inflation

Who are the lenders for real estate investing? Here are the basics of each lender and how rising inflation and interest rates will affect your relationship with them as you invest.

In real estate investing, there are three key lenders.

1) Banks and Credit Unions

National banks don’t usually have many options for real estate investors. But local banks and credit unions love real estate investors.

Even so, banks are the most conservative lenders. They’ll be especially tight with their money until they figure out the new normal with updated federal interest rates. 

As a real estate investor, bank loans will be increasingly difficult to get. It’ll be more common for banks to lend 60-70% of the LTV with high credit score requirements. 

In the last few months, we’ve been receiving four times as many calls as usual from investors who typically go through banks for all their money. Already, investors are getting turned away by banks.

2) Hard Money Lenders

There are two types of hard money lenders: national and local. Each type of lender will approach the change in the economy in a different way.

Much like banks, national hard money lenders will tighten up on their requirements and options. National lenders were known for offering up to 90-100% LTV. Now, they’ll only lend 80% and their credit score range requirements have gone up. The higher your credit score, the higher your leverage with national hard money lenders.

Local lenders won’t change nearly as much based on the economy. Smaller lenders make their income by loaning money, so they’ll never tighten too much. Local hard money lenders don’t typically have any credit score requirements. 

Get to know the hard money lenders in your area. They’re a valuable asset to have in your portfolio of lenders, especially now, and especially if your credit score is outside of the range of traditional lenders.

3) Real OPM

OPM is Other People’s Money – from family, friends, neighbors, or other people in a position to lend. You might think that normal people wouldn’t want to loan you their money at a time like this. But you would be wrong. 

People with money in the bank are making around a 1% return. So getting a 5%, secured return from you is way more appealing. OPM lenders won’t care about credit – as long as you secure their money and ensure them a return. 

All three of these lending sources will be important. You’ll need a mix of all of them. Putting them together in the right way will accelerate your real estate career.

Credit Score Requirements for Fix-and-Flip Loans

During inflation, how does your credit score impact the flow of money to invest in fix-and-flip real estate?

We monitor a few national wholesale companies that have raised credit score requirements 40 points and dropped their LTVs by 10%. And it will only get tighter.

These lenders will charge higher rates too. One of these companies used to have 7% interest rates. Now, they’ve already risen to over 10%.

What does this mean for you?

You’ll need to raise your credit score to have a chance at these loans. And between lower LTVs and higher interest rates, you’ll have to expect to put more money down.

Use these tricks to raise your score while applying for new loans.

BRRRR Loans and Credit Score Requirements

During inflation and rate-rising, cash flow can take a huge hit. This means you’ll need to be much more careful with BRRRR loans.

BRRRR’s Two-loan Strategy with Rising Requirements

We’ve mentioned how traditional bank loans are changing. But even DSCR loans – loans based on rental income from property – are raising rates up to 9% and requiring credit score minimums.

You’ll have to be much more intentional with your BRRRR loans.

In BRRRR, there’s two loans, and you’ll need good credit scores for both. The first is a hard money loan (where national lenders require higher scores). The second is long-term, either a traditional bank loan or a DSCR (which are all raising requirements).

Upcoming price drops and foreclosures will be perfect opportunities for BRRRR properties. Investors who can get approved for financing will be the first to take advantage of these opportunities.

Fewer investors will be able to keep their business going. You need to know your credit score so don’t lose out on funding!

Be Credit-Ready

Your credit score is an important part of your business. You’ll need to be better at credit than ever before in your real estate career.

You can take advantage of this dip! Be credit-ready to invest in real estate during inflation.

Download our credit score checklist here.

Watch our videos on credit preparedness here.

Happy Investing.

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What Is a Good BRRRR Property?

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What makes a good BRRRR property? What is it you should be looking for?

A good BRRRR property follows the 75% rule. But that’s not the only criteria you should follow. What else makes a good BRRRR property?

What to Look for in a BRRRR Property

Here are the factors successful BRRRR investors consider in their properties.

Single-family properties

For multi-family or commercial tenants, lenders have different requirements. They often need you to hold your loan for 12 months after purchase (or even 12 after tenants move in). But that timeline doesn’t work well with the BRRRR method. You’ll have a much easier time with single-family homes.

Rent prices

“Knowing your numbers” also means knowing the rent prices in the area of a property. Cash won’t flow on your investment if you’re unable to charge enough rent.

Desirable Areas

Similarly, find properties people want to live in. If you wouldn’t want to spend time there, good renters probably won’t either.

Vacation Rentals

If you’re doing vacation rentals, do the research on:

  • What areas people want to visit
  • What the rates are in the area
  • What third-party booking sites would be most profitable
  • What fix up levels you’ll need
  • Whether there are good hosts or property managers in the area.

Don’t Rush into Bad BRRRR Properties

Beginners fail at BRRRR when they don’t choose properties wisely. Don’t just buy property to buy property. You can own ten bad rentals and make no money. BRRRR should be a system that builds cash flow.

We see people do one or two BRRRRs then stop because it’s not what they expected. They put too much money in, or the area isn’t good, or their renters aren’t paying, or the rent isn’t enough to generate cash flow.

In short, these issues aren’t BRRRR’s fault. A prepared investor, beginner or experienced, can always succeed with BRRRR properties.

Read the full article here.

Watch the video here:

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3 Ways a Hard Money Bridge Loan Makes Your Life Easier

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Some lenders might talk about hard money and a bridge loan as the same – that’s okay. But it will benefit you to know the particular uses for bridge loans.

The basics of a bridge loan are that they’re used to bridge you from one project to the next. You pay the loan off when the first property sells. Using bridge loans can make your investment career smoother, faster, and more profitable.

Here are 3 ways you can use them.

1. Bridge Loans to Get from One Property to the Next

The most common use of bridge loans in the hard money space is to bridge you from one property to the next.

When you have a flipped property that’s almost complete – the work is done, it’s under contract, it’s almost sold – you might want to get started on your next project without waiting for the official close.

The problem is: How do you buy a new property without the money from selling the old one? A hard money bridge loan solves that problem.

A bridge loan allows you to use the property that’s about to be sold as collateral for a new loan for a new property. Once the first property sells, some of that money is used to pay off the bridge loan. Then you own the new property free and clear.

This way of using a bridge loan is especially useful if you have a lot of cash put into one property. You don’t have to wait to get that money back after selling to start on your next investment.

2. Bridge Loans to Cover a Down Payment on a New Property

You can use an advance of the equity on a current property as the down payment for the new property through a bridge loan.

Maybe you’re about to sell one property. And you’re able to get financing for your next one… Except you can’t cover the down payment.

In this case, you’ll probably use a bridge loan in conjunction with a hard money loan. The hard money loan covers the property cost, and the bridge loan covers the remaining down payment cost. Then that bridge loan gets paid off when you sell the old property.

3. Bridge Loans to Close Fast

Another way you could use a bridge loan is to close faster on a new property.

Maybe you plan on using more traditional financing through a bank, but the bank loan wouldn’t be ready in time. You can use a short-term bridge loan.

This loan bridges you from the closing to the refinance. A bridge lender will help you with the initial purchase. Then once your bank (or hard money) loan is completely ready – usually several weeks or a month later – that bank loan pays off the bridge loan.

Bridge Loans in the Hard Money World

Typically bridge loans are used for 3 situations in real estate investing:

  1. When you’re buying a new property and already have one listed for sale
  2. When you need to cover down payment on a new property
  3. When you find a great deal but your bank’s financing won’t be ready in time.

Read the full article here.

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How to Flip for Profit in 2022

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At the beginning of 2022, flipped homes would sell in a matter of hours, rather than weeks or months. The fix-and-flip experience will be a little different in the remainder of 2022. How can you flip for profit this year?

What Properties Will Flip for Profit?

Your best bet for income in real estate flipping will be sticking to medium price point properties.

Some areas – for example, City center of Denver — are still doing great in higher price ranges. People are still selling $1 – 2 million dollar properties with no issues. But in smaller communities, there are fewer people who can afford $600,000 – $900,000 properties.

With rising interest rates, people who were looking in those higher price ranges now need to look a little lower. Medium property prices are also always competing with rent.

Even though interest rates have gone up 5 – 6%, a $150,000 – $250,000 house will still be in a competitive market with rent. As long as they can afford it, people will always steer toward buying a home rather than renting.

Rent prices aren’t going anywhere but up. We may see changes in the renting sphere as congress discusses hedge funds and other big investors driving rent prices up. But for you now, rising rents could push more people to consider home ownership in the low-to-mid price range.

Flipping Expectations for 2022

When you look at your market, know that 3-bedroom, 2-bath, and garage homes will always be reliable as a seller. People will always be searching for those types of properties for their families.

You’ll find buyers in this range, but be sure to adjust your expectations. In the last market, buyers would make offers within hours or days. The reality of this upcoming market is it might take one or two months to find a buyer. Be patient, take your time, look at your area, and keep an eye out for upcoming foreclosures and other opportunities.

Read the full article here.

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How To Make Sure a Subject To Is a Good Real Estate Investment

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Not all subject tos and owner carries are created equal. Here are some tips on knowing when a property will be a good real estate investment for you.

Good Real Estate Location

In the upcoming market, don’t settle for properties in bad locations. A good real estate investment is a deal in a good area.

As more foreclosures happen, more REITs and investment companies will buy large amounts of rental properties, creating new “rental areas.” Your target tenants might want to avoid those areas. You might have more success buying in “better” areas.

Good Real Estate Investments – Know Your Goals

When you go into a subject to deal, you’ll need to know the terms that will make the investment worth it to you, along with the goals you’d have for the property.

How long do you want to carry this property? Can your seller agree to those terms? What does your seller require?

What’s your plan? What are your options for this property? Will you want to rent out the property, or look at lease to own or contract for deed options?

In addition to a traditional subject to, lease to purchase and contract for deed deals are worth considering. Those buyers will give you a down payment, which is a lump sum you can use to fund the property’s fix-ups, put in a reserve, or just keep in your pocket.

Subject Tos are Good Real Estate Investments, Even with High Loan-to-Value Ratios

Often, subject tos will have a high loan-to-value ratio. It’s often around 90%, but we’ve seen subject to properties with over 100% loan-to-value.

Naturally, this could give you pause, but high loan-to-value properties are okay for subject to deals. They’re still good real estate investments. As a subject to buyer, you know:

  • There’s no money out of your pocket.
  • Rent will cover your payments.
  • The loan will amortize down.
  • Over time, you can own the property free and clear, and when the market’s up, you could sell for straight profit.
  • You can create wealth without even using your own credit.

Subject tos are a good real estate investment if you have no experience or money – or if you do!

Read the full article here.

Watch the video here:

Text: "What is a DSCR loan?"

Understanding Real Estate Loans: What Is a DSCR Loan?

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What is a DSCR loan, and when should you use one?

DSCR loans have been around for a few years, and they’re only getting more popular.

These are unique opportunities for funding rental properties. But they aren’t for just any deal.

Are DSCR loans right for you? Could you find properties that qualify? Let’s find out.

What is a DSCR Loan?

DSCR stands for Debt Service Coverage Ratio, which is a term used in the mortgage industry.

In the real estate industry, a DSCR loan is more commonly known as an “easy loan.”

What is it that makes a DSCR loan so “easy”?

DSCR Loans’ Easy Reputation

DSCR loans are easy because they cut out 50 to 60% of the paperwork required for a typical loan of its kind. If you’ve ever done a loan for a rental property, you know the paperwork seems endless.

All a DSCR loan looks at is whether your property’s rent covers your monthly expenses. At the very least, your rent (income) needs to be higher than your expenses – payments, taxes, insurance, HOA, etc.

The only other consistent criteria for getting a DSCR loan is your credit score. But if you have a good to great credit score and a cash-flowing property, you can get one of these easy DSCR loans.

What Is Unique About a DSCR Loan?

Every DSCR loan will be slightly different. You can find a DSCR loan in any shape or size.

Each lender puts their own nuance in their DSCR loans. There’s no national standard for underwriting for these loans. There are thousands of institutions offering these loans, so there are thousands of different versions of them.

For your investments, you can find DSCR 30-year loans, 3 to 7-year adjustables, interest-only loans, and more. DSCRs are useful for their range of options.

But you do have to shop around for each of your DSCR loans. Each lender will have different criteria, and your different rental properties will each meet a different set of criteria.

Take your time finding DSCR loans, and take advantage of their wide variety.

Other Common Requirements for DSCR Loans

As mentioned, DSCR loans can vary widely from lender to lender. But there are a few more common requirements for DSCR loans to keep in mind.

First, DSCR loans typically require 20% down for a purchase. Their refinance max is usually 75%. There are unique lenders out there that will offer more, but a lower down payment will be offset by higher interest rates.

Second, interest rates for DSCR loans are typically around 1.25 to 1.5% higher than other traditional conforming conventional loans.

Third – and this is an important one – DSCR loans almost always come with pre-pay penalties.

You have to keep the loan for a set amount of time, usually 3-5 years. Or else you have to pay the lender a penalty for paying it off early. That means if you sell or refinance, they’ll charge you a penalty.

Lenders will want these loans to stay on the property for a longer amount of time. So they penalize you for ending the loan before their minimum timeframe. Watch for these penalties, and be sure they fit into your guidelines for a project.

DSCR Loan Pros and Cons

Every loan in the world has its pros and cons. The important thing is to be able to evaluate whether it’s right for your property.

DSCR Loan Pros

No Income Requirements

The biggest advantage to a DSCR Loan is that there are no income requirements.

You don’t have to work a W2 job, or be self-employed for 2 years. The application won’t ask where you work or what you do.

This is helpful if you’ve just started a new job, become recently unemployed, or have more unconventional income.

The number one requirement for a DSCR loan is the income from the property itself.

Business-Friendly Financing

DSCRs are considered business loans since the properties are non-owner-occupied. The majority of them allow you to finance in an LLC or other business name. 

They also do loans in different states. If you have properties in Colorado and Florida, you can go to one lender and they can lend both places.

Minimal Paperwork

If you’ve ever done a traditional loan, you know the paperwork is a giant hassle. DSCR loans have very minimal paperwork. They’ll need to look at your:

  • Credit score
  • Loan-to-value
  • Rent

And that’s it. 

The majority of lenders won’t ask for info on your other properties. They just want to know the other properties are current, and that shows up on your credit report. Even if you have other rental properties with negative cash flow, it won’t impact your ability to get a DSCR loan on a positive cash-flowing one. 

As long as you have a property that’s making money, you can get this loan for very little paperwork.

DSCR Loan Cons

Prepayment Penalties

DSCR loans almost always come with pre-pay penalties. You have to keep the loan for a minimum timeframe of around 3-5 years to avoid a fee for paying off early.

So, if you get a DSCR loan, then a year later you find someone who wants to buy, or some other unexpected event comes up and you have to sell the property… You’re stuck paying to get out.

And prepayment penalties can be up to 5% of the loan amount. 

Let’s say you have a $200,000 loan with a 5 year pre-pay minimum. And you end up wanting to sell it after 2 years. Then you’ll have to pay the lender 5% of $200,000 – or $10,000 – just to get out of the loan.

Higher Rates Than Other Conventional Loans

Some DSCR loans have 5, 7, or 10-year ARMs that keep rates down. Still, DSCR interest rates will be 1.25 to 1.5 points higher than other conventional loans. 

This will impact your cash flow, so a property has to have a strong cash flow for you to consider a DSCR loan.

Pros vs Cons: Are DSCR Loans Worth It?

Despite their drawbacks, DSCR loans can be a truly great option. 

It’s a great portfolio loan for real estate investors. DSCR is perfect for people who want something easy, or who don’t have the income traditional loans need.

As long as your specific property fits the criteria and the cash flow is there, a DSCR is a great easy loan to build your portfolio without the hassle of underwriting.

DSCR Formula

An important part of considering a DSCR loan is understanding the DSCR calculation. All lenders will look at this formula for DSCR loans. 

Let’s go through and look at the numbers to find out if your property has enough cash flow for a DSCR loan. 

(You can grab our free download that sets up this DSCR formula at this link.)

Income & Expenses

The number one thing DSCR lenders look at is income.

For this example, let’s say our rent is $1,000 per month.

The next thing they look at is expenses.

They want to make sure your income more than covers your total costs. They’ll look at: mortgage payments, taxes, insurance, and HOA. Right now, they don’t look at property management costs, but that could change in the future.

Let’s fill out these numbers for our example property:

Table. Title: "DSCR Formula." Rent: $1000. An itemized list of expenses totaling $850.

So, the total expenses for this property are $850. Right away, we can see that income more than covers expenses, and this property cash flows $150/month.

Applying the DSCR Formula

Then, the equation lenders will do to determine this cash flow will be:

Income  ÷  Expenses  =  Cash Flow Rate

Or, in this case:

1000  ÷  850  =  1.17+

Lenders are looking for a positive cash flow. They want properties with:

  • Bare minimum: One-to-one. This means your rent at least covers your costs. (Example: Rent is $1000 and your monthly expenses on the property is $1000).
  • Better: 1+
  • Best: 1.25+

Download our free spreadsheet to fill out this formula for your properties to see if they’d qualify for a DSCR loan.

DSCR Loan Down Payment

What is the down payment requirement for DSCR loans? What does refinancing look like with this type of loan?

Down Payments for Different Types of Properties

Your typical DSCR loan will require 20% down, but as interest rates are rising, you may see that that tighten up to 25%. So, if you’re buying a $100,000 property, they’ll loan you 80%, or $80,000. But you’ll have to come up with the remaining $20,000.

If you go from a single-family to a four-plex (some DSCR loans work for up to six-plexes!), you may be required to put in more like 25-30%. As your “doors” go up, so does your down payment.

But always check around! DSCR loans are the wild west. You’ll have lots of choices, every lender likes having slightly different requirements.

Refinancing with a DSCR Loan

For a rate and term refinance, a DSCR loan will typically cover 75%. 

So you’ll need 25% equity in the property on a DSCR loan to do rate and term. 

Cash out refinancing is a little tighter. Most are at 70%, but you could find outliers between 65 and 80% (but the higher ones will raise your interest 2 or 3 points).

For true, good DSCR loans, you’ll be maxed out at 75% for rate and term, 70% for cash out.

Let’s say you’re looking at a property that’s worth $100,000. On the cash out, you can only get $70,000, and you’ll need $30,000 in equity. For rate and term, the max loaned is $75,000.

At the end of the day, it’s impossible to give a one-size-fits-all answer about DSCR loan amounts. There are so many options, and your properties will each require different loans. You’ll have to talk to brokers and lenders in your area to find the best rates for you.

Using DSCR with BRRRR

If you’re lucky, the rental property you’re getting into is a BRRRR property. You can use a DSCR loan like any other traditional conventional loan to refinance.

If you buy the property at 75% or below its ARV, you can use a DSCR loan and buy a rental property with zero money down.

Airbnb Investing with a DSCR Loan

Can you buy an Airbnb with a DSCR loan? 

Short answer: yes. However, you may come across a few obstacles.

Using Standard Rental Rates

Typically, to refinance an Airbnb, a lender requires 2 years’ history of rents and expenses for the property.

If you can’t provide that, a DSCR loan could be an option for your short-term rental.

But to get the DSCR loan, you need to use the standard rental rates for a standard rental property in that area. Without a longer history, you can’t use your Airbnb rates as the income for the property.

This can be a major hurdle.

A property that’s successful with short-term rentals (Airbnb, VRBO, etc.), probably makes more money than a standard monthly rental in the same area. In fact, the monthly income from an Airbnb can be 3-4x the standard rents in an area.

But a DSCR will require you to use the number for standard rents. So it’s possible that even though your short-term rental is cash-flowing, it might not qualify for a DSCR loan.

Lenders and Airbnb Investing

DSCR loans vary from lender to lender. Three-quarters of DSCR lenders will be open to loaning for Airbnb properties. The other quarter will want nothing to do with it.

Some lenders look at Airbnb as a riskier investment. Cash-flow has the potential to be higher, but there are a lot of moving parts. Also, some municipalities put restrictions on short-term rentals, making them a more unpredictable investment in lenders’ eyes.

It’s still worthwhile to research a DSCR loan for your Airbnb. You should always shop around – you’re bound to find the right lender with the right loan for your project.

What Other Loans Are Available to You?

DSCR loans are unique, great opportunities for some rental properties. If you have more questions about DSCR, don’t hesitate to reach out at HardMoneyMike.com.

Again, here’s the link to download our free DSCR loan calculator.

And if you’re curious about your other loan options as a real estate investor, try this free lending options download.

Happy Investing.