Text: "What is a HELOC?"

What Is a HELOC for Real Estate Investors?

As a real estate investor, it’s important to know: What is a HELOC?

It stands for Home Equity Line of Credit. But what exactly is a HELOC?

It’s a Lien

A HELOC is a lien against a property.

It can come as a first, second, or sometimes even third mortgage. If you don’t owe anything on your house, you can put a HELOC in first position. With an existing mortgage, it’s put in second position.

It’s a Line of Credit

A HELOC is set up kind of like a credit card. The bank sets a limit they’ll lend and a term for how long.

A HELOC can pay for almost anything related to your projects. You can go to Home Depot and get materials, you can pay your contractors, you can make a down payment. It can take the form of a bank wire, a debit card, or whatever other option your bank gives you.

At the end of the month or the end of a project, you pay the HELOC off, and all the credit is freed up. You can use it again, pay it down, then use it again for as long as the term is active.

Typically, the bank will set a 10-year term. So for 10 years, you can use and re-use it up to the limit they set. If your property goes up in value during that time, it’s possible to get a refinance for a higher limit.

It’s a Faster, Easier, Cheaper Source of Money!

Any expenses you can put on a HELOC frees up your investment experience. When you borrow from other places (hard money lenders, banks, etc), there’s more paperwork and more cost.

HELOCs are easier, faster, and cheaper. A successful investor uses every leverage tool at their disposal, so it’s important to tap into this one.

Read the full article here.

Watch the video here:

Text: "Benefits of a HELOC"

Benefits of a HELOC: Are You Missing Out?

If you don’t use a HELOC in your real estate investment career, you’re missing out on these benefits.

The uses and benefits of a HELOC for a real estate investor are broad and huge. This line of credit is one of the best ways to tap into your existing money to create more money.

Let’s take a look at a few of the ways you can utilize your HELOC to benefit your real estate investments.

Benefits of a HELOC for Real Estate Investors

Down Payment

You can use a HELOC as a down payment on any loan – hard money or long-term. Anytime a lender requires a down payment, you can take the money off your home equity line of credit, and bring it to closing.

For down payments on rental properties, your lender will still require the money borrowed from your HELOC to be included in your debt ratio.

Construction Costs

For a flip or a BRRRR, you can use money from your HELOC to cover the costs of construction.

Money from a hard money lender or bank comes at a higher price. If you’d prefer to use your HELOC to cover construction costs, you can lower the amount borrowed from a lender.

A HELOC will be some of the cheapest money you can find out there – especially now with money tightening. Using it helps lower your overall costs.

Another benefit of a HELOC is the speed and flexibility. If you don’t have time to wait for your lender’s escrow process to pay your contractor, you can just pull the payment off your HELOC.

Carry Cost Benefits of a HELOC

Carry costs include monthly interest, HOA fees, mortgage payments, some materials and construction, and any other regular cost associated with owning the property.

These costs can turn into a burdensome expense on a flip. You can pull from your line of credit to cover carry costs, and when your flip sells, you can put it all back in.

Buying Properties at Auction

There will be more foreclosures coming up soon. To take advantage of this turn in the market, you can use money from your HELOC to buy a foreclosed property at auction.

The benefit of a HELOC here is that you don’t have to get lender approval or meet lender requirements before placing a bid on a property. You can pull from it, pay for the property (or at least the down payment), and refinance later if needed.

Buying Wholesale Properties

You can also buy properties from wholesalers or the regular marketplace when you otherwise couldn’t. You close with a HELOC, then go back and refinance with a hard money or bank loan.

With this strategy, you can close on a deal faster than anyone else. You don’t have to sift through the paperwork and red tape of a loan; just go to the bank and wire out the funds.

Bridge Loan Benefits of a HELOC

Some investors use their HELOC to bridge between properties.

They have one flip for sale, but they’re ready to buy their next one. They use a HELOC to cover the down payment, then pay it back when the other property sells.

You can create your own bridge loan by using a HELOC.

Lend to Other People

You can also use it to lend to other people in the real estate investment community at a profit.

You can borrow from a HELOC at a rate of 5-6%, and you could charge someone else up to 10-12%. (But of course, always be careful and protect yourself when lending to other people).

Overview of the Benefits of a HELOC

  • Using your HELOC allows you to use your money, without taking anything from your savings or 401k
  • You can tap into the equity that’s already at your disposal
  • It keeps projects going while typical loans are tightening up
  • You can get into properties quickly and refinance a few weeks later
  • You can avoid the higher rates of external lenders by borrowing from your HELOC

Read the full article here.

Watch the video here:

Text: "What is a HELOC?"

What is a HELOC? A Real Estate Investment Must!

Here’s what a HELOC is and why you should be using it as a real estate investor.

More and more investors have been calling us to ask about HELOCs.

With traditional, non-traditional, and hard money loans, why would a real estate investor need a HELOC?

In times like this with money tightening, it’s hard to get all the money you need for a project from a lender.

Let’s talk about what a HELOC is, how to get one, and what to do with it to leverage your real estate investments.

What Is a HELOC?

It stands for Home Equity Line of Credit. But what exactly is a HELOC?

It’s a Lien

A HELOC is a lien against a property. 

It can come as a first, second, or sometimes even third mortgage. If you don’t owe anything on your house, you can put a HELOC in first position. With an existing mortgage, it’s put in second position.

It’s a Line of Credit

A HELOC is set up kind of like a credit card. The bank sets a limit they’ll lend and a term for how long.

A HELOC can pay for almost anything related to your projects. You can go to Home Depot and get materials, you can pay your contractors, you can make a down payment. It can take the form of a bank wire, a debit card, or whatever other option your bank gives you.

At the end of the month or the end of a project, you pay the HELOC off, and all the credit is freed up. You can use it again, pay it down, then use it again for as long as the term is active.

Typically, the bank will set a 10-year term. So for 10 years, you can use and re-use it up to the limit they set. If your property goes up in value during that time, it’s possible to get a refinance for a higher limit.

It’s a Faster, Easier, Cheaper Source of Money!

Any expenses you can put on a HELOC frees up your investment experience. When you borrow from other places (hard money lenders, banks, etc), there’s more paperwork and more cost.

HELOCs are easier, faster, and cheaper. A successful investor uses every leverage tool at their disposal, so it’s important to tap into this one.

Benefits of a HELOC

The uses and benefits of a HELOC for a real estate investor are broad and huge. This line of credit is one of the best ways to tap into your existing money to create more money.

Let’s take a look at a few of the ways you can utilize your HELOC to benefit your real estate investments.

Down Payment

You can use a HELOC as a down payment on any loan – hard money or long-term. Anytime a lender requires a down payment, you can take the money off your home equity line of credit, and bring it to closing.

For down payments on rental properties, your lender will still require the money borrowed from your HELOC to be included in your debt ratio.

Construction Costs

For a flip or a BRRRR, you can use money from your HELOC to cover the costs of construction. 

Money from a hard money lender or bank comes at a higher price. If you’d prefer to use your HELOC to cover construction costs, you can lower the amount borrowed from a lender.

A HELOC will be some of the cheapest money you can find out there – especially now with money tightening. Using it helps lower your overall costs.

Another benefit of a HELOC is the speed and flexibility. If you don’t have time to wait for your lender’s escrow process to pay your contractor, you can just pull the payment off your HELOC.

Carry Costs

Carry costs include monthly interest, HOA fees, mortgage payments, some materials and construction, and any other regular cost associated with owning the property.

These costs can turn into a burdensome expense on a flip. You can pull from your line of credit to cover carry costs, and when your flip sells, you can put it all back in.

Buying Properties at Auction

There will be more foreclosures coming up soon. To take advantage of this turn in the market, you can use money from your HELOC to buy a foreclosed property at auction.

The benefit of a HELOC here is that you don’t have to get lender approval or meet lender requirements before placing a bid on a property. You can pull from it, pay for the property (or at least the down payment), and refinance later if needed.

Buying Wholesale Properties

You can also buy properties from wholesalers or the regular marketplace when you otherwise couldn’t. You close with a HELOC, then go back and refinance with a hard money or bank loan.

With this strategy, you can close on a deal faster than anyone else. You don’t have to sift through the paperwork and red tape of a loan; just go to the bank and wire out the funds.

Bridge Loan

Some investors use their HELOC to bridge between properties. 

They have one flip for sale, but they’re ready to buy their next one. They use a HELOC to cover the down payment, then pay it back when the other property sells.

You can create your own bridge loan by using a HELOC.

Lend to Other People

You can also use it to lend to other people in the real estate investment community at a profit.

You can borrow from a HELOC at a rate of 5-6%, and you could charge someone else up to 10-12%. (But of course, always be careful and protect yourself when lending to other people).

Overview of the Benefits of a HELOC

  • Using your HELOC allows you to use your money, without taking anything from your savings or 401k
  • You can tap into the equity that’s already at your disposal
  • It keeps projects going while typical loans are tightening up
  • You can get into properties quickly and refinance a few weeks later
  • You can avoid the higher rates of external lenders by borrowing from your HELOC.

Primary vs Secondary HELOCs

You can get a HELOC from two sources: the house you live in, and, potentially, some of your rental properties.

What is a HELOC on a Primary Home?

HELOCs are calculated using LTVs and CLTVs (combined loan-to-values). 

To calculate this, the bank looks at the loan balance for your first mortgage, plus what the HELOC will add to it. Then they divide that by the value of your home to get to the combined loan-to-value.

Most banks and credit unions will go up to 90% CLTV, but some do 100% on primary homes. 

Using a HELOC unlocks all the equity you’ve established on your home as home values go up over the years.

What is a HELOC on a Rental?

Rental HELOCs are a little more limited. They have different LTV/CLTV requirements. 

For rental properties, there are some banks, credit unions, and mortgage brokers that will allow HELOCs in second position that go up to a CLTV of 65% to 75%. 

Different lenders will limit the amount of secondary HELOCs differently, but most will give you one or two properties.

When To Get a HELOC

Start using your HELOC now, before home prices go down. 

If you have a lot of equity in your rental properties or home, you can tap into that now while the market’s still high. This limit will be locked in for 10 years, even as your home value will likely come down 5-10% in the next six to nine months. 

If you wait to take out your HELOC, you’ll lose more of your available funds.

Where To Find HELOCs

There are three places you can look to find HELOCs.

1. Credit Unions

Credit unions will have the best HELOC rates and terms. We’ve found that to be universal state-to-state.

Shop around at local credit unions. Make sure the lender you’re working with likes real estate investors. Each lender has their own niche. One may prefer doing car loans, but another will prioritize HELOCs.

You’ll find the best deal from a credit union, but you should still shop around for the right one.

2. Local Banks

Local banks usually like to work with real estate investors. They’ll have more products available as far as HELOCs for rental properties and HELOCs on multiple properties.

3. National lenders

Now that the refi-boom is settling down, national lenders and mortgage brokers are starting to offer HELOCs. Going through a national lender will open you up to more products, but the cost is almost guaranteed to be higher.

Consider all three of these options to find the best deal you can. For a HELOC, the “best” deal involves not just rate but LTV.

What Is a HELOC and More

You can use a HELOC to take advantage of what’s happening in the market in 2022.

If you need more guidance with a HELOC of your own, reach out to HardMoneyMike.com.

For one-on-one help, send us an email at mike@hardmoneymike.com. We’re happy to coach you through any real estate investment questions.

Happy Investing.

Text: "Using a DSCR Loan for Airbnb Investing"

Airbnb Investing with a DSCR Loan

Can you use a DSCR loan for investing in an Airbnb?

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

Using Standard Rental Rates for DSCR Loans

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 investing in your Airbnb. You should always shop around – you’re bound to find the right lender with the right loan for your project.

Read the full article here.

Watch the video here:

Text: "Gap Funding & Hard Money How They Work Together"

Gap Funding and Hard Money – How the Real Estate Lending Options Work Together

How do gap funding and hard money go together?

As we move toward a recession, your money as a real estate investor will tighten. Lenders who used to give you 90% of the value of a property will now only offer 80% or less.

Where will you come up with that extra 20% or more? Is real estate in a recession only for those of us with hundreds of thousands of dollars sitting around?

Not at all. Lenders tightening only means that gap funding will become more important for real estate investors.

Let’s look at what gap funding is, how to apply it to your upcoming purchases, and how it integrates with a hard money loan.

What Is Gap Funding?

What does “gap funding” mean in the real estate world?

Gap Funding Definition

Gap funding is the money you bring in from another source to fill any gap left between the lender and the project costs.

If a lender offers you 70% of the LTV on a property, gap funding is how you fill in the remaining 30%. Usually gap funding is secured, although unsecured gap funding is possible. 

A “secured” loan means that the debt is backed by a piece of collateral. In a typical gap funding scenario, the loan is secured by the property being purchased.

For the most part, you won’t be able to find a gap lender at an institution like you can a bank lender. Instead, gap lenders are family members, friends, or someone you know.

OPM vs Gap Funding

You can use a couple gap funding terms interchangeably:

  • gap funding
  • gap lending
  • OPM (other people’s money)
  • real people’s money

All of these terms get at the same concept. It’s money, not from you and not from an institutional lender, that covers whatever costs of an investment property that your lender won’t fund.

OPM can cover up to 100% of a deal, but for now, we’ll be talking about it in a strictly gap funding sense. These are loans that fill in the holes of a project that a mortgage or hard money loan wouldn’t cover.

Gap Funding for Flips

During a time when lenders are offering less money up-front for investment deals, you might need more money to fill in the gaps on your fix-and-flip projects.

Here are a few phases where you might need gap funding on your project.

Down Payments

Hard money lenders require at least 10% as a down payment. This is a very common use for gap funding.

If you use gap funding for your down payment, you’ll need to find out right away whether or not your hard money lender will accept a secured gap loan on the property.

Construction Costs

Another way to use gap funding for flips is for construction costs – rehab, repair, or anything necessary to bring the house up to the ARV and onto the market. These expenses can rack up fast, and they may not be completely covered by the main loan for the flip.

Carry Costs

Some investors will only use gap funding for the carry costs during their flip. 

The lender will pay the mortgage payment, the insurance, or whatever other monthly costs are required during the project. Having a gap lender for carry costs can smooth out a fix-and-flip experience.

The Reach of Gap Funding for Fix-and-Flips

It’s possible to coordinate with your gap lenders to cover all three of these additional costs. This is a common way investors successfully finish fix-and-flips with zero money down.

You can use gap funding however you need, as long as both the hard money lender and the gap lender agree that the loan fits their criteria. 

Not all hard money lenders allow you to secure your gap loan with a lien on the property you’re closing on. And not all gap lenders will loan to you unsecured.

Gap Funding for BRRRR

Gap funding is also used for BRRRRs, and works much like fix-and-flips. The biggest differences happen at closing.

Gap Funding Process During BRRRRs

BRRRR gap funding can be used the same way as a fix and flip: down payment, construction, or carry costs.

For BRRRR though, you need to close the gap funding loan on the same day as closing. You’ll also need to be sure you close the gap funding at the title company, with your lender. So you’ll need to know in advance that your hard money lender allows gap funding with a lien on the property.

Protecting Your BRRRR Refinance While Using Gap Funding

If you close your gap loan too late or incorrectly, your long-term lender can consider your refinance cash-out, not rate-and-term. This will lower the LTV on your refinance.

It’s important to get the money for your loan back in the refinance. In a good BRRRR transaction, you walk away with a house that’s cash-flowing and little to no money out of your pocket.

How to Calculate Gap Funding

How do you calculate what you’ll need for gap funding? It depends on each project.

Calculating Gap Funding Needed for a Project

The way to figure out the gaps in your project is simple:

(Cost of Property + Rehab Costs) – Hard Money Loan Amount = Gap Funding Amount Needed

If the property costs $200,000, but your lender gives $140,000, there’s a $60,000 gap you’ll need to cover. You can:

  1. Pay the $60,000 out-of-pocket

Or

  1. Bring in a gap lender, enabling you to buy the property with 100% financing. You would likely use part of this loan for the down payment and part for construction costs.

How to Calculate Construction Costs

Most hard money lenders use the ARV (anticipated retail value) rather than LTV (loan in relation to the current sale value).

In case your loan is for LTV only and doesn’t take into account construction costs, here’s how you would calculate those costs for an undermarket home:

ARV  –  Actual Cost of Property  =  Maximum Construction Budget

It’s important for you to work these numbers and know your budget up-front. Keep in mind, it’s always better to err on the generous side with your numbers. You want to be sure you can get done on-time and within the budget allotted by your hard money and gap lenders.

Ways to Secure a Gap Loan

So when you hear the advice to “secure” your gap loan, what does that mean? How do you secure a gap loan? And why?

Securing with Two Lenders

Securing your loan involves both your hard money lender and your gap lender.

Your friend or family member is giving you a fairly large chunk of money. They’ll want to know how you’ll secure it for them. 

Securing your gap lender’s loan involves putting a lien on the property. Does your hard money lender allow this? Not all lenders will.

If Your Hard Money Lender Doesn’t Allow a Lien

If your hard money lender does not allow a lien on the property, you’ll have to secure the loan with a different property.

You could either put the lien on your own home, or you could use another rental or investment property.

If They Do Allow a Lien

If your hard money lender does allow a lien on the property to secure a gap loan, it’s best to do during closing with the mortgage and deed. This way title records it, and you have evidence for your gap funder that it’s recorded.

Many gap lenders – especially if they’re family or friends – won’t be educated enough about the real estate world to understand how to secure  their money. As the investor, it’s your responsibility to keep your lenders’ money safe.

Securing the Loan

No matter which property has the lien, you’ll have to take a few important steps to secure the gap loan. 

You’ll need a note – a promissory note between you and your gap lender – and a lien, either a mortgage or a deed of trust. And you’ll have to record all this with the county.

To make sure the loan is concerned, be sure to check all these boxes. It’s important to do this thoroughly so your lender will:

  • Get their money back
  • Feel comfortable with the deal
  • Want to lend to you again
  • Recommend you to their network

For More Help on Gap Funding and Hard Money

Gap funding and hard money are big, important concepts that work together for real estate investors.

If you’re left with questions, you can reach out to us at info@hardmoneymike.com, on Facebook, or at HardMoneyMike.com. 

We’re more than happy to answer specific questions on specific deals.

You can also check out these videos on gap funding and OPM.

Happy Investing.

Text: "DSCR loan: down payment & refinancing

Does a DSCR Loan Require a 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.

Read the full article here.

Watch the full video here:

Text: "Finding Hard Money Bridge Loan Lenders"

Where Do You Find a Hard Money Bridge Loan Lender?

Does every hard money lender do bridge loans? Where do you find a hard money bridge loan lender?

A lot of people use the term bridge loan interchangeably with gap funding or hard money, but a true bridge loan is slightly different. They’re shorter-term than a hard money loan, and they’re typically less expensive because of that.

Is a Bridge Loan Different from a Hard Money Loan?

A hard money loan is longer and broader than a bridge loan.

  • The average bridge loan lasts 30 to 45 days. Hard money loans can last up to a year or longer.
  • Bridge loans get you from one property to the next. Hard money focuses more on a single project.
  • Bridge loans get paid when your old property sells. Hard money loans get paid when you refinance or sell the property the loan was originally for.
  • A bridge loan is used as temporary funds to close on a house. A hard money loan can be used as a more general budget for a purchase. Many come with the option for escrows to fix up the property over time.

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

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

What Lender Give Bridge Loans?

To find these quick, short loans, a small local lender (like Hard Money Mike) will be your best and fastest option. Smaller hard money lenders prefer working with deals that provide good, safe returns. Bridge loans do exactly that.

A bigger hard money lender will do a bridge loan, too. But they may take up to four weeks to close, which often defeats the purpose of true bridge lending.

You can also get bridge loans from some banks. Not big, national banks, but many local banks and credit unions who work with real estate investors may do bridge loans, too. Banks usually offer the cheapest bridge loans, but can take 3 – 4 weeks or longer.

Ask around to hard money bridge loan lenders you know to learn their pricing and see if it’s worth it. You can use our free loan optimizer to find out if you can get a good deal on bridge loans near you.

Read the full article here.

Watch the video here:

Text: "Loans for Investing with Rising Inflation"

Loans for Investing with Rising Inflation: What Should You Expect?

With rising inflation, how will your loans for investing be impacted?

In the past few years, everyone with money rushed into the real estate industry. All that money flowed freely, making real estate investing relatively easy and cheap.

But with rising inflation, that money is now leaving. Here are some changes you can expect around loans for investing.

What Does a Rising Federal Fund Rate Mean?

To combat inflation, the Fed has started raising their rates. They do this to raise the cost of credit, making less money available across the board.

And obviously, this affects us as real estate investors.

When interest rates rise, money tightens up. There’s less of it available for everyone, and lenders adopt stricter requirements. 

While this makes loans for investing harder to get, it also means there will be less competition. Many current investors won’t be able to qualify for loans for investing with rising inflation.

What Will Investing Look Like with Rising Inflation?

It’s hard to say when money will start coming into the real estate market again. Lenders don’t know where exactly home prices are going. And property values are one of the main factors that decides the availability of funds.

But while everyone else is running out of the real estate market, you want to be running in. Why? Because that’s when prices will be the lowest. If you have the leverage to get into properties at low prices, you can refinance when interest rates come down. This is how you capture the wealth real estate investing offers.

This is the time you want to buy, yet it’s also the time where loans for investing are hardest to come by.

You’ll need to be prepared and qualified to take advantage of the upcoming market.

Read the full article here.

Watch the video here:

Text: "DSCR Loan Formula"

What Formula Do Lenders Use for DSCR Loans?

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.

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.

Read the full article here.

Watch the full video here:

Text: "Subject To Example"

What’s an Example of a Subject To?

Subject to deals are unique (and potentially confusing). Here’s a subject to example deal – what the process should look like from beginning to end.

Why the Seller Wants a Subject To

A subject to starts with a seller who has a problem. Either they can’t make payments on their property, or they need to move ASAP (got a new job across the country, etc). They can’t sell the property as fast as they need to; or maybe they could sell, but paying 6% realtor fees and 2% closing would leave them upside down.

The seller would rather have someone else take over the property and make the loan’s payments. This saves the seller’s credit and helps them avoid foreclosure.

A subject to helps a seller get out of a messy situation.

Closing the Sale

Once you find a seller, you’ll need to set up your terms. You’ll go through a typical closing, so you can get a title report and check for any existing liens.

You’re responsible for any liens on the property. They may have a first, second, or judgment lien that would become your responsibility. You don’t want to get stuck with a property whose value is way undermarket.

Payment Example for Subject Tos

After closing, you’ll need to set up the payment system to the seller’s mortgage company. Many people use a third-party escrow company. They make the payments to the escrow company, and that company makes the actual payments to the mortgage lender.

A seller’s credit is on the line when they agree to a subject to deal. If you offer to use a third-party company to make the payments, that could give the seller the reassurance they need to go through with a deal.

The escrow company may cost five to twenty-five dollars per month, but it’s a small price to get in on an existing loan with 2.5% – 3% interest.

Read the full article here.

Watch the video here: