Tag Archive for: Real estate investing

When NOT To Use Hard Money For Real Estate Investing

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Every form of leverage has its time and place. Here’s when not to use hard money.

You need all kinds of leverage as a real estate investor. Different investment problems will call for different kinds of debt solutions.

Hard money, banks, private equity, and OPM all have their time and place. However, there are times when certain lending methods just aren’t smart.

Hard money has a lot of important uses, but when should you not use hard money?

1. When It Costs More

The main time when not to use hard money is whenever it’s the more expensive option.

You get into real estate to make money. Saving money on the leverage for a deal is a top priority.

Hard money is one of the most expensive forms of leverage. If using hard money costs you more than any other lending option, that’s your first sign not to use hard money.

When Is Hard Money More Expensive?

Private equity funds and hard money lenders typically have around the same pricing. The real gap comes when you compare bank loans to hard money.

In a previous article about when you should use hard money, we went over an ideal situation for hard money. In this example, the speed of a hard money loan can get you such a good deal on a property that you wind up saving money.

However, that doesn’t always happen. The cost of the property might not change whether you have a hard money loan or bank loan. You might have plenty of time to wait for the cheaper but slower loan from the bank. In those cases, you almost always should not use hard money.

The interest rate and origination fee for hard money will almost always make it the more expensive loan. Here’s a side-by-side comparison of a hard money loan vs bank loan for the same property.

As you can see, when all else is equal, a hard money loan would cost you over $9,000 more.

Always, always go with the cheapest source of funds. In typical situations, bank loans and OPM will be cheaper than hard money or private equity.

2. When You Have Time

If speed isn’t a factor in getting a good deal, that’s a sign when not to use hard money.

Sometimes, speed at closing can mean the difference between getting a property and not getting it. Or, closing fastest could mean saving tens of thousands of dollars on a deal. Hard money is a good option then.

However, that’s not always the case. Sometimes a seller is willing to wait several weeks for a bank loan to clear in order to take a higher bid.

If time isn’t a consideration, then you probably shouldn’t use hard money.

3. When You Have Real OPM

OPM is money you get from real people you know. If OPM is available to you, you should always use it instead of hard money.

This form of leverage combines the speed and flexibility of a hard money lender with the price (or cheaper) of a bank loan.

If you can source and secure an OPM loan for a project, then there’s usually no reason to get hard money.

4. When You Already Have Money

It’s never smart to use a hard money loan when you already have cheaper funds available – especially when you have cash.

There’s no reason to pay a 9% interest rate when you could pay with a 0% rate, or use a cheaper line of credit like a HELOC.

A time when not to use hard money is when you have an equally flexible funding source that costs way less. In general, when you have cash available, stay away from leverage at all.

How Else Do I Know When Not to Use Hard Money?

What’s the right leverage for you? Are you doing it right? Are you using the best funds for your project?

Join our weekly call-in here, every Thursday at 1:15 PM to 2:15 PM MST to find out! Bring a specific question about a deal, and we can talk through the best option for you.

Happy Investing.

What To Do When Your Flip Is Stuck on the Market

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It’s all too common in times like these – your flip is stuck on the market. Here are your options to save your money.

You got a great deal on a property a couple months ago. You worked hard to fix up the house fast. And now… it’s not selling.

This problem is happening to investors daily. We’re getting a lot of calls from our clients (and other people’s clients!) asking for help.

So, what do you do with a sticky flip?

Your Options When Your Flip Is Stuck on the Market

Obviously, the ideal goal with a flip is to sell at a profit, quickly. That may not be possible under current conditions. If your flip is stuck on the market, you might need to strategize a different exit plan.

Your main options are to:

  1. Keep dropping the price until it sells. Cut your losses and just get rid of the property.
  2. Refinance your flip’s loan. Make your lender happy, but keep the house on the market to try to salvage some profit.
  3. Convert the flip into a rental. Refinance your flip, then hold onto the property for a couple more years, until a good market returns. You can keep a tenant and get some rent income in the meantime.

Which option is right for you? That depends on your goals, willingness to rent, and financial situation. Let’s go over some of these options in detail to help you decide.

First Step in Converting a Flip to a Rental

First of all, if you decide you’d rather turn the flip into a rental, stop lowering the market price immediately.

You can’t drag out this decision, lowering the price “just in case” while exploring rental options.

When you refinance your fix-and-flip, the appraiser looks at the market history. They see the last price the house was listed for. They have to base their appraisal off that number, regardless of whether the house sold or not.

If the last listed price is lower than what they would have appraised the house for… they still have to go with the listed number.

So every time you drop the price, it lowers your potential appraisal. This directly hurts your loan-to-value on a refinance.

Loan Options for Your Flip Stuck on the Market

Once you’ve made the (quick) decision to refinance the property, what are your options?

Typically, you’d go to a bank to get a conforming or traditional loan. But banks are slow, and this refinance needs to happen quickly. Also, with money tightening, bank loans are harder to get than ever.

Here are 3 other options we’d steer you toward:

1. DSCR Loans

The DSCR loan is the easiest, fastest way to get a longer-term rental loan. The core requirements for most DSCR loans are:

  • A good credit score – 680 minimum, with a higher score meaning the better the rates and terms.
  • Rent income – If your rent covers your monthly payments on the loan transaction, you’ll qualify. Some DSCR products will still take you if you lose up to 25% on the loan payment with rent.

If you decide you want to turn your flip into a rental, a DSCR loan should be the first option you consider.

Beware the Prepayment Penalty

All DSCR loans have a prepayment penalty. The standard timeframe is 3 or 5 years. The longer the term for your prepayment penalty, the better the rate.

Prepay penalties are like exit fees. For example, if your term is 5 years, and you decide to pay off the loan during year 3, they’ll charge you 3% of the loan as an exit fee.

2. Bridge Loans

If your flip is stuck on the market, but you want a short-term refinance, then bridge loans could be the better option.

Bridge loans typically last about 1 to 2 years. There are a couple directions you could go with a loan like this:

  • You can keep the house on the market and just use the bridge loan to get out of your original flip loan.
  • You can convert it to a short-term rental (think Airbnb) to bring in some cash flow.
  • You can turn it into a traditional rental while you wait out the market.

Bridge loans are good because they’re fast, interest-only, and have no prepay penalty. The downside of bridge loans is that they’re limited to 70% of the value of the home. Plus, they tend to have higher interest rates.

If your flip is stuck on the market for too long, your original lender will start asking for their money back – potentially raising rates or threatening foreclosure. A bridge loan is a great exit.

DSCR vs Bridge Loan to Refinance Out of a Fix-and-Flip

When deciding whether to go with a DSCR loan or bridge loan, you should consider the “tipping point.” Bridge loans have 2% – 4% higher annual rates. DSCR loans have a prepayment penalty.

Depending on how long you want to keep the loan on the house decides which type of loan will be cheaper for you. This tipping point usually lies somewhere between the 14th and 17th month of a DSCR loan. That’s when the pre-pay fee becomes cheaper than the rates on the bridge loan.

3. Real OPM

Lastly, real OPM is always the ideal funding source to get you out of difficult situations.

Real OPM is real people – family, friends, folks in local real estate groups – who want to put their money in a safe place with an easy return.

An OPM lender can get a 6% to 7% rate of return lending to you over a 2% or 3% rate keeping their money in a bank. You can use OPM to pay back your original lender  and free you up to make the best decision for your flip stuck on the market.

OPM is win-win.

More Help for a Flip Stuck on the Market

We’d be glad to help you find the best loan for your needs.

Reach out now! Rates are only going to rise, and now is the perfect time to get prepared for a market with more opportunities.

Email us at Mike@HardMoneyMike.com.

Happy Investing.

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What Does ARV Mean in Real Estate Investing?

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To profit in real estate investing, you’ll need to know: What does ARV mean?

Real Estate Investing: What Does ARV Mean?

ARV is the after repair value. It’s what the property will appraise for, or sell for, on the current market once the scope of work is completed.

You estimate a property’s ARV by looking at the prices of similar homes in the current market.

What Are Comps?

Comps (comparables) are those similar homes you look at. It’s important that your comps have the same value as your property.

For example, if your deal is for a 950 square-foot home, you’ll compare it to other 900 to 1,000 square-foot homes on the market, not a 2,000 square-foot one. Similarly, compare a 2-bedroom, 1-bath house to houses of the same specifications – not to 4-bedroom, 2-bath homes.

How To Get an Accurate ARV

For your ARV to be accurate, you need to stay true to your scope of work. If you only repaint and re-carpet a house that needed much more work, you won’t get top-of-the-market value when you try to sell or refinance.

On the other hand, if your scope of work is a full remodel, your comparables should be homes that are fully remodeled, so you don’t miss out on any profit.

The money you put into fixing up a house isn’t a direct indicator of how much the house will be worth. What the property looks like when it’s finished has nothing to do with how much it cost to get it there.

What Does ARV Mean for Profit in Real Estate Investing?

Estimated profit is what you expect to make on the transaction between:

  • buying the property
  • fixing it up
  • selling it again.

Additionally, equity is the difference between the amount you owe and what the property is worth. You build equity on your rentals by:

  • buying properties with a low purchase price and a high ARV
  • successfully refinancing after a flip
  • paying down the mortgage with rent income.

If you want to find the true profitability of a deal, then use your ARV and comparables:

ARV – (Purchase Price + Budget) = Profit Amount

Read the full article here.

Watch the video here:

https://youtu.be/4RErCDhSi44

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How Will Changing BRRRR Loan Requirements Affect You?

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Lenders are upping the requirements for a BRRRR loan. Here’s what to know to prepare.

BRRRR has two loans – hard money to buy, long-term to refinance. With inflation, both loans will have lower LTVs.

What else should you expect?

Hard Money BRRRR Loan Requirements

Many private money companies – particularly bigger, national lenders – are requiring 20% down.

Hard Money Mike is a little different. We fund using real private money, so our loans aren’t as dictated by federal rates. We still go up to 100% on financing, as long as you’re approved for your long-term loan up-front.

Smaller lenders can give you a better advantage with BRRRR during inflation. But you should still expect many private lenders to offer lower LTVs.

Bank BRRRR Loans with Inflation

Long-term loans are decreasing, making it harder to cash out. Traditional lenders could go down to 70% or 65% LTVs, or just have tougher requirements.

Money is shrinking, so the pot of money available to you on either BRRRR loan is shrinking.

The Plus Side of BRRRR and Inflation

What’s the good in all of this? If you’re in a bad financial position, you’ll have a hard time continuing your real estate career in inflationary times.

But, if you’re in a good position, you’ll be able to find fantastic properties in your pricepoint. And you’ll be able to find them for 20-40% less money than you could a year ago.

Don’t fight what’s happening with the economy – figure out how to use it.

Understand BRRRR loan requirements now. If you get into a BRRRR, fix it fast and refinance fast. Figure out your BRRRR’s long-term loan first before you look for a short-term loan.

Things are changing rapidly in the real estate investment world. Get yourself in the best position to be able to work with it.

Read the full article here.

Watch the video here:

Text: "Leverage Up!"

The Power of Leverage: Are You Losing Money?

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These simple examples show you the power of leverage in real estate investing.

Real estate investors know they need loans to buy properties. But few real estate beginners understand exactly how big of a difference leverage makes.

Leverage turns property-buying into a real estate investment career. It builds real money, and a portfolio of net worth that can create generational wealth.

In this article, we’ll use simple examples to break down the power of leverage in real estate – and how maximizing leverage skyrockets your real estate career.

What Is Leverage?

In short, leverage means buying with money that isn’t yours in order to make a profit.

Leverage takes the form of loans from lenders: banks, credit unions, hard money lenders, people you know.

The greatest tool for a real estate investor is leverage.

How to Find the Power of Leverage

Let’s look at some simple numbers to show the power of leverage.

We’ll look for two things:

1) How much income can you get from a rental?

2) How much equity will a property generate over time?

Note: We’re going to use $100,000 as our base number. That might be a lot more money than you have to start with. It’s also likely a lot less money than you’ll spend for your properties.

Regardless, it’s a simple number to show the power of leverage. These same principles will apply despite your starting number or your property costs.

Now, let’s dive in.

Income without Leverage vs with Leverage

Rent is the income you get from tenants. Net rent is that income after you’ve made any loan payments for the month on that property.

Net rent is the number that’s true cash flow for you. We’ll use this number to analyze real estate income with and without the power of leverage.

Income No Leverage

Say you have $100,000 to invest in real estate.

You could take this money and buy one rental property valued at $100,000. You can invest the full $100,000 and receive $1,200 of net rent income per month, or $14,400 per year.

Income With Leverage

Now let’s see how it plays out when you involve a lender rather than buying outright.

You could talk to a lender who might offer to loan you $75,000 if you put in the other $25,000. Now, instead of pouring all of your money into one rental property, you’ll only have to use $25,000. The $75,000 covered by the lender is considered leverage.

Using lenders like this, you could buy four properties, each with a $25,000 down payment. Because you’re paying a mortgage, however, your net rent per month goes down. Your net rent is now $750 per property. This brings in $3,000 per month, or $36,000 per year.

With leverage, you have the potential to make $1,800 per month more, or an additional $21,600 per year – just from using leverage.

Net Worth without Leverage vs with Leverage

Rent income isn’t the only financial outcome of buying and renting real estate. There’s also appreciation. 

According to the stats over the last 20 years, real estate goes up an average of 5.3% per year. Using this 5.3% number, one home increases value by an average of $5,000 per year. 

This isn’t a straight line (ie, exactly $5,000 per year). Some years may appreciate more, some less. But over the long-term, that’s the average yearly appreciation, so we’ll use this number.

Net Worth No Leverage

Let’s see how appreciation would impact our real estate portfolio had we bought the one home outright, with no leverage.

Our single rental would have $5,000 in equity after one year, $25,000 after five years, and $150,000 after 30 years.

Net Worth with Leverage

Now let’s see the equity of the four properties purchased with leverage. 

Each of the four homes increases in value by $5,000 every year. Multiply that by four, and your portfolio appreciates $20,000 per year.

Over a 30-year span, your four properties would add $650,000 to your net worth (compared to $150,000 with the single property).

Total Power of Leverage

Let’s put all these numbers together now.

Using leverage brought in an extra $21,600 of income per year,  plus a total net worth increase of $600,000 over 30 years.

This is the power of leverage: bringing in extra income and raising your net worth through equity.

By using other people’s money, you can take advantage of the true wealth in real estate.

Maximizing Leverage

Now, we’ll take this example one step further. Simply using leverage unlocks a lot of money. What happens when you maximize leverage?

We looked at an example of a lender giving you 75% ($75,000 on a $100,000 property). “Maximizing” that leverage would look like getting a bigger loan. Instead of 75%, another lender might give you 80-85%.

80% Leverage

Let’s go back to the original example, but say a bank gives you 5% more. Now, you get $80,000 per $100,000 transaction.

Income with Maximized Leverage

Your down payment per property is now only $20,000, so you can buy 5 properties. But since you borrowed more money, the mortgage payment is higher, and the net rent goes down.

At this point, it may seem like you’re set up to make less money since you’re paying more on your loan. But let’s see how it plays out.

Five properties with an income of $700 per month is $3,500 per month. This works out to be $42,000 per year. Annually, that’s $6,000 more than using a 75% loan, and $27,600 more than using no leverage at all.

Equity with Maximized Leverage

For five properties, after 30 years, equity appreciates by $750,000. All that money is added to your net worth.

Maximizing your leverage in this scenario would give you $42,000 in yearly income, plus $750,000 added to the value of your properties over time.

That’s the road to generational wealth.

How to Maximize Leverage

To maximize your leverage, focus on becoming the sort of investor that attracts lenders.

Have a great credit score. Make sure your income is in line. Know the numbers lenders will ask about. Be professional about your investment career.

Having all the right pieces in place will help your leverage take you further. The more leverage you use, the better returns you’ll see – both in the short-term income and long-term equity.

Harnessing the Power of Leverage

Now you can see how leverage impacts your real estate career. 

What are your next steps?

If you need an entry point into real estate investment, email Mike@HardMoneyMike.com. Ask about our 30-day fuel up challenge to learn how to maximize your leverage.

You can also join our weekly Leverage Up chat, on Thursdays from 1:15pm – 2:15pm MST at this link.

Text: "Get Money Wise!"

7 Real Estate Loan Fundamentals – Hard Money 101

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For a successful investment career, start with these 7 real estate loan fundamentals.

Are you “money wise”? It’s not hard to get there. And it will save you a lot of cash down the line.

It’s like when a person who knows about cars goes to a mechanic – they have peace of mind because they understand what’s going on. If you’re not a “car person,” at the mechanic’s it’s harder to figure out if they’re telling you the truth, or just trying to sell you more than you need.

As a real estate investor, leverage is at the center of what you do. It’s like a foreign language when you first start out. But when you become money wise, the leverage in your real estate investment career is fully in your hands.

Here are 7 real estate loan fundamentals that will make you money wise.

Fundamentals of a Real Estate Deal

There’s certain information you’ll need to bring to your lender when you need a loan. If you know the answers to their questions, the time with your lender will be much more productive.

At the end of the day, lenders want to know: Do you have a good deal? (And you should want to know the answer, too!)

We’re going to dive into 7 main concepts to answer that question:

  • Strategy
  • Purchase Price / Contract
  • Scope of Work
  • Budget
  • Estimated Profit  / Equity
  • Comps / ARV
  • Exit Strategy

1. Strategy – What Is a Real Estate Strategy?

When your lender asks about your strategy, they want to know whether you’ll use the property as a

  • fix-and-flip
  • a rental
  • or if you’re not sure yet.

What is a real estate strategy dependent on? 1) your goals, and 2) the property.

You’ll have to know the numbers to know if the property will make a good flip with carry costs you can afford, or if it would cash flow well as a BRRRR-style rental.

But how do you “know the numbers”? Let’s start with the cost of the property.

2. Purchase Price / Contract – What Are the Fundamental Numbers of a Real Estate Loan?

Your lender could refer to this as purchase price, contract, or as-is value.

In real estate investment, there’s a distinction between what you’re paying for a property and what it’s worth. The purchase price isn’t necessarily what the value of the home is. 

This is the number on the contract, the number you’ve agreed to buy the property for. And this number is foundational to whether or not your project will turn a profit.

3. Scope of Work – How Do You Fix Up a Real Estate Investment?

Many beginner investors mistake “scope of work” for the budget. Scope of work is what you’re going to do to the property, not the number of what that work will cost. 

Will you add a bedroom? Re-do the garage? Are you going to convert the porch to additional square footage? Or add egress windows to the basement?

Scope of work is your rehab plan. Lenders need this info to find out what kinds of properties they should compare to yours to estimate an after repair value.

4. Budget – What Is a Real Estate Budget?

During the conversation with your lender, have a high overview of your construction budget. You don’t necessarily need all the details ironed out quite yet.

For example, you can estimate that the kitchen will cost $10,000, siding $6,000, windows $4,000, and new paint $2,000. At this point, you don’t need to share a breakdown of the cost of each new appliance, labor and materials, etc.

You just need a realistic estimate of how much it will cost to get into the property. Having your scope of work lined out helps you with an estimated budget. When you know the purchase price an your budget, then you know how much the entire project will cost.

5. Estimated Profit (Flips) / Estimated Equity (Rentals) – How Much Will a Deal Make?

Estimated profit is what you expect to make on the transaction, between buying the property, fixing it up, and selling it again.

Equity is the difference between the amount you owe and what the property is worth. You build equity on your rentals by successfully refinancing after a flip and paying down the mortgage with rent income.

The number one reason to be in real estate investment is to make money and create wealth – it’s true for lenders, and it’s true for you. So, it’s important to both you and your lender that your properties make profit or build equity.

You’ll need your estimated profit / equity when you bring a deal to your lender.

6. Comps / ARV – What Does ARV Mean in Real Estate Investing?

ARV is the after repair value. It’s what the property will appraise for, or sell for, on the current market once the scope of work is completed.

You estimate a property’s ARV by looking at the prices of similar homes in the current market. 

Comps (comparables) are those similar homes you look at. It’s important that your comps have the same value as your property.

For example, if your deal is for a 950 square-foot home, you’ll compare it to other 900 to 1,000 square-foot homes on the market, not a 2,000 square-foot one. A 2-bedroom, 1-bath house will be compared to houses of the same specifications, and not compared with 4-bedroom, 2-bath homes.

For your ARV to be accurate, you need to stay true to your scope of work. If you only repaint and re-carpet a house that needed much more work, you won’t get top-of-the-market value when you try to sell or refinance.

On the other hand, if your scope of work is a full remodel, your comparables should be homes that are fully remodeled, so you don’t miss out on any profit.

The money you put into fixing up a house isn’t a direct indicator of how much the house will be worth. What the property looks like when it’s finished has nothing to do with how much it cost to get it there.

To find the true profitability of a deal, your ARV and comparables help:

ARV – (Purchase Price + Budget) = Profit Amount

7. Exit Strategy – How Will You Pay Your Real Estate Loans?

When a lender asks for your exit strategy, they want to know your plan for paying off the loan. For hard money loans, your exit should be fast.

If it’s a flip, your exit strategy is to sell the property, then pay off the loan.

If it’s a rental, your exit strategy is to refinance into a long-term loan, which will pay off the hard money loan.

The Why Behind Money Wise – Real Estate Investing Definitions

When you come to the table prepared, with strategies, numbers, and knowledge, you can speak the same language as your lender.

This is key to ensuring you have a safe transaction with a lender that is working in your best interest.

Curious About Other Real Estate Loan Fundamentals?

If you have any questions, or want coaching through a deal, we’re happy to help. Reach out at HardMoneyMike.com.

For more info on real estate loan fundamentals, keep up with our Hard Money 101 series on our blog, or visit our YouTube channel here.

Happy Investing.

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How Does Your Credit Score Impact Your Cash Flow?

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Rates and cash flow depend on your credit score. Here’s just how much:

Let’s look at an example with real numbers to get a picture of just how seriously your can credit score impact cash flow on your real estate investments.

Comparing Interest Rates

Pretend you have a $300,000 loan. And you were able to get a 6% interest rate – a normal rate for today. Your monthly payment would be around $1,800.

But, for every 10 to 20 points your credit score lowers, your rate increases. This raises your monthly payments by $100 to $200.

So with a low score, you’d only be able to get a 9% rate on that $300,000 loan. You’d be giving $615 every month straight to the bank. That’s money other investors will be able to use to re-invest.

Chart showing your interest payment depending on your rate for a $300,000 loan

Interest Rates Over the Life of the Loan

This interest story gets worse when we consider the full life of the loan.

The person with a 6.5% interest rate pays a little under $1,200 per year in interest, or around $35,000 for the full 30-year loan.

The person with 9% pays over $7,300 yearly, and over $221,000 over the course of the loan!

Chart showing your yearly and 30-year interest payments depending on your rate for a $300,000 loan

We can take this example out further.

Let’s say we have a portfolio of 10 properties, not just one, each with $300,000 loans.

At 6.5%, you’ll spend almost $350,000 over 30 years between the interest of all the loans. At 9%, you’d pay $73,800 per year on interest alone for your portfolio. As a result, you’d shell out a grand total of $2.2 million in interest in 30 years.

Chart showing your total interest payments over the life of 10 $300,000 loans, depending on your rate.

Cash Flow & Credit Score Conclusion

As you can see, a low credit score is a major disadvantage. Properties that would cash flow for someone else, won’t for you. Your debt-to-income could disqualify you for DSCR loans. Your score itself can disqualify you for many other loans.

Look at the impact of your credit score on cash flow. Keep more money to do what you love and give less to the banks in the form of interest.

Above all other investment goals: raise your credit score.

If you need to work with a credit specialist to get everything in line, it’ll be worth your time. Do it ASAP – now is the time to get prepared as a real estate investor. Because in 2023, prices will come down, and you don’t want to miss those opportunities.

Read the full article here.

Watch the video here:

https://youtu.be/sa9iCDxJFnk

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Airbnb Investing with a DSCR Loan

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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:

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How to Retire Early with Real Estate

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Our time-tested, actionable plan to retire early with real estate investing.

Here’s the plan we give to people who want to start investing in real estate at 40:

Buy ten properties in three years.

This simple plan can let you earn over $150,000 per year during retirement. Here’s exactly how.

The Timeline

Year One: Buy two properties. You’re learning the ropes this year, so you take it slow. Take this year to learn how to do everything right, build relationships in the industry, and prep for the coming years.

Year Two: Get three more properties. After the initial experience of your first year, it’s a reasonable stretch to do one more property. By the end of year two, you’re halfway to your goal of ten properties.

Year Three: Do the remaining five properties. By this time, you’re in the swing of things, you know the right people, and buying five properties in one year is very manageable.

What Type of Properties to Buy

These ten properties should be BRRRRs or subject tos. Both of these real estate investment methods are ways to:

1) Gain properties with little to no money down

2) Create rental properties that will generate cash flow.

So when we say “buy 10 properties,” it’s not with money out of your pocket. It’ll be with debt leverage and investment strategies that will help you reach your goals quickly (without dipping into retirement savings or hurting cash flow).

Understanding the Numbers to Retire Early with Real Estate

In this example, we’ll look at properties with a value of $200,000. That number is spot on for some regions, and very low for others. Remember, you can use these same equations and concepts no matter what actual price range you’re dealing with.

Loans and Net Worth

Let’s say we’re using BRRRR and looking at $200,000 properties. You can get a loan for $150,000 per property (which means you only owe $150,000 on each house).

Each property adds $50,000 in net worth to your portfolio. So ten properties in three years automatically builds you $500,000 in net worth.

Also, these rental properties will add up to $800/month in cash flow (more on cash flow in the next section).

Chart of property costs, amount owed, and net worth. Total net worth is $500k.

Calculating Cash Flow

Let’s look at an example property that has a loan for $150,000 and an interest rate of 6%.

In this case, your monthly principal and interest payment will be $899.33.

Once you add taxes, insurance, and other costs, you’ll be at $1,184.33 in expenses.

If you’re in an area where you’re finding a $200,000, 3-bedroom 2-bath property, you should be able to reasonably rent for $1,600.

With that rent, we’d have a net total of $415.67/month coming into the property.

Chart showing loan amount and rate, monthly principal and interest, total expenses, and rent. Net cash flow is around $400 per month.

How Should You Use Cash Flow?

If you’re nearing retirement age and don’t need to pocket the cash flow on your new properties, there are some options to make that money work for you.

By using the income from your rentals, you can get the properties completely paid off. So once you finally retire, you’ll have several options:

  • Sell off the houses
  • Take out equity loans to buy more real estate or supplement retirement income
  • Get higher cash flow on each property with no loan payments

How to Increasing Cash Flow to Retire Early with Real Estate

If you use the cash flow on properties pre-retirement to pay down the mortgages, you can retire early (and with more money!).

Let’s round our $415.67/month net income down to $400. So instead of taking that $400 and putting it in your pocket, let’s see what it looks like to pay down an extra $400 on your mortgage every month.

Instead of paying around $1,200 toward your loan plus insurance and taxes, you’ll be doing around $1,600/month total.

This will cut your mortgage down to 14 years. So even if you’re 50, you can own these properties free and clear by the time you’re 65.

And once all the houses are paid off, you’ll automatically have:

  • $2 million in equity.
  • $1,300/month income per property. (You no longer have to pay principal or interest, just taxes and insurance.)

$1,300/month per property equals $13,000/month total across 10 properties. That’s an annual income of $156,000/year. While being retired!

Chart showing the math to find annual cash flow. Annual cash flow is $156k.
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Text: "What's BRRRR in a down market?"

What Does BRRRR Mean In a Down Market?

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Does BRRRR mean the same thing in a declining market and a rising one?

Let’s start with the basics. What does Buy, Rehab, Rent, Refinance, Repeat mean? Your understanding of this real estate investment method will determine your success when inflation hits.

BRRRR comes down to two key factors.

1) Buying Undermarket Properties

Buying undermarket properties is the crux of BRRRR.

This important point has been confusing to people in the last few years. That’s because truly good undermarket properties have been hard to find.

We’ve been seeing people buy at 80-85% of a property’s ARV. In the near future, those values will come down.

Back in 2010, people were able to buy properties for 60-65% of the ARV. We’re hoping that’s where this next market will take real estate investors.

This method means buying undermarket properties. Inflation should make this part easier, with lower priced BRRRR properties coming back.

2) Using a Two-Loan Strategy

The other foundational concept in BRRRR is its two-step loan process.

The whole point of this method is to get into rentable properties with little to no money down. To do this, you need two loans – one to acquire it, and one to hold it long-term.

Once you own the property (using the first loan), you can refinance it using the appraised value (via the second loan).

If you can buy a property undermarket (with private money) and own it, you capture the equity of the house when you refinance it.

Instead of pulling more money from your pocket for your next deal, you can use the equity you create with one BRRRR to buy more real estate – even with inflation.

Learning More About What BRRRR Means

BRRRR means two things: buying undermarket real estate, and utilizing two loans to do it.

We’ve been doing this rental property strategy for over 15 years – before it even had the acronym to go with it! For more on BRRRR fundamentals, check out these YouTube videos, or reach out to us anytime at HardMoneyMike.com.

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