Real estate investments can be a wild ride. They offer a lot of risk, the potential for a lot of reward, and often come with a whole lot of stress. It’s no different when investors are looking for a loan for their next property.
First time flippers may not have the cash available to purchase a property they want to improve and sell. Seasoned fix and flippers may be maxed out financially but have the bandwidth to tackle more properties at the same time. This is why knowing the options when it comes to loans is so critical.
The option many know about is hard money loans. This is available for really hard flips only, and that’s why it’s called hard money. That’s actually not even close to true, but I did want to see if you were paying attention. Hard money loans are from private lenders, and these loans evaluate the post-renovation value of the house to determine whether the loan is a yes or no.
A second option is a bit of a hybrid style bridge loan using the Debt Service Coverage Ratio, or the DSCR. The DSCR is a calculation of net operating income divided by expenses. A value greater than 1 shows lenders that the borrower has more money coming in than going out, and thus likely could satisfy a loan. The reason this is a hybrid is because it’s still a speciality loan, but you can think of it like a hard money loan with soft money loan benefits. The soft money benefits are the lower interest rates (typically 3-4% lower) and fees. Additionally, the DSCR doesn’t take the property into account at all. It can be a total piece of…you know. The lender is only looking at whether or not the borrower can make the payments on the loan. This option becomes pretty attractive for those willing to take on some legit nightmares.
Speaking of taking on nightmares, I’d love to tell you about some scenarios we’ve heard about here at A Nightmare on Loan Street Blog. These are countless and never end, so there’s always something interesting to pass on.
Nightmare Investment #1: Make yourself at home
An investor identified a home in foreclosure he was interested in buying as a rental property. He went to take a look at the place with his agent, and it’s a good thing he did. There were people shooting drugs in the bedroom literally while they were touring the house. The bigger atrocity is that these folks did not remove their shoes prior to trespassing and left smudges on the carpet. I think it’s only common courtesy that if you are going to be illegally squatting and doing drugs in someone else’s home, you should still have the decency to take off your shoes in the house. Call me old-fashioned.
Nightmare Investment #2: A special kind of hoarder home
I’m sure everyone has heard about or seen a hoarder home. The place is filled to the brim with junk. Well, this one reader sent us a summary of his experience about a…um…special kind of hoarder house he bought. Sean writes us “I walked into the place, and I could barely get the door open from the amount of stuff lining the entryway. Floor to ceiling crates, tote bins overflowing, trash bags everywhere. They were just full of…wait for it…WWE wrestling figures. That’s right, this guy had them all: Hulk Hogan, Macho Man Randy Savage, The Ultimate Warrior. You name it, this guy had them. And not just one of them, like 27 of each one.” I mean, I love Ricky the Dragon Steamboat as much as the next guy, but this was beyond overboard. Whoa.
So you see, there are plenty of situations where investors need options when it comes to a loan for their next property. What’s great about the DSCR is that you can calculate your score before even exploring this option with a lender. But if you are ready to move forward, pick and the phone and holler at the team at Truss Financial Group. They are experts in DSCR loans.
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