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Are you interested in investing in cheap properties but struggling to find funding? Don't worry; you're not alone. Many investors face this problem when dealing with low-cost properties. However, the good news is that there is a way around it. In this article, we'll discuss how to finance cheap properties using the BRRRR method and DSCR loans.
The BRRRR Method
The BRRRR method stands for Buy, Rehab, Rent, Refinance, and Repeat. It is a popular strategy used by investors to acquire low-cost properties, rehab them, rent them out, refinance them, and then repeat the process. The goal is to acquire properties that need a little work and increase their value by renovating them. Once the property is fixed up, you can rent it out and refinance it to get your initial investment back. You can then use the same funds to repeat the process and acquire more properties.
DSCR Loans
DSCR stands for Debt Service Coverage Ratio. It is a metric used by lenders to determine the borrower's ability to pay back the loan. The ratio measures the property's net operating income to the debt service. A ratio of 1 means that the property generates enough income to cover its debt service. Lenders typically require a ratio of 1.25 or higher for investment properties.
Using DSCR Loans to Finance Cheap Properties
Now, let's combine the BRRRR method with DSCR loans to finance cheap properties. As the video explains, it can be difficult to get traditional loans for low-cost properties. Therefore, the best approach is to use other people's money (OPM) to fund the purchase price and rehab costs. Once the property is fixed up and rent-ready, you can refinance it with a DSCR loan.
To qualify for a DSCR loan, you'll need to have a good credit score and put down at least 20% of the property's value. Additionally, the property must generate enough rental income to cover the debt service. You'll need to provide the lender with the property's annual taxes, insurance, and any HOA fees to calculate the DSCR ratio.
Finding Funding for Low-Cost Properties
As the video suggests, finding funding for low-cost properties can be challenging. National funds typically don't fund small deals, so it's best to look for localized hard money lenders. You can also attend real estate investor club meetings and build a list of potential private money lenders. Private money lenders are individuals with money in their retirement accounts who can become your Bank of America. They can provide you with the funds you need to purchase and rehab the property, and you can pay them a return on their investment.
Conclusion
Investing in cheap properties can be a great way to build wealth, but it requires a different approach than traditional real estate investments. By using the BRRRR method and DSCR loans, you can finance low-cost properties and turn them into profitable investments. Remember to look for localized hard money lenders and potential private money lenders to fund your deals. If you're new to real estate investing, consider seeking the advice of a professional to guide you through the process.