Inspiring and teaching how to obtain Financial Freedom, that is my goal with this blog. I will tell you about the best and worst practices that I have tried. I share my wins and losses, how I overcome problems and give out all of the advice I have gathered thus far. I may also share some things that I find interesting or things that I enjoy such as parts about my life and hobbies. Enjoy!
Investing's Best Kept Secret For Getting Your Deals Funded
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Its no secrete that investing in real-estate has its challenges. One of the biggest, especially when your starting out, is finding and obtaining financing for any deals your working on. Sure you may know how to do analysis, and yeah being a strong borrower definitely helps. Those definitely play a part in getting funding but those alone usually don't help a newer investor convince banks or lender to lend them money and some of you may not have a lot of money or great credit. So why can some investors that you hear of who have no money, terrible credit, and no experience get funding for their deals when you cannot?
I was one of those investors when I was starting out. I had no money, no job, bad credit, and just a base line knowledge in some construction. Why was I able to find a bank that would work with me and how did I overcome needing 20% down on my first purchase? 20% down is typical for commercial loans which is what most investment properties will fall under.
The secret that helped me is actually three separate things that when added together was what helped the bank trust me to get the job done, and just so you know, I was WRONG about my numbers not once but twice throughout the course of the project. I went far over budget and had to have them refinance the property twice so I could pull more money out to finish it and I went far over my timeline. So if you think the secret is being the best at analysis, a bit of spoiler for you, its not. Although it does play an important part, never slack on your due diligence. Just so you are aware I continued to work with this bank over the course of my next few projects and just a few weeks ago I asked why they decided to lend to me when I first came to them even though they didn't know me, and why they kept lending to me even though I was wrong multiple times. They told me it was because of these three things. So lets dive in.
Secret #1 Debt Service Coverage Ratio
Debt Service Coverage Ratio or DSCR for short, is a very important factor when analyzing a deal and something most real estate investment calculators, do not calculate. First lets take a look at why its important. Then we can talk about how to calculate it.
DSCR is a indicator to the person that is servicing the debt on a project of how much the property is handling the debt and how much potentially the individual or organization borrowing the debt is going to have to take care of. The bank uses this in multiple ways but basically they can use this to determine whether or not a project is a good investment for THEM, not the borrower. I'm sure after reading that some of you are wondering why that matters to you as the investor, we will get to that, just know for now that this is one of the most important numbers that the bank cares about.
Now how do you calculate it? Go through most calculators on the market for any type of rental property and its going to give you a couple numbers. Your NOI or net operating income, your Monthly Mortgage payment on the debt you will use to finance the deal and a bunch of other numbers but these are two we care about for DSCR. The formula is written out like this, Debt service coverage ratio = net operating income / (monthly mortgage payment x 12). Your monthly mortgage payment may be principle and interest or interest only depending on your financing and if you are using interest only payments make sure to calculate this out for when your payments switch to P&I as well. Your monthly payment x 12 is what your yearly debt service would be. So to shorten it lets write it like this.
DSCR = NOI*Yearly Debt Service
For example, say your have a home with an NOI of $10,000 and your monthly P&I payment is $500. The equation would be
DSCR=$10,000 / ($500 x 12) ;
DSCR = $10,000 / $6,000 ;
DSCR = 1.66
Now this is how DSCR should be calculates and formatted, as 0.00 if the number has more than 2 numbers after the decimal point just round to the nearest hundredth. Now I haven't spoken to every bank in the world but for them to be comfortable, most commonly, a bank wants any investment property to have a DSCR of 1.25 or higher. This indicate to the banks that the property can take care of its self and there is enough room in the income of the property to service the debt even if the property has a rough month or two. Now lets hold off on DSCR for a moment and move onto the next secret.
Secret #2 Plan and Other People's Money
This one is a little more complicated than doing a bit of math, but the idea behind it is to utilize one of the many low or no money down strategies that are all over the internet and then tell your bank about how you intend to use that strategy to fund your down payment. Do not try to hide this strategy from your bank! There are also many articles about low and no money down tactics so I wont go into them here. Make certain your investment strategy, calculations and plan account for which ever tactic you use. Now lets move on to the last secret, so we can combine them into the secret philosophy that I used to get started in real estate and that will be able to help you as well.
Secret #3 Confidence
Confidence needs to come from both sides of the negotiating table, for now we are talking about the table between you and your lender. For this secret to work there needs to be confidence in yourself as well as the banker or lender must have confidence in YOU! See here is one of the misconceptions about how most of the lending is done in this space. Banks and lenders don't make the final decision based on the deal, they make the final decision based off the individual and their confidence in that individual getting and completing the deal.
So when you go to present to a bank you have to convince them that you can get the deal done and that's done in a few ways, lets talk about two of them right now.
First, and one of the easiest, dress up. If you look like a bum and try to go get money they are going to treat you like a bum. Take a shower, do your hair, get the piece of lettuce from lunch out of your teeth, put on a suit. Not only is it proven that dressing up give others more confidence in you but it also raises your confidence in your self.
Second, Practice your pitch. Create a great pitch with some print outs of the deal, property info, strategy and then rehearse it a little. Give the lenders a nice little packet of information on the deal and your analysis on it, make sure you calculate DSCR. This should be easy because it takes no money just a little effort and time. If you go into your meeting with your banker and you don't know how to speak their language or your stumbling over what you want to say they wont take you seriously.
Bringing it full circle
When you look at these three pieces separately they may not add much to your arsenal. Their power comes from combing them so you can speak the lenders language, not only tell them why the deal makes sense but show them how the deal is good for THEM using the DSCR. Show them how the deal will work even with using a no or low money tactic, and then using all of this to instill confidence in them that you can and will get this done and that you are a safe investment.
If you have a lot of money you may not need this, if your well established you may not need this. This article wasn't written for you, this was written for the people who know if they could just figure out how to get the capital they could change their lives. Then ending secret is very simple, do what you have to do to make the banker confident that you can do the deal.
As always my hope is that I can help at least just one person start or take the next step towards financial freedom. Thank you for taking the time to read my article. Also, I am not a financial advisor and nothing I write is advice to do anything, this is purely written as a dictionary of sorts of the things that I choose to do and how I do them.
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Its no secrete that investing in real-estate has its challenges. One of the biggest, especially when your starting out, is finding and obtaining financing for any deals your working on. Sure you may know how to do analysis, and yeah being a strong borrower definitely helps. Those definitely play a part in getting funding but those alone usually don't help a newer investor convince banks or lender to lend them money and some of you may not have a lot of money or great credit. So why can some investors that you hear of who have no money, terrible credit, and no experience get funding for their deals when you cannot? I was one of those investors when I was starting out. I had no money, no job, bad credit, and just a base line knowledge in some construction. Why was I able to find a bank that would work with me and how did I overcome needing 20% down on my first purchase? 20% down is typical for commercial loans which is what most investment properties will fall under. The secret that helped me is actually three separate things that when added together was what helped the bank trust me to get the job done, and just so you know, I was WRONG about my numbers not once but twice throughout the course of the project. I went far over budget and had to have them refinance the property twice so I could pull more money out to finish it and I went far over my timeline. So if you think the secret is being the best at analysis, a bit of spoiler for you, its not. Although it does play an important part, never slack on your due diligence. Just so you are aware I continued to work with this bank over the course of my next few projects and just a few weeks ago I asked why they decided to lend to me when I first came to them even though they didn't know me, and why they kept lending to me even though I was wrong multiple times. They told me it was because of these three things. So lets dive in.
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