Cash flowing with DSCR?

[Raj Patel]

With conventional mortgage rates hovering around 7% for 30 years… cash flow basically happens at 6.5% cap rate and above. If you don’t care about cash flow year 1 you can go down as low as 6% cap rate and still break even. This assumes 25% down.

Now in markets like Manhattan it’s hard to find a seller willing to go to 6.5% or above in areas outside Harlem. But in other markets in NYC/N-NJ it’s doable.

DSCR starts at 8% for borrowers with strong credit scores (800+ which I have btw) but at 8% at 30 years 75% LTV you would need to buy at 7% cap rate to just about break even.

This becomes much harder to find properties. Also the DSCR ratio at 7% cap rate is barely above 1. Would it even be approved?

I’m so lost. What am I not seeing?

I see the advantages with DSCR… in that unlike conventional mortgages which have a 10 property cap, and it becomes exponentially harder to purchase each time… DSCR allows you to build a portfolio.

But the math doesn’t seem to work at all.

Can anyone help?

Thanks!

Let's assume the property has $313,000 in NOI

Valued at

6.26 M 5% cap
loan $4,695,000

P+I annual= $413,400> NOI

5.216M 6% cap

loan $3,912,000

P+I annual= 344,460 > NOI

4.47M 7% cap

loan $3,352,500

P+I annual= $294,708 <NOI cash flow +

[Ko Kashiwagi]

Hi Raj,

As you mentioned, the math is very difficult to pencil out in this market. A lot of buyers are having to put more down or negotiate harder to get those deals. Another benefit of the DSCR is that it allows LLC vesting. As of now rates can actually be in the higher 7's as well depending on the deal (FICO, property type, location, loan amount).

[Joshua Janus]

Quote from @Raj Patel:

With conventional mortgage rates hovering around 7% for 30 years… cash flow basically happens at 6.5% cap rate and above. If you don’t care about cash flow year 1 you can go down as low as 6% cap rate and still break even. This assumes 25% down.

Now in markets like Manhattan it’s hard to find a seller willing to go to 6.5% or above in areas outside Harlem. But in other markets in NYC/N-NJ it’s doable.

DSCR starts at 8% for borrowers with strong credit scores (800+ which I have btw) but at 8% at 30 years 75% LTV you would need to buy at 7% cap rate to just about break even.

This becomes much harder to find properties. Also the DSCR ratio at 7% cap rate is barely above 1. Would it even be approved?

I’m so lost. What am I not seeing?

I see the advantages with DSCR… in that unlike conventional mortgages which have a 10 property cap, and it becomes exponentially harder to purchase each time… DSCR allows you to build a portfolio.

But the math doesn’t seem to work at all.

Can anyone help?

Thanks!

Let's assume the property has $313,000 in NOI

Valued at

6.26 M 5% cap
loan $4,695,000

P+I annual= $413,400> NOI

5.216M 6% cap

loan $3,912,000

P+I annual= 344,460 > NOI

4.47M 7% cap

loan $3,352,500

P+I annual= $294,708 <NOI cash flow +

 If your main focus is cash flow you'll want to focus on the markets that have it right now where rates are at. A lot of those markets are in the Midwest. I focus on 1-4 units in the Cleveland, Ohio market. 

[Raj Patel]

Quote from @Joshua Janus:

Quote from @Raj Patel:

With conventional mortgage rates hovering around 7% for 30 years… cash flow basically happens at 6.5% cap rate and above. If you don’t care about cash flow year 1 you can go down as low as 6% cap rate and still break even. This assumes 25% down.

Now in markets like Manhattan it’s hard to find a seller willing to go to 6.5% or above in areas outside Harlem. But in other markets in NYC/N-NJ it’s doable.

DSCR starts at 8% for borrowers with strong credit scores (800+ which I have btw) but at 8% at 30 years 75% LTV you would need to buy at 7% cap rate to just about break even.

This becomes much harder to find properties. Also the DSCR ratio at 7% cap rate is barely above 1. Would it even be approved?

I’m so lost. What am I not seeing?

I see the advantages with DSCR… in that unlike conventional mortgages which have a 10 property cap, and it becomes exponentially harder to purchase each time… DSCR allows you to build a portfolio.

But the math doesn’t seem to work at all.

Can anyone help?

Thanks!

Let's assume the property has $313,000 in NOI

Valued at

6.26 M 5% cap
loan $4,695,000

P+I annual= $413,400> NOI

5.216M 6% cap

loan $3,912,000

P+I annual= 344,460 > NOI

4.47M 7% cap

loan $3,352,500

P+I annual= $294,708 <NOI cash flow +

 If your main focus is cash flow you'll want to focus on the markets that have it right now where rates are at. A lot of those markets are in the Midwest. I focus on 1-4 units in the Cleveland, Ohio market. 

Funny enough my family is actually from Ohio. My grandfather immigrated to Cincinnati in the late 60s. My dad went to the University of Cincinnati. But I have reservations about the Midwest. They have such high cap rates there because the future outlook is bleak. High cap rates come with low occupancy too. I’m not saying Ohio is the next Michigan (which is a failing state). But Ohio is not the future either unfortunately. 

I mean cash flows are important but I can go without them too. But my main concern is it’s nearly impossible to cash flow with current rates in the Northeast at least for 2-3 years post purchase. And without cash flow lending options also become limited. 

But I understand your suggestion. The cure to high interest rates would be high cap rates, or higher % down. Not good either way in my opinion. 

[Travis Biziorek]

I just did a DSCR the other month on a duplex in Detroit I just finished up.

It appraised for $193,000 and each unit is rented for $1,200/mo.

The DSCR is at 8.00% and PITI is something like $1,130/mo.

The deals are out there, you just need to know where to look.

[Evan Hopple]

@Raj Patel

Columbus, OH has the cashflow AND appreciation that you're looking for

[Samuel Diouf]

Quote from @Raj Patel:

Quote from @Joshua Janus:

Quote from @Raj Patel:

With conventional mortgage rates hovering around 7% for 30 years… cash flow basically happens at 6.5% cap rate and above. If you don’t care about cash flow year 1 you can go down as low as 6% cap rate and still break even. This assumes 25% down.

Now in markets like Manhattan it’s hard to find a seller willing to go to 6.5% or above in areas outside Harlem. But in other markets in NYC/N-NJ it’s doable.

DSCR starts at 8% for borrowers with strong credit scores (800+ which I have btw) but at 8% at 30 years 75% LTV you would need to buy at 7% cap rate to just about break even.

This becomes much harder to find properties. Also the DSCR ratio at 7% cap rate is barely above 1. Would it even be approved?

I’m so lost. What am I not seeing?

I see the advantages with DSCR… in that unlike conventional mortgages which have a 10 property cap, and it becomes exponentially harder to purchase each time… DSCR allows you to build a portfolio.

But the math doesn’t seem to work at all.

Can anyone help?

Thanks!

Let's assume the property has $313,000 in NOI

Valued at

6.26 M 5% cap
loan $4,695,000

P+I annual= $413,400> NOI

5.216M 6% cap

loan $3,912,000

P+I annual= 344,460 > NOI

4.47M 7% cap

loan $3,352,500

P+I annual= $294,708 <NOI cash flow +

 If your main focus is cash flow you'll want to focus on the markets that have it right now where rates are at. A lot of those markets are in the Midwest. I focus on 1-4 units in the Cleveland, Ohio market. 

Funny enough my family is actually from Ohio. My grandfather immigrated to Cincinnati in the late 60s. My dad went to the University of Cincinnati. But I have reservations about the Midwest. They have such high cap rates there because the future outlook is bleak. High cap rates come with low occupancy too. I’m not saying Ohio is the next Michigan (which is a failing state). But Ohio is not the future either unfortunately. 

I mean cash flows are important but I can go without them too. But my main concern is it’s nearly impossible to cash flow with current rates in the Northeast at least for 2-3 years post purchase. And without cash flow lending options also become limited. 

But I understand your suggestion. The cure to high interest rates would be high cap rates, or higher % down. Not good either way in my opinion. 

Like Josh said, you'll need to look into other markets where the numbers still work with these high rates. If you're able to invest when the market get's more competitive, you'll have a huge advantage compared to the investors sitting on the sidelines. 

And Columbus, Ohio, isn't forecasting a bleak future. The population is one of the fastest growing in the U.S. and large companies are investing billions of dollars in the city to create new job opportunities and infrastructure. 

[Calvin Thomas]

Quote from @Raj Patel:

With conventional mortgage rates hovering around 7% for 30 years… cash flow basically happens at 6.5% cap rate and above. If you don’t care about cash flow year 1 you can go down as low as 6% cap rate and still break even. This assumes 25% down.

Now in markets like Manhattan it’s hard to find a seller willing to go to 6.5% or above in areas outside Harlem. But in other markets in NYC/N-NJ it’s doable.

DSCR starts at 8% for borrowers with strong credit scores (800+ which I have btw) but at 8% at 30 years 75% LTV you would need to buy at 7% cap rate to just about break even.

This becomes much harder to find properties. Also the DSCR ratio at 7% cap rate is barely above 1. Would it even be approved?

I’m so lost. What am I not seeing?

I see the advantages with DSCR… in that unlike conventional mortgages which have a 10 property cap, and it becomes exponentially harder to purchase each time… DSCR allows you to build a portfolio.

But the math doesn’t seem to work at all.

Can anyone help?

Thanks!

Let's assume the property has $313,000 in NOI

Valued at

6.26 M 5% cap
loan $4,695,000

P+I annual= $413,400> NOI

5.216M 6% cap

loan $3,912,000

P+I annual= 344,460 > NOI

4.47M 7% cap

loan $3,352,500

P+I annual= $294,708 <NOI cash flow +

 Are you a gambling man?  What neighborhood in Newark?  Newark is a tough area and evictions take a long time.  Do you have experience in working in the Newark boro?