Leverage offers a valuable tool for real estate investors. It allows you to boost your buying power, ultimately increasing your properties and chances to maximize the return on investment.

If you’re looking to build a portfolio of income-producing properties, finding the ideal financing plan can be challenging. However, the current mortgage market offers options to help real estate investors secure a loan. One such option is an investor cash flow loan. It allows the borrower to use cash flow on the property to qualify.

Here, we explore this option and its many benefits.

What Is Investor Cash Flow Loan?

An investor cash flow loan allows real estate investor clients to qualify for a mortgage based on property cash flow. It’s an excellent alternative to conventional home loans because there’s no personal income required to qualify. Moreover, it saves time from dealing with complicated tax returns and paperwork.

Investor cash flow loans can be anywhere from $75,000 to $2.5 million. These loans look specifically at the cash flow of your existing property, and you don’t need to disclose employment or income from other sources.

What Is Leverage in Real Estate Investing?

Leverage in real estate work differently than with other assets. Leveraging means that you borrow money to obtain income-generating property to make profits from it. Although leverage investment in real estate can take many forms, they all follow the same formula.

Leverage is typically done with real estate mortgages. However, it can also be done through financing. The most popular real estate investment leveraging strategy is to put down a small amount of your money and use the borrowed money for the rest. That lets you purchase more property than you could afford without it.

The most notable benefit of this method is that your return on investment (ROI) will be larger because you’re investing with borrowed money.

Once you obtain a real estate investment property with leverage, the lender will require you to make monthly payments on the loan. That means your cash flow will be reduced by the interest rate you need to pay for borrowing the money.

That’s why when acquiring a property with leverage, you need to find one that can produce income higher than your expenses.

Why Do You Need to Leverage to Buy Property Investments?

There are two primary reasons why you need to borrow money to buy property investments:

• You don’t have enough money to buy the investment property
• You want to maximize your return using less money for each investment

Leveraging increases your return when the interest you have to pay is lower than the rate of the ROI. For example, if the rate of return is 11% while you pay 6% on the loan, you’ll make a 5% difference.

It’s essential to assess investment with leverage by calculating your cash-on-cash return. A cash-on-cash return is net cash you get from the investment based on money put in and net cash received after all expenses and loan payments.

Here’s a formula to help you determine your cash-on-cash return by removing the loan payments from the rental net income to equal cash flow: cash flow = net income - loan payment; now, divide the annual cash flow with your down payment: cash-on-cash return = annual pre-tax down payment/ total cash invested.

What Are the Requirements for Investor Cash Flow Loan?

You’ll need a credit score of at least 680 and make a 20% down payment. Mortgage rates can be as low as 4%, and residential properties qualify if they house up to four units. Moreover, there’s no limit on the number of properties you can finance with an investor cash flow loan.

In addition, you have several options available, just like with conventional loans. For instance, you can find interest-only and 30-year fixed options.

The 11 Benefits of Investor Cash Flow Loans

Cash flow loans have many favorable features:

1. No need for personal income to qualify
2. Qualifications are based only on property cash flow
3. You don’t have to disclose employment and income
4. Credit scores as low as 680 are accepted
5. Rates start at 4%
6. 20% minimum down payment
7. Residential properties up to 4 units
8. No limit on the number of properties
9. Loans up to a whopping $2.5 million
10. 30-year fixed option
11. Interest-only options

Investor Cash Flow Loan Is an Excellent Option for Real Estate Investors

If you’re a real estate investor, an investor cash flow loan can be a great option to help you finance properties without having to show your income. Instead, it relies on the cash flow from your properties. This is particularly beneficial in hot and ultra-competitive real estate markets like California.

This kind of financing can help you get approved much faster and for more money than a conventional mortgage. However, you’ll have to demonstrate that you have experience in owning and managing several properties for at least six months, or you’ve been involved in the real estate investing industry. Also, you’ll need three months’ worth of reserves to qualify.

If you qualify, you’ll reap high rewards and many benefits, including:

• Larger funding amount: Investor cash flow loans are based on multiple trailing earnings before interest, taxes, depreciation, and amortization (EBITDA), rather than an advance rate against assets. That usually means the investor qualifies for a much larger loan - sometimes up to five times the amount a bank will lend you.
• Longer, more flexible terms: Investor cash flow loans are customized to the needs of the borrower. Repayments are often backend through a balloon payment, which allows you to delay the loan payments and use cash flow to grow your business.
• Less collateral: Cash flow loans are often unsecured when compared to a conventional bank loan or are in a second lien position. They lend deeper into the equity valuation of the business, providing you with financing to stimulate growth. Usually, there’s no requirement for a personal guarantee.
• Scalability: Investor cash flow loans are tied to the equity value of your properties. Since they believe in your equity value, they are more willing to give more funding for growth.

Final Thoughts

Investing in real estate is about understanding the numbers, and a reason you’re in this business is probably to get a return on your investment. Cash flow is one of the most significant factors in the real estate investment strategy.

Before you invest in real estate, define your goals. Understanding ROI and cash flow are vital to a successful income-generating property investing journey.