Small Investor Needs Money Now

Sarah owns a small real estate investment company specializing in single-family homes in suburban areas. She currently has a portfolio of five properties, which she purchased over the years using a combination of personal savings and traditional mortgages. Now, she wants to expand her portfolio by acquiring more properties and consolidating her existing debt to streamline her finances.

Current Situation:

  1. Sarah’s five properties generate a total monthly rental income of $7,500.
  2. Her existing mortgage payments for these properties amount to $4,000 per month.
  3. She has other debts, including personal loans and credit card debt, totaling $100,000.

Objectives:

  1. Obtain a refinance loan to cash out equity from her existing properties.
  2. Use the cash-out funds to purchase additional properties for her portfolio.
  3. Consolidate her existing debts to simplify her financial obligations.
  4. Ensure that the new loan’s debt service coverage ratio (DSCR) is sufficient to meet lender requirements and provide a cushion for potential fluctuations in rental income.

Solution:

  1. Assessment of Property Value and Cash-Out Amount: Sarah engages with a real estate appraiser to assess the current market value of her properties. Based on the appraisal, the combined value of her portfolio is appraised at $1,000,000. After considering the loan-to-value (LTV) ratio, she decides to refinance 75% of the total value, resulting in a cash-out amount of $750,000.
  2. Refinance Loan Structure: Sarah approaches several lenders specializing in real estate investment loans. She selects a lender offering a DSCR loan tailored to investors. The terms of the loan include:
    • Loan Amount: $750,000
    • Interest Rate: 4.5%
    • Loan Term: 20 years
  3. Debt Consolidation: Alongside the refinance, Sarah uses a portion of the cash-out funds to pay off her existing debts totaling $100,000. This reduces her monthly debt obligations and simplifies her financial management.
  4. Purchase of Additional Properties: With the remaining cash-out funds, Sarah identifies promising investment opportunities and purchases two more single-family homes, each costing $300,000. She intends to generate additional rental income from these properties, further bolstering her cash flow.
  5. Evaluation of DSCR: After consolidating her debts and acquiring new properties, Sarah reassesses her monthly cash flow to ensure that the rental income from her expanded portfolio is sufficient to cover her new mortgage payments. The lender requires a minimum DSCR of 1.25 to approve the loan. Based on her updated financial projections, Sarah calculates her DSCR as follows: Total Monthly Rental Income: $10,500 New Mortgage Payment: $3,805 (estimated based on the new loan terms) DSCR = Total Monthly Rental Income / New Mortgage Payment = $10,500 / $3,805 ≈ 2.76Sarah’s calculated DSCR comfortably exceeds the lender’s requirement, demonstrating the viability of her investment strategy and ensuring her ability to service the new loan.

By structuring her refinancing as a DSCR loan and strategically utilizing the cash-out funds, Sarah effectively expands her real estate portfolio, consolidates her debts, and strengthens her financial position for future growth.

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