In the hectic world of today, you might hear words like “cash flow financing” more and more often. If you are new to the world of investment and mortgages, this may sound slightly scary, and maybe even somewhat confusing. Fret not, since here, we are going to tackle everything that you need to know regarding cash flow mortgage loans.
Let’s paint a picture, you own properties and you are in need of an investor cash flow mortgage. How do you get one? What are the main requirements for this kind of mortgage? Do you need to verify your personal income? What are the benefits of using this type of loan versus other types of loans?
There are so many questions that could be running through your head. Therefore, here, we are going to get more familiar with the world of cash flow loans, as well as give you a step-by-step guide with what you, the investor, can do with this loan product.
Table of Contents
Cash Flow Mortgage as an Investor
Firstly, you need to understand what cash flow is. Cash flow is how much profit is brought in each month once all income is collected and all expenses are paid. This is a key component of real estate investment since it allows you to forecast income as well as expenses.
In other words, the formula for calculating cash flow is the following:
Cash flow = gross rental income – all expenses and cash reserves.
On a company’s cash flow statement, you will be able to find cash flow from investing activities, cash flow from operating activities, and cash flow from financing activities. You can also have a negative cash flow, which occurs when a company or business spends more than it makes during a certain amount of time.
Cash Flow Financing: Understanding Cash Flow Mortgages
As an investor or real estate owner, it’s crucial that you understand cash flow to its fullest. Especially before you want to apply for cash flow financing and all of its benefits. Cash flow financing is defined as a form of financing or a loan product, where a loan is made to a lender which is backed by the companies expected cash flows.
The cash flow generated is used as a means to pay back the taken-out loan. Companies, real estate owners, and investors take out this loan if they don’t own all too many physical assets (real estate properties, equipment, etc.) since these assets would, most often, be taken as collateral for such a loan.
Cash flow mortgages do not require proof of personal income in order to qualify. Depending on where you are in the United States, you can take out a loan from 7500$ up to 1.5 million dollars, and at times even 2.5 million. Most often, this loan product has a low-interest rate; but will require a high credit score (600 and up) and a larger down payment (usually, 20%).
However, up until 2020, an interest rate was considered low if it was 4,42% to 5.5%. Currently, in 2021, a low-interest rate is considered from 2% up to 3.35%. This is something to keep in mind when choosing a lender for your cash flow mortgage loan.
The Steps You Need to Take
Even though you might not need to file complicated and hefty paperwork alongside tax returns and personal income in order to apply for this loan, there are still requirements that you need to meet in order to be eligible. You do not need to disclose employment, but below are the things that you do need to meet in order to get a cash-flow mortgage loan.
List of Requirements:
Usually, you need a minimum credit score of 680, as well as a downpayment of 20%. Currently, you may find mortgage rates anywhere from 3% to 6%. You may qualify for this loan when you own a certain amount of property. It’s common practice to at least be able to house four units. You can, however, finance any number of properties with this loan.
What You’ve Learned
After reading through all of this, you might be wondering what the difference between cash flow financing and asset-backed financing is? With cash flow financing, the cash flow that you have is considered the collateral while with asset-backed the asset is listed on the balance sheet. Most commonly: land, vehicles, equipment, inventory, machines, etc.
Most commonly, the types of companies that do asset-based financing own a lot of mixed assets (for example, manufacturers). Cash flow financing is ideal for companies, investors, etc. that don’t have a lot of assets.
Consult Before Applying
You probably wouldn’t believe how many investors don’t have a firm grasp on cash flow as a key concept in the world of finances. Miscalculations can happen, and the occurrence of a negative cash flow (explained above). Before applying for this loan, it would be extremely important to speak to your financial advisor or accountant.
Now, you know all the requirements and all of the things that you might need to ask your financial advisor. If your cash flow is positive and you meet the other requirements, don’t hesitate to find a group of professionals to help you with your ideal cash flow mortgage loan.