Buy More Rentals Faster With DSCR Loans (No W-2 Needed) (Rookie Reply)

Ashley:
Today’s rookie reply is about capacity, the debt you take on, the time you can actually give a property, and the cash required to finish the plan after closing.

Tony:
We have an investor weighing a DSER loan fine print, a rookie asking whether real estate fits beside a demanding day job, and an owner who needs repair money after the purchase is already completed.

Ashley:
This is the Real Estate Rookie Podcast. I’m Ashley Kehr.

Tony:
And I’m Tony G. Robinson. And with that, let’s get into our first question, which today comes from Brandon in the BiggerPockets forum. So Brandon says, “I just recently learned about the DSCR or debt service coverage ratio loans. Until now, I’ve cash funded any of our real estate purchases, which has made them a slow process. Are there any pitfalls to using the DSCR loans? Do they have the right to call a loan due at any time? What are the typical length of terms a lender will hold the loan? And what are the typical interest rates used, including fees when calculating if you plan a purchase with the DSCR loan?” All right, so let’s talk a little bit about what the DSCR loan is. So again, as Brandon said, it’s a debt service coverage ratio loan, and it simply means that the lender is putting more of an emphasis on the property’s revenue and the property’s ability to generate enough revenue to cover the mortgage.
So if the mortgage is $1,000 and the rent is $1,000, then the DSCR is one. It means it’s a one-to-one. If the mortgage is $1,000 and the rent is $3,000, you have a DSCR of three. So the higher your DSCR, the easier it typically is to get approved for a DSCR loan. And different lenders have different thresholds they set. Some will say you need to have a DSCR of 1.5. Some will say you need to have a DSCR of one. So it depends on who the lender is and what their risk profile looks like. So the benefit of the DSCR loan is that if you are someone who maybe has a harder time qualifying for conventional mortgages where you have to submit all this paperwork about who you are and your firstborn child and your blood type and all these other things that lenders ask about, the DSCR loan product asks for significantly less of that because they’re more focused on the property.
Now, the upside is what I just talked about. The downside and what I’ve typically seen, I only have one DSCR loan in my portfolio today. And the downside was that was that the rate was a little bit higher at a time when I think rates were at six. I think I closed this DSCR loan at seven and some change, so the rate was a little bit higher. I had a prepayment penalty, I want to say of two years associated with that as well. And it was a bigger down payment. It was 20% down payment as opposed to what I was getting significantly less than on a lot of my other properties. So I think that’s typically what you see with these DSER products is that the rates are a little bit higher. Typically, I haven’t seen many DSCR loans below 20%. I’m sure there are loaners out there that do it, but they’re just harder to find.
But those are the downsides to the DSCR.

Ashley:
Yeah. So some of the things that I like about the DSCR loan is, like Tony mentioned, that they’re looking more at the property than your actual finances. So I do have two properties that have DSCR loans on it, and they looked at the rental income. One’s a short-term rental, one’s a long-term rental, the rental income that the property brings in to make sure that it can cover the mortgage payment and other expenses on the property on a monthly basis. Then I like that it’s also amortized over 30 years. So a lot of commercial loans, they’ll also look at the property and their finances instead of yourself and take that into consideration. But most of the time they’re only fixed rates for five, seven or maybe 10 years. And then they’re only usually amortized a max of 25 years, but usually it’s 15 or 20 years.
So it’s definitely not as great as the DSER loan because the DSER loan will amortize over 30 years. So your payment will be less because it’s spread out over more monthly payments and also the rate will be fixed for that amount of years. What I have seen is a prepayment penalty that can be attached to the property. So for my short-term rental, it’s a two-year prepayment penalty. And for my long-term rental, it’s on a three-year prepayment penalty. And it decreases. I think it starts for the three-year one, it’s like year one, it’s 3% of the balance. If you were to pay it off, then it’s 2% and then it goes down to 1%. So you watch out for that. As far as the fees for a DSER loan, I see an exorbitant amount of fees compared to doing one through a small local bank. So I got a quote for financing using a DSER loan and the fees were going to be $8,000 and it was $1,500 at my small local bank.
So that definitely is a huge disadvantage. But if you weigh out long-term, maybe this deal will only work if you can get the 30-year amortization compared to the commercial loan where it’s only going to do a 20-year amortization for you. So I think definitely look at other types of loan products because there are pros and cons of so many different things and see what actually works for you because maybe paying that out 8,000 upfront is actually going to be way more beneficial to you. And honestly, it’s not even 8,000 upfront. A lot of times they’ll just wrap that into the loan cost for you too, and you’re paying 20% of whatever the total could be as long as the property will appraise for that. But yeah, so that I see as a downside. I did just put on my Instagram because I’m looking at buying another short-term rental.
Tony, you’ll be so proud of me. And I asked what people were seeing for DSCR loans or rates and things like that. And fortunately I only got one response. So come on you guys, I need you to help me out here. What are you seeing with DSER loans and good rates, things like that. And so far the only person that responded said they got a 30-year amortization at 7.25% with no rate buy down. And it was with 25% down. And when I had talked to a lender, they had said that it would be 20 to 25% and they’re favoring people putting 25% down, which you can understand why less risk for them. So that’s currently what people are telling one person told me they’re seeing with DSER loans and rates right now. So I thought 7.25% was actually pretty good. My one short-term rental, the rate is over 8% on that DSCR loan.
And I think my other one’s maybe 7.5, but I got that one several years ago. Okay. Coming up, a rookie working 45 to 65 hours a week wants to know whether real estate investing can realistically fit into their schedule. We’ll separate the steady workload from the intense seasons. We’ll be right back.
Okay. Brandon’s question is about financial capacity. Braden’s is about time capacity, which can be just as important when choosing a first strategy. So here’s his question. I work around 45 to 65 hours a week. I just want to see if this is something I could do or will I have to open up time? I also want to know how flexible is scheduling and if there would be any scheduling problems with having a full-time job? I think this is a great question. So it really depends on what type of investing you’re trying to get into. So you’re going to do a flip and you’re going to do the rehab yourself. I’m going to say yes, you probably need to open up some time, weekends, weeknights to go in and actually rehab the property yourself. If you’re going to buy a turnkey rental and you’re going to self-manage it, you’re definitely going to be able to do a lot more using property management software and you being remote.
People manage their rental properties remotely. You don’t physically need to be at the property. So I think first thing is to identify what type of strategy you actually want to do because some are way more active such as flipping or wholesaling where having a long-term residence and having a tenant in place can definitely take up way less time, I guess per se. What about for a short-term rental? Is it hard to respond to guests and things like that when you’re working a full-time job and not being available?

Tony:
To an extent, but I think a lot of this is solvable today for a few different reasons. Number one is a lot of these property management tools in the short-term rental space have gotten good enough where they can reply on your behalf to a lot of the different questions that someone might have. And if someone reaches out with a question about, “Hey, the outlet in the living room isn’t working,” well then your AI can reply and say, “Well, hey, here’s the location of the breaker panel. Just go flip this one switch and make sure nothing’s tripped.” So a lot of these tools can answer a lot of these questions that come from guests. But I think the bigger thing is that if we can simply set expectations for guests correctly, that in a lot of situations can prevent bigger issues or smaller issues from becoming bigger issues.
And what I mean by that is if someone books one of your properties and you say, “Hey, my name’s Tony. I’m super excited to host you. Just to make sure you understand, Ashley, as much as I enjoy hosting, it’s not what I do full-time. So I do have a job where I’m an elementary school teacher, so it’s really hard for me during the day to respond to every message. So if I’m a little slow between those hours, just know it’s because I’m training the Youth of America, however you want to say it. But I think just letting people know and giving them those expectations or setting those expectations is how you can alleviate some of that. That they know, hey, if Tony’s slow to respond, it’s because they’re doing something important. And by the way, I’m going to encourage every single one of you guys to say that you’re an elementary school teacher because no one can get mad at you or say that you’re a firefighter or something like that because people can’t get mad at that.
So setting the expectations I think is a big thing.

Ashley:
Great. Now Tony’s telling people to lie. Yeah, great.

Tony:
Yeah. I’m totally joking.

Ashley:
Make an AI version of yourself and you have a whole background story of somebody else that you are. Just pick whatever you wanted to be as a child, a doctor, saving lives, anything like that.

Tony:
I’m actually an astronaut. So if I’m not replying, it’s because I’m on my flight to the moon right now.

Ashley:
Elon Musk Starlink, sorry, doesn’t reach this far. Yeah, we’re getting close, but Starling doesn’t reach the moon yet. But yeah, I’ve been using the AI through Hospitable and it is amazing. I used to feel like I had to be available twenty four seven and I hired somebody to co-host because I didn’t want to do it. And then they ended up moving on to other things and then I implemented Hospitable and it’s such a game changer. I mean, there still are definitely things that I like. You can put in there what you want to respond to. So there are still some things I’m handling or if it says it doesn’t know or if it’s completely honest that it will look into it and get back to them. So it’s not like there’s nobody responding or things like that if the AI doesn’t actually know the answer of it.

Tony:
I think the last thing I’ll add there, Ash, is that even aside from the tools and systems and the software, I think the bigger thing is even if you’re working 45 to 65 hours a week, that is a lot of time, but you still have some pockets where you can probably squeeze in some of the work that needs to be done to become a real estate investor. And even if maybe you feel like you’re already stretched to your limits, there are options out there to help you move more quickly and efficiently through the process. There are turnkey provider companies like rental retirement in the long-term rental space, and there’s lots of other short-term rental providers who do the same thing. There are companies that even help manage your flips for you. They’ll help you find the deal. They’ll help you manage the renovation. So if you want to get into it, but you’re worried about the time commitment, then maybe the bridge is can I work with one of these turnkey providers in whatever asset class and use that as my way to get my feet wet.
So even with limited time, I think there are some options for you out there. Okay. After the break, an owner has already closed and still needs 20 to $30,000 for repairs. So we’ll talk about what to do before piling expensive debt onto an unfinished scope. All right guys, our last question today comes from Teresa and the purchase is complete, but the repair budget is not, which turns the financing decision into more of a risk management decision. So here’s Teresa’s question. She says, “Just close on a property through our LLC. We funded the purchase with a retirement account loan, and now we need roughly 20 to 30K for repairs. No extra cash flow right now, and I’d rather not tap more retirement funds. The LLC is about five months old, so it doesn’t yet meet most bank business line of credit requirements.” So the question here is how do we get this extra 20 to 30K to fund the repairs?
There’s a few options I’ll give you and take these in no order of priority, but just things that come to mind for me. First is just partnering up with someone else. Can you go find a partner in your network who has the 20 to 30K that you need? And in exchange for that, you give them some percentage of the profits or the equity of this deal. If you’re keeping this as a rental and not flipping it, it becomes a little trickier because now you guys are splitting the long-term rental profits. But if you’re flipping it, bringing in a partner becomes, I think, a little bit more easier because now you guys just split the profits in whatever way you guys both feel is fair. I think the other option is can you go out and get maybe not a business line of credit, but just go get some business credit cards.
I mean, 30 grand, there are a lot of business banks out there who might give you that from one single credit card and to get 0% interest for 12 to 18 months, that might be honestly the easiest solution is just to go out there and get a 0% interest credit card for your business or maybe stack a few of those together. And then the final option that I might consider is going out to a private money lender. If there’s someone in your space that you know or maybe start building some of those connections, can they give you a note for 30K and you have some repayment plan over the next maybe five years or that effect to pay them back with principal plus interest. But those are the things that come to mind for me.

Ashley:
Yeah. I’ve done the 0% credit card before and that works great. It’s just make sure that you know exactly when that interest rate is going to come because it is going to be a huge amount. I did do, I think it was a Discover card one before where it was like for 12 months it was 0%, but if you made your minimum payment of… It’s super low, I mean depending on how much you’re putting onto the card or whatever, but if you’re still making a minimum payment on it every month and you do that consistently over the 12 months and don’t miss one or don’t pay late, which hopefully shouldn’t be a problem at all to do, they’ll actually extend it. So they extended it into 18 months. So I actually was able to use this card. The same card was 0% for two different rehabs that I was doing because of that benefit also.
So I do like the 0% interest credit cards. But what about, you mentioned you don’t want to tap into your retirement, but what type of retirement do you have? So can you take a loan against it? So if you have a 401k, can you borrow money from your 401k and then you’re paying it back? Do you have any non-retirement investments that you could get a line of credit against those and have those as collateral? And then also, we just did an episode on tapping into your home equity. So your primary residence, are you able to go and get a home equity line of credit on your primary residence to be able to use that to fund the rehab? But I also like the idea of going and finding a private money lender or kind of doing a joint venture with somebody who’s going to fund the rehab on this too.
A word of caution, I think this is something in the future going forward that this should be a plan in place before you actually purchase the property, before you close on the deal. You should know because what if none of these things start to actually end up working out and now you’re stuck holding this property and you’re paying all these holding costs trying to figure out what you’re going to do to actually fund this rehab. So going forward, just everyone think about that and make sure you have kind of maybe a couple different scenarios of how you can fund the rehab during this time instead of closing and then trying to figure it out. Well, thank you guys so much for joining us on this episode of Real Estate Rookie. I’m Ashley, he’s Tony, and this has been an episode of Rookie Reply. If you have a question, head over to the BiggerPockets Forums, put your question in there, and most likely one of the other investors that’s engaged into the community will actually answer your question before we even get a chance to put it onto the show.
Thank you guys for joining us and we’ll see you next time.