DSCR loans but what about the DOWN?

Question

Hi,

My brother and I just started an LLC. We want to start either flipping small or investing in multifamily properties, but the 20-25% down concerns me. If the DSCR loan covers the 80% where to we get a loan for the other 20%? Or do we need to have that saved as cash going into this investment. Assistance is greatly appreciated. We are looking from LA to San Diego, so if any one can help or refer someone with answers that would be excellent.

Thank you,

Nina

Caroline Gerardo · Answer

You need: 20% cash in checking /savings Plus reserve funds; good credit; property that cash flows

Sam Yin · Answer

@Dan Heuschele

DITTO

It's been EXTREMELY tough to find LTVs higher than 70. Not impossible,  but almost. the last time I was able to even get 75% was last year. Most DSCR loans currently have been penciling out to about 65% LTV or less.  Additionally,  I have been noticing lenders requiring higher reserves. It use to be 3 to 6 months. Now I'm seeing more 6 to 9 months of reserves.

Rick Albert · Answer

Think about it from the lender's perspective. Would you do 100% financing on a construction job? Do you have the experience to justify it?

Maybe the work around is start small, such as out of state, build up the savings and experience, and then go big from SD to LA. I've recently started investing out of state but did one at a low price point and one with a business partner to limit my risk and understand the process. Because even then over time you could sell the out of state properties and do a 1031 Exchange into California. That would be technically no money down.

Doug Smith · Answer

Hi @Nina Gibson, I don't know of anyone in the country that will allow you to borrow the down payment on a DSCR deal. I know we don't have that product. You can get a gift from someone close to you (most want to see it be a relative) where they write a gift letter stating that they are gifting you the money and wan't no repayment in return. The only other option is to turn your first few deals with an equity partner that puts up the cash until you're ready to fly on your own. I know that doesn't help, but I wish you well!

Twana Rasoul · Answer

There are quite a few lenders I can introduce you to between Los Angeles and San Diego that do DSCR loans and you will be very unlikely to find something that will debt service, it will be difficult at least.  However, there are "no ratio" DSCR loans which ignore the income altogether and charge a bit of a higher interest.

That said you definitely need the cash for down payment, closing costs and renovations.  You can always choose to partner up with folks for the down payment assuming someone has the capital and doesn't know what to do with it and you can provide expertise in deal finding and investment if you won't be bring any money into the deal.

Dan H. · Answer

The responses did a good job indicating that you likely cannot find anyone to finance the down.  What no one bothered to indicate is that DSCR loans have Debt Service Coverage Ratios (DSCR) requirements.  With the high value of property with respect to the rents, you likely will not find any properties that meet the DSCR at 80% LTV and likely not at 75% LTV.   I will go further and state if you can meet DSCR requirements at any LTV above 70%, you have found a good rent/value ratio for LA to San Diego.  This implies that you likely need at least 30% plus reserves to use a DSCR loan in San Diego to LA.

Note in higher cashflow areas, the DSCR is not a limiting factor.  It is here because the cash flow is poor.

Good luck

Mark Munson · Answer

Hi @Nina Gibson

You will need to come up with the 20% yourself. Most DSCR lenders won't allow for a 2nd position loan at closing to cover the down payment. They want you to have capital invested into the deal. If you can afford 10-15% down instead, then I would consider buying a fixer-upper and borrowing 85-90% of the purchase price plus 100% of the rehab funds on a fix/flip style loan, then refinancing out after the work is completed (BRRRR strategy). There are more moving parts than what I stated, but that may be a better approach for you. Feel free to message me if you need help walking through every option.

Ash Hegde · Answer

The down payment is on you. This could be raising money from friends and family to invest, pulling equity out of a primary residence, or just saving up cash. If fix and flips are of interest, you can get a hard money loan with 15% down of the purchase price and use your profits after selling as capital for the next flip or rental. You will need some type of money to start with though.

Matt Giacinto · Answer

Hey Nina, the down payment could be paid by your or an investor partner if you're open for that. Would love to chat more about it.

DSCR loans but what about the DOWN?

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