Long term rental scaling

[Brandon Morgan]

Hey guys am a new investor I currently own 2 rental properties in Carbondale PA. One duplex and one single family that are next to each other. I started investing in real estate about 2 years ago. I currently have 3 doors my goal is to get to 10 doors within 2 years. I want several long term rentals ideally turnkey since I live out of state.  I make decent W2 income about $150k a year. I am looking to scale a bit faster but I been relying heavily on my W2 income and looking for ways to scale a bit faster without drastically increasing risk. I have decent cash reserves as well and will have more within the next few months. Just thinking of ways I can scale a bit faster. Willing to learn and connect! Please reach out! Any advice will be appreciated. 

[Stacy Raskin]

Another option is if you are investing in non owner occupied rental property you can use DSCR loans and you won't be constrained by your W2 income or debt to income / DTI ratios as the loans are underwritten by the actual or projected market rent. I have seen investors who have bought 10 properties in one year with the program and I haven't seen a limit on property purchases with DSCR loans as long as all mortgage payments are made on time and the investor/borrower meets the program guidelines which usually have to do with minimum credit score and down payment.

As mentioned, DSCR loans won't use your personal income to underwrite the loan. DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.

Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 760-780+ generally gets best pricing for investment property loans with most lenders. From there every 20 point increment affect pricing differently. So for example, a 761 credit score will be in the 760-779 credit category, then going down to 740-759 and so on.

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.

4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs.

I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350, Insurance = $100, Association Dues = $50

Total PITIA = $2200

Rent = $2000

DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250, Insurance = $100, Association Dues = $25

Total PITIA = $1875 Rent = $2300

DSCR = Rent/PITIA = 2300/1875 = 1.23

If a purchase, you also generally need reserves / savings to show you have 3-6 month payments of PITIA (principal / interest (mortgage payment), property taxes and insurance and HOA (if applicable). If a cash out refinance, many lenders will allow the cash out to satisfy the reserves requirement.

DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals. Happy to connect to discuss further.