Scaling Rentals with DSCR Loans — Who’s Using Them?

Question

I’ve been digging into different ways investors are financing growth, and DSCR loans keep coming up as a strong option. Instead of relying on personal income or W-2s, lenders focus on the property’s ability to generate rental income.

For those of you scaling into multiple rentals, have you used DSCR loans as part of your strategy? Did it make acquiring properties smoother compared to traditional financing?

Curious to hear what others have experienced — pros, cons, or tips for making them work effectively.

Jay Hurst · Answer

Look out for pre-payment penlaties. To get rates below conventional as mentioned above will take 3-5 year pre-payment penalty. These often get glossed over by both broker and borrower but are very importnant to understand in a likely falling rate interest environment.

Arman Ahmed · Answer

@Kelly Schroeder

Kelly — DSCR loans can definitely be powerful for scaling. I invest in the Midwest, and they’ve helped me keep acquiring rentals without hitting the usual W-2 or DTI roadblocks. The trade-off is slightly higher rates and fees, but if the property cash flows strong, it often pencils out.

Are you thinking of using them mainly for single-family or small multis?

Alex Bekeza · Answer

@Kelly Schroeder

It really comes down to your strategy.  If you're a BRRRR investor looking to scale a rental portfolio and plan on using financing on the purchase (hard/private money) and looking to refi into long term fixed rate financing using relatively short seasoning you can throw Conventional out the window assuming you're shooting for max cash out based on the new appraised value.

The main perks of DSCR loans as opposed to conventional are:

Short Seasoning - 90 day or even zero seasoning options available (to use new appraised value for cash out)

Entity Vesting - LLC and Corp Vesting allowed or sometimes even required

Scalability - No limit on the # of financed properties owned

Simplicity - A DSCR loan is a much simpler underwrite especially if you have complex personal income to document trying to go conventional.

I personally own 22 units (about $1.9M value grossing over $17k in monthly rent) at the moment all of which were BRRRRs and I simply could not have achieved this velocity (4 years) without the use of DSCR loans.

Eric Fernwood · Answer

Hello @Kelly Schroeder,

Some of our clients use DSCR loans once they’ve reached the limit of ten conventional mortgages. There are portfolio loans but they come with issues that I will not discuss here.

For example, one client inherited three 4-plexes in Las Vegas. Because of tenant challenges (non-payment, property damage, evictions, etc.), they are replacing them with single-family homes for better cash flow and income reliability. The client is using DSCR loans to acquire six or seven replacement properties per multifamily relinquished.

The other client segment that uses DSCR loans is international clients, as well as others who can’t qualify for conventional financing.

While we’ve facilitated a number of DSCR loans, I’m not a lender and only have limited knowledge. Below is my understanding of how DSCR loans compare with conventional loans.

I hope this helps.

Doug Smith · Answer

DSCR options are coming in cheaper than conventional rental financing right now. As lenders, we close several each week. One closed Monday at 6.75% with 0.6 points for a 30 year fixed. They are pretty straight forward loans and we have clients that have done several of them. Technically, you can put as little as 15% down, but most of the investors I see put down 25% or more. You have to get the deal to cash flow, so putting down less in this environment often leads to a negative cash flow. What specific questions do you have?

Scaling Rentals with DSCR Loans — Who’s Using Them?

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