Recommendation of lenders who use leases vs market rent for DSCR

[Dana Powell]

At 4% interest, I bought investment properties which easily met a DSCR of 1 or greater, even when using the market rental value which was always less than the actual rent I receive from my tenants' federal housing choice vouchers (HCV). However, with the rise in interest rates, I am fairly certain that a threshold ratio of 1 will not be met.

If I were able to acquire my next investment through cash and/or bridge loan, install my section 8 tenant and show a couple of months of rental payments, is there a lender out there that would use that lease and its accompanying Housing Assistance Payment contract I would have with the local housing authority? The DSCR using market rent is more like .50.

Thanks in advance!

[Ryan O'Mara]

@Dana Powell

Most lenders will order a 1007 appraisal that includes an analysis of the market rents even if you have signed leases.  They will then generally take the lower of the two.  And often they'll only use 90% to account for vacancy.

A 1.0 dscr is breaking even.  Few lenders will do this.  Average min dscr requirement is 1.2.  Some go lower.  As stated above, some lenders have no dscr options.  But with all things, there's a trade off.  Namely higher rates.

And if your actual dscr is below 1 then you're in negative cash flow territory.  Even if a lender is willing to lend on this, it's not a good position to be in as an investor.