How to calculate my DSCR Cash Out Re-FI value
New to Real Estate · Pittsfield, MA · Member since 2022 · 64 posts · 19 votes
How to calculate my DSCR Cash Out Re-FI value
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Jeff CopelandBusiness Member
Real Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votesThere are three methods of real estate valuation:
1. Comparable Sales ("comps")
2. The Income Approach
3. Replacement Cost Analysis
A real estate appraiser can use one, can use all three, or can weight them based on market conditions, the property, and their personal expertise.
A single family home is going to be mostly comps. The lender (who orders the appraisal) may still want a rental analysis done, especially on a DSCR loan product (since it is based largely off income, expenses, and debt service) but the value for the LTV will likely be determined almost exclusively by comps.
The income approach, which looks more at the property's income and cap rate, would be more appropriate for a large multifamily, or a self storage facility, or a car wash.
A small 2-4 multifamily, an appraiser might use a blended approach, and use some weighted average: 80% comps and 20% income, for example.
I think the replacement cost approach is somewhat self explanatory, but market value is often higher than replacement cost.
Copeland Morgan LLC4.770 Reviews
14 Replies
- Lender · Charlotte, NC · Member since 2020 · 224 posts · 221 votes3y
Hey Tim,
I would just have a real estate agent run comps for you, or just look at real estate within 1 mile of your property that has similar attributes/factors to determine property value.
Yes, the 75% LTV max cash out is based on the value of the property, so if your property is worth 200K, then you can take a maximum cash-out of 150K.
I am not sure what you are asking in the last question, but you would have to determine a hypothetical payment (so lets say 1500/month including taxes and insurance based on loan amount of 150K). As long as your gross rent is 1500/month then you would be at a 1:1 ratio which is good! The higher the better for rates, and the lower the worse for rates.
- New to Real Estate · Pittsfield, MA · Member since 2022 · 64 posts · 19 votes3yMy question is does the income the property produces have any effect on the value of the property for a DSCR loan? I understand how a house is comped so where Im getting confused is if rental income even plays a role if refinancing into a DSCR?
Quote from @Jon Puente:
Hey Tim,
I would just have a real estate agent run comps for you, or just look at real estate within 1 mile of your property that has similar attributes/factors to determine property value.
Yes, the 75% LTV max cash out is based on the value of the property, so if your property is worth 200K, then you can take a maximum cash-out of 150K.
I am not sure what you are asking in the last question, but you would have to determine a hypothetical payment (so lets say 1500/month including taxes and insurance based on loan amount of 150K). As long as your gross rent is 1500/month then you would be at a 1:1 ratio which is good! The higher the better for rates, and the lower the worse for rates.
- Investor · Tampa, FL · Member since 2022 · 68 posts · 56 votes3y
My understanding is with a DSCR Loan, you have to show 2 years of rental income when it comes to a RE-Fi
- 3yJeff CopelandBusiness MemberReal Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votes
There are three methods of real estate valuation:
1. Comparable Sales ("comps")
2. The Income Approach
3. Replacement Cost Analysis
A real estate appraiser can use one, can use all three, or can weight them based on market conditions, the property, and their personal expertise.
A single family home is going to be mostly comps. The lender (who orders the appraisal) may still want a rental analysis done, especially on a DSCR loan product (since it is based largely off income, expenses, and debt service) but the value for the LTV will likely be determined almost exclusively by comps.
The income approach, which looks more at the property's income and cap rate, would be more appropriate for a large multifamily, or a self storage facility, or a car wash.
A small 2-4 multifamily, an appraiser might use a blended approach, and use some weighted average: 80% comps and 20% income, for example.
I think the replacement cost approach is somewhat self explanatory, but market value is often higher than replacement cost.
Copeland Morgan LLC4.770 Reviews - Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes3y
@Timothy Allen DSCR lenders consider primarily two numbers. LTV which is the loan % of the appraised value. The next number they consider is the cash flow relative to the loan payments. (net rent - expenses as a percentage of the monthly loan cost) Hence the name "Debt Service Coverage Ratio" loan. The number needs to be about 1.1 to 1.4. In other words the net cash flow after expenses needs to be 110% to 140% more than the loan payments.
Each lender will have a different ratio of net cash flow to loan payment. Also each lender will calculate the "expenses" differently. Some may simply look at taxes and insurance, some may add in other estimated costs. The numbers and ratios will vary from lender to lender and from time to time. However at a given time, they probably won't vary that much between lenders due to competitive forces.
- 3yDevin PetersonBusiness MemberLender · Sarasota, FL · Member since 2022 · 2k+ posts · 666 votes
Quote from @Timothy Allen:
Hey everyone how do I roughly calculate my properties value before I go the bank inquiring about a DSCR cash out ReFi? I know the bank advertises 75% LTV but is it just a comp valuation? How do I factor in the cashflow income the property produces? Thanks
Hi Tim, divide the anticipated PITIA by the gross income.
Anything >1 you’ll be fine. 1.25+ will get you better pricing.
I’m local to you in mass and would be happy to help you with this also.
ProAlpha Capital56 Reviews - Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes3y
They will lend you based off the appraised value, not your CMA.
- New to Real Estate · Pittsfield, MA · Member since 2022 · 64 posts · 19 votes3y
Thanks for all the responses!! Roughly 20% of my valuation comes from rental income was what I was looking for.
- 3yRobin SimonBusiness MemberLender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
Quote from @Timothy Allen:
Hey everyone how do I roughly calculate my properties value before I go the bank inquiring about a DSCR cash out ReFi? I know the bank advertises 75% LTV but is it just a comp valuation? How do I factor in the cashflow income the property produces? Thanks
If the property is a single family residence its going to be based almost entirely on comps (recent sales of comparable properties) - if the property is multi-unit then the value is more going to be derived from the income potential. Generally value is determined by the buyer pool, mots buyers of SFRs will value it not worried about income potential, while multi-unit buildings are de facto investment properties so income potential will drive the value for them
Harpoon Capital514 Reviews - New to Real Estate · Pittsfield, MA · Member since 2022 · 64 posts · 19 votes3y
Quote from @Robin Simon:
Quote from @Timothy Allen:
Hey everyone how do I roughly calculate my properties value before I go the bank inquiring about a DSCR cash out ReFi? I know the bank advertises 75% LTV but is it just a comp valuation? How do I factor in the cashflow income the property produces? Thanks
If the property is a single family residence its going to be based almost entirely on comps (recent sales of comparable properties) - if the property is multi-unit then the value is more going to be derived from the income potential. Generally value is determined by the buyer pool, mots buyers of SFRs will value it not worried about income potential, while multi-unit buildings are de facto investment properties so income potential will drive the value for them
Ok so mine are multifamily. How can I underwrite the way the bank will so I can roughly determine how much equity I’ll have? Is this impossible to do without paying for a bank appraisal?
- 3yRobin SimonBusiness MemberLender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
Quote from @Timothy Allen:
Quote from @Robin Simon:
Quote from @Timothy Allen:
Hey everyone how do I roughly calculate my properties value before I go the bank inquiring about a DSCR cash out ReFi? I know the bank advertises 75% LTV but is it just a comp valuation? How do I factor in the cashflow income the property produces? Thanks
If the property is a single family residence its going to be based almost entirely on comps (recent sales of comparable properties) - if the property is multi-unit then the value is more going to be derived from the income potential. Generally value is determined by the buyer pool, mots buyers of SFRs will value it not worried about income potential, while multi-unit buildings are de facto investment properties so income potential will drive the value for them
Ok so mine are multifamily. How can I underwrite the way the bank will so I can roughly determine how much equity I’ll have? Is this impossible to do without paying for a bank appraisal?
how many units? Do you have access to prevailing cap rates in the market/area for recent sales?
Harpoon Capital514 Reviews - New to Real Estate · Pittsfield, MA · Member since 2022 · 64 posts · 19 votes3y
I have (2) duplexes in question.
I’m not sure about the cap rate part but if you don’t mind I can message you on how to get that data
- 3yJeff CopelandBusiness MemberReal Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votes
Duplexes, much like single family homes, will be mostly comps. The appraiser may give some weight to income/cap, but probably not a lot.
The truth is, you can calculate, guess, and hope all you want. But you will be paying for a professional appraisal anyway, and it will be gospel for the most part. Ultimately, the V in LTV will be determined by one individual on one particular day: The Appraiser.
The good news is appraisers use a very standardized methodology, and there's no reason to think you're going to get a value that's way out in left field.
And because of this very standardized methodology, one thing appraiser love is data.
Rather than doing your own self-appraisal, I would spend my time putting together a packet of information for the appraiser that consists of:
1. Any recent past appraisals done on your properties (or on comparable properties nearby if you can get your hands on them somehow). Also note, if you have an appraisal of your property from two years ago, and you know your market has appreciated by 10% (or whatever) annually, that alone can give you a pretty good idea of the current value.
2. Details info about any improvements you have made to the property. Focus on value add things like new kitchens and bathrooms, floorplan changes, new flooring, landscaping, etc. Sure, it's nice to let the appraiser know about new roofs and HVACs, but these are capital expenditures, not improvements, so they won't add as much value as one might think.
3. Any recent comparable sales you are aware of, with as much detail about the transaction and the property as possible. Especially anything that was not listed in the MLS. There might be 10 comps in the MLS that sold for $400k. But if you know the duplex next door that's just like yours sold for $500k off market, the appraiser might completely miss that if the data isn't readily available.
4. Copies of your rent roll and leases. They will need this for their rental analysis. Make their lives easy.
Finally, speaking of making their lives easy, make sure you are on top of the actual appraisal appointment when the appraiser visits the property: Make sure your tenants receive proper notice, maybe hint to them to tidy the place up as much as possible, make sure the grass is freshly cut and the exterior is spic and span, and make sure someone is present with keys and all pets are secured. Nothing will annoy your appraiser more than having to make two trips because your keys didn't work, or your tenants refused entry or left their pit bull roaming the apartment when they left for work.Copeland Morgan LLC4.770 Reviews - New to Real Estate · Pittsfield, MA · Member since 2022 · 64 posts · 19 votes3y
Quote from @Jeff Copeland:
Duplexes, much like single family homes, will be mostly comps. The appraiser may give some weight to income/cap, but probably not a lot.
The truth is, you can calculate, guess, and hope all you want. But you will be paying for a professional appraisal anyway, and it will be gospel for the most part. Ultimately, the V in LTV will be determined by one individual on one particular day: The Appraiser.
The good news is appraisers use a very standardized methodology, and there's no reason to think you're going to get a value that's way out in left field.
And because of this very standardized methodology, one thing appraiser love is data.
Rather than doing your own self-appraisal, I would spend my time putting together a packet of information for the appraiser that consists of:
1. Any recent past appraisals done on your properties (or on comparable properties nearby if you can get your hands on them somehow). Also note, if you have an appraisal of your property from two years ago, and you know your market has appreciated by 10% (or whatever) annually, that alone can give you a pretty good idea of the current value.
2. Details info about any improvements you have made to the property. Focus on value add things like new kitchens and bathrooms, floorplan changes, new flooring, landscaping, etc. Sure, it's nice to let the appraiser know about new roofs and HVACs, but these are capital expenditures, not improvements, so they won't add as much value as one might think.
3. Any recent comparable sales you are aware of, with as much detail about the transaction and the property as possible. Especially anything that was not listed in the MLS. There might be 10 comps in the MLS that sold for $400k. But if you know the duplex next door that's just like yours sold for $500k off market, the appraiser might completely miss that if the data isn't readily available.
4. Copies of your rent roll and leases. They will need this for their rental analysis. Make their lives easy.
Finally, speaking of making their lives easy, make sure you are on top of the actual appraisal appointment when the appraiser visits the property: Make sure your tenants receive proper notice, maybe hint to them to tidy the place up as much as possible, make sure the grass is freshly cut and the exterior is spic and span, and make sure someone is present with keys and all pets are secured. Nothing will annoy your appraiser more than having to make two trips because your keys didn't work, or your tenants refused entry or left their pit bull roaming the apartment when they left for work.THIS! great answer. Appreciate the response
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