DSCR options on Cleveland Duplex on rents way below market

Rental Property Investor · Reinholds, PA · Member since 2019 · 34 posts · 16 votes

Good morning all, I'm looking at a fully occupied Cleveland duplex, with long-term section 8 tenants that wish to remain in place. Their current rent is way below FMR and way below market rate. It seems as though the previous owner has not done a rent increase request in many, many years. As reference, current rents are at 47% of FMR (I know FMR is a guide and not cast in stone, but hey that's what I'm using it for, a guide)

When underwriting and calculating the DSCR, Will lenders be using current, in place rents only? Is there any upside taken into account for the section 8 rent increases that would be submitted as soon as I take possession? Current rents put it at just over a 1.07 if excluding PM.

Any advice is appreciated, thanks!

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Arman AhmedPro Member

Real Estate Agent · Columbus Cleveland Dayton, OH · Member since 2024 · 2k+ posts · 915 votes

7mo

Quote from @Devin Peterson:

A good DSCR lender will use the current market rents assuming you are going to raise them. Sec8 included - should be a non issue for most banks!

Trever, long-term Section 8 tenants with rents that far below FMR can actually be a hidden value play if you structure it right.

Most DSCR lenders will underwrite off in-place rents, especially if there's no documented history of increases. However, there are exceptions and workarounds depending on the lender and how the file is presented.

A few things I’ve seen work on deals like this:

- Some DSCR lenders will considermarket rents supported by the appraiser’s 1007 rent schedule (or comparable rent comps), especially if the gap between current rent and market is extreme.

- If you can document that arent increase request will be submitted immediately after closing, and show local housing authority payment standards, some lenders will give partial credit toward pro forma rents.

- Having astrong rent narrative (FMR, payment standards, comp grid, demand for voucher units, etc.) can materially change how underwriting views the deal.

- Worst case, there are short-term DSCR / bridge-style products that will close on in-place income and then allow a refi into higher DSCR once rents are adjusted.

You're right that 47% of FMR is well below typical, which tells me there’s real upside here if handled correctly.

I spend a lot of time helping investors structure deals like this with lenders that actually understand Section 8 mechanics (instead of treating it like conventional long-term tenants), so if you want to sanity-check the numbers or structure, happy to share what I’m seeing in the lending space right now.

[email protected]614-418-6081

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AJ ExnerPro Member
Lender · Springfield, MO · Member since 2023 · 652 posts · 314 votes
7mo
There is a little more flexibility on a purchase compared to a refinance because most lenders will assume that as the new landlord you will be tweaking rents.

I don't know of any lenders that will base their UW-DSCR calculations on section 8 though, most will just base it on market rents. Section 8 undergoes quite a bit of scrutiny every year from the government (state and federal) and lenders don't like that kind of variability.

However, my clients in OH rarely run into DSCR constraints and I assume on a 2-4 unit you would be fine.

Happy to connect and help if you would like.

Good luck!
[email protected]417-427-2612
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Devin PetersonBusiness Member
Lender · Sarasota, FL · Member since 2022 · 2k+ posts · 664 votes
7mo
A good DSCR lender will use the current market rents assuming you are going to raise them. Sec8 included - should be a non issue for most banks!
[email protected]860-538-3672
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- Arman AhmedPro Member
  Real Estate Agent · Columbus Cleveland Dayton, OH · Member since 2024 · 2k+ posts · 915 votes
  7mo
  Quote from @Devin Peterson:
  
  A good DSCR lender will use the current market rents assuming you are going to raise them. Sec8 included - should be a non issue for most banks!
  
  Trever, long-term Section 8 tenants with rents that far below FMR can actually be a hidden value play if you structure it right.
  
  Most DSCR lenders will underwrite off in-place rents, especially if there's no documented history of increases. However, there are exceptions and workarounds depending on the lender and how the file is presented.
  
  A few things I’ve seen work on deals like this:
  - Some DSCR lenders will considermarket rents supported by the appraiser’s 1007 rent schedule (or comparable rent comps), especially if the gap between current rent and market is extreme.
  - If you can document that arent increase request will be submitted immediately after closing, and show local housing authority payment standards, some lenders will give partial credit toward pro forma rents.
  - Having astrong rent narrative (FMR, payment standards, comp grid, demand for voucher units, etc.) can materially change how underwriting views the deal.
  - Worst case, there are short-term DSCR / bridge-style products that will close on in-place income and then allow a refi into higher DSCR once rents are adjusted.
  You're right that 47% of FMR is well below typical, which tells me there’s real upside here if handled correctly.
  I spend a lot of time helping investors structure deals like this with lenders that actually understand Section 8 mechanics (instead of treating it like conventional long-term tenants), so if you want to sanity-check the numbers or structure, happy to share what I’m seeing in the lending space right now.
  
  [email protected]614-418-6081
  1 Reply
Alfath AhmedBusiness Member
Real Estate Agent · Columbus, OH · Member since 2022 · 1k+ posts · 1k+ votes
7mo
Quote from @Trever Good:

Good morning all, I'm looking at a fully occupied Cleveland duplex, with long-term section 8 tenants that wish to remain in place. Their current rent is way below FMR and way below market rate. It seems as though the previous owner has not done a rent increase request in many, many years. As reference, current rents are at 47% of FMR (I know FMR is a guide and not cast in stone, but hey that's what I'm using it for, a guide)
When underwriting and calculating the DSCR, Will lenders be using current, in place rents only? Is there any upside taken into account for the section 8 rent increases that would be submitted as soon as I take possession? Current rents put it at just over a 1.07 if excluding PM.
Any advice is appreciated, thanks!

I would run your numbers at current state and look at what market rents are (go off of the lower end of values). Make sure your capEX is good and update (within last 5-7 years) and buy at 15-20% discount off of the ARV.
[email protected]614-802-5698
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Brandon Croucier
Lender · Nashville, TN · Member since 2024 · 700 posts · 284 votes
7mo
DSCR lenders will use 100% of market rents on a purchase. They will often use active rents if they are greater than market rents.
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Brian Shapiro
Investor · Cleveland, OH · Member since 2016 · 3 posts · 1 vote
7mo
Can always find a lender that potentially does a lower DSCR. I know that sounds blasphemous but I know they exist. Happy to talk more
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Erik EstradaBusiness Member
Lender · Member since 2022 · 6k+ posts · 1k+ votes
7mo
Quote from @Trever Good:

Good morning all, I'm looking at a fully occupied Cleveland duplex, with long-term section 8 tenants that wish to remain in place. Their current rent is way below FMR and way below market rate. It seems as though the previous owner has not done a rent increase request in many, many years. As reference, current rents are at 47% of FMR (I know FMR is a guide and not cast in stone, but hey that's what I'm using it for, a guide)
When underwriting and calculating the DSCR, Will lenders be using current, in place rents only? Is there any upside taken into account for the section 8 rent increases that would be submitted as soon as I take possession? Current rents put it at just over a 1.07 if excluding PM.
Any advice is appreciated, thanks!

It depends on the lender. Some will only look at market rent, others will use the lower of the two, and some will use only up to 20% variance and make a judgement call if the actual rent is significantly low.
I would suggest shopping around and seeing which one will accept only Market Rent value.
[email protected]818-269-7983
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Stacy RaskinBusiness Member
Lender · Member since 2022 · 1k+ posts · 497 votes
7mo
DSCR loans will either be structured based on the market rents on the appraiser's rent schedule when the appraisal is done for the transaction or the lower of the two (between the actual rents and the appraiser's rent schedule). This depends on the lender. Working with a mortgage broker that specializes in DSCR loans can be helpful as lenders that specialize in DSCR loans (so generally more favorable guidelines to the investor such as lower required DSCR ratios) are generally not advertising directly to the public.
There are DSCR lenders who will structure the loan with DSCR 1 ratio and above with no negative impact to structuring the loan. Some lenders require a DSCR 1.2 ratio. An example for easy math of a DSCR 1.2 ratio would be $1,200 of rent to $1,000 of expenses (the expenses that lenders consider generally for DSCR loans on 1-4 units are the new mortgage, property taxes and insurance (HOA if applicable). This is for long term rental contracts- short term rental purchase and refinance loans are structured differently. Happy to connect to discuss further.
[email protected]818-770-0340
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Corby GoadeBusiness Member
Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
7mo
There's lot of advice above saying "DSCR lenders do it like this." There is no standard- DSCR loans are portfolio loans and every lender will have different underwriting guidelines and many of them will have different guidelines within their own products for loans from different portfolios.
To complicate this- they'll also get an appraisal and the appraiser will give them market rents, which they will take in to consideration. In my experience, the appraisers are usually pretty far off too.
Bottom line- talk to a few lenders about how they calculate and underwrite rents and their DSCR to get a feel for what options are available.
Best of luck!
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