DSCR options on Cleveland Duplex on rents way below market

[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!

[Arman Ahmed]

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.