I am a house flipper hoping to segue into rental properties ￼in the near future in hopes of earning cash flow. I have short term goals of house hacking a fourplex, and long term goals of owning larger apartment buildings.
My question is regarding debt service coverage ratio (DSCR). From what I've been reading about the types of loans I will be pursuing for multi family buildings, I should be looking for listings where the DSCR is 1.2 or greater. Am I missing something or are properties yielding such a ratio basically non-existent? Are such deals only attainable if you can rustle up a seller on your own and persuade them to sell at a discount?
Would the correct course of action be to purchase a value add property using a bridge loan, rehab, raise rents, and then find a proper loan with better terms?
I should mention that I have a nest egg of about 1.5m at my disposal. Does having a decent net worth afford me any flexibility from prospective lenders?
Thank you for any insight.
@Julian S. I know some of the more experienced will chime in here but I share our experience.
I own properties in an LLC with 2 partners. Being an LLC it is very hard to find 'conventional loans' so 'commercial loans' like you are describing are generally the way to go.
Our local lender that we use likes to see a DSCR of 1.2 or better, 20% down, 4% amortized over 25 years.
It seems like in our area, if you can find a '1% rule' property the 1.2 DSCR is no problem. An example would be a 200K duplex, with 40K down and 160K loan @ 4% amortized 25 years. This puts our payment with taxes and insurance at $1460 per month. Income would be $2000 per month. That gives a DSCR of 1.36 or so, meaning our income is 1.36 times as much as our PITI.
Not sure if that helps or not.
Thank you Dan. I think I’ve been trying to calculate the ratio all wrong and you just cleared it up for me.
When talking to lenders make sure to ask how they calculate the DSCR. Some will calculate it based on your gross rental income and some it base it on your net rental income. Knowing which they use can make a difference in qualifying.