DSCR Qualifications with Negative Cash-Flow

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DSCR Qualifications with Negative Cash-Flow

Nick Coons
Investor · Tempe, AZ · Member since 2019 · 102 posts · 66 votes

I'm working on investing in Phoenix (just because I'm getting started again after years, so I don't want to complicate things by going long-distance). This is a high-appreciating market, which means finding properties that cash-flow positive is very difficult. Most DSCR lenders that I'm looking at require about a 1.2 ratio.

I'm content with the idea that if I purchase a rental property, rehab it, etc, that I might cash-flow negative for a couple of years. To me, that's still worth the other wealth-building characteristics of rental properties (appreciation, tax deductions through depreciation, mortgage pay-down, and future cash-flow). However, this seems like it would make it difficult to qualify for a DSCR-style loan since my ratio would be below 1.0. So here are my questions:

- When a DSCR-lender is looking at income/expense ratios, are they looking at just a single property individually, or are they looking at the business entity as a whole that owns the property. For instance, let's say that the property itself cash-flows negative, but the business entity that holds the property also has other sources of income.. which is the lender looking at?

- When calculating cash-flow, I'm taking everything into account. That is, not just holding costs (like PITI and utilities), but funds I'm putting aside for repairs, capital expenditures, vacancies, and management (even though I'll be self-managing). Is the lender looking at "expenses" the same way, or are they just looking at actual monthly outflow of cash?

It's possible that a DSCR-based loan may not be the best option, and I'm also fine with a conventional mortgage that uses my personal income, credit score, and DTI to qualify. I'm just exploring options.

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Kristen L GarnerBusiness Member
Lender · Phoenix, AZ · Member since 2021 · 451 posts · 287 votes
4y

DSCR ratio calculations are monthly expenses (principal, interest, taxes, insurance, and HOA if applicable) divided by the rental amount that comes back in the appraisal. If the percentage comes in below 1% the loan can still be done, you just get hit with .5 points (might vary lender to lender). Rehab costs, PM costs, etc. are not included in the calculations. And we look at the property itself, not your business entity or investment portfolio. For my borrowers that are deciding between conventional and DSCR I usually run both scenarios so they can compare and make the decision that best suits their goals and strategies. If you are already working with a lender they should be able to do that for you as well.

[email protected]213-880-0434
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  • Kristen L GarnerBusiness Member
    Lender · Phoenix, AZ · Member since 2021 · 451 posts · 287 votes
    4y

    DSCR ratio calculations are monthly expenses (principal, interest, taxes, insurance, and HOA if applicable) divided by the rental amount that comes back in the appraisal. If the percentage comes in below 1% the loan can still be done, you just get hit with .5 points (might vary lender to lender). Rehab costs, PM costs, etc. are not included in the calculations. And we look at the property itself, not your business entity or investment portfolio. For my borrowers that are deciding between conventional and DSCR I usually run both scenarios so they can compare and make the decision that best suits their goals and strategies. If you are already working with a lender they should be able to do that for you as well.

    [email protected]213-880-0434
    4Reply
  • Jake Kain
    Flipper/Rehabber · Phoenix, AZ · Member since 2016 · 254 posts · 100 votes
    4y

    @Nick Coons Hey Nick! I am no mortgage expert, so I can't answer with 100% certainty, especially on your first question about them looking at the single property vs business entity.

    We just closed on a triplex, using a DSCR loan. From my understanding, they are only looking at PITI (and probably HOA if there is one, ours does not) in comparison to what it brings in in monthly rent. The property we purchased was fully rented so we had to provide leases showing the current rent. We are currently only bringing in about $140/month without taking into consideration any other expenses, cap ex, vacancy, etc. So we are definitely negatively cashflowing on actuals until we can get the rents up to market value. If the units were vacant, I am not sure how the underwriter determines "market rent" and if they use the full amount or a percentage like they do for calculating DTI.

    If you want I can get you in touch with who I used, he is local here in AZ. He would be happy to answer all of those questions.

    1Reply
  • Jake Kain
    Flipper/Rehabber · Phoenix, AZ · Member since 2016 · 254 posts · 100 votes
    4y
    Quote from @Kristen L Garner:

    DSCR ratio calculations are monthly expenses (principal, interest, taxes, insurance, and HOA if applicable) divided by the rental amount that comes back in the appraisal. If the percentage comes in below 1% the loan can still be done, you just get hit with .5 points (might vary lender to lender). Rehab costs, PM costs, etc. are not included in the calculations. And we look at the property itself, not your business entity or investment portfolio. For my borrowers that are deciding between conventional and DSCR I usually run both scenarios so they can compare and make the decision that best suits their goals and strategies. If you are already working with a lender they should be able to do that for you as well.

    This is great info, thank you for sharing!

    That is exactly what we did, we compared 4 options. 2 DCSR with rate buy down vs no buy down and 2 conventional with rate buy down and no buy down. We went with the DSCR because it was 20% down payment and bought the rate down. It was less down over conventional and actually has a better return than all of the other options we considered!

    1Reply
  • Nick Coons
    OP
    Investor · Tempe, AZ · Member since 2019 · 102 posts · 66 votes
    4y
    Quote from @Kristen L Garner:

    DSCR ratio calculations are monthly expenses (principal, interest, taxes, insurance, and HOA if applicable) divided by the rental amount that comes back in the appraisal. If the percentage comes in below 1% the loan can still be done, you just get hit with .5 points (might vary lender to lender). Rehab costs, PM costs, etc. are not included in the calculations. And we look at the property itself, not your business entity or investment portfolio. For my borrowers that are deciding between conventional and DSCR I usually run both scenarios so they can compare and make the decision that best suits their goals and strategies. If you are already working with a lender they should be able to do that for you as well.


    That's good info to have. But darn, I was hoping the lender would have the option of looking at the business as a whole rather than the individual property. That way I could have other revenue sources to help qualify.

    My concern with a conventional loan, and maybe I'm wrong, is that there's a limit on the number of these that one can hold. There's also a limit on the number of properties that I can support with negative cash-flow from a qualification perspective using my personal income and DTI. But maybe I'm not looking at this correctly, so hopefully you can fill me in on the ways I might qualify in a situation like this.
    0Reply
  • Nick Coons
    OP
    Investor · Tempe, AZ · Member since 2019 · 102 posts · 66 votes
    4y
    Quote from @Jake Kain:

    @Nick Coons Hey Nick! I am no mortgage expert, so I can't answer with 100% certainty, especially on your first question about them looking at the single property vs business entity.

    We just closed on a triplex, using a DSCR loan. From my understanding, they are only looking at PITI (and probably HOA if there is one, ours does not) in comparison to what it brings in in monthly rent. The property we purchased was fully rented so we had to provide leases showing the current rent. We are currently only bringing in about $140/month without taking into consideration any other expenses, cap ex, vacancy, etc. So we are definitely negatively cashflowing on actuals until we can get the rents up to market value. If the units were vacant, I am not sure how the underwriter determines "market rent" and if they use the full amount or a percentage like they do for calculating DTI.

    If you want I can get you in touch with who I used, he is local here in AZ. He would be happy to answer all of those questions.

    That's good to know that they're using "hard" expenses and not the projected expenses (like capital expenditures, vacancies, etc). I'd have to re-analyze the properties I'm looking at to see if they calculate as cash-flow positive from that perspective.

    I'm at the lender interview stage, so while I have a preference out of the ones I've talked to so far, I'm not currently working with anyone, and certainly open to new introductions.
    1Reply
  • Jake Kain
    Flipper/Rehabber · Phoenix, AZ · Member since 2016 · 254 posts · 100 votes
    4y
    Quote from @Nick Coons:
    Quote from @Jake Kain:

    @Nick Coons Hey Nick! I am no mortgage expert, so I can't answer with 100% certainty, especially on your first question about them looking at the single property vs business entity.

    We just closed on a triplex, using a DSCR loan. From my understanding, they are only looking at PITI (and probably HOA if there is one, ours does not) in comparison to what it brings in in monthly rent. The property we purchased was fully rented so we had to provide leases showing the current rent. We are currently only bringing in about $140/month without taking into consideration any other expenses, cap ex, vacancy, etc. So we are definitely negatively cashflowing on actuals until we can get the rents up to market value. If the units were vacant, I am not sure how the underwriter determines "market rent" and if they use the full amount or a percentage like they do for calculating DTI.

    If you want I can get you in touch with who I used, he is local here in AZ. He would be happy to answer all of those questions.

    That's good to know that they're using "hard" expenses and not the projected expenses (like capital expenditures, vacancies, etc). I'd have to re-analyze the properties I'm looking at to see if they calculate as cash-flow positive from that perspective.

    I'm at the lender interview stage, so while I have a preference out of the ones I've talked to so far, I'm not currently working with anyone, and certainly open to new introductions.
    Sounds good, I will send you his contact in a PM.
    0Reply
  • Jonathan Taylor
    Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes
    4y

    @Nick Coons I'm an investment property lending expert and there are negative DSCR or no DSCR loan options that can help you obtain a property. Usually requiring 25% down since the lenders I work with approach lending in high value markets with a common sense approach. Rates will be higher than DSCR programs but this would allow you to obtain the property and be in line with your goals.

    1Reply
  • Alex Hunt
    Lender · Member since 2022 · 441 posts · 134 votes
    4y

    I can answer from a DSCR lender standpoint.

    - Looking at only the property in question not the business entity, unless it is a mixed use property which it does not sound like it is. 

    - When calculating cash-flow, I'm taking everything into account. That is, not just holding costs (like PITI and utilities), but funds I'm putting aside for repairs, capital expenditures, vacancies, and management (even though I'll be self-managing). Is the lender looking at "expenses" the same way, or are they just looking at actual monthly outflow of cash? As an investor I agree this a good way to think about it. As a lender though we mainly consider taxes, insurance, management or HOA and the P+I payment against the rent or market rent.

    Hope this was helpful, If you have further questions please message me or inquire on Brrr Loans Bigger Pockets page.

    2Reply
  • Nick Coons
    OP
    Investor · Tempe, AZ · Member since 2019 · 102 posts · 66 votes
    4y
    Quote from @Jonathan Taylor:

    @Nick Coons I'm an investment property lending expert and there are negative DSCR or no DSCR loan options that can help you obtain a property. Usually requiring 25% down since the lenders I work with approach lending in high value markets with a common sense approach. Rates will be higher than DSCR programs but this would allow you to obtain the property and be in line with your goals.


    When you say "25% down", does this also equate to "up to 75% LTV on a cash-out refinance", for instance, if I'm changing out of a HML used to purchase/rehab?
    0Reply
  • Jonathan Taylor
    Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes
    4y

    @Nick Coons Yes, you are correct on that. Up to 75% cash out to refinance out of a HML on a no DSCR loan.

    0Reply
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