DSCR to Cash Out BRRR
Member since 2019 · 18 posts · 2 votes
DSCR to Cash Out BRRR
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Financial Advisor · Des Moines, IA · Member since 2017 · 173 posts · 58 votes
4y@Calvin Quallis - If you need financing for the initial purchase and rehab (not using your own cash) then a short term hard money rehab/bridge loan is what you'll need. A long term dscr rental loan won't work. The lender won't do that type of loan on a property you plan to rehab. You do the rehab first, then do a long term take out loan once the rehab is done and you have cashflow (or soon will). You need a good broker to find loan programs for you.
23 Replies
- Helen, GA · Member since 2015 · 96 posts · 68 votes4y
Have you looked into hard money on a shorter-term and refinance into longer-term loan once repairs and higher ARV is reached?
- Member since 2019 · 18 posts · 2 votes4yI have not. However, would there be a benefit to a hard money loan if the current DSCR I’m looking at is an 8.5% interest loan with no prepayment penalty and no lender points (no middle man here). The rate if I accepted a prepayment penalty would be 7.375%, but doesn’t make sense if I’d like to refi and cash out in 6 months.
Quote from @Rolly Weaver:
Have you looked into hard money on a shorter-term and refinance into longer-term loan once repairs and higher ARV is reached?
- 4yRaymond J. RodriguesBusiness MemberLender · Miami, FL · Member since 2017 · 1k+ posts · 797 votes
@Calvin Quallis, you can qualify based on proposed rents or current rents when using a DSCR loan. Some lenders want rents in place, others do not care. Whether there is a middleman or not on the lender you're working with, for no PPP, that rate still seems kind of high with no points. This is all of course dependent on what your credit score is.
Helm Mortgage Corp.5125 Reviews - 4yStephanie P.Pro MemberWashington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
Quote from @Calvin Quallis:
Hi,
Purchasing a buy and hold property in the Hamptons, NY for $1,895,000. Will put $500K in property. ARV is $3M conservatively, with a really great reno can fetch up to $3.5M. Purchase contract has no mortgage contingency and needs to close in 60 days, so decided to do a DSCR with no prepayment penalty to cash out after repairs. Was told I cannot do cash out DSCR refi because I will have no rental income yet and I've held the property for about 6 months while doing the reno.
Any suggestions on which loan I should look at for at least a 75% LTV cash out refi. BTW: I'm self employed.This is a case for hard money with a 12 month term. That will give you time to renovate and then sell. DSCR shouldn't come into play. If you can get 8.5% with no prepay and no lender points, you should take it. That's close to hard money right now on the east coast.
- Member since 2019 · 18 posts · 2 votes4y
Quote from @Raymond J. Rodrigues:
@Calvin Quallis, you can qualify based on proposed rents or current rents when using a DSCR loan. Some lenders want rents in place, others do not care. Whether there is a middleman or not on the lender you're working with, for no PPP, that rate still seems kind of high with no points. This is all of course dependent on what your credit score is.
Thanks Raymond! My middle FICO score isn't great, but isn't horrible at 707.
- Member since 2019 · 18 posts · 2 votes4y
Quote from @Stephanie P.:
Quote from @Calvin Quallis:
Hi,
Purchasing a buy and hold property in the Hamptons, NY for $1,895,000. Will put $500K in property. ARV is $3M conservatively, with a really great reno can fetch up to $3.5M. Purchase contract has no mortgage contingency and needs to close in 60 days, so decided to do a DSCR with no prepayment penalty to cash out after repairs. Was told I cannot do cash out DSCR refi because I will have no rental income yet and I've held the property for about 6 months while doing the reno.
Any suggestions on which loan I should look at for at least a 75% LTV cash out refi. BTW: I'm self employed.This is a case for hard money with a 12 month term. That will give you time to renovate and then sell. DSCR shouldn't come into play. If you can get 8.5% with no prepay and no lender points, you should take it. That's close to hard money right now on the east coast.
@Stephanie P. Are you suggesting that we do a hard money loan or because the DSCR with no prepayment penalty and no points is at 8.5%, I should just do the DSCR?
- Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes4y
DSCR should be immune to that seasoning period, or else it's just a regular conventional seasoning period. They usually do a rental analysis and if that comes back 1:1 then you qualify.
- Lender · Tampa/St. Petersburg/Sarasota FL and Knoxville/Sevierville/Maryville, TN · Member since 2018 · 361 posts · 178 votes4y
So a DSCR loan is what you will use when you cash out. DSCR is Debt Service Coverage Ratio, or how much money will the property makeover its expenses. They used to be called cash flow loans. You can use private money, bridge loan, or flip loan to purchase the property and rehab. You will want to do the math on the front side because if you do these loans and rate and term refi into the DSCR there is no season. However, if your math is off, you do not finance the rehab or a couple of other items, and you will need to wait around 6 months to pull the equity out. You will also want to make sure you can justify what your rental income will be and that it will cover all expenses on the property.
- 4yStephanie P.Pro MemberWashington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
Quote from @Calvin Quallis:
Quote from @Stephanie P.:
Quote from @Calvin Quallis:
Hi,
Purchasing a buy and hold property in the Hamptons, NY for $1,895,000. Will put $500K in property. ARV is $3M conservatively, with a really great reno can fetch up to $3.5M. Purchase contract has no mortgage contingency and needs to close in 60 days, so decided to do a DSCR with no prepayment penalty to cash out after repairs. Was told I cannot do cash out DSCR refi because I will have no rental income yet and I've held the property for about 6 months while doing the reno.
Any suggestions on which loan I should look at for at least a 75% LTV cash out refi. BTW: I'm self employed.This is a case for hard money with a 12 month term. That will give you time to renovate and then sell. DSCR shouldn't come into play. If you can get 8.5% with no prepay and no lender points, you should take it. That's close to hard money right now on the east coast.
@Stephanie P. Are you suggesting that we do a hard money loan or because the DSCR with no prepayment penalty and no points is at 8.5%, I should just do the DSCR?
Just saying you're muddying the waters by getting a DSCR loan that you don't need (unless you're keeping the property). Otherwise, why not get a short term loan that will allow for renovations and then just sell the property and not have two sets of closing costs. Also, be careful with that size loan; many DSCR loans have a cut of of 1M or 1.5M for a single family property.
- Member since 2019 · 18 posts · 2 votes4y
@Stephanie P. My concern is not being able to get out of a hard money loan with all the volatility and being stuck with a $20K a month payment and fees to extend. The IO 40 year with 10 year interest only and 30 year fixed is sounding better here. Thanks for your advice.
- Rental Property Investor · Columbus, OH · Member since 2017 · 3k+ posts · 3k+ votes4y
Quote from @Calvin Quallis:
Hi,
Purchasing a buy and hold property in the Hamptons, NY for $1,895,000. Will put $500K in property. ARV is $3M conservatively, with a really great reno can fetch up to $3.5M. Purchase contract has no mortgage contingency and needs to close in 60 days, so decided to do a DSCR with no prepayment penalty to cash out after repairs. Was told I cannot do cash out DSCR refi because I will have no rental income yet and I've held the property for about 6 months while doing the reno.Any suggestions on which loan I should look at for at least a 75% LTV cash out refi. BTW: I'm self employed.
Is there a reason you cant wait the 6 months until the property is stabilized? Most lenders will have a 1.2 DSCR
- Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes4y
@Calvin Quallis there are a few options you can consider before jumping into a Hard Money loan. These loans are a good tool but they are the most expensive loans to get. DSCR (if lender can use appraised market rents and the new loan can debt cover on this amount) or negative DSCR loans are an option along with whats called a no ratio loan. These would still be in the higher rates but less than HMLs and have longer terms than 12 months to buy you some time to stabilize your asset. This is a great asset and the right financing can turn this into a cash cow.
- Member since 2019 · 18 posts · 2 votes4y
Quote from @Steven Foster Wilson:
Quote from @Calvin Quallis:
Hi,
Purchasing a buy and hold property in the Hamptons, NY for $1,895,000. Will put $500K in property. ARV is $3M conservatively, with a really great reno can fetch up to $3.5M. Purchase contract has no mortgage contingency and needs to close in 60 days, so decided to do a DSCR with no prepayment penalty to cash out after repairs. Was told I cannot do cash out DSCR refi because I will have no rental income yet and I've held the property for about 6 months while doing the reno.Any suggestions on which loan I should look at for at least a 75% LTV cash out refi. BTW: I'm self employed.
Is there a reason you cant wait the 6 months until the property is stabilized? Most lenders will have a 1.2 DSCR
@Steven Foster Wilson You have a good point there. Hadn't considered that. That may be the answer. Get rents coming in if I can't refi out after the renovation and refi after I have 6 months of rental history.
- Member since 2019 · 18 posts · 2 votes4y
Quote from @Jonathan Taylor:
@Calvin Quallis there are a few options you can consider before jumping into a Hard Money loan. These loans are a good tool but they are the most expensive loans to get. DSCR (if lender can use appraised market rents and the new loan can debt cover on this amount) or negative DSCR loans are an option along with whats called a no ratio loan. These would still be in the higher rates but less than HMLs and have longer terms than 12 months to buy you some time to stabilize your asset. This is a great asset and the right financing can turn this into a cash cow.
@Jonathan Taylor Thanks, so you're saying that there are lenders that should be able to use appraised market rents for the cash out refi into another DSCR vs. having to show rental history, which is impossible while the property is being renovated. Albeit, the new payment should be able to support the debt.
- Financial Advisor · Des Moines, IA · Member since 2017 · 173 posts · 58 votes4y
@Calvin Quallis - If you need financing for the initial purchase and rehab (not using your own cash) then a short term hard money rehab/bridge loan is what you'll need. A long term dscr rental loan won't work. The lender won't do that type of loan on a property you plan to rehab. You do the rehab first, then do a long term take out loan once the rehab is done and you have cashflow (or soon will). You need a good broker to find loan programs for you.
- 4yStephanie P.Pro MemberWashington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
Quote from @Calvin Quallis:
Hi,
Purchasing a buy and hold property in the Hamptons, NY for $1,895,000. Will put $500K in property. ARV is $3M conservatively, with a really great reno can fetch up to $3.5M. Purchase contract has no mortgage contingency and needs to close in 60 days, so decided to do a DSCR with no prepayment penalty to cash out after repairs. Was told I cannot do cash out DSCR refi because I will have no rental income yet and I've held the property for about 6 months while doing the reno.
Any suggestions on which loan I should look at for at least a 75% LTV cash out refi. BTW: I'm self employed.A couple of things. The reason to do a hard money loan on this is to keep your cash in your pocket. The hard money will fund the renovation. if you do a DSCR loan, you won't get renovation money and you'll come out of pocket with the reno funds. You can use comparable rentals for the appraisal and monthly leases with every DSCR lender I know, but that's on a purchase. On a refinance, the property has to be stabilized or you'll get a reduction in LTV. If refinancing, 6 months is your bare minimum on this one. Your loan amount is going to be too high for many to consider this loan on a DSCR product. Even Deephaven, which is the lender to the lenders and has some of the highest loan amounts on DSCR has a max loan amount of $2,000,000 and a max cash out amount of $500,000. If you're going to use short term rentals for a property like this, you'll need to see comparables that are also using STR's and some AirDNA data.
This is not a slam dunk loan.
Stephanie
- Member since 2019 · 18 posts · 2 votes4y
Quote from @Eliott Elias:
DSCR should be immune to that seasoning period, or else it's just a regular conventional seasoning period. They usually do a rental analysis and if that comes back 1:1 then you qualify.
@Eliott Elias Thanks!
- Member since 2019 · 18 posts · 2 votes4y
Quote from @Ryan O'Mara:
@Calvin Quallis - If you need financing for the initial purchase and rehab (not using your own cash) then a short term hard money rehab/bridge loan is what you'll need. A long term dscr rental loan won't work. The lender won't do that type of loan on a property you plan to rehab. You do the rehab first, then do a long term take out loan once the rehab is done and you have cashflow (or soon will). You need a good broker to find loan programs for you.
@Ryan O'Mara I have the $500K cash for the rehab. I need the loan to purchase the property. Then looking to cash out refi to get at least all of my renovation costs back and maybe even part of the down payment, but would be a win for me if I just got my $500K back.
- Member since 2019 · 18 posts · 2 votes4y
Quote from @Stephanie P.:
Quote from @Calvin Quallis:
Hi,
Purchasing a buy and hold property in the Hamptons, NY for $1,895,000. Will put $500K in property. ARV is $3M conservatively, with a really great reno can fetch up to $3.5M. Purchase contract has no mortgage contingency and needs to close in 60 days, so decided to do a DSCR with no prepayment penalty to cash out after repairs. Was told I cannot do cash out DSCR refi because I will have no rental income yet and I've held the property for about 6 months while doing the reno.
Any suggestions on which loan I should look at for at least a 75% LTV cash out refi. BTW: I'm self employed.A couple of things. The reason to do a hard money loan on this is to keep your cash in your pocket. The hard money will fund the renovation. if you do a DSCR loan, you won't get renovation money and you'll come out of pocket with the reno funds. You can use comparable rentals for the appraisal and monthly leases with every DSCR lender I know, but that's on a purchase. On a refinance, the property has to be stabilized or you'll get a reduction in LTV. If refinancing, 6 months is your bare minimum on this one. Your loan amount is going to be too high for many to consider this loan on a DSCR product. Even Deephaven, which is the lender to the lenders and has some of the highest loan amounts on DSCR has a max loan amount of $2,000,000 and a max cash out amount of $500,000. If you're going to use short term rentals for a property like this, you'll need to see comparables that are also using STR's and some AirDNA data.
This is not a slam dunk loan.
Stephanie
@Stephanie P. Got it. Again, my concern is being stuck in a hard money loan at $20K per month, not including taxes and insurance (an additional $1,317 per month) and having difficulty getting out of the loan with just the option to sell if I can't refinance. If I took the interest only for 10 years with 30 years fixed DSCR, my PITI would be roughly $11K a month for the first 10 years. If I couldn't refinance out of it to get my cash, I could still rent and cash flow about $80K or more annually conservatively or I could sell. I'd still have the option to buy and hold, which is what I'd prefer, I just wouldn't be able to pull the cash back out immediately. If I could wait to refinance later than 6 months, do you think it might be easier for me to find a $2,250,000 cash out refi loan product at 75% LTV?
- 4yStephanie P.Pro MemberWashington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
Quote from @Calvin Quallis:
Quote from @Stephanie P.:
Quote from @Calvin Quallis:
Hi,
Purchasing a buy and hold property in the Hamptons, NY for $1,895,000. Will put $500K in property. ARV is $3M conservatively, with a really great reno can fetch up to $3.5M. Purchase contract has no mortgage contingency and needs to close in 60 days, so decided to do a DSCR with no prepayment penalty to cash out after repairs. Was told I cannot do cash out DSCR refi because I will have no rental income yet and I've held the property for about 6 months while doing the reno.
Any suggestions on which loan I should look at for at least a 75% LTV cash out refi. BTW: I'm self employed.A couple of things. The reason to do a hard money loan on this is to keep your cash in your pocket. The hard money will fund the renovation. if you do a DSCR loan, you won't get renovation money and you'll come out of pocket with the reno funds. You can use comparable rentals for the appraisal and monthly leases with every DSCR lender I know, but that's on a purchase. On a refinance, the property has to be stabilized or you'll get a reduction in LTV. If refinancing, 6 months is your bare minimum on this one. Your loan amount is going to be too high for many to consider this loan on a DSCR product. Even Deephaven, which is the lender to the lenders and has some of the highest loan amounts on DSCR has a max loan amount of $2,000,000 and a max cash out amount of $500,000. If you're going to use short term rentals for a property like this, you'll need to see comparables that are also using STR's and some AirDNA data.
This is not a slam dunk loan.
Stephanie
@Stephanie P. Got it. Again, my concern is being stuck in a hard money loan at $20K per month, not including taxes and insurance (an additional $1,317 per month) and having difficulty getting out of the loan with just the option to sell if I can't refinance. If I took the interest only for 10 years with 30 years fixed DSCR, my PITI would be roughly $11K a month for the first 10 years. If I couldn't refinance out of it to get my cash, I could still rent and cash flow about $80K or more annually conservatively or I could sell. I'd still have the option to buy and hold, which is what I'd prefer, I just wouldn't be able to pull the cash back out immediately. If I could wait to refinance later than 6 months, do you think it might be easier for me to find a $2,250,000 cash out refi loan product at 75% LTV?
Yes, your options to refinance open up after 12 months although loan size is still a huge concern and rents and rental comps will have to be solid.
- Lender · Nationwide · Member since 2021 · 220 posts · 105 votes4y
Is your intention to use this as a STR? Can you finance the renovations with the DSCR loan? If not, what is the game plan to finance the construction?
There are DSCR products that allow for refinance without seasoning if renovation was conducted. However, I'm only familiar with funding the renovation with a value-add loan then refinancing (in this case up to 80% without seasoning). If you're planning to use it as a STR, NOI would be calculated with project income from a site like AirDNA. Feel free to reach out if you have any questions. - Member since 2019 · 18 posts · 2 votes4y
Quote from @Kevin Woodard:
Is your intention to use this as a STR? Can you finance the renovations with the DSCR loan? If not, what is the game plan to finance the construction?
There are DSCR products that allow for refinance without seasoning if renovation was conducted. However, I'm only familiar with funding the renovation with a value-add loan then refinancing (in this case up to 80% without seasoning). If you're planning to use it as a STR, NOI would be calculated with project income from a site like AirDNA. Feel free to reach out if you have any questions.@Kevin Woodard Yes, the goal is to use this as an STR. No, this DSCR would only be used for the purchase. I will be paying cash of about $500K for renovations.
- Lender · Nationwide · Member since 2021 · 220 posts · 105 votes4yOk, I'm tracking now. The terms of this loan sound pretty good and close to a hard money loan. If you are paying on principal, though, how does that affect the bottom line? The alternative, like others have mentioned, would be a bridge (you fund construction) pay I/O then refi. You would have to see how it all pencils out though. Hope this helps.
Quote from @Calvin Quallis:
Quote from @Kevin Woodard:
Is your intention to use this as a STR? Can you finance the renovations with the DSCR loan? If not, what is the game plan to finance the construction?
There are DSCR products that allow for refinance without seasoning if renovation was conducted. However, I'm only familiar with funding the renovation with a value-add loan then refinancing (in this case up to 80% without seasoning). If you're planning to use it as a STR, NOI would be calculated with project income from a site like AirDNA. Feel free to reach out if you have any questions.@Kevin Woodard Yes, the goal is to use this as an STR. No, this DSCR would only be used for the purchase. I will be paying cash of about $500K for renovations.
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