Should I use a hard money loan or DSCR loan for my first rental?

Question

Hi everyone,

I'm new to real estate investing. I would like to invest out-of-state on small multifamily properties. The issue is that I think I might have a high DTI due to my student loans. I don't really have any cash on hand for a down payment so Ideally, I would like to invest with no money down if possible. That's why I think a hard money lender would be a good avenue to start my real estate investment journey, seeing as hard money could cover the full purchase price and repair of the rental property. However, I've also heard that a DSCR loan is another alternative. My question is, which loan do you think is better considering my financial situation???

Michael Dumler · Answer

@Mohammed Milord, probably not the advice you want to hear, but I would recommend paying off your student debt before investing in real estate. To invest with no money down essentially means that you're going to have to acquire a deal significantly below market value. That's not to say it's entirely impossible, but with current market conditions, it's challenging. If you do happen to come across a home run deal, I'd also highly recommend parenting with someone who has experience with rehabs and working with hard money lenders. Hope this helps!

James Wise · Answer

You should focus on paying down your debts and get yourself to the point where you have a 25% down payment and can use traditional financing. Bad financing can take a good deal to a bad one real quick.

Luther Wilson III · Answer

You can use hard money or private money on the front end for the acquisition and the renovation. Then you can refinance into a long-term, DSCR loan.  This is basically a BRRR on a multifamily deal - kinda similar to how it’d be on a SFH.  This could work out if the property is a value add type of deal.  If you’re looking to get into turnkey property or something that doesn’t need as much in the way of repairs and such - you could look at going the traditional financing route.  In that case you might need more than you would if you went the BRRR route.

Anyway you go you’re gonna need access to some type of additional capital… Probably more than what you have on hand now.  Have you considered partnering with someone on it? That might be a reasonable option if you have some solid contacts - and, of course, if the deal is sweet enough!

Bill B. · Answer

Save up until you can buy a fixer primary home. Move in some friends/relatives/co-workers to pay you rent.

If you can’t swing 3-5% downpayment then you can’t swing fixing up a fixer upper.

Jack Mawer · Answer

Mohammed, I think a solid route would be to buy and rehab the property with a hard money loan and then refinance into permanent 30 year debt with a DSCR loan or something of the sort.

Sergey A. Petrov · Answer

100% financing on an investment doesn’t really exist. 20-25% is usually the minimum unless you go FHA with 3.5%. Find an equity partner

Becca F. · Answer

Hi Mohammed,

Echoing what the others said, it's going to be difficult to buy an investment property with no money down. I also thought about doing a hard money loan but I'm not going to do that for now. The interest rates are high, at least where I checked. I'm a beginning investor - I started by buying a single family home in the Midwest as my primary residence then rented it out instead of selling it when I moved. I'm guessing that houses in Long Island are expensive. I've acquired two more rentals since then. I'm also looking into a private lender but I'm not going to rush into a real estate transaction. My student loan was not a major factor in my DTI ratio. Have to talked with a lender to have them review your financial situation or if you could buy property?

You should have at least 6 months of savings. Things happen with rentals -  major repairs, tenants move out, have to evict someone, etc. If you don't have any cash for a down payment, I would approach this very cautiously. Good luck!

Luther Wilson III · Answer

I’d look at getting the hard money and or private money lender lined up and ready first.  Then go hunting…

William Anderson · Answer

Mohammed,

You should have six months of expenses including the mortgage in the bank when you start.  There is no such thing as "no money".  Stuff happens, vacancies, storms, accidents.  Avoid the stress, save up then make your move.  Interest rates are moderating so waiting a bit to save will probably be an advantage.

Mohammed Milord · Answer

Thank you for the advice!

Should I use a hard money loan or DSCR loan for my first rental?

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