How Accurate Do Rent Projections Need to Be for DSCR?

Question

For those using DSCR:

How tight are your rent estimates vs actual performance?

Are you seeing deals fall apart over small gaps?

Corby Goade · Answer

Every DSCR lender I've worked with has different underwriting criteria and requirements. In addition, the appraisals are all over the board, god forbid you are buying a property using proforma STR criteria.

The key with DSCR loans is that you need to have flexibility in the amount you can put down, obviously that will vary a bit from market to market, but it's likely that number will change once your appraisal comes in. If you aren't ready for it, then yes, your deal could fall apart and you could lose your EMD.

DSCR has a time and place, but it's not the cure-all that many people believe it to be.

Jaycee Greene · Answer

Hi @Tracy Thielman. In my experience, it generally depends on whether your lender is a bank/credit union or an HML.

Kyle Hendricks · Answer

I do a lot of DSCR loans for clients and it typically all comes down to the appraiser. Estimating very conservatively is the way to go. I do see deals fall apart over this, so having a good backup plan in place is ideal. The deals rarely actually fall apart it is typically just a pivot to a different product.

Chris Seveney · Answer

Well, if the property is not rented and you're getting a DSCR loan, they will take average market comps and may adjust your down payment and financing amount. During that time period, it's very dependent on the lender. I strongly recommend, if you're seeking financing, you have some strong comps that you can provide ahead of time and let them review what you provide. They will still also do their own work. If you can show your justification, that can add weight to the situation.

As a lender who used to correspond loans, if it was tight and we required a little additional down payment and the borrower did not have it, then we would typically pass on the deal. The numbers are too tight to begin with, and we want to make sure the borrower has adequate protection to be able to pay and cover the loan.

Bryan Coll · Answer

I think the question comes down to what do you realistically think you can produce?

Performance is the largest driver for a DSCR loan. The lender wants to ensure that the property pays for itself over time.

So while you can make any claim on proforma performance, you want to ensure that it's a number you can realistically get to.

If the rents in the area average $1,500/month and the loan only works at $4,000/month because it has a shiny front door and new flooring, you may need to reassess your comps or your proforma. But if you are able to make the numbers work at $1,600/month, that wouldn't be unreasonable to get to since that's a 6% increase in rental income.

How Accurate Do Rent Projections Need to Be for DSCR?

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