Who is using DSCR Loans?

[Alex Turner]

DSCR or (Debt Service Coverage Ratio) loans are loans granted on the bases that an investment property will cash flow based on a 1007 Rent schedule appraisal.

The rent schedule is based on LTR rents.

The greatest advantage to these loans that there is no income or employment required to qualify.

I wonder for investors out there that look at properties for STR, when you do an analysis of the property for STR would the property still cashflow for LTR as well? I assume you look at STRs for greater cash flow, but interested on the comparison between the analysis of a property for STR vs. LTR.

Thanks

[Joshua Strickland]

Certain lenders are doing these based off STR income now too. Host, Visio, The Lender, plenty others.

And yes they are a tick higher, but if .25 - .75% makes the loan not a good deal then the property was probably not going to work either way.

[Joshua Strickland]

Certain lenders are doing these based off STR income now too. Host, Visio, The Lender, plenty others.

And yes they are a tick higher, but if .25 - .75% makes the loan not a good deal then the property was probably not going to work either way.

[Jeff Langley]

I have multiple DSCR and conventional loans and DSCR programs are offered for STR and LTR data. I would think if you're buying an STR in a popular STR area, it'll be more challenging to get a DSCR loan because you're paying top dollar if it's a proven area so the ratio may be less than what most require, which is 1.25

[Gerald Pitts]

I just pencil it into the numbers. Another point never really moves the needle with STR cashflow. A better way to mitigate risk of STR is to invest in areas with proven track record of supporting vacation rentals. That is where you make the most money, and where you don't need to worry about converting to LTR because the community thrives on vacation rentals being there.

[Alex Turner]

Good Point, area seems to be very important when targeting a property for STR. I have also been chatting with some investors and they say it is important to identify the market that your STR would serve. For example, Ken owns a STR SFH 3,200sqft 5 bed 3 bath in Denver. He lives in the ADU in the back so he can do the STR in Denver county. But he has Identified his audience as people coming to the city for bachelor parties or big family gatherings because his house can accommodate 10+ people. It wasn't something I thought of until he brought it up but each property can serve a specific audience depending on what it offers.

[Joshua Janus]

@Alex Turner I know many investors that use the DSCR loan to get into larger properties that they wouldn't generally be able to qualify for. If you can find a lender that provides the appraisal, property performance evaluation and ratio on the projected rents, then you can get a property at a discount and set yourself up for a great cash flow in the future with more units. At least in my market, it is difficult to find a property that is a successful STR that would have anywhere near the same return for LTR. Potential state or local regulations scare a lot of investors away from STR's.

[James Carlson]

@Alex Turner

I haven't personally done a deal with a DSCR loan, but I've been talking to a few lenders for myself and for our Colorado STR clients. It seems like some DSCR lenders will look at long-term rents to determine whether they'll lend. If you're in Denver, then that won't work because LTR rates often won't cover the mortgage (much less additional costs). You'd want to make sure the lender looks at Airbnb revenues when deciding on lendability.

The one lender I've been talking with lately requires 1.1

Good luck!

[Jeff Langley]

I've had some DSCR offerings of .75 ratio but you'll pay for it in the increased rates. There are also products that do calculate for STR with airdna data… i haven't had to use any yet since 2nd home loans work well for that.

[Kristen L Garner]

I use DSCR for my own investment portfolio. But I also use it for many of my borrowers. We have STR and LTR analysis options. But since you only need 1% DSCR for the property work out, the loan can usually go through even if LTR analysis is used during the appraisal. If there are no STR comps in your area, the lender will have to use LTR instead.

[Jeffrey Albaum]

Hi @Alex Turner - we just closed a deal using a DSCR loan where the appraisal wasn't able to use STR rental data, even though the market is almost exclusively used for STRs. So even though we didn't meet the DSCR needed, we were able to still close the loan and pay 1 percentage point higher - so not the biggest deal in the world. I loved the lender we used - feel free to message me if you'd like more info or ever want to chat about STRs!

[Timothy Hero]

I'd say 50-70% of DSCR/non-qm lenders offer financing on STR's these days. Most require 12 months of STR history on the property.

If you don't have this, some lenders will treat it like a LTR and go off the market rent.

[Jordan Sachs]

I have three DSCR loans on LTR and they've been great. I am looking to get a STR though and I know that at present my lender underwrites properties for STR using LTR data so it is definitely a bit more tricky to make the numbers work. I'm looking into other lenders who may use the actual STR data to underwrite the loans though. I definitely found the loans to be very easy to use as long as you have the money for down payment.

[River Sava]

Quote from @Alex Turner:

DSCR or (Debt Service Coverage Ratio) loans are loans granted on the bases that an investment property will cash flow based on a 1007 Rent schedule appraisal.

The rent schedule is based on LTR rents.

The greatest advantage to these loans that there is no income or employment required to qualify.

I wonder for investors out there that look at properties for STR, when you do an analysis of the property for STR would the property still cashflow for LTR as well? I assume you look at STRs for greater cash flow, but interested on the comparison between the analysis of a property for STR vs. LTR.

Thanks

Hi Alex, I am with a private nationwide lender that specializes in DSCR loans! I would love to connect and talk to you more about what our product offers and it’s benefits! 

[Jordan Sachs]

@River Sava do you offer DSCR loans for STR? If so, I'd love to connect as well!

[River Sava]

Quote from @Jordan Sachs:

@River Sava do you offer DSCR loans for STR? If so, I'd love to connect as well!

Yes we do!

[Kerry Baird]

I just closed a long term refinance in Texas and a STR purchase in Florida with @Timothy Hero and am very pleased with how it all proceeded.

[Jordan Moorhead]

@Conner Olsen you used one right?

[Conner Olsen]

@Jordan Moorhead I've only used conventional loans, I used a second home loan for my STR cabin.

[Kayla Givens]

My fiancè and I plan to use a DSCR loan to purchase our next group home as the cash flow covers the mortgage and then some. We'll also be looking to purchase an STR using a DSCR once we've built our reserves back up for a down payment. Anyone using a DSCR loan for their STR - how is it going?? What's the cash flow look like? Was it worth it?

[Alex Bekeza]

Quote from @Alex Turner:

DSCR or (Debt Service Coverage Ratio) loans are loans granted on the bases that an investment property will cash flow based on a 1007 Rent schedule appraisal.

The rent schedule is based on LTR rents.

The greatest advantage to these loans that there is no income or employment required to qualify.

I wonder for investors out there that look at properties for STR, when you do an analysis of the property for STR would the property still cashflow for LTR as well? I assume you look at STRs for greater cash flow, but interested on the comparison between the analysis of a property for STR vs. LTR.

Thanks

There are DSCR lenders who will calculate DSCR based on the lower of Air DNA Data or actual financials but things are tightening quickly in this space. In general, aside from obvious vacation destinations perhaps, it's always best to underwrite your STRs to cash flow as LTRs should the market shift I would think.

I've originated over 350 DSCR loans in the last 2 years and I have seen everything under the sun in terms of people trying to qualify for better priced LTR products if the 1007 allows, 1007 rents killing deals, established performing STRs getting special treatment, and more recently super aggressive STR products that seem to be banking on continued STR performance because the LTR figures would never cover the debt.

I've even originated some loans this year where we were paying off hard money used for the rehab process and these properties had literally no operating history (barely just furnished prior to appraisal) and we still found appetite for 75% cash out/30 year terms calculating DSCR on a Air DNA figure with a slight hair cut. (pretty darn aggressive if you ask me) but this was a premier vacation destination in California which probably has more stable demand than many others during a recession.

@Dave Meyer shared some really interesting data recently on an episode of "On the Market" about how STR demand is holding very strong but SUPPLY is also up so much from investors wanting to get it on this that people are starting to take a hit on occupancy. (in addition to hotels removing covid restrictions and boosting their business). I think this will all be very market specific but I'm interested so see where this goes and how many of those STR markets which will feel the burn the most have long term market rents which can support the debt these properties have.

[Mike Reynolds]

Not really a fan yet of DSCR. Have a deal that I have under contract. Will close on Wed next week.

I went to a local "meetup". Well, it was a 90-minute drive but that is considered local in Texas. Met a lender there and gave him the first crack at it. I got the run around for a few days then I was told it would be 10% with 2 points. Now, I have this property under contract for 200k. It will appraise for 325k right now and I am putting 100k down. No work needed on it at all. 

I ended up getting 5.75% commercial from a trusted bank I have done business with in the past. They jumped at the chance even. Maybe I am using the wrong DSCR people? Oh, btw, my credit is in the 800's. Not sure why they wanted to fleece me. Maybe they think I was born last night?

[Stephanie P.]

Quote from @Mike Reynolds:

Not really a fan yet of DSCR. Have a deal that I have under contract. Will close on Wed next week.

I went to a local "meetup". Well, it was a 90-minute drive but that is considered local in Texas. Met a lender there and gave him the first crack at it. I got the run around for a few days then I was told it would be 10% with 2 points. Now, I have this property under contract for 200k. It will appraise for 325k right now and I am putting 100k down. No work needed on it at all. 

I ended up getting 5.75% commercial from a trusted bank I have done business with in the past. They jumped at the chance even. Maybe I am using the wrong DSCR people? Oh, btw, my credit is in the 800's. Not sure why they wanted to fleece me. Maybe they think I was born last night?

DSCR should only be used once you've exhausted your conventional and local bank sources. 10% and 2 points sounds more like hard money than a long term DSCR loan.

[Mike Reynolds]

Quote from @Stephanie P.:

Quote from @Mike Reynolds:

Not really a fan yet of DSCR. Have a deal that I have under contract. Will close on Wed next week.

I went to a local "meetup". Well, it was a 90-minute drive but that is considered local in Texas. Met a lender there and gave him the first crack at it. I got the run around for a few days then I was told it would be 10% with 2 points. Now, I have this property under contract for 200k. It will appraise for 325k right now and I am putting 100k down. No work needed on it at all. 

I ended up getting 5.75% commercial from a trusted bank I have done business with in the past. They jumped at the chance even. Maybe I am using the wrong DSCR people? Oh, btw, my credit is in the 800's. Not sure why they wanted to fleece me. Maybe they think I was born last night?

DSCR should only be used once you've exhausted your conventional and local bank sources. 10% and 2 points sounds more like hard money than a long term DSCR loan.

At the meet up, he just said he was a lender. Both commercial and residential. That was on me for assuming I guess. I have a commercial property that I want to refi and a SFH that I wanted to finance. I just wanted to give him a shot at it. I had no idea it was a dscr loan. I have heard about them but never really dug into what they were.

I can get financing. But just wanted to see if my lenders were staying honest. Looks like they are. 

[Luke Stewart]

Quote from @Alex Turner:

Good Point, area seems to be very important when targeting a property for STR. I have also been chatting with some investors and they say it is important to identify the market that your STR would serve. For example, Ken owns a STR SFH 3,200sqft 5 bed 3 bath in Denver. He lives in the ADU in the back so he can do the STR in Denver county. But he has Identified his audience as people coming to the city for bachelor parties or big family gatherings because his house can accommodate 10+ people. It wasn't something I thought of until he brought it up but each property can serve a specific audience depending on what it offers.

This technically violates the STR laws in Denver, he cant live in the ADU, he must live in the primary and then can rent the ADU. By living in the ADU he forfits the right of the primary being his actual primary, which is required to operate a STR. He needs to be careful because he can get a hefty fine and lose his license.

[Brendan H.]

Related - Anyone know if there are hybrid DSCR type loans where W-2 could cover the nut if rents don't fully cover the required ratio? Specifically for purchasing an STR in an established area? Looking at various options where qualifying as a second home might not work, and qualifying at straight DSC ratios might not work. However, W-2 income would more than cover the difference in the event the STR #'s didn't fully cover. Thoughts? Options?

[Brendan H.]

Also related - Are there blanket loans that might be able to utilize equity from one property as the down payment / collateral on said purchase above, and then subsequently using the DSCR on that STR, with W-2 covering the difference if necessary?