Would you use a DSCR to scale today?

Question

I have a triplex worth about 330,000. I am about 10 years in on the property and have about 100,000 on the mortgage at 3.875%. Assuming I find another multifamily that would cash flow, how would you all finance the deal. DSCR loan? I am not interested in investing with anyone, just looking for some advice on how to scale without giving up too much cash flow. Thanks!

Mark Munson · Answer

Hi @Jason V.

I would seek a 2nd position lien before refinancing into a DSCR loan at a much higher rate. Your rate would be above 6%+ with the current DSCR rates and losing the 3.875% rate obviously isn't ideal. If that is not possible, then I would ask myself if the increased cost of capital to access the equity is worth the next deal's profits/benefits. Without having another deal in mind, it is truly impossible to concretely answer your question. If getting another $100k in cash unlocks a large flip profit to keep scaling/injecting capital into your business or a great cash-flowing property that outweighs the increased capital cost on the triplex, then go for it.

Jason V. · Answer

Thanks all for the posts. I feel like I usually know the answer but need a sounding board like BiggerPockets to test my thoughts out!

Corby Goade · Answer

DSCR loans are always going to be more expensive than conventional. In my opinion, there are two reasons that someone might use one:

1. Their personal income doesn't support the purchase, but the income from the property makes the deal work.

2. They don't want the loan or deed in their personal name.

There are pros and cons to these loans and as long as you know WHY you'd use one, they can be a great tool.

Travis Timmons · Answer

I'd suggest digging into the exact dollar amounts on a monthly and annual basis rather that measuring by rate percentages. Moving from a 3 handle rate to an almost 8% DSCR feels like defeat. If, however, that means you own more real estate in locations that you like, you get the magic of leverage + appreciation that results in a better long term return.

Making that move, however, is really nervy and anxiety inducing. I'm a big "life doesn't exist on a spreadsheet" guy, but I'd suggest letting the numbers influence your decision rather than the hesitation to let the once in a lifetime rate go. Also, have a conversation with 2-3 lenders that you trust. It's helpful for me to move beyond my inner dialogue because I tell myself all sorts of stories that may or may not be true.

I get it, though. I have a 3% and a 4% loan that I swear I'll keep forever. Insert the "my precious - lord of the rings" joke of your choice.

Would you use a DSCR to scale today?

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