Insight on DSCR vs standard commercial cash out refi

Real Estate Agent · Birmingham, AL · Member since 2020 · 13 posts · 9 votes

I am just finishing up a rehab and its about time to get my hard money lender paid back, and get the money I put into the deal back out to rinse and repeat. The property is in my LLC and I am trying to figure out if I want to do a DSCR loan or do a commercial cash out refi. I don't really know much except the very basic things about a DSCR loan. Does it allow me to get cash back? Or just pay off the previous lender?

I am all in (including my own money) about 230K. ARV for this house should be at minimum 300K but the house directly behind it just sold for 375K about 5 months ago. Rent is probably $2,000 but worst case scenario I have no problem knowing that I could get $1800.

thoughts?

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Alex BekezaBusiness Member

Lender · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes

@Jordan Holt DSCR loans absolutely allow for cash out. It's the most common transaction we do. In fact, the commercial bank is the only one likely to have any limiting guidelines pertaining to LTC/cash out. Most DSCR lenders don't care about loan to cost once seasoned and just go off of the appraised value and cash flow. The only thing that could stop you from achieving cash out might be the DSCR itself on this one. It's impossible for me to calculate without knowing your expenses for taxes/insurance but even with low estimates this deal would be DSCR constrained with only $1,800 in rent. Getting that extra $200 in your lease agreement could be the matter of 10s of thousands of dollars higher in loan amount. With only $1,800, it does not appear it could debt service at $230,000. However, it could possibly with $2,000 pending costs for taxes/ins. I'm doing some very quick math using a 30 year fixed rate in the low 7s.

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Alex BekezaBusiness Member
Lender · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
3y
@Jordan Holt DSCR loans absolutely allow for cash out. It's the most common transaction we do. In fact, the commercial bank is the only one likely to have any limiting guidelines pertaining to LTC/cash out. Most DSCR lenders don't care about loan to cost once seasoned and just go off of the appraised value and cash flow. The only thing that could stop you from achieving cash out might be the DSCR itself on this one. It's impossible for me to calculate without knowing your expenses for taxes/insurance but even with low estimates this deal would be DSCR constrained with only $1,800 in rent. Getting that extra $200 in your lease agreement could be the matter of 10s of thousands of dollars higher in loan amount. With only $1,800, it does not appear it could debt service at $230,000. However, it could possibly with $2,000 pending costs for taxes/ins. I'm doing some very quick math using a 30 year fixed rate in the low 7s.
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Brandon SturgillBusiness Member
Real Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes
3y
@Jordan Holt On the simplest level the debt service loan would be based on the income the property generates...I'm a little confused on the details...it sounds like the property is a single family that is not occupied?...if the property is not generating income, how would you get a DSCR loan?...and you also mentioned a commercial cash out re-fi...isn't it a residential property? Do you have other units collateralized?
Has your lender provided these two options to exit the hard money?
It sounds like this is a traditional cash-out re-fi...if its a SFR property you would be at whatever LTV your lender is offering...typically 70-80% on non-occupied...that changes if its your primary....and conventional lenders would be reluctant to re-fi a renovation project if you hold title in your LLC...if you could add some details to the project, debt structure and exit options it would help get to a more accurate answer.
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Mark MunsonBusiness Member
Lender · Orlando, FL · Member since 2022 · 440 posts · 300 votes
3y
Hi @Jordan Holt
To do a cash-out refinance into a DSCR loan and get the most back out (75% Loan to Value), you'd need to own it 6-months with most lenders. If you just want to pay off the previous HML, you would just be doing a rate and term refinance. Based on the figures you provided, your max loan amount would be $225k (assuming a $300k valuation), and that assumes the DSCR still works at that amount. To really be able to tell you the max loan amount, we'd need to know the taxes and insurance as well, also your estimated credit score. Feel free to reach out, I can walk you through the numbers and options.
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Mark MunsonBusiness Member
Lender · Orlando, FL · Member since 2022 · 440 posts · 300 votes
3y
Quote from @Brandon Sturgill:

@Jordan Holt On the simplest level the debt service loan would be based on the income the property generates...I'm a little confused on the details...it sounds like the property is a single family that is not occupied?...if the property is not generating income, how would you get a DSCR loan?...and you also mentioned a commercial cash out re-fi...isn't it a residential property? Do you have other units collateralized?
Has your lender provided these two options to exit the hard money?
It sounds like this is a traditional cash-out re-fi...if its a SFR property you would be at whatever LTV your lender is offering...typically 70-80% on non-occupied...that changes if its your primary....and conventional lenders would be reluctant to re-fi a renovation project if you hold title in your LLC...if you could add some details to the project, debt structure and exit options it would help get to a more accurate answer.

Just to clarify, you don't need to have a renter in place for a DSCR loan. It doesn't have to be generating income at the time of closing, or even be leased. An appraiser would determine the rent via a 1007 and the lender would use that to calculate the DSCR.
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Brandon SturgillBusiness Member
Real Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes
3y
@Mark Munson thanks for clarifying...is that across all DSCR loans and lenders? can you provide more info on the 1007? Most appreciated
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Jordan Holt
OP
Real Estate Agent · Birmingham, AL · Member since 2020 · 13 posts · 9 votes
3y
Quote from @Brandon Sturgill:

@Jordan Holt On the simplest level the debt service loan would be based on the income the property generates...I'm a little confused on the details...it sounds like the property is a single family that is not occupied?...if the property is not generating income, how would you get a DSCR loan?...and you also mentioned a commercial cash out re-fi...isn't it a residential property? Do you have other units collateralized?
Has your lender provided these two options to exit the hard money?
It sounds like this is a traditional cash-out re-fi...if its a SFR property you would be at whatever LTV your lender is offering...typically 70-80% on non-occupied...that changes if its your primary....and conventional lenders would be reluctant to re-fi a renovation project if you hold title in your LLC...if you could add some details to the project, debt structure and exit options it would help get to a more accurate answer.
So I’m just finishing the rehab up. I am about to list it for rent. So it’s not currently occupied, but should be somewhat shortly.

as for the debt structure my HML is currently at 11% and I have the loan for another 9 months if I want to keep it. However, I’d like to get my cash back to use on my next project. The loan would be in my LLC so commercial loan as in your standard 20yr am/5 year balloon.

I’m just still green enough (this will only be my 6th door) to be dangerous with what I know, but not be an expert. Does all that make sense?
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Brandon SturgillBusiness Member
Real Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes
3y
Thanks @Jordan Holt out of curiosity, have you done this strategy before?...if so, why not just repeat what happened on prior projects...its sounds like you have something working well.
When we were doing a lot of these deals it was delayed finance...with mixed results...the guys that were using HML and trying to exit were all getting burned with low appraisals on the back end...but at the end of the day it's all about the initial acquisition price of the property...buying at 50% of stabilized value seemed to always end well...
anyway, whatever decision you reach, I hope it works well. best of luck going forward.
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Jay HurstBusiness Member
Lender · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes
3y
Quote from @Jordan Holt:

Quote from @Brandon Sturgill:

@Jordan Holt On the simplest level the debt service loan would be based on the income the property generates...I'm a little confused on the details...it sounds like the property is a single family that is not occupied?...if the property is not generating income, how would you get a DSCR loan?...and you also mentioned a commercial cash out re-fi...isn't it a residential property? Do you have other units collateralized?
Has your lender provided these two options to exit the hard money?
It sounds like this is a traditional cash-out re-fi...if its a SFR property you would be at whatever LTV your lender is offering...typically 70-80% on non-occupied...that changes if its your primary....and conventional lenders would be reluctant to re-fi a renovation project if you hold title in your LLC...if you could add some details to the project, debt structure and exit options it would help get to a more accurate answer.
So I’m just finishing the rehab up. I am about to list it for rent. So it’s not currently occupied, but should be somewhat shortly.

as for the debt structure my HML is currently at 11% and I have the loan for another 9 months if I want to keep it. However, I’d like to get my cash back to use on my next project. The loan would be in my LLC so commercial loan as in your standard 20yr am/5 year balloon.

I’m just still green enough (this will only be my 6th door) to be dangerous with what I know, but not be an expert. Does all that make sense?

@Jordan Holt When did you buy the property? Seasoning is important to know. and 300k to 375k is pretty wide range but most DSCR products are going to allow cash out to 75% for a single family. (some will go to 80% but worse terms) Also, as mentioned above on DSCR to get favorable terms your rent will have to be higher then your payment, interest, taxes and HOA dues so that can be a limiting factor as well.
But, even if you cannot get out as much as you would like most DSCR loans (that is if you cannot qualify for conventional which would be even better) will give you better terms then a 20 yr am/5 yr balloon. They will be 30 year fixed, so 30 yr am so better cash flow and no balloon or adjusting rates.
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Eliott Elias
Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
3y
Commercial loans are what you want to target. The terms are better and it is a lot harder to qualify.
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Mark MunsonBusiness Member
Lender · Orlando, FL · Member since 2022 · 440 posts · 300 votes
3y
Quote from @Brandon Sturgill:

@Mark Munson thanks for clarifying...is that across all DSCR loans and lenders? can you provide more info on the 1007? Most appreciated

I wouldn't say all DSCR loans, just because I'm sure there are banks out there that may require a lease in place. However, I could name a ton that have the structure I mentioned. A 1007 is an appraisal rent schedule. They will determine the market rent by pulling rental comps, and the lender will use that figure to calculate the DSCR. If a property is unleased, this is likely going to be ordered. Also, unleased properties may have a .250% add on to the interest rate with some DSCR lenders.

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Stephanie P.Pro Member
Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
3y
Quote from @Jordan Holt:

I am just finishing up a rehab and its about time to get my hard money lender paid back, and get the money I put into the deal back out to rinse and repeat. The property is in my LLC and I am trying to figure out if I want to do a DSCR loan or do a commercial cash out refi. I don't really know much except the very basic things about a DSCR loan. Does it allow me to get cash back? Or just pay off the previous lender?
I am all in (including my own money) about 230K. ARV for this house should be at minimum 300K but the house directly behind it just sold for 375K about 5 months ago. Rent is probably $2,000 but worst case scenario I have no problem knowing that I could get $1800.
thoughts?

You're going to want to explore something at your six month mark of owning the property and you're going to want to explore a 40 year interest only. It appears to me, running the numbers, your rental amount is too low for your loan amount and you're going to come to the table with cash. Spreading the amortization over 40 years can put you where you need to be to make it work.
Stephanie
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