Do any DSCR lenders appraise based on rent?

Question

My understanding is that DSCR appraisals are on the basis of market rent and property value based on comps. Do any DSCR lenders appraise on the basis of ACTUAL rent?

I ask since a property we're purchasing is going to be leased to a group home organization, and if we were to get the home appraised after a seasoning period, we could refinance and pull our down payment out. Any tips on how to find a lender that would work with this are helpful.

Nate Herndon · Answer

Good morning @Michael Caldwell - I think I know what you are asking.

Question: Are there lenders that will use the actual in-place rents (that are higher) for your underwriting of DSCR instead of using the lesser of market rents vs. in-place rents? The reason this is preferred is because your group-home rents will be much higher than the long-term market rent on a 1007 appraisal.

Answer: Nearly all residential 1-4 unit DSCR loan programs will utilize the lesser of 1007 market rents and in-place rents. However, there are multiple programs that I utilize for my clients that give a savvy investor extra credit if the market rents fall below in-place rents - that extra credit comes in the form of 110% of the market rent being used for underwriting.

Example would be $1,200 actual rents vs. $1,000 market rents: the useable income for underwriting would be 110% of market rent, or $1,100. Not quite the $1,200 you are pulling in actuality, but it's helpful. Pair that 110% with a 1.00 DSCR minimum and you will likely achieve the loan you are looking for.

Now, the group-home aspect is another story. Many residential DSCR programs would like the property to be leased to an individual using it for long-term rental purposes. Leasing to an entity or for the purposes of a group home or business or something other than a standard long-term rental is usually a no-go. The easiest route here would be to refinance as a vacant BRRRR at the shortest available seasoning of 90 days, before the property is leased out for your other purposes. The catch here is that the vacant refinance will utilize those market rents only, with no extra credit to be given since it vacant.

Allan Smith · Answer

Lenders almost never appraise anything. The appraiser does. So I think what you're asking here is how an appraiser would value your property.

if it's five or more units, it is quite likely the appraisal would be based on cash flow and Rental income. If it's a single family home, those are typically valued by similar houses that sold in the area. This one does have a little bit of gray area because it seems to have a bit of a commercial use.

If you know any appraisers, you could try asking them to get an idea.

Erik Estrada · Answer

This will depend on the property type.

If it's a 1-4 Unit, Appraisers will use the sales comparison approach to determine the value of the property.

If it's a 5+ Unit, Commercial property, appraisers will value the asset based on income.

Simmy Ahluwalia · Answer

@Michael Caldwell - everyone is correct above on the explanation and application of DSCR; however, this is NOT going to apply to your deal scenario.

Since this commercial property (assuming it's zoned commercial) is going to be leased to a Group Home, now you will technically be in a single tenant net lease scenario. If the property is not zoned commercial, then you cannot have this tenant operating a Group Home. You need to check with your planning/zoning department.

Stacy Raskin · Answer

Some lenders use the lesser of the actual rents or the rent survey done by the appraiser. If vacant, the rent survey will be used to structure if a DSCR loan.

DSCR loans won't use your income to underwrite the loan.

DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.

Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 760+ generally gets best pricing for investment property loans with most lenders

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.

4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs.

I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350, Insurance = $100, Association Dues = $50

Total PITIA = $2200

Rent = $2000

DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250, Insurance = $100, Association Dues = $25

Total PITIA = $1875 Rent = $2300

DSCR = Rent/PITIA = 2300/1875 = 1.23

DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.

Robin Simon · Answer

This is generally accurate - the value is going to be derived based on the "market" of buyers - since most buyers of SFR are owner-occupants and not basing price on rental potential, rents aren't going to be the source of value. That flips as you add units, anything 5+ for example the market for buyers is near 100% pure investor - so value will be mostly determined by rental potential (cap rate)

Devin Peterson · Answer

Hi Michael, this depends on which lender you ultimately choose to use. Most of the times, a lender will use the lesser of actual rent or market rent in a DSCR calculation. Reason for doing so is that because they base the risk off of worst case scenario under the idea that they would have to take over the property if you were to foreclose, how much of a difference is your lease between the market rent? Are you charging way above market?

Do any DSCR lenders appraise based on rent?

Do any DSCR lenders appraise based on rent?

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