When Do You Consider DSCR Financing?

Question

For investors building a rental portfolio, what usually makes DSCR financing attractive for a particular property?

Is it the property's income, the overall portfolio strategy, qualification considerations, or something else?

What makes you consider DSCR over other financing options?

Stacy Raskin · Answer

Many real estate investors will consider DSCR financing for different reasons. Some of which being they don't want to or can't qualify off for a conventional loan off of their personal income or debt to income (DTI) ratios, they want a loan with significantly less paperwork, or they want to vest the property directly into an LLC.

Reasons why investors like DSCR loans because if the investor is working with the an experienced mortgage professional that specializes in DSCR loans, the investors will get different DSCR loan options, rates similar to conventional loans and also a loan that is likely to close as long as nothing weird comes back on the appraisal such as significant structural damage. That is without the real estate investor being asked for what can seem like endless amounts of paperwork on their personal income or other properties that they are not getting a loan on.

Ashish Acharya · Answer

Linda, I think the property’s income is probably the starting point, but I’d also look at what the financing is helping the investor accomplish across the portfolio. DSCR can be particularly useful when the property supports the debt based on its own rental income, but I’d still compare the full loan terms, cash required, reserves, prepayment terms, and long term financing strategy.

I’d also look at the tax side before choosing the financing. The interest expense, depreciation, and how the borrowed funds are used can all affect the property’s after tax return, so the lowest payment or easiest qualification is not necessarily the best overall structure. For me, DSCR makes the most sense when the property works on its own numbers and the financing fits the investor’s broader portfolio strategy.

Aaron Zimmerman · Answer

I’d generally say on properties that are 5 units or more on multifamily. Anything below that will qualify for conventional and I’d generally prefer conventional financing to dscr primarily due to locking in a rate for 30 years.

Mike Fisher · Answer

Good question, Linda. I will leave rates and loan terms to the lenders here and come at it from the management side, since that is where I see DSCR deals hold up or struggle after closing.

What makes it attractive: the loan qualifies off the property's rent instead of your personal income, which is why it tends to show up once someone has a few doors and their tax returns no longer tell the full story. It lets the portfolio grow on what each property earns.

The part I would add: the ratio the lender calculates is not the ratio you live with. Most DSCR math is rent against principal, interest, taxes, insurance and any HOA. It usually leaves out the things that actually move cash flow on a single family or small multifamily rental:

1. Vacancy and turnover. One turn can cost a month or more of rent plus the make ready, and it lands all at once.

2. Repairs and capital items. Roofs, furnaces and water heaters do not care what your coverage ratio was at closing.

3. Management. Even if you self manage, carry a management line, so the deal still works the day you hand it off.

So before I would get comfortable with a DSCR loan on a property, I would run my own version: rent, minus a vacancy allowance, minus a monthly reserve for repairs and capital items, minus management, then divide by the full payment. If that number still clears 1.0 with some room, the loan fits the property. If it only works at the lender's version, the property carries the loan on a good month and you carry it on a bad one.

Also worth checking the rent figure the appraiser uses against actual leased comps, not asking rents. A rent schedule that runs a little optimistic flatters the ratio on paper and nowhere else.

For context, I have personally managed rentals since 1991, and our company, M Property Group LLC (MF CashFlow), manages single family and small multifamily rentals in the south and southwest Chicago suburbs. Happy to compare notes with anyone working through this.

Jim Johnson · Answer

DSCR starts making more sense when the property cash flows well but conventional financing becomes the bottleneck, especially as the portfolio grows. At that point, qualifying more on the strength of the property can be useful. Rate, fees, prepayment terms and the cash flow left afterward still have to make sense though. Easier qualification doesn't automatically make it the better loan.

Ryan Flanagan · Answer

When you are churning through several deals a year and you have a good relationship with a DSCR lender, it starts to make a lot of sense. Turning over capital is the name of the game at that point and friction from borrower based underwriting starts to become a drag. You need a way to move from your fix and flip loan into a perm loan quickly to get on to your next deal.

That being said, you can't rely on a DSCR lender to keep you safe. As someone else said in their post, they don't account for many of the items that actually move cash flow. You need to do that math yourself. In my experience, DSCR lenders have been more than willing to put me in a loan that would made the property cash flow negative.

Wale Lawal · Answer

@Linda Murray

When it comes to myself, DSCR seems very good because the property can pay back the money by itself without having to rely on my income or anything else in the W-2. Rent, taxes, insurance and debt servicing would be done before the overall assessment of the loan.

Good luck!

When Do You Consider DSCR Financing?

When Do You Consider DSCR Financing?

Most Popular Reply

7 Replies