DSCR Terms to minimize cash investment

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DSCR Terms to minimize cash investment

Victor B.
Member since 2022 · 13 posts · 3 votes

Hi BP,

I'm just getting started with RE investment, and want to control my risk exposure by not throwing all my money on a single property and keeping some cash reserves. To that end, I'd be interested in getting a DSCR loan but am not really sure how to approach it. I feel like I need loan terms in order to plug in values to see what properties would be profitable, but at the same time I need example properties so I can go to a lender and ask for a loan. How does everyone here go about it?

I've got a few other questions:

1. How much cash (if any) does a lender expect from me? Supposing I could get a property at a low enough price to cashflow, could I get a 100% loan? Similarly, what would the maximum dollar amount be?

2. What rates are currently being offered? How much flexibility is there (and what would be within my control to influence)?

For the sake of discussion, suppose I found a property similar to the following:

Texas triplex, asking 300k and bringing in 3.8k/month with existing tenants. Building could use some renovation so room for further improvement as well. Assume taxes are 5.2k/annual, and PM company takes 10% = 380/month. Building is ~90 years old but relatively recently updated, so I don't think capex would be too high.

Assuming I could get a 30 year loan at 5% for 100% of the purchase price (we'll assume that my cash goes entirely to closing costs to simplify calculation), my DSCR calculation looks like the following:

DSCR = (EBITDA - Capex) / (Principal + Interest)

          = (3.8 - (5.2/12) - 0.38) / (1.61 + 0.1 + 0.245) // Principal + interest numbers taken from Zillow); all units in $1,000/month

          = 1.52


I know this doesn't account for capex, vacancy, etc, but even adding a $500/month buffer for that would put the DSCR at 1.27.

How good do these numbers look? Would lenders be salivating to throw money at me, or is this acceptable but not amazing, or uninspiring? Is there anything else I'm missing with these numbers (or is my calculation in any way incorrect)?

Thanks,

Victor

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Matthew CrivelliBusiness Member
Lender · MA · Member since 2021 · 1k+ posts · 1k+ votes
4y

Hi Victor,  

Let me answer some of your questions about DSCR loans and give you some insight on what the current market rates are looking like!

1. You will need around 30% of the total purchase price liquid (20% of that is the down payment) 100% is unrealistic. 

2. The rates are currently between 6% - 7% range and are expected to go higher. The better credit score you can bring to the table the lower the starting rate will be.

Assuming you put 20% down and had a loan amount of $240,000 this property would cashflow enough to qualify for a DSCR loan even at 7% interest. Your P-I-T-I payment would be somewhere in the ball park of $2,200 per month. Expect your DSCR lender to need to see somewhere in the ball park of 90k in liquidity to get you to the closing table.

[email protected]413-348-8346
Freedom Capital Funding, LLC523 Reviews
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  • Matthew CrivelliBusiness Member
    Lender · MA · Member since 2021 · 1k+ posts · 1k+ votes
    4y

    Hi Victor,  

    Let me answer some of your questions about DSCR loans and give you some insight on what the current market rates are looking like!

    1. You will need around 30% of the total purchase price liquid (20% of that is the down payment) 100% is unrealistic. 

    2. The rates are currently between 6% - 7% range and are expected to go higher. The better credit score you can bring to the table the lower the starting rate will be.

    Assuming you put 20% down and had a loan amount of $240,000 this property would cashflow enough to qualify for a DSCR loan even at 7% interest. Your P-I-T-I payment would be somewhere in the ball park of $2,200 per month. Expect your DSCR lender to need to see somewhere in the ball park of 90k in liquidity to get you to the closing table.

    [email protected]413-348-8346
    Freedom Capital Funding, LLC523 Reviews
    WebsiteView Page
    1Reply
  • Caroline Gerardo
    Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes
    4y

    1. What is real market rent

    2. use 7% 30 year fixed plus PITI and HOA vs rents

    3. You need cash reserves (big $)

    4. Generally you need 50 -20 % down depending on market price and rents

    0Reply
  • Stephanie P.Pro Member
    Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
    4y

    @Victor B.

    Hey Victor

    DSCR doesn't mean 100% financing by far.

    Typically, you're at 80% ltv on a purchase and 75% for cash out.  85% does exist, but anything above 75% is getting pricey.  Where prices were in the mid 4's for a 30 year fixed just a month ago, we're now looking at rates in the low to mid 6's. They can be bought down into the 5's by paying points.

    Cash flow for these loans doesn't take capex or vacancy loss or other factors like maintenance into the equation to compute the DSCR (unless it's something lender specific). It's simply if the mortgage is $1000 per month and the rent is $1200, you're at 1.2 DSCR.

    All the best and welcome to BP.

    Stephanie

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  • Victor B.
    OP
    Member since 2022 · 13 posts · 3 votes
    4y

    Thanks everyone for the warm welcome and for chiming in; the numbers are very helpful!

    Matthew: The ranges and outlook are super helpful, and I appreciate you confirming that 100% loan is unrealistic.

    Caroline: 20-50% is a huge range; is there a resource to get a ballpark of if a property falls closer to the 20% figure than the 50% figure? I'm sure it's entirely based on how risky the lender views the property, but as someone who isn't (yet) plugged in to as much data, it would be useful to be able to look up a rough estimate.

    Stephanie: Thanks for clarifying the calculation and the historical trend. I might be thinking of this the wrong way, but I would expect rent to grow faster and thus be more profitable than paying the points, but it's a great tip to keep in mind for future deals I look at.

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