DSCR Terms to minimize cash investment

[Victor B.]

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

[Matthew Crivelli]

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.