Questions about DSCR Loans

[Joshua Maffuccio]

Hello, first poster here!

I currently live in Southern California but am looking to dip my toes into real estate investing via purchasing a rental investment property in Kansas City (I have roots there, visit fairly often, have real estate connections there, etc.). I have a few questions related to DSCR loans that I'm not easily finding the answers to online so I thought I'd post some of them here to glean this community's insights. I understand that all answers come with qualifications and things need to be assessed on a case-by-case basis, but I appreciate your general advice!

1. Do you think it's best to work through a loan broker and if so, should I look for one that's local to the area I want to invest in? Note that  if this goes well, I would want to continue making deals there.

2. If I'm able to make a cash purchase, do you recommend stabilizing the property before seeking a DSCR loan i.e. is it better to use a DCR based on real rental income once the property is leased or based on a rent appraiser before leasing?

3. I'm confused about what exactly gets included in the operating expenses that are used in the DCR calculation - perhaps there's some variability? I know there are the obvious PITIA items but what about property management fees (I plan on using a property manager), maintenance/repair allowance, and vacancy allowance?

4. I understand that a DCR over 1 is expected (1.25 and above is best) but what if you're expecting that DCR to be say, .97 in year 1 but 1.05 in year 3, based on anticipating rental growth rates? Do DSCR lenders even look at projected DCRs or do they mostly just care about what they see at time of lending?

Thanks in advance!

[Robin Simon]

1. Do you think it's best to work through a loan broker and if so, should I look for one that's local to the area I want to invest in? Note that if this goes well, I would want to continue making deals there.

I don't think this is necessary in this day and age - plenty of direct lenders that can offer you good service and DSCR Loans for a wide variety of situations with competitive rates - easy to find here as well.  No real need to pay a broker fee if you are already ahead of the curve and have found/posted on BP!

2. If I'm able to make a cash purchase, do you recommend stabilizing the property before seeking a DSCR loan i.e. is it better to use a DCR based on real rental income once the property is leased or based on a rent appraiser before leasing?

Most DSCR Lenders will require the property to be rented for a refinance (or if used as an STR for example, have some STR history)  You may be able to find an option for refinancing prior to leasing, but it will make it more challenging and will likely need a "good reason" more than just speed

3. I'm confused about what exactly gets included in the operating expenses that are used in the DCR calculation - perhaps there's some variability? I know there are the obvious PITIA items but what about property management fees (I plan on using a property manager), maintenance/repair allowance, and vacancy allowance?

Common question - "DSCR Loans" are going to have DSCR be calculated as Rent/PITIA (no prop mgmt fees, vacancy/credit loss or any other expenses counted).  This is a big contrast from CRE dscr calcs that typically include all this and is calculated NOI/Debt Service.  For better or worse, this feature is one of the ways that make DSCR Loans popular with investors since the qualification metrics are typically easier than other options

4. I understand that a DCR over 1 is expected (1.25 and above is best) but what if you're expecting that DCR to be say, .97 in year 1 but 1.05 in year 3, based on anticipating rental growth rates? Do DSCR lenders even look at projected DCRs or do they mostly just care about what they see at time of lending?

DSCR Lenders will generally underwrite DSCR Ratio for a 30-year loan at a "go-forward" estimate of NOI thats generally looking at the next 12 months or first 12-months of the term.  While the DSCR calculation as noted above is a bit "aggressive" and looser by not taking into account many expenses, its somewhat balanced in that these are 30-year typically fixed rate loans where the rents should increase much more over the term than expenses (and largest typical cost - debt service - is locked in).  Thus, the DSCR Ratio will likely grow over time and this is why some DSCR Lenders will indeed lend on loans with a "sub-1.00x DSCR" which at first glance looks off.  One of the main scenarios where it does in fact make sense is your example - it might be negatively cash flowing in year 1 - but start cash flowing positively in years 2, 3 and then down the road years 5, 6, 7 (all the way to 30 is technically possible if no refi or sale) the DSCR can explode quite a bit higher

Also sharing links here to 11 articles published here on BiggerPockets all about DSCR Loans, hope these help as well!

DSCR Loans: What Are They And How To Get The Best Terms

https://www.biggerpockets.com/...

DSCR Loans: How To Use Pro Strategies To Save More And Make More

https://www.biggerpockets.com/...

Multifamily DSCR Loans: A New High-Impact Loan Option For Real Estate Investors?

https://www.biggerpockets.com/...

12 Frequently Asked Questions (And Answers) About DSCR Loans

https://www.biggerpockets.com/...

8 More Commonly Asked Questions and Answers to DSCR Loans

https://www.biggerpockets.com/blog/eight-questions-and-answe...

What Documents Do You Need for a DSCR Loan?

https://www.biggerpockets.com/blog/what-documents-do-you-nee...

BRRRR Loans: What Are the Options, and How Do DSCR Loans Stack Up?

https://www.biggerpockets.com/blog/brrrr-loans-what-are-the-...

Short-Term Rental Loans: What Are the Options and How Do DSCR Loans Stack Up?

https://www.biggerpockets.com/blog/short-term-rental-loans-a...

DSCR Loans: Terms to Know When Working With These Popular Rental Loan

https://www.biggerpockets.com/blog/dscr-loans-terms-to-know

What’s Next For DSCR Loans? Updates For 2024 and Beyond

https://www.biggerpockets.com/blog/what-is-coming-in-2024-fo...

What Are Current DSCR Loan Rates? Key Market Movers and How to Track Rates

https://www.biggerpockets.com/blog/2024-dscr-loan-rates-and-...