DSCR Calculation in Multifamily with Upside

[Account Closed]

Hi everyone,

I have heard a lot about DSCR loans, which sound promising for several reasons (feel free to give your opinion if you think otherwise). However, I'm wondering how to manage the disconnect between the common >1.25 DSCR requirement and the investor's goal of acquiring properties with upside, meaning that it shouldn't start out with the best NOI at acquisition. Would a DSCR lender only look at what would be the current rent roll and expenses immediately after acquisition, or would the lender consider reasonable pro forma with upgrades/improved market rents?

Thanks for your input.

[Albert Bui]

Quote from @Account Closed:

Hi everyone,

I have heard a lot about DSCR loans, which sound promising for several reasons (feel free to give your opinion if you think otherwise). However, I'm wondering how to manage the disconnect between the common >1.25 DSCR requirement and the investor's goal of acquiring properties with upside, meaning that it shouldn't start out with the best NOI at acquisition. Would a DSCR lender only look at what would be the current rent roll and expenses immediately after acquisition, or would the lender consider reasonable pro forma with upgrades/improved market rents?

Thanks for your input.

 HI Henry,

Cool to see you're across the lake.

Regarding DSCR, its important to identify which exact DSCR product you're referring to. If its the gross rental income DSCR products (not a true commercial DSCR that bank loans or multi-family 5+ will use) then you're using the appraisers market gross rental opinion (form 1007 or 1025 in appraisal world) or the property's current leases whichever is the lesser/lowest.

These DSCR products are harder to do in seattle area because the RV or rent to value ratio is lower around .4% per month (gross rents relative to value/price) approximately.

To get around DSCR min's you can use 5/6 ARM interest only DSCR products that qualify off interest only which makes the caluclation easier to work out because the calculation is that the gross rents need to be .85 or greater than the monthly mortgage payment (PITIA).

PITIA = principal, interest, taxes, insurance, assessments (think HOA dues or etc)

When the Gross rents are .85 or 85% of the monthly mortgage PITIA you hit the min qualification.

Your DSCR pricing/rate will be a lot better if you get to 1:1, or 1.00x, or said in another way when the gross monthly income is equal to the monthly PITIA payment or better most lenders will provide better rates. I've seen lenders lead with with their pricing at 1.00 or 1.25X (1.25:1) but they know they're in an area that is not going to have that pricing which I find a bit unethical but hey its not illegal right? lol

There is a definite advantage to use DSCR products and its important to incorporate all loan products into your tool box including conventional, DSCR gross income products, private/hard money, actual commercial DSCR product, or other alternate doc products so that when the need arises you'll be using the most efficient tool for the job.

The downside I see for these gross income DSCR products are that they typically have 3-5 year PPP or prepayment penalities and you can raise your rate or pay points to get rid of them but you gotta be careful with those. If you dont intend to be in your loan for that duration of time and you're about to pay it off or refinance and find out you have to pay 5 points on the way out you'll not be too happy either (IE if you owe 500k your payoff would be 525k at payoff with 5 pts on the way out). On the other hand sometimes you know you're going to be in a loan for more than 3 years till you clean up your taxes or credit so taking on PPP actually might improve your rate .25-.75% so you might actually add on PPP for 3 years as a strategic choice to lower your month to month debt service or payments.

The main pros of the gross income DSCR products is that it can let you qualify purely off the property's gross income and ignore all your other liabilities in the qualification equation. So if you have lots of other liabilities (other rental properties negatively cashflowing on "paper," other credit cards, housing expenses for yourself, car loans, student loans, etc) you can use DSCR gross income product and bypass all these entanglements and still obtain financing.

Hope that helps.

@Matthew Kwan

@Carlos Valencia