DSCR-type Construction Loans?

Question

Any recommendations for lenders who have a loan product for a DSCR construction loan? We are purchasing land in OBX and have a great builder lined up to build us what should be a tremendous rental property.  The total cost of project is more than we can qualify for based on personal income, although our W2 income and credit score all work in our favor. Hoping to find a way to purchase myself rather than bring on an equity partner.

Andrew Postell · Answer

@Kevin Fowlks thanks for the post here. Guess this is one that I missed from 2 years ago - but basically construction loans don't work this way. Construction loans don't care about the properties income (DSCR loans do) but construction loans do care about you making the payments while the home is under construction and then REFINANCING out of the construction loan after the construction is complete. So, you would refinance into a DSCR loan if you were keeping the property type of thing. Just about all construction loans require construction experience too. Granted, I can't speak for all 8,000 lenders in the US here...but that's how the majority of construction loans work.

Hope some of that helps in some way.

Robert Ellis · Answer

we build at $174 per sq ft hard bid guaranteed. land is $10-$15 per sq ft. Entitlements are about $5 per square foot with permit sets. Resale we do urban core where rents are higher. We build single family too and larger assets we are in entitlements but we have a standard product for the triplex. we build 668 sq ft. our goal was the smallest two bed possible to create maximum rents per sq ft and max equity and lowest build cost. I have sold apartments in Columbus for 10 years. existing inventory in C and D areas are the same cost per square foot as suburban multifamily so I figured we have a shot at something and there's been plenty of demand. I'd recommend 3 story. check out the classifieds I have renderings of ours and floorplans

Robert Ellis · Answer

how are people letting new builds take 12+ months? we just built and sold a house and were on title for 4 months start to finish and it was sold during framing. we built it in 90 days. I can't believe that. whoever your builder is call them out

Anderson S. · Answer

I'm so glad that things worked out! Please share pics (if that's okay) of the build once it's done!

Jonathan Schwartz · Answer

@Andrew Postell and @Robin Simon were correct and a DSCR loan was not right for our project.  As an update though, we did move ahead and were able to secure a 1X close construction loan that automatically converts to a 30-year fixed rate.  We locked in at 6% about 16 months ago, which was fortunate.  The build has run longer than expected (shocking...) but the house should be finished in the next 2 weeks.

We were unable to use projected income to qualify for the loan, so I needed to bring on a partner for the project.  50% of something great is much better than 0% of a project I wouldn't have been able to do myself.

Kevin Fowlks · Answer

Thanks for the information. I built a SFH for STR towards the end of last year and it's giving me a 1.0 DSCR at the moment (This only works for me since it's in an OZ zone and it offset my W2). I'm looking to start a 2 or 3-unit project for LTR but can't seem to get the numbers aligned to get the DSCR without doing a stacked unit. What are you guys paying per sqft for per unit? I'm in the midwest by the way.

Robert Ellis · Answer

single family homes don't really work the best for DSCR. I'd build at least 3 units. the DSCR loans we underwrite get 1.6 debt coverage and because we build under 4 units they have so many exit strategies depending on which appraisal method goes for more.

Robert Ellis · Answer

ground up development is much more complex. I've seen 100 different structures. there's bigger players, more capital, a lot depends on the deal, track record, debt amount, returns, pitching to funds is way different. we separate construction financing and long term financing for the clients that build with us and help educate them. I'd say it's hard to get both. the best construction finances are on biggerpockets. we give 5-10 to our clients to consider and talk to whether they use them or not all the lenders know who we are and we form relationships with all of them. most are active on biggerpockets and can help get people out of construction even if they don't know anything

Robin Simon · Answer

This kind of doesn't make much sense since something under construction is not going to have cash flow - I'd check out hard money or "ground up construction" private lenders

DSCR-type Construction Loans?

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