Seeking DSCR lender to scale my specific long term rental strategy

[Brian Joseph OConnor]

I closed on my first deal back on 10/16/24 so I'm a newbie. This deal was found on MLS and is a new construction 4/3.5 SFH with DADU and I purchased on n FHA owner-occupied loan. I only brought 3.5% down to closing and the seller paid 3% CCA which I used to buy down my rate to 4.8%. I'm house hacking living in the DADU and renting the 4 bedrooms out by the room. I had no trouble filling my rooms and the house appreciated for $10K over purchase price, the tenants are paying utilities. I'm cash flowing $1100/month. So even though I'm new I've seen enough to know I want to scale this new construction/build to rent by the room strategy in my market. I'm not renting to students! My property is in a depressed area walking distance to the largest employer in the area which is a shipyard. The area is loaded with men on 1-2 year contracts who have homes some where else and they just need 1-2 years of safe, clean, comfortable housing and the only other option is seedy hotels.

That being said, I approached a local DSCR lender who refuses to look at my specific rental strategy in underwriting. The lender actually said he will only underwrite my property as a single renter long term rental based on comps. So I did that and my property revenue cannot service the debt but using my strategy I'm cash flowing $1100/month after PITI on a new construction home under warranty. The lender seems to believe that the only rent by the room strategy that exists is renting rooms to college students and his quote to me was "more people, more leases, more problems".

What do I know?? But my 4 renters are in there 30's-50's and work 50+ hours / week building naval ships and submarines and they enjoy being close enough to walk to the shipyard and coming home to a brand new house with all the modern upgrades. My house has no vacancies and other guys are constantly calling and inquiring about rooms available. I'm not really "pitching an idea" as much as I'm wanting to scale up something that is untapped and ready to roll. My builder has 4 houses in the area already built and on MLS but I can't deploy another owner occupied mortgage for another 11 months.

A DSCR would be perfect for me because I have funds for down payment, I have good enough credit and my strategy has proven to do a lot more than just service the debt.

Does anyone know of any good DSCR lenders that I could contact?

Thanks,   Brian

[Erik Estrada]

Hey Brian, 

Most DSCR lenders will underwrite based on Long-Term and Short-term Rents. There is no Mid-Term or a Rent by the Room style loan as of yet.

There are a few DSCR lenders that will allow you to operate a rent by the room strategy as long as the strategy makes sense, and no one related to you is one of the tenants. Unfortunately you will have to qualify using market rents, if you want the better rate. Otherwise, you will need to do a no ratio DSCR loan, which will allow you to purchase or refinance at 75% LTV however the rate will be pretty high.

[Devin Peterson]

Quote from @Brian Joseph OConnor:

I closed on my first deal back on 10/16/24 so I'm a newbie. This deal was found on MLS and is a new construction 4/3.5 SFH with DADU and I purchased on n FHA owner-occupied loan. I only brought 3.5% down to closing and the seller paid 3% CCA which I used to buy down my rate to 4.8%. I'm house hacking living in the DADU and renting the 4 bedrooms out by the room. I had no trouble filling my rooms and the house appreciated for $10K over purchase price, the tenants are paying utilities. I'm cash flowing $1100/month. So even though I'm new I've seen enough to know I want to scale this new construction/build to rent by the room strategy in my market. I'm not renting to students! My property is in a depressed area walking distance to the largest employer in the area which is a shipyard. The area is loaded with men on 1-2 year contracts who have homes some where else and they just need 1-2 years of safe, clean, comfortable housing and the only other option is seedy hotels.

That being said, I approached a local DSCR lender who refuses to look at my specific rental strategy in underwriting. The lender actually said he will only underwrite my property as a single renter long term rental based on comps. So I did that and my property revenue cannot service the debt but using my strategy I'm cash flowing $1100/month after PITI on a new construction home under warranty. The lender seems to believe that the only rent by the room strategy that exists is renting rooms to college students and his quote to me was "more people, more leases, more problems".

What do I know?? But my 4 renters are in there 30's-50's and work 50+ hours / week building naval ships and submarines and they enjoy being close enough to walk to the shipyard and coming home to a brand new house with all the modern upgrades. My house has no vacancies and other guys are constantly calling and inquiring about rooms available. I'm not really "pitching an idea" as much as I'm wanting to scale up something that is untapped and ready to roll. My builder has 4 houses in the area already built and on MLS but I can't deploy another owner occupied mortgage for another 11 months.

A DSCR would be perfect for me because I have funds for down payment, I have good enough credit and my strategy has proven to do a lot more than just service the debt.

Does anyone know of any good DSCR lenders that I could contact?

Thanks,   Brian

Brian, although your strategy is fantastic and makes sense for you. It's not a traditional bank underwriting approach. I come across this issue 10 times a day. Folks will generally have a fantastic rental strategy but they don't fit the lense of regular guidelines. You have to find a way to implement your game plan within the confines of either an LTR or STR DSCR underwrite assumption. Reasoning being is because simply put, the bank is not you. You are you, and only you can create these proforma figures based on the way you intend to stabilize an asset. A lender will use market data, conservative comps, and always side on the fence of "what if" - as in, what if they have to default you and take over the property? hence, your strategy is good for you but doesn't make sense in an economic stress test to a lender. With that being said, there are creative ways to scale SFH or MF home rental still sufficiently. happy to connect and strategize if you have any DSCR or investment-specific Q's. Good luck!

[Patrick Roberts]

This is going to be very hard to finance. Boarder income/rent by the room is frowned upon by most lenders. It would likely be just as easy to get a commercial loan for a motel/condotel for what you're trying to do. As someone else mentioned, you'll likely need a no ratio DSCR, which will not be pretty.

One last word of advice - watch your concentration risk. If you invest heavily into building a portfolio of these and then something happens that downsizes/closes the shipyard, things could go from great to horrible very quickly. Make sure you have a plan B and build resiliency into the portfolio. 

[Robin Simon]

Quote from @Brian Joseph OConnor:

I closed on my first deal back on 10/16/24 so I'm a newbie. This deal was found on MLS and is a new construction 4/3.5 SFH with DADU and I purchased on n FHA owner-occupied loan. I only brought 3.5% down to closing and the seller paid 3% CCA which I used to buy down my rate to 4.8%. I'm house hacking living in the DADU and renting the 4 bedrooms out by the room. I had no trouble filling my rooms and the house appreciated for $10K over purchase price, the tenants are paying utilities. I'm cash flowing $1100/month. So even though I'm new I've seen enough to know I want to scale this new construction/build to rent by the room strategy in my market. I'm not renting to students! My property is in a depressed area walking distance to the largest employer in the area which is a shipyard. The area is loaded with men on 1-2 year contracts who have homes some where else and they just need 1-2 years of safe, clean, comfortable housing and the only other option is seedy hotels.

That being said, I approached a local DSCR lender who refuses to look at my specific rental strategy in underwriting. The lender actually said he will only underwrite my property as a single renter long term rental based on comps. So I did that and my property revenue cannot service the debt but using my strategy I'm cash flowing $1100/month after PITI on a new construction home under warranty. The lender seems to believe that the only rent by the room strategy that exists is renting rooms to college students and his quote to me was "more people, more leases, more problems".

What do I know?? But my 4 renters are in there 30's-50's and work 50+ hours / week building naval ships and submarines and they enjoy being close enough to walk to the shipyard and coming home to a brand new house with all the modern upgrades. My house has no vacancies and other guys are constantly calling and inquiring about rooms available. I'm not really "pitching an idea" as much as I'm wanting to scale up something that is untapped and ready to roll. My builder has 4 houses in the area already built and on MLS but I can't deploy another owner occupied mortgage for another 11 months.

A DSCR would be perfect for me because I have funds for down payment, I have good enough credit and my strategy has proven to do a lot more than just service the debt.

Does anyone know of any good DSCR lenders that I could contact?

Thanks,   Brian

 What is the leasing situation like - how long are these leases?  Also, have you made any significant alterations to the property or if it were put on the market today, would it be indistinguishable from a standard 4-bedoom house (are there any extra walls for the SRO, constructed locks/barriers etc.)

If its a standard SFR and the leases are very short term - there is a path that you could refinance this with a DSCR as basically a Short Term Rental and then potentially change strategic course back to SRO if needed at a later date

[Scott Wolf]

Quote from @Brian Joseph OConnor:

I closed on my first deal back on 10/16/24 so I'm a newbie. This deal was found on MLS and is a new construction 4/3.5 SFH with DADU and I purchased on n FHA owner-occupied loan. I only brought 3.5% down to closing and the seller paid 3% CCA which I used to buy down my rate to 4.8%. I'm house hacking living in the DADU and renting the 4 bedrooms out by the room. I had no trouble filling my rooms and the house appreciated for $10K over purchase price, the tenants are paying utilities. I'm cash flowing $1100/month. So even though I'm new I've seen enough to know I want to scale this new construction/build to rent by the room strategy in my market. I'm not renting to students! My property is in a depressed area walking distance to the largest employer in the area which is a shipyard. The area is loaded with men on 1-2 year contracts who have homes some where else and they just need 1-2 years of safe, clean, comfortable housing and the only other option is seedy hotels.

That being said, I approached a local DSCR lender who refuses to look at my specific rental strategy in underwriting. The lender actually said he will only underwrite my property as a single renter long term rental based on comps. So I did that and my property revenue cannot service the debt but using my strategy I'm cash flowing $1100/month after PITI on a new construction home under warranty. The lender seems to believe that the only rent by the room strategy that exists is renting rooms to college students and his quote to me was "more people, more leases, more problems".

What do I know?? But my 4 renters are in there 30's-50's and work 50+ hours / week building naval ships and submarines and they enjoy being close enough to walk to the shipyard and coming home to a brand new house with all the modern upgrades. My house has no vacancies and other guys are constantly calling and inquiring about rooms available. I'm not really "pitching an idea" as much as I'm wanting to scale up something that is untapped and ready to roll. My builder has 4 houses in the area already built and on MLS but I can't deploy another owner occupied mortgage for another 11 months.

A DSCR would be perfect for me because I have funds for down payment, I have good enough credit and my strategy has proven to do a lot more than just service the debt.

Does anyone know of any good DSCR lenders that I could contact?

Thanks,   Brian

 Hey Brian,

Congrats on the success! One issue that I have not seen addressed, is the cost of the home, which will greatly affect your cash flow. A DSCR Loan will carry a much higher rate than 4.8% and will most likely need a greater down payment. Make sure you run your numbers higher. Always happy to discuss stratgey.

[Stacy Raskin]

I've seen short term rentals and long term rentals financed by DSCR loans but not by the room income. Is it possible to cover your mortgage taxes and insurance through what the average market amount is in the area? If the property is vacant, most lenders will use the rent schedule that the appraiser will prepare as part of the appraisal process. So if the appraiser determines for example that the average rental amount for the area is $1,500 then the mortgage, taxes and insurance (and HOA if applicable) need to be at or under $1,500 to get the most favorable terms.

Another option depending on where you invest is to use the AirDNA profile and a lender will underwrite if the occupancy rate is high enough. Many lenders will deduct 5% so if the maximum for the borrower's credit profile is 80% LTV, the lender will only lend 75% for a short term rental.

In case helpful the below covers more about how DSCR loans are structured. DSCR loans won't use your income to underwrite the loan. DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.

Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 760-780+ generally gets best pricing for investment property loans with most lenders. From there every 20 point increment affect pricing differently. So for example, a 761 credit score will be in the 760-779 credit category, then going down to 740-759 and so on.

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.

4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs.

I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350, Insurance = $100, Association Dues = $50

Total PITIA = $2200

Rent = $2000

DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250, Insurance = $100, Association Dues = $25

Total PITIA = $1875 Rent = $2300

DSCR = Rent/PITIA = 2300/1875 = 1.23

If a purchase, you also generally need reserves / savings to show you have 3-6 month payments of PITIA (principal / interest (mortgage payment), property taxes and insurance and HOA (if applicable). If a cash out refinance, many lenders will allow the cash out to satisfy the reserves requirement.

DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.

Happy to connect to discuss further.