DSCR Qualifications with Negative Cash-Flow

[Nick Coons]

I'm working on investing in Phoenix (just because I'm getting started again after years, so I don't want to complicate things by going long-distance). This is a high-appreciating market, which means finding properties that cash-flow positive is very difficult. Most DSCR lenders that I'm looking at require about a 1.2 ratio.

I'm content with the idea that if I purchase a rental property, rehab it, etc, that I might cash-flow negative for a couple of years. To me, that's still worth the other wealth-building characteristics of rental properties (appreciation, tax deductions through depreciation, mortgage pay-down, and future cash-flow). However, this seems like it would make it difficult to qualify for a DSCR-style loan since my ratio would be below 1.0. So here are my questions:

- When a DSCR-lender is looking at income/expense ratios, are they looking at just a single property individually, or are they looking at the business entity as a whole that owns the property. For instance, let's say that the property itself cash-flows negative, but the business entity that holds the property also has other sources of income.. which is the lender looking at?

- When calculating cash-flow, I'm taking everything into account. That is, not just holding costs (like PITI and utilities), but funds I'm putting aside for repairs, capital expenditures, vacancies, and management (even though I'll be self-managing). Is the lender looking at "expenses" the same way, or are they just looking at actual monthly outflow of cash?

It's possible that a DSCR-based loan may not be the best option, and I'm also fine with a conventional mortgage that uses my personal income, credit score, and DTI to qualify. I'm just exploring options.

[Kristen L Garner]

DSCR ratio calculations are monthly expenses (principal, interest, taxes, insurance, and HOA if applicable) divided by the rental amount that comes back in the appraisal. If the percentage comes in below 1% the loan can still be done, you just get hit with .5 points (might vary lender to lender). Rehab costs, PM costs, etc. are not included in the calculations. And we look at the property itself, not your business entity or investment portfolio. For my borrowers that are deciding between conventional and DSCR I usually run both scenarios so they can compare and make the decision that best suits their goals and strategies. If you are already working with a lender they should be able to do that for you as well.