DCSR, LLC, and Trusts

[Melissa Odom]

Hello,

I am new to real estate investing.  I currently have 3 LTR and soon will be remodeling a small family-owned shopping center in Wimberley, Texas.  My question is how can I leverage my 3 rental properties to cash out money for the remodel?  Doing a conventional loan for each property is out of the question due to my debt-to-income ratio.  I have recently been learning more about DCSR loans.  All three properties have positive cash flow - not a lot, but I am not losing money.  

One lender I have spoken with stated that the DCSR loans are not regulated. In my situation I can only borrow 70% of LTV. He also stated a 3% origination cost. Is this for all DCSR loans or can these items vary?

I have also been told by multiple people that I should create an LLC or Trust. Maybe one LLC for all 3 properties or one LLC for each property? And then I think you can put an LLC into the Trust. I know with conventional loans the property cannot be in a trust or LLC when you go to refinance. That seems to be different with a DCSR loan?

Just reaching out for some feedback from people with more experience than I have in this area.  

Thank you in advance for your time and information!

Melissa

[Brandon Beardt]

Quote from @Melissa Odom:

Hello,

I am new to real estate investing.  I currently have 3 LTR and soon will be remodeling a small family-owned shopping center in Wimberley, Texas.  My question is how can I leverage my 3 rental properties to cash out money for the remodel?  Doing a conventional loan for each property is out of the question due to my debt-to-income ratio.  I have recently been learning more about DCSR loans.  All three properties have positive cash flow - not a lot, but I am not losing money.  

One lender I have spoken with stated that the DCSR loans are not regulated. In my situation I can only borrow 70% of LTV. He also stated a 3% origination cost. Is this for all DCSR loans or can these items vary?

I have also been told by multiple people that I should create an LLC or Trust. Maybe one LLC for all 3 properties or one LLC for each property? And then I think you can put an LLC into the Trust. I know with conventional loans the property cannot be in a trust or LLC when you go to refinance. That seems to be different with a DCSR loan?

Just reaching out for some feedback from people with more experience than I have in this area.  

Thank you in advance for your time and information!

Melissa

DSCR loans are business purpose loans therefore there is much less documentation and red tape to deal with vs conventional financing. It also gives you the opportunity to be creative on how you want to vest/take Title (LLC vs Individual name). That being said, the trade off are higher fees and rates. The DSCR scenario you mentioned doesn't seem too far off depending on the full scenario. I would imagine you're capped at 70% LTV to make the DSCR work at whatever threshold that lender allows (typically 1.00x) or maybe it's a credit/FICO issue. 3% in origination also doesn't seem too far off depending on the loan amount. The lower the loan amount, the higher the origination percentage% is usually, however, as you asked - those items can vary greatly depending on the full scenario.

[Ross Francis]

Quote from @Melissa Odom:

Hello,

I am new to real estate investing.  I currently have 3 LTR and soon will be remodeling a small family-owned shopping center in Wimberley, Texas.  My question is how can I leverage my 3 rental properties to cash out money for the remodel?  Doing a conventional loan for each property is out of the question due to my debt-to-income ratio.  I have recently been learning more about DCSR loans.  All three properties have positive cash flow - not a lot, but I am not losing money.  

One lender I have spoken with stated that the DCSR loans are not regulated. In my situation I can only borrow 70% of LTV. He also stated a 3% origination cost. Is this for all DCSR loans or can these items vary?

I have also been told by multiple people that I should create an LLC or Trust. Maybe one LLC for all 3 properties or one LLC for each property? And then I think you can put an LLC into the Trust. I know with conventional loans the property cannot be in a trust or LLC when you go to refinance. That seems to be different with a DCSR loan?

Just reaching out for some feedback from people with more experience than I have in this area.  

Thank you in advance for your time and information!

Melissa

Melissa, 

Brandon is bang on when it comes to the DSCR product. Not much to add there.

If the concern is max cash out, you can cross collateralize the properties to cut down on costly processing fees.  The one caveat being that when it comes time to sell or refinance one of the properties there may be a partial release clause, causing you to pay the bank back more (120%) than the original loan on that particular property.

Happy to be a resource! 

[Robin Simon]

Quote from @Melissa Odom:

Hello,

I am new to real estate investing.  I currently have 3 LTR and soon will be remodeling a small family-owned shopping center in Wimberley, Texas.  My question is how can I leverage my 3 rental properties to cash out money for the remodel?  Doing a conventional loan for each property is out of the question due to my debt-to-income ratio.  I have recently been learning more about DCSR loans.  All three properties have positive cash flow - not a lot, but I am not losing money.  

One lender I have spoken with stated that the DCSR loans are not regulated. In my situation I can only borrow 70% of LTV. He also stated a 3% origination cost. Is this for all DCSR loans or can these items vary?

I have also been told by multiple people that I should create an LLC or Trust. Maybe one LLC for all 3 properties or one LLC for each property? And then I think you can put an LLC into the Trust. I know with conventional loans the property cannot be in a trust or LLC when you go to refinance. That seems to be different with a DCSR loan?

Just reaching out for some feedback from people with more experience than I have in this area.  

Thank you in advance for your time and information!

Melissa

Hi Melissa, welcome to BP - some great questions, I've actually published an 11-part (soon to be 12-part) series here on BP on all about DSCR Loans, linking below - hopefully this will help!

As for your initial questions:

One lender I have spoken with stated that the DCSR loans are not regulated. In my situation I can only borrow 70% of LTV. He also stated a 3% origination cost. Is this for all DCSR loans or can these items vary?

These items will vary from DSCR Lender to DSCR Lender and can also be determined by things like your credit score, property type and its DSCR ratio, etc. 3% origination cost is very high for DSCR as well unless you are essentially "buying down" the interest rate quite a bit (trading fees for a much lower rate over the life of the loan)

I have also been told by multiple people that I should create an LLC or Trust. Maybe one LLC for all 3 properties or one LLC for each property? And then I think you can put an LLC into the Trust. I know with conventional loans the property cannot be in a trust or LLC when you go to refinance. That seems to be different with a DCSR loan?

Yes, one of the big advantages that DSCR Loans have over conventional is that they are LLC-friendly and even friendly towards other entity types like corporations, partnerships, TIC or even most types of trusts! Unless you have a specific need for a trust, many DSCR borrowers just create one or multiple LLCs for the loans (this has gotten to a point where it is very easy and affordable to create LLCs, especially in TX)

BP-Published DSCR Guide!

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-...

[Drago Stanimirovic]

Hi Mellisa,

You're on the right track with DSCR loans to leverage your rental properties for the remodel. DSCR loans are ideal when your debt-to-income ratio is a concern, as they focus on the property's cash flow rather than your personal financials. The terms like the 70% loan-to-value (LTV) ratio and 3% origination fee you were quoted are standard but can vary depending on the lender. Some may offer better terms if your properties are cash-flow positive, so it's worth shopping around.

A key advantage of DSCR loans is their flexibility with LLCs and Trusts. Unlike conventional loans, DSCR loans typically allow you to hold properties in an LLC or Trust, providing liability protection. You could form a single LLC for all properties, which is easier to manage but carries shared risk, or you can create an LLC for each property, which offers better protection at the cost of more administrative work. Additionally, transferring properties into a trust for estate planning purposes is possible if needed.

To maximize your leverage, I recommend exploring multiple DSCR lenders for better terms and working with a real estate attorney to structure your LLCs for both protection and lender compliance.

Let me know if you’d like more details or assistance with financing!

Best,

Drago

[Melissa Odom]

Thank you for all the great information! Hearing from all of you with experience makes me feel more confident that this is the right way for me to go.

Thank you for sharing your knowledge!!!

[Dustin Tucker]

@Melissa Odom Hello Melissa, can you dm me your projects? We have the option to to get you funded up to 75% and at 50% less origination fees, I would need to know your fico, and rental list. Thanks

[Robin Simon]

Quote from @Melissa Odom:

Thank you for all the great information! Hearing from all of you with experience makes me feel more confident that this is the right way for me to go.

Thank you for sharing your knowledge!!!

 of course! Are you located in Kyle?  I would highly recommend joining some of the many meetups and networking events in Austin for real estate investors, very valuable exchanges of ideas in person as well

[Erik Estrada]

Quote from @Melissa Odom:

Hello,

I am new to real estate investing.  I currently have 3 LTR and soon will be remodeling a small family-owned shopping center in Wimberley, Texas.  My question is how can I leverage my 3 rental properties to cash out money for the remodel?  Doing a conventional loan for each property is out of the question due to my debt-to-income ratio.  I have recently been learning more about DCSR loans.  All three properties have positive cash flow - not a lot, but I am not losing money.  

One lender I have spoken with stated that the DCSR loans are not regulated. In my situation I can only borrow 70% of LTV. He also stated a 3% origination cost. Is this for all DCSR loans or can these items vary?

I have also been told by multiple people that I should create an LLC or Trust. Maybe one LLC for all 3 properties or one LLC for each property? And then I think you can put an LLC into the Trust. I know with conventional loans the property cannot be in a trust or LLC when you go to refinance. That seems to be different with a DCSR loan?

Just reaching out for some feedback from people with more experience than I have in this area.  

Thank you in advance for your time and information!

Melissa

 Hi Melissa, 

DSCR loan guidelines vary per lender and are always changing. Yes you can close in an LLC or Revocable Trust with a DSCR loan. If it's a layered LLC, most lenders will need to trace a warm body on the operating agreement which will involve a bit more paperwork trail. Most lenders will want to verify that the personal guarantor has at least 21-25% ownership in the borrowing entity.

Closing costs also very per lender so I would recommend asking for a loan estimate and looking at the bottom line. Also work with trusted lenders, look for reviews, etc .. since there are many unqualified loan officers pushing term sheets to get you to pay for an appraisal and switch the terms on you at the very last minute. Be careful, and happy to connect if you need help. 

[Costin I.]

@Melissa Odom - it's a pretty wild west territory with DSCRs, some allow LLC, some allow trusts, some require LLC, some not. The fees and conditions also can differ a lot, so you should try figure out first what kind of apple do you want (DP, LTV, rate) and then bring them to an apple-to-apple comparison to see which one gives you what you need for what cost (instead of accepting all the fruits that are on display from each different DSCR provider).

Resources used in education on DSCR:

https://www.biggerpockets.com/blog/dscr-loans-what-are-they

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

https://www.biggerpockets.com/blog/brrrr-loans-what-are-the-options-and-how-do-dscr-loans-stack-up

https://www.biggerpockets.com/blog/eight-questions-and-answers-to-dcsr-loans?

https://www.biggerpockets.com/blog/what-documents-do-you-need-for-a-dscr-loan?

https://www.biggerpockets.com/blog/dscr-loans-advanced-strategies

https://www.biggerpockets.com/blog/questions-and-answers-about-dscr-loans

https://www.biggerpockets.com/blog/eight-questions-and-answers-to-dcsr-loans

+

https://www.biggerpockets.com/forums/49/topics/1163069-using-chat-gpt-for-lender-conversations?

https://www.biggerpockets.com/forums/49/topics/1179403-dscr-loan-prepayment-penalties

https://www.biggerpockets.com/forums/50/topics/1165246-dscr-loan-options

https://www.biggerpockets.com/forums/853/topics/1180832-dscr-cash-out-refi-options

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

+

https://lendingone.com/our-rental-loans/

https://www.visiolending.com/dscr

[Carole Parker]

Hi Melissa, 
It's great to hear you're diving into real estate investing! I've actually been working with private money lending for a while now, and I've seen a lot of variations in terms and conditions. The 70% LTV and 3% origination cost you mentioned are typical, but they can definitely vary depending on the lender and the specific deal.

Regarding the LLC or Trust, you're right, it's a good idea to explore those options for asset protection and potential tax benefits. I've helped several investors structure their deals in a way that works for them, and I'd be happy to chat about how it could apply to your situation.

I sent you a connect request. Happy to collaborate with you!

[Doug Coup]

Quote from @Ross Francis:

Quote from @Melissa Odom:

Hello,

I am new to real estate investing.  I currently have 3 LTR and soon will be remodeling a small family-owned shopping center in Wimberley, Texas.  My question is how can I leverage my 3 rental properties to cash out money for the remodel?  Doing a conventional loan for each property is out of the question due to my debt-to-income ratio.  I have recently been learning more about DCSR loans.  All three properties have positive cash flow - not a lot, but I am not losing money.  

One lender I have spoken with stated that the DCSR loans are not regulated. In my situation I can only borrow 70% of LTV. He also stated a 3% origination cost. Is this for all DCSR loans or can these items vary?

I have also been told by multiple people that I should create an LLC or Trust. Maybe one LLC for all 3 properties or one LLC for each property? And then I think you can put an LLC into the Trust. I know with conventional loans the property cannot be in a trust or LLC when you go to refinance. That seems to be different with a DCSR loan?

Just reaching out for some feedback from people with more experience than I have in this area.  

Thank you in advance for your time and information!

Melissa

Melissa, 

Brandon is bang on when it comes to the DSCR product. Not much to add there.

If the concern is max cash out, you can cross collateralize the properties to cut down on costly processing fees.  The one caveat being that when it comes time to sell or refinance one of the properties there may be a partial release clause, causing you to pay the bank back more (120%) than the original loan on that particular property.

Happy to be a resource! 

[Doug Coup]

Melissa, not trying to hijack the post, but I am curious about cross collateral, as I own a 5 unit with a lot of equity and would like to buy using same bank, using the equity as a form of down payment and the new property income to justify a higher tha 75% loan. 

Is that how it works? What did you mean about 120%

[Craig Warner]

Hello, 

Perhaps your lender was talking about NonQm loans being unregulated? I wouldn't pay points unless you are trying to "buydown" the interest rate, which doesn't always make sense, depending on your length of ownership and "breakeven" time.

Properties held title in an LLC can offer protection from personal lawsuits, but we still require personal guarantees on our loans.

Let me know how I can be of service.

Thanks

Craig

[Kerry Baird]

@Doug Coup, welcome to BP. If your rate is low on the 5 unit, I might consider the possibility of a line of credit for my equity instead of an entire new mortgage. The rate is higher on a second mortgage. Perhaps ask at your current lender and see what they say, whether they have such a product. I see a fixed rate product advertised here on BP but not a HELOC type of product, where you can draw and repay on commercial property.

With the DSCR loans, the lender requirements will change from lender to lender. Some will go to 70% LTV and some will go all the way up to 85% LTV. I do have a portfolio loan that encumbers several SFRs, so that is a possibility…one origination fee, a bunch of appraisals and a new mortgage over a handful of properties. The mortgage I have in place has a waterfall prepayment penalty, so 5% penalty in the first year, 4% in the second year, 3%…and so forth.