How DSCR Loans Are Used in Multifamily Investing
Loans based solely on a property’s debt service coverage ratio can provide fast capital, but will this work for your multifamily portfolio? Find out more on our blog.
- So, What Is a DSCR Loan?
- Wait. What's DSCR?
- DSCR Calculator
- What Can DSCR Loans Be Used For?
- Comparing DSCR Loans With Standard Multifamily Loans
- What Are the Advantages of DSCR Loans?
- What Are the Disadvantages of DSCR Loans?
- What Are the Requirements for a DSCR Loan?
- When Should I Use a DSCR Loan?
- Are DSCR Loans Expensive?
- Eligibility Criteria for DSCR Loans
- How Do I Get a DSCR Loan?
- Related Questions
- Get Financing
In the world of multifamily real estate, there are many different types of loans that can be used to finance a property. One type of loan that is relatively common is a DSCR loan. In this article, we will take a closer look at DSCR loans and how they can be used to finance a multifamily property.
So, What Is a DSCR Loan?
A multifamily DSCR loan is a type of non-qualified mortgage loan that is based on the debt service coverage ratio, or DSCR, of an apartment building. A DSCR loan is typically used for commercial real estate, but it can also be used for certain personal or business needs.
Wait. What's DSCR?
A debt service coverage ratio, or DSCR, is a very common financial metric that is used to assess a borrower's ability to repay a loan.
The DSCR is calculated by dividing an asset’s net operating income by its annual total debt service, sometimes referred to as TDS. The NOI is the income that is generated from the property, minus any operating expenses. The TDS is the total amount of debt payments owed on the property, including any principal and interest payments, over the course of that year.
DSCR Calculator
Want to calculate your property's DSCR? Slot in your NOI and annual debt service into the calculator below.
What Can DSCR Loans Be Used For?
First of all, DSCR loans aren’t exclusive to the multifamily sector. DSCR financing is also present in most other commercial real estate sectors, including office, industrial, retail, and many others.
The loan’s purpose may be a limiting factor, though. Typically, a DSCR loan is used for an acquisition or refinance. Finding a DSCR construction loan, while technically possible, is extremely unlikely, due to the risks involved with projecting an unbuilt property’s future income.
Comparing DSCR Loans With Standard Multifamily Loans
DSCR loans may be a unique lending instrument, but they share some common elements with many other popular multifamily financing options. Let’s examine some pros and cons of DSCR loans below.
What Are the Advantages of DSCR Loans?
First, as mentioned above, DSCR loans can be used to finance a variety of different types of properties. This means that no matter how your portfolio is composed, there’s likely a possibility to use one of these financing options. And terms are flexible, too — some lenders may offer loans of up to 35 years, and shorter-term financing packages aren’t uncommon.
Second, DSCR loans are extended based not on a borrower’s financial strength but the expected earnings of the property itself — not unlike most CMBS loans. This greatly expands the pool of investors who can use this tool, and it also significantly speeds up loan approval and closing processes.
Third, a DSCR loan may offer a very competitive financing option for properties with very high debt service coverage ratios. As with any loan, the lower the risk to the lender, the better terms you’ll receive as the borrower. So, if you have a multifamily property with a DSCR above, say, 1.5x, you will receive far better terms than if your asset has a 1.2x DSCR.
Finally, a serious pro of DSCR loans is that they generally allow unlimited cash out. This could be particularly useful in the event of an unexpected or surprisingly large property expense.
What Are the Disadvantages of DSCR Loans?
First, DSCR loans are commonly — though not always — interest-only loans. While this may be a pro in terms of lower monthly payments, it brings a risk of going underwater on the loan should your property lose significant value.
Second, DSCR loans are usually, albeit not always, shorter-term loans. This can present a challenge if subsequent financing has not been lined up — as a potential balloon payment at the end of the loan’s term could be massive and something a borrower must adequately prepare for.
The maximum amount of a DSCR loan could be a major constraint. Most lenders don’t offer this type of financing for amounts higher than $5 or $6 million, though there are exceptions. That said, if you’re looking for a $15 million financing package, a DSCR loan probably isn’t a good option.
Finally, DSCR loans typically have higher interest rates than many traditional financing options, like Freddie Mac or Fannie Mae multifamily loans.
What Are the Requirements for a DSCR Loan?
The main eligibility criteria for a DSCR loan is the property’s debt service coverage ratio. Generally, DSCR financing is available for assets with a ratio of at least 1.25x. However, some lenders may offer financing for buildings with a DSCR of less than 1x, but these loans are usually more expensive and may require additional reserves.
When Should I Use a DSCR Loan?
You may wish to consider using a DSCR loan if you have some credit issues but are looking to finance a property with a strong DSCR. A strong DSCR indicates to a lender that the borrower has a good ability to repay the loan.
You should also consider DSCR loans when you need a loan fast. Because of the asset-focused risk assessment, this financing type closes far quicker than most other multifamily loans.
The good news is that DSCR loans typically aren’t constrained by asset type. As previous discussed, they can be used to finance a variety of different types of properties, from office buildings and retail assets to warehouses and small apartment buildings.
Are DSCR Loans Expensive?
DSCR loans typically have higher interest rates than many traditional financing options, like Freddie Mac or Fannie Mae multifamily loans. However, they can offer competitive financing options for properties with very high debt service coverage ratios.
Eligibility Criteria for DSCR Loans
The main eligibility criteria for a DSCR loan are surrounding, understandably, the property’s debt service coverage ratio. Broadly speaking, DSCR financing is available for assets with a ratio of at least 1.25x. Every lender is different, however, and some may even offer financing for buildings with a DSCR of less than 1x — but expect those loans to be far more expensive and may require additional reserves.
How Do I Get a DSCR Loan?
Not sure where to go for one of these loans? Or, not convinced this is the right type of financing for your needs? You’re not alone. DSCR loans can be a useful tool, but they certainly aren’t right for every investor in every situation.
That’s where we come in.
At Janover, we can connect you with any type of multifamily loan you need, including agency loans, bank financing, and, yes, even DSCR loans. Just fill in your details in the form below, and we’ll get back to you with a quote.
Related Questions
How do I qualify for a DSCR loan?
- You'll need to show that your property has a strong debt service coverage ratio in order to qualify for a DSCR loan. This ratio is a measure of your ability to repay the loan, and a strong ratio indicates to the lender that you're a good candidate for the loan.
What are the benefits of a DSCR loan?
- One of the main benefits of a DSCR loan is that they're typically quick to close. This is because the loan is based on the expected earnings of the property, rather than the borrower's financial strength. This can speed up the loan approval and closing process.
What are the disadvantages of a DSCR loan?
- DSCR loans generally have higher interest rates than many other traditional multifamily financing options. Also, the maximum loan amount rarely goes beyond $5 million or $6 million.
What is a DSCR loan?
A DSCR loan is a type of non-qualified mortgage loan that is based on the debt service coverage ratio, or DSCR, of an apartment building. A DSCR loan is typically used for commercial real estate, but it can also be used for certain personal or business needs.
The DSCR is calculated by dividing an asset’s net operating income by its annual total debt service, sometimes referred to as TDS. The NOI is the income that is generated from the property, minus any operating expenses. The TDS is the total amount of debt payments owed on the property, including any principal and interest payments, over the course of that year.
How do DSCR loans work in multifamily investing?
DSCR loans are a type of loan that is used in multifamily investing. They are based on the Debt Service Coverage Ratio (DSCR), which is a measure of a borrower's ability to pay back a loan. The DSCR is calculated by dividing the net operating income (NOI) of a property by the total debt service (principal and interest payments) of the loan. If the DSCR is greater than 1, the loan is considered to be in good standing. If the DSCR is less than 1, the loan is considered to be in default.
DSCR loans are typically used for multifamily investments because they provide a more secure form of financing than other types of loans. They are also more flexible than other types of loans, as they can be used for a variety of purposes, such as refinancing existing debt, purchasing a property, or making improvements to a property. Additionally, DSCR loans can be used to finance a variety of projects, such as new construction, renovations, and repairs.
If you are interested in obtaining a DSCR loan for your multifamily investment, you can contact Janover at www.multifamily.loans/contact-us/. They can provide you with a quote and connect you with the right type of loan for your needs.
What are the benefits of using a DSCR loan for multifamily investing?
DSCR loans offer a variety of benefits for multifamily investing. First, they can be used to finance a variety of different types of properties, and terms are flexible, with some lenders offering loans of up to 35 years. Second, DSCR loans are extended based not on a borrower’s financial strength but the expected earnings of the property itself, which greatly expands the pool of investors who can use this tool and speeds up loan approval and closing processes. Third, a DSCR loan may offer a very competitive financing option for properties with very high debt service coverage ratios. Finally, a serious pro of DSCR loans is that they generally allow unlimited cash out, which could be particularly useful in the event of an unexpected or surprisingly large property expense. Source
What are the risks associated with DSCR loans?
The risks associated with DSCR loans include going underwater on the loan should the property lose significant value, a potential balloon payment at the end of the loan’s term, a maximum amount of the loan that could be a major constraint, and higher interest rates than many traditional financing options.
Going underwater on the loan could occur if the loan is interest-only, which is commonly the case with DSCR loans. A balloon payment at the end of the loan’s term could be massive and something a borrower must adequately prepare for. The maximum amount of a DSCR loan is usually $5 or $6 million, though there are exceptions. DSCR loans typically have higher interest rates than many traditional financing options, like Freddie Mac or Fannie Mae multifamily loans.
What are the requirements for obtaining a DSCR loan?
The main eligibility criteria for a DSCR loan are surrounding the property’s debt service coverage ratio. Broadly speaking, DSCR financing is available for assets with a ratio of at least 1.25x. Every lender is different, however, and some may even offer financing for buildings with a DSCR of less than 1x — but expect those loans to be far more expensive and may require additional reserves.
Outside of assessing the property’s value, a lender will also examine the debt service coverage ratio, or DSCR, of any loan they extend. DSCR is a measure of a property’s cash flows relative to its debt service obligations. Essentially, using a DSCR calculation, a lender can determine if a property generates enough net income to cover its debt obligations. DSCR requirements vary by asset type, but the higher the better. Don’t expect to find many institutions willing to offer you a competitive loan at a DSCR of less than 1.25x.
What are the best strategies for using a DSCR loan in multifamily investing?
DSCR loans can be a great tool for multifamily investors, as they can provide access to capital without the need for a large down payment. However, it is important to understand the terms of the loan and the risks associated with it. Here are some strategies for using a DSCR loan in multifamily investing:
- Understand the terms of the loan and the risks associated with it. Make sure you understand the interest rate, loan-to-value ratio, and other terms of the loan.
- Make sure you have a good debt service coverage ratio (DSCR). A good DSCR will help you qualify for a loan and get the best terms.
- Make sure you have a good credit score. A good credit score will help you qualify for a loan and get the best terms.
- Make sure you have a good business plan. A good business plan will help you qualify for a loan and get the best terms.
- Make sure you have a good exit strategy. A good exit strategy will help you qualify for a loan and get the best terms.
- Make sure you have a good understanding of the market. A good understanding of the market will help you qualify for a loan and get the best terms.
At Janover, we can connect you with any type of multifamily loan you need, including agency loans, bank financing, and, yes, even DSCR loans. Just fill in your details in the form below, and we’ll get back to you with a quote.