DSCR Loans: No Income to Qualify, But Worth It? (Rookie Reply)

19:55Tony:I think that was just because the market has changed. Like we definitely have seen a shift into a buyer's market where they thought they were going to be able to sell in February. So their comps were from December, January. And then now they're saying that what has sold recently is not what those properties were selling for six months ago.

20:18Ashley:But they also added that they said based on recent comps and our contractors finish quality. So like, I wonder what that part is about. You know, it's like, was it was it the scope that you guys collectively came together and the scope just wasn't strong enough to reach that 375? ARV? Or is it like, Hey, we had the right scope, but the contractor used cheap materials or maybe didn't do things the right way. Or yeah.

20:41Tony:Like I'm literally pitching like the trim, not like matching up completely, like not perfectly or like the tile isn't perfectly square, you know, like it's a little off center. That's, that's what I think at least as far as like finish quality. So what, on the point of the contractor told me is like, is there a contract in place? And is there any way to go after this contractor, whether it be in small claims court or to just sue this contractor because the property is not completed?

21:12Ashley:Yeah. And that's an option as well, or maybe another way to recoup some of the funds that you guys might lose on this deal. But I was with Dominique Gunderson, who we interviewed on the podcast recently. And I was asking her about her flips that she does in New Orleans because she's also remote. She's right now in California. All of her flips are in New Orleans. And I said like, hey, how's the market been for you? And she said, hey, it's also shifted for me. She's like, but what I found is that the way that I'm moving inventory is I'm pricing slightly lower than all of the other comps that I'm finding.

21:41Ashley:So if I have a comp at 300, I'm going to list it at 295. I'm going to list it to 290. And that's how she's been getting her inventory to move. So I think the lesson for a lot of our rookie investors right now is whatever comps you're seeing, because we know that we are moving maybe more so into a buyer's market, you have to decrement whatever those comps are by a certain percentage. Again, I was in OKC yesterday and I saw comps and I was not using those numbers as my ARV. I was knocking off$5 ,000,$10 ,000,$12 ,000 to try and make sure I had some cushion built in for whatever fluctuations the market might have.

22:16Ashley:And I didn't know that had I not talked to a more experienced flipper or had I not myself had flips that have sat for a long time. So I think you learn some of those as you go through the process.

22:26Tony:And Tony, we actually were lucky enough to have Dominique come to BPCon with us. She is actually on one of the how-to tracks that Tony and I put together. It's going to be her and James Daynard and James Daynard's project manager, Ryan. And they're going to be sharing all of their secrets to success for estimating rehabs and running construction projects like this. So if you're going to BPCon, make sure you attend that session. Also, if you guys, we want every rookie to attend BPCon. So if you guys need an extra discount to come, Tony and I have a couple secret codes. Go on Instagram, send us a DM.

23:05Tony:I'm at Wealth From Rentals. Tony's at Tony J. Robinson. Send us a DM and we'll see what we can do to hook you guys up so you guys can come hang out with us.

23:14Ashley:All right, Ash, let's finally answer this question for Chris. What should he do? He gave us a few options. If you're in his situation, what do you focus on? What are you going to do and why?

23:23Tony:I think my answer has changed over the years. At first, I never wanted to fail. I would grind and do whatever it took to finish it, even if it meant going at a loss. But now, I don't want to say give up, but I would not be so worried about finishing a project just to not be a failure that I didn't even finish it and I'm selling the flip uncompleted. I think that I would either sell the flip now, be done with it, get rid of it before you're putting more money into it. Or I would want to see the numbers a little bit more as it listed as a long-term rental. Because if it's a couple hundred dollars that you're losing in cash flow, however much it ends up being, if that's something you can manage for several years, is there an opportunity for it to appreciate a little bit more?

24:27Tony:Is there an opportunity to be able to refinance, to pull out more money? So I would also look at that as an option too.

24:36Ashley:I agree with you. I think the mindset piece here is super important. But looking at the options that he's laid out, selling as is, which is a 73K loss, refining and long-term renting, which is a 46K loss, negative cash flow. So the refinance and short-term and mid-term renting, still a 46K loss with an additional 12K, maybe even more. It's your first time doing it. You're probably underestimating how much it costs to furnish this thing. So that really comes out to, what is that, maybe almost a 60K loss if you refinance and short-term rent. In my mind, finishing it and selling it, even at a 27K loss, is probably the best approach.

25:10Ashley:Because at least you know you're done with the deal once you sell it. With all of these other options, what if something else goes wrong?

25:17Tony:Like Tony, this 27K, like to finish it and sell it, that is the least amount of money to lose. But how do you know that nothing else is going to go wrong between then and now? You know, like, I think that's like a big thing too, is like, what's, what's the risk going forward? And will that number actually stay the same? Because it's already changed so much too.

25:39Ashley:Yeah. So I think speed of finishing is probably important here as well. You know, and it's like, they say there's 75 % done, how much more time will it take to get that last 25%. So yeah, I mean, to me, it's smallest loss, potentially maybe the least amount of risk. But worst case, I mean, maybe you try and list it, see what happens. And the plan B is that you just refinance and sell, right?

26:01Tony:That idea is to like, try to sell it, see what happens. And then, but in the process, you know, start looking at what refinancing would look like so that if it doesn't sell and it sits, you're already in progress of getting that loan to refinance it and rent it out. Another thing too is it is mentioned like if he does refinance and hold it, he's putting at 46K loss. Technically, it's not a loss. It's just that your money is sitting in that deal and you're not pulling it back out. So I think that's another thing too is kind of change your mindset on that, that depending how long you hold that property, yes, you could still lose that 46K, but you could lose more than that and owe the bank, have to write a check to the bank at closing two years from now because it's worth even less.

26:52Tony:So because a tenant destroyed the property or something like that. So I think the numbers do come a lot into play as to what to do, but I also think about how successful do you think you'll be finishing the project? to sell it? If you do rent it out, what kind of headaches will come along with that? So there's also that mindset piece and why you got into real estate investing and what makes it worth it at this point.

27:16Ashley:All right, guys, coming up, we're going to answer the question of DSCR loans are really for beginner investors. We'll share our thoughts after one final word from today's show sponsors. But while we're gone, be sure to subscribe to the Real Estate Rookie YouTube channel. You can find us at Real Estate Rookie. And if you're on Instagram, we're at BiggerPockets Ricky, you can find us there. We'll be back with more after this. An Airbnb deal can look great on paper and still become an expensive mistake. B &B Calc makes the numbers prove the deal. Use B &B Calc's market map to browse over 10 million Airbnb and VRBO listings, compare cities by revenue and gross yield, spy on top operators, and build comp sets.

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32:35Ashley:I initially wanted to do a BRRRR, but since I'm not from the area, real estate agents are telling me I should maybe start out with a turnkey to get my foot in the door. Can I please have the BP community's thoughts on this? Is a DSCR loan worth it or does it depend on my strategy? I hate that my money will be stuck in the property though, hoping to get some insight. So I think first let's just define what is a DSCR loan. So a DSCR loan stands for debt service coverage ratio. So basically the bank is looking at how much revenue does the property generate and is that revenue enough to cover the debt service, aka the mortgage?

33:16Ashley:I believe this originated in commercial real estate, or at least that's where it's super prevalent. Because if someone goes out and buys a$100 million apartment complex, one person's not going to cover that mortgage. So the bank is looking at the property itself to gauge, can the property itself generate enough revenue to cover a$100 million purchase, a$100 million mortgage? And we've seen this DSCR loan make its way into single family investing as well. So that's what a DSCR loan is. It's looking at the property, not so much the individual to gauge whether or not it can cover the mortgage. So Ash, what are your thoughts?

33:53Ashley:Do you think that DSCR loans make sense for rookie investors? Are they too complex? What was your initial take?

33:59Tony:I think they are actually easier getting a DSCR loan because they don't care about you as much. So they're not going to go into, you know, let me see your mother's bank statement. Like sometimes when you get conventional lending on the personal side of like, where's every dollar coming from? And so I think it is easier to actually get those loans, especially if you're buying a property that has all the documentation, like if it already has a tenant in place, actually easier to do because with the DSER loan, they're going to want to see what the rental income is. And I've had the banks actually ask for the lease agreement, even though I don't even own the property yet.

34:42Tony:They want me to already have it rented before I close on the loan. So like sometimes I haven't gone that route because first of all, I don't want to commit mortgage fraud and make a fake lease agreement just to get this loan. And the second thing is, is I don't want to rent a unit to someone that I don't even own yet. So even a lot of lenders will say, yes, this is a very, very gray area as far as that the bank would ask that. So having a tenant in place is better if you're going to purchase a property that is you're going to use the DSCR loan. But I think one of the really big questions in here are the things we need to discuss is that the real estate agent is saying that this person should start out with a turnkey because they are not from that area.

35:28And Tony, in our first question,

35:30Tony:you literally proved that you do not need to be from an area to be able to do the BRRRR strategy, which is buy the property, rehab the property, rent out the property, refinance the property, and then repeat it. So I think that's the first thing is what strategy is for you. And Adrena, if you don't want to leave your cash into the deal and you want to be able to pull more of it out because you're doing the BRRRR strategy, instead of just putting down like a DSCR loan, it's probably going to be, you know, a 20 to 25, maybe even a 30 % down payment that you're going to leave in there until you sell the property or refinance the property if you want to pull that money back out.

36:14Tony:So I think if you want to do the birth strategy, talk to some of the contractors in that area. Ask the agents that you're working with for recommendations or maybe even find another agent that instead of saying you shouldn't do that can help you find a way to actually do that.

36:34Ashley:You bring up a really good point, Ashley. And I just kind of didn't even process for me that that was in the question as I was reading it. But I would encourage you, Andrina, agents are agents. They're not lenders. So I would go talk to as many lenders in whatever market it is in Ohio that you're considering and ask them what their loan products look like for BRRRR products or for BRRRR-type properties. And I was able to do my very first real estate deal as a remote BRRRR because I found an amazing banking partner who not only lent me the money that I needed for the construction, but they also sent someone out there to check in on the job to make sure it was getting done the right way.

37:09Ashley:So I agree with you, Ash. I think there's a lot of value in doing that. I don't know why a rookie would even have to necessarily use a DSCR loan to buy, even if it was a turnkey property. There are still other loan options out there that are non-DSCR. I think to Ashley's point, the application process is probably simpler and not as in-depth. but again, typically higher down payments, typically higher interest rates. So the cost of the debt is more. So if you're looking at the same deal and you can put a 15 % down loan, or you can put a 25 % down loan, the cost to acquire that deal is going to be different.

37:54Ashley:If you can get approved maybe conventionally, the interest rate is going to be lower versus the DSC alone. So your cashflow is better. So I think it's really weighing the pros and cons. I think the DSER starts to make a lot of sense when you are really focused on scaling and maybe your traditional banks are worried about DTI because you have so many mortgages going on and you're not showing enough income yet on your tax returns, whatever it may be. I think that's when the DSER has become maybe a little bit more attractive. But as a rookie investor, I would think that there may be cheaper options out there that you can use in that first deal to really get the most either in terms of cost to acquire the deal or the actual cash flow you get on a monthly basis.

38:31Ashley:So shop around. I think that's the biggest thing. to shop around and see which loan product makes the most sense for the deal that you find.

38:37Tony:Yeah. And even with the birth strategy, when you go and refinance, you can refinance into a DSCR loan. If you have a primary residence that maybe you're moving out of and you want to use your FHA loan again, you can refinance that primary residence into a DSCR loan. So you can go ahead and use that FHA loan product on another property for yourself that's going to be your primary. So there's still lots of ways to be able to use the DSCR loan besides just on the purchase of the property. Well, thank you guys so much for joining us today. If you guys have questions, head over to the BiggerPockets forums.

39:13Tony:Put your questions there. We pull them from there every single week. Thanks so much for joining us. I'm Ashley. He's Tony. And we'll see you guys next time.

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