A DSCR loan is great for rentals, but why don’t they work for flips?
DSCR loans definitely have their place in the real estate investor’s arsenal. But if you’re trying to do a fix and flip, this loan might not be the right fit for you.
How Does a DSCR Loan Work?
DSCR stands for Debt-Service Coverage Ratio and is a loan particularly suited for rental properties. Like any other traditional loan, a DSCR is able to fund up to 80% of the purchase price or appraisal, whichever is lower.
For example, if you have a $200,000 property, the DSCR will cover up to $160,000 (80% of the total purchase price). This leaves $40,000 left for you to cover on your own.
As mentioned above, this loan is very well-suited for properties that generate steady cash flow (like a rental), but they can be more difficult to work with in the fix and flip game.
Why You Shouldn’t Use DSCR for Flips
You Need to be Rent Ready to Get a DSCR
In order to qualify for a DSCR appraisal, a property must be rent ready. This creates a lot of hurdles in the fix and flip world since many flippers are doing more than basic cosmetic repairs.
DSCRs Have Prepayment Penalties
Most DSCR loans come with prepay penalties. These penalties typically come in 3- or 5-year plans. Again, in a rental market where you’ll be holding onto the property for longer amounts of time, you typically don’t need to worry about the prepay.
However, the fix and flip market moves quickly. DSCRs penalize investors who pay off these loans quickly, something fix and flip investors often work towards.
You’ll Pay More For Rehab
In addition to the remainder of the purchase price, DSCRs don’t cover renovation costs. This means that even more money will need to come out of your pocket.
Make Sure Your Loan Fits the Project
DSCRs are a great product for rental properties. However, if you’re looking at doing a fix and flip, take a look at other types of loans.
The most flexible loans are going to be hard money (also called private money) loans.
We have a ton of free tools on our website that can help you find the right loan to fit your project. We’re also happy to chat with you about any particular deals or questions you have.
Just reach out to us at Info@HardMoneyMike.com.