Are you looking for financing options to fund your midterm rental property investment? Projection-based loans or DSCR loans may be a suitable option for you. In this article, we will discuss what DSCR loans are and how they can help you fund your property investment.
What are DSCR loans?
Debt service coverage ratio (DSCR) loans are a type of loan that evaluates the cash flow of a rental property to determine its ability to cover its debt obligations. Lenders use the DSCR ratio to evaluate the risk of lending money to a borrower for their rental property investment. The DSCR ratio is calculated by dividing the net operating income (NOI) of the rental property by its total debt service.
Using projections to qualify for DSCR loans
One of the challenges of using DSCR loans for midterm rentals is the lack of projected midterm rental income. However, according to the video transcript, lenders can use a tool like AirDNA to estimate the gross revenue of the rental property. By running the numbers through the AirDNA tool, lenders can use the projected short-term rental income as the basis for the DSCR ratio.
If there is no projected midterm rental income, lenders can use the long-term rental rate to calculate the DSCR ratio. Some lenders are willing to go below a DSCR ratio of 1.0 and even as low as 0.5, but this limits the loan-to-value (LTV) ratio to around 65%. If the DSCR ratio is 0.8 or below, the LTV ratio is limited to 65%.
Stabilized Bridge loan as an alternative
Another option for financing midterm rentals is a stabilized bridge loan. A stabilized bridge loan allows you to finance the property quickly without using the DSCR ratio calculations. Once the property is stabilized, you can refinance it at a lower interest rate. This option allows you to finance up to 75% of the property value.
Working with a lender who knows how to navigate midterm rentals
Although there are no specific programs for midterm rental properties, there are lenders who are familiar with navigating these types of investments. By working with a lender who specializes in midterm rental financing, you can get the best options available for your investment.
Conclusion
Projection-based loans or DSCR loans can be a suitable option for financing midterm rentals. By using projected short-term rental income or the long-term rental rate, you can qualify for a DSCR loan. Alternatively, you can opt for a stabilized bridge loan to finance your property quickly and then refinance it at a lower interest rate once it is stabilized. By working with a lender who understands the nuances of midterm rentals, you can get the best financing options for your investment.