Purchase a Multi-Unit Property with a DSCR

Are you considering buying a multi-unit property, like an apartment building, but want to avoid the hassle of personal income verification? A Debt Service Coverage Ratio (DSCR) loan could be the solution for you. Today we will be discussing how using a DSCR loan to purchase a multi-unit property can get you on the right track! 

What is a DSCR Loan?

A DSCR loan is a type of financing that focuses on the income of the property you’re buying rather than your personal income. It’s perfect for investors who want to streamline the process, especially if their personal financials aren’t ideal. With DSCR loans, lenders look at the property’s cash flow compared to its expenses. If the property brings in enough income, you’re good to go!

Example:

If your property expenses are $1,000 per month, your rental income should be at least $1,200 to meet the typical DSCR of 1.2. That means your income is 120% of your expenses.

Can You Use a DSCR Loan for Multi-Unit Properties?

Yes! While DSCR loans are often associated with single-family homes or duplexes, they can also be used for multi-family buildings with five or more units. Whether you’re looking at a small apartment building or a larger complex, the loan works the same way, focusing on the property’s income.

However, keep in mind that for commercial properties like this, there are a few differences:

• Loan Size: For multi-unit properties, DSCR loans typically start at around $1 million. If you’re looking for something smaller, this might not be the best option.
• Loan Terms: You can expect shorter fixed-rate periods, such as 5 or 7 years. After that, the loan either adjusts or you’ll need to refinance.

What Do Lenders Look For?

To qualify for a DSCR loan on a multi-unit property, lenders usually have a few specific requirements:

1. Minimum Property Value: The property should be worth at least $50,000 per unit. If you’re looking at a 20-unit building, that means the building’s value should be at least $1 million.
2. Occupancy Rates: Most lenders require that 75% to 90% of the units are rented. This ensures the property is already generating income.
3. Cash Flow: As with all DSCR loans, the property’s income should be at least 1.2 times higher than its expenses.

Example:

If you’re buying a 10-unit apartment building with each unit worth $50,000, you’re looking at a $500,000 loan. If your total expenses for the property are $5,000 per month, your rental income should be at least $6,000 to meet the 1.2 DSCR requirement.

Benefits of DSCR Loans for Multi-Unit Properties

There are a few key reasons why DSCR loans are popular for multi-unit properties:

• No Personal Income Verification: Since the loan is based on the property’s income, you don’t need to provide personal tax returns or income statements.
• Non-Recourse: Many DSCR loans are non-recourse, meaning you’re not personally liable if something goes wrong. The lender can’t come after your personal assets.
• Simplified Process: The DSCR loan process is straightforward. You won’t need to deal with the endless paperwork typical of traditional loans.

When Is a DSCR Loan NOT the Best Option?

While DSCR loans are fantastic for stabilized properties, they’re not always the best choice if you’re planning a value-add or major renovation project. Most DSCR loans require a high occupancy rate, so if you’re buying a property with a lot of vacancies or under-market rents, you might have trouble meeting the 1.2 DSCR.

Example:

If you’re buying a property that only has 50% of the units rented and you’re planning to renovate the rest, this loan might not be for you. You would need to bring up the occupancy and rental income before it qualifies.

Can You Use a DSCR Loan for a Portfolio?

Absolutely! DSCR loans aren’t just for individual properties. If you have multiple single-family homes or other properties, you can bundle them under one loan. The main requirement is that each property must meet the minimum value and occupancy thresholds.

Ready to Learn More?

A DSCR loan can be a powerful tool for purchasing multi-unit properties. By using a DSCR loan to purchase a multi-unit property you can get yourself set up for success! If you have any questions or want to explore your options, reach out to us. We’re happy to help you find the right financing for your next investment.