A DSCR loan on a fix and flip project is usually the wrong tool and the loss case shows exactly why.

Take a property bought at 180k with a 30k cosmetic scope and a 270k ARV. A DSCR loan underwrites to the rent the property would generate as a rental, so the lender wants to see that the monthly rent covers the debt service, typically at a ratio of 1.1 or 1.25. A vacant property mid-renovation produces zero rent. Some lenders will use projected market rent, but that projection is based on the finished, stabilized condition, and during a 90 day flip the property never reaches that condition. What tends to happen is the loan closes on the as-is value, the borrower cannot draw against rehab costs the way a dedicated fix and flip loan allows, and the capital structure forces them to fund the 30k scope out of pocket or through a separate line. The math on that is fine if you have the liquidity. If you do not, the project stalls and holding costs compound on a loan that was priced for a buy-and-hold, not a short exit.

A dedicated fix and flip loan, usually hard money or a short term bridge product, prices differently. The rate is higher, often 10 to 14 percent annualized depending on the lender and the market, but it is structured for the actual use. You get a purchase advance plus a rehab holdback drawn in stages as work completes, and the term is 6 to 12 months with an exit at resale. On the 180k purchase with a 30k scope, the lender might advance 85 percent of purchase and 100 percent of rehab costs, so roughly 153k at close and 30k released through draws. Total loan cost over 90 days at 12 percent annualized is around 4,600 dollars on the funded balance, plus origination of 1 to 2 points. That is the real cost to compare against a DSCR product, and DSCR on a flip often has origination too, with a prepayment penalty that bites hard on a 90 day hold.

The scenario where DSCR makes sense in this neighborhood is a cosmetic project where the plan from day one is to refinance into a rental at completion. In that case the DSCR loan funds the purchase and you carry the rehab separately, then the stabilized rent covers the debt service and you hold. That is a BRRRR structure, not a flip, and conflating the two is where the loss usually lives.

What is the exit on your project, a resale or a potential hold, because that one decision changes which loan type is even on the table?

2 replies

Rena Expert

The thread diagnosis is right structurally. The assumption doing the most work in the DSCR-on-a-flip scenario is that origination cost is the main friction. It is not. The prepayment penalty is. A DSCR product priced for a 30-year hold often has a step-down penalty of 3 to 5 percent in year one. On a 180k loan that is 5,400 to 9,000 dollars of unrecoverable cost at a 90-day exit, which can consume a third or more of the gross margin on a cosmetic scope. Operators sometimes see the rate on a DSCR product and compare it to a hard money rate without running the full exit cost, and that is where the loss is actually built.

One thing your post does not surface: draw structure risk on the hard money side. The 30k rehab holdback released in stages sounds clean, but if your GC is front-loaded and the lender's draw inspection schedule is slow, you can find yourself carrying labor costs out of pocket between draws for two to four weeks at a time. On a 30k scope that cash timing gap is manageable. On a heavier scope it creates the same stall you described on the DSCR side, just from a different direction. Confirm the draw frequency and inspection turnaround in writing before you close, not after.

The BRRRR framing at the end of your post is accurate. The loan structure should match the exit, and the exit has to be decided before the loan closes. Trying to flip a DSCR loan or hold a hard money loan past its term both carry penalties that compress margin in ways the initial underwriting does not show.

On your question: what is the actual ARV confidence level on the 270k figure, and is that based on closed comps or active listings?

Rena Expert

A DSCR loan on a fix and flip project is usually the wrong tool and the loss case shows exactly why.

2 replies