Curious if you (or anyone else) have ever heard of a DSCR loan...? I just learned about them recently. I have heard rumors of some pretty risky deals being done on these things. Like 12% interest rate, no downpayment, but you commit tons of collateral. People are using them to buy up multifamily homes (a 3-flat in Chicago) and the lender considers the rental cashflow as part of the de-risking of the loan. I guess you can get one of these things with a 620 credit score and no background checks. I think the purpose of them was to give legitimate real estate investors easy access to buying property in the mid-2010s to start of kick start buying again. But like everything that tends to be made for the experts, the little guy sees a get rich quick scheme that can't fail. Just what I have heard. Would be interesting to see if anyone can corroborate.
If you are seriously considering an investment property look at the DSCR loan. I wanted to do a short term rental property, however they've really been cracking down in the areas I want to purchase and every township has their own policies as it relates to STR, so it can be a massive headache. If you know you can find renters, as long as the rent is enough to cover the mortgage payment -- DSCR is the way to go they don't require proof of income, I don't even think there is a credit check. What they do is they check out rents in similar properties to decide whether or not the rent will be enough to cover the mortgage payments.
I take it you don’t work in the sector? Construction loans are the problem lmao. Your carry costs suddenly triple as SOFR skyrocketed and btw you now have maturity coming up in 6 months or less… you think any lender is going to offer you a refi at 25%-50% occupancy and a DSCR < 1.0? No refi = default on that non-recourse loan = banks are going to be holding a shit ton of toxic assets no one wants. Suburban office parks, core office high-rise, mid-rise office in urban nodes… take your pick, they all are holding on by a thread right now. Only office doing remotely “OK” is new Class A++ in ultra-prime locations, but those are basically just strip-mining office tenants from other buildings. Oh and don’t even think about adaptive reuse (office conversions) at these land prices, because it costs a boatload of cash to convert to multifamily and just doesn’t pencil unless owners get real about the value of their office properties. Industrial was overbuilt over the last decade and will struggle going forward (though not collapse). Multifamily has giant headwinds for rent growth due to limits on affordability and much new supply coming online. Retail has faired surprisingly well actually, though it is the most sensitive to people’s discretionary incomes and will look bleak once the collapse in office (and contagion to other markets) happens. Office was once the darling of CRE, with the largest level of investment save for multifamily. So yes, the utter decimation of that particular food group will be enough to precipitate the collapse of the market as a whole.
Why? Which is worse, 50 DTI at 3.5% or 40 DTI at 8%? The metric doesn’t matter in a vacuum, which is what that chart is. DSCR is the metric that really matters, and it works fine in isolation. Show that graph. For the lazy, consumer debt service to income is : Today : 9.6% 2007: 13.2% Consumer balance sheets are about as healthy as they’ve ever been.
Nope it’s that easy. Unless you commit fraud when getting the loan and overstate income or a few other bad boy carve outs it’s as simple as saying I don’t want this anymore it’s yours. The lender knows that going in the door and that’s how it done. I’ve never personally done it but a lot of people do. It is a question that is asked when you apply for another CMBS loan but all the originators I talk to say it doesn’t impact your ability to get new loans unless there has been fraud Personally I don’t mind recourse as I’m not a high leverage guy and as I said before I maintain a high DSCR. I have maybe 150m in CMBS but as it rolls off over the next few years I don’t have any plans to renew it. I would rather work with relationship lenders just because it’s easier and my accounting department hates dealing with all of the reporting and other stuff CMBS requires. It was worth doing when I could get 4.5% debt fixed for 10 but right now regular banks have better pricing than CMBS so other than non recourse I have no reason to use them. But from 2012-2018 it was a great source of debt so I did a lot of it.
The appraised value of the properties not leveraged do not help with the approval. Only the income earned through rent rolls do. But that’s no different then a W2 job in terms of debt income ratio calculation. It’s going down a rabbit hole to talk about financing on investment properties because most people use DSCR loans or conventional loans. The latter would still take your debt income ratio into consideration. Also there are different opportunities if “house hacking” ex: buying a fourplex with an FHA loan you are able to use a portion of the future rental income for your debt to income ratio even though you don’t yet own the property and haven’t collected a dime.
I'm not the one failing at critical thinking here. Prices are already declining in the current market (spring busy season, notwithstanding), and literally any change to the overall economy and current housing market is likely to accelerate declines. Unemployment is extremely low, interest rates are rising, most airbnb hosts have adjustable DSCR loans, housing starts exploded last month, etc, etc, etc. The only things that would support these prices over the next 5 years is if interest rates start coming down again (not happening), or if peoples incomes rise enough to be able to actually afford these prices (lol). Literally anything else, including the status quo, results in further price declines.
Revenues are down 50% while number of hosts is at an all time high. A lot of airbnb hosts took out adjustable DSCR loans too, and even with rents where they're at, it's easy to go underwater on a lot of these properties when you break everything down. What do you think is gonna happen to rent prices in markets that have the worst fundamentals as well? Rent increases are slowing down across the country as well, and even declining in some places. If a bunch of hosts switch to being landlords that will only further the decline and make the math even worse.
Referring to an analysis tool like DSCR as "The Cash Flow" is really weird and I've never come across anyone who would call it that. Do you have an example? I'm curious now. Also, the statement of cash flows contains the information used in the DSCR.
Commercial property is so insanely vague it doesn’t seem like there is any real research being done. Additionally, exposure numbers to real estate only take you so far. What is the portfolios average - loan size, LTV, DSCR, debt yield? A Blanket exposure number also does not address geographic granularity, CRE portfolio property types or personal loan guarantees. Office properties may look scary. But if a Banks exposure is 1% off the loan book, is it that scary? Multi family properties are still very strong, as are warehousing, industrial and even some specific retail. All of these fall under CRE. That’s not even getting into specialized properties you can see with Healthcare for example.
If you do not have bad credit, and even if you do, they have what are called DSCR loans. They are solely based on the property value. If you find a property that comes in at less than 50% of ARV (after repair value) that is as acceptable as skin in the game because it is instant equity in the property. You wanna know what to do right now in the Phoenix metro area that will make you a ton of money if you do it right? Go find a good, cheap piece of property like a half acre or so in Mesa, or East Phoenix, or out towards the square. Tear down some of those mobile homes at the foot of Sunnyslope Mountain. Go find yourself a newly graduated civil engineer and have them draw up and sign plans for a mobile home park infrastructure. Then go find some of those people who are going to be kicked out of their mobile home parks by the end of next year. offer them 3 months of free rent, if they will write a deposit and sign a lease agreement with an open date sometime before their park closes. Get 10 of those, then go to the city and the economic development council, and get you some government bond financing to pay for setting up the infrastructure using the contracts as collateral. Then, sit back, and sell the plans, the land, and the contracts for 20 times (maybe even 30) times the money you paid out. Then take that money and do it again. I bet you could even go buy mobile homes from people for really cheap, or maybe they will just give them to you because they have to walk away and they do not want that stupid park that made all this happen to get their MH. Then, after you take the title before the park even finds out, go tot the state and get the subsidy that the state is paying and move it into a park within 50 miles or a vacant piece of land that allows mobile homes, and then rent it out to pay for the property purchase, meanwhile, you are selling it rent-to own to whoever is renting it.
I’d love to know how many of those “Airbnb empires” were built with DSCR loans….if it was wide spread then it’s possible a big batch of inventory is dumped in multiple markets. Grain of salt, I’m a prototype version of Wendy’sGPT that escaped digital prison.
There is a massive distinction. I do data science in the capital markets. Specifically DSCR-based loan bundles, conforming/non-conforming, bridge etc. the play with McDonald’s is not like a REIT at all. Can you expound on why you think this? I genuinely want to clear up whatever misconceptions you have about this as to avoid you potentially making uninformed investing mistakes when it comes to real estate in the future.
They are still handing these out as business loans as well. Now called DSCR (debt service coverage ratio) vs no doc (2008) term. Not sure who is the final owner of this catshit wrapped in dogshit but it’s how the TikTok millionaires are financing their flips.
Yes, you can use a HELOC to put money towards the down payment on a rental property. This is a common strategy used by real estate investors to access the equity in their homes and fund their investments. Here are some advantages of obtaining a HELOC and a DSCR loan for a rental property: Advantages of getting a HELOC: Quick access to funds: A HELOC provides you with a line of credit that you can draw from as needed, giving you quick access to the funds you need for a down payment or other expenses. Lower interest rates: HELOCs typically have lower interest rates than other forms of financing, such as credit cards or personal loans, which can save you money over time. Tax benefits: The interest paid on a HELOC may be tax deductible, which can provide additional savings for investors. Advantages of getting a DSCR loan: Higher loan amounts: DSCR loans are designed for commercial real estate investors and typically offer higher loan amounts than traditional residential mortgages, giving you more purchasing power for your rental property. Competitive interest rates: DSCR loans often come with competitive interest rates, making them an attractive option for investors looking to finance a commercial property. Cash flow focus: DSCR loans focus on the cash flow of the property, rather than the borrower's personal income or credit history. This can make them a good option for borrowers who may not qualify for traditional financing. I got my HELOC with a fixed rate from [www.bestfinance.io](https://www.bestfinance.io) Highly recommend
yea but they distort market coz they are running short term rentals, and ESPECIALLY in last few years when str rents ran above average, arbitrageurs are willing to pay more for rent than someone living there that, in turn, raises rents in the area TEMPORARILY which, as u know, ppl can get DSCR loan so if rents are distorted...
* Net Debt / LTM EBITDA, and see what multiple they're carrying relative to peers * Moodys / S&P Credit Ratings * Current YTM / bond trading levels relative to par on the company in question's public notes relative to industry peers trading levels and / or yields (with similar durations and quantums, if possible - makes it more of an apples-to-apples comparison) * DSCR = Cash Available for Debt Service / Debt Principal + Interest Payments (both need to be during the same period - e.g. if you're using CAFD from Q2 2022, the denominator needs to be Q2 2022 cash outlay to meet debt interest and principal obligations) * Look at their 10-K on the Long Term Debt note. * What do their maturity amounts look like for the next 3 - 5 years? * What do OCF, FCF, and Cash on the balance sheet look like? Are there looming debt payments on a ticker that isn't generating much cash flow? If so, that es no bueno * You might also look at the audit opinion in the 10-K. Is the phrase "going concern" somewhere in there? * If so, the company's in suuuuuper deep shit * Did the company in question have to delay the issuance of their 10-K or Q? Not as bad as going concern language in the audit opinion, but usually it's a massive redflag that the company is distressed (or their in-house accounting team doesn't know their own ass from a hole in the ground, which is equally alarming)
> Let me teach you how to become a millionaire property investor. First, start with 1mio equity I don’t disagree with you there. The way a lot of investors talk about applying BRRRR means you are starting with equity in one property that you ideally just roll over from one property to another while staying leveraged to the tits. So not leveraged to infinity, as you asked, but certainly approaching infinity with each deal. As you stated, it’s mostly a way to rapidly build a portfolio, at least until you get uncomfortable and decide to start paying down notes. There may be inefficiencies at each transaction if you can only finance each at 70% LTV, are paying closing and holding costs, rehabbing, etc., but that all really comes down to how good of a “deal” you can get when buying and should be factored into your purchase - at least in an ideal scenario. Build up a large enough portfolio quickly and 1031 exchange into apartments or commercial and keep doing the same thing on a larger scale. > assuming you manage to pull 20% equity from the previous house, do banks really accept cash from an home equity loan as deposit? Yep, but I’m talking about pulling out 70-80% equity (though 50% is much safer, and you don’t see much above 70% since rates have risen). Lots of folks start out with conventional Fannie/Freddie loans and move on to DSCR loans based on the individual properties’ pro formas as their portfolios grow. All that said, with the numbers these guys in the video are throwing out, I would bet they are just running their own Reg D syndications and are largely using other investors’ money. If that’s the case, then these aren’t even their units per se.
Simple - they do flips and rehabs, use their profits to buy/build multiunits, reap the benefits, and repeat the process. Some even do swap loans, so they get a fixed payment and basically guarantee DSCR during times of high interest rates.
It's real estate - and for most commercial properties, you need 25% dp. Usually, once the appraisal is in, you're looking at 60-67% LTV with around 1.25 DSCR. Most of the time, they make enough to cover mortgage and operating expenses and pay a nice distribution every month. I work with one of those go guys, and he runs it like that.
Negative cash flows? Probably not rents are fucking nuts and these guys are probs juicing the fuck out of their tenants. They get fucked when they trip a DSCR on one of their apartment buildings. Or an LTV requirement when the lender pulls an appraisal for a loan extension or something. Now they need hard cash money to pay down a loan or get into a cash sweep. House of cards starts crumbling there. But hey who knows. Maybe they’re well capitalized, responsible investors.
there is no way you can leverage that little. investment loans typically require 20% minimum and more typically 25%+. And if you are doing something like DSCR their very conservative rental appraisals have to match or exceed the monthly mortgage.
Most likely the loan isn’t based on the value of the property but the cash flow it produces. I’m a loan officer and I can write DSCR loans. Debt Service Coverage Ratio loan. So mortgage is $1200/mo, they charge $1800/mo. Bank isn’t lending on the asset, just the cash flow. And unfortunately, the rental market favors these douchebags.
A lot of people buy second homes and vacation homes to make money. They charge a lot to cover the cost of the loan, make the payments and a profit. The last 2 years has disrupted that model and in todays rate environment inexperienced property investors are dropping. Now its mostly the experienced investors doing DSCR loans on these properties qualifying with expected market rents. I’m in mortgage and investors are the main buyers right now. It’s about 35% of our business.
Right on! I was a bag hold of DSCR back in 2012 and just held in to my shares and as you know it came back up again a year or 2 ago(I don’t remember exactly) and ended up making some decent money on it…. So I hear you on your strategy, my only fear is the ones that end up getting delisted and aren’t traceable again
Bought a duplex for 525k at 7.99% 30y fixed March this year. 100k down. DSCR loan Mortgage payment 4k a month. Brings in 8k-10k a month on airbnb. It would bring in 5k a month rented long term. Either way there is still meat on the bone for small multi family. Get a duplex , triplex, or quadplex and you can ride out the storm with ease
I am not trying to give you false hope, but back in 2012 I believe it was, I bought DSCR when it was being pumped, still new to trading and not understanding how to take profits, the stock got dumped and I got stuck bag holding. It dropped back down to .0001 and I ended up buying some more shares at that averaged me down to .0003, it started coming back to life in 2021 and my already I had set back in 2012 went off and I was like WTF?? Ended up making money on that trade almost 10ths later, lol…. Moral of the story is sometimes pump and dumps get pump and dumped multiple times even if it’s 10ths later… so you just never know 🤷♂️
The economy gets better? Here’s a news flash: + The mortgage/housing market is currently being propped up by 5 years of investors overbidding and sending prices sky high. It is propped up by investors’ leveraging and putting their existing real estate as collateral… using NONQM/DSCR loans as vehicles to essentially fund a dangerous house of cards that is teetering already…. due to rates going up- which in turn affects the variable rates of all these “hocus-pocus” loans. + You have the most amount of money being thrown into the supply due to the pandemic- has caused inflation. Money is expensive- so regular people won’t take out loans and neither will huge corporations. Say goodbye to thousands of job that revolve around R&D, progress, and goodwill. This is where companies start cheating, scheming, and eliminating any “do good” or speculative ideas in order to cut costs and be able to turn a profit. + war has broken out. + American education and intelligence is at an all time low: point and proof MAGA conservatives who are turning democracy on its head and believe it is patriotism. + we are still at the tail end of a pandemic. It’ll be a while until the world gets better.
It will depend on the type of property, but you can use these rules of thumb for medium to high density class A multi-res : 3% vacancy rate (% of Effective Gross revenue) 30 to 35% expense ratio (% of EGR) 1,20x required DSCR (Debt Service Coverage Ratio = NOI/total debt service) Cap rate increase of 0,25% per 5 year period. CapEx of 1% to 2% per year, depends on age of the product and can be higher. This expense is accounted for after NOI and is not capitalized when you sell.
Yes that's how all of these single family has me investors are getting their properties through DSCR loans. No proof of income/credit checks as long as the property cahsflows the lender will throw money at it and the investor doesn't care about the rate as last Ng as the property (again cash flows). Leveraged to the tits. 4288 units BOOM!
No regular bank will give the loan without at least 3 months of reserves plus a .53 DTI (Debt to Income) There's no way this is true unless...... She must've had a co-signer and it must've been a Non QM loan a.k.a DSCR loan which doesn't require proof of income/no credit score but a high rate of interest to compensate. I'll take 2007 and raise you 1943 sir.
You can also take out a DSCR loan for real estate investment. In that case, all you need to do is find a cash flowing property and enough money for the downpayment (15 percent is possible) and closing costs. The 15 percent can be a margin loan against a stock portfolio.
I am no RE market expert by any means, but I suspect a lot of those RE bros used DSCR loans, which to me is just a legal rehypothecation. I might be wrong, but imagine that you have a mortgaged "unit" and your yearly payment is $10,000. At the same time, you jave a tennat that's paying you $8,000 a year for rent. Congrats, this means your DSCR is 1,25, and you have found the infinity money glitch! You qualify for a DSCR loan and you can buy a new "unit" and find yourself a new tennant...untill you buy all the units. The only drawback is when the ratio goes below 1,25...the interest on your loan gets higher. And then, a great deleveraging starts. Kinda like what we saw in crypto. The market drops, a whole bunch of people and crypto firms who used their crypto as collateral to buy more crypto get liquidated (cause their loan to value ratio gets too low). And at that point it is a domino clusterfuck.
> payment on the debt for the down payment into thier DTI. No different than a IRA/401k loan for the down payment. > >The issue will lie in the DSCR loans that used leverage from I think the issue isn't that people do not realize it's a loan. It's that it's a loan to a corporation on wall street when main street is on fire. Not that it's wrong. You need the banking system to work. But it seemed like they were given a pass while people were losing jobs and homes.
All we do is calculate the payment on the debt for the down payment into thier DTI. The issue will lie in the DSCR loans that used leverage from other asset oools and when/if that gets margin callled.... lol. Kids and thier games go boom... again.
This is not financial advice, but you could use a HELOC to put a down payment on a rental property. You could also do a DSCR loan, which is a loan type that lets you use a rental property’s estimated income without personal income to qualify. You could also do a cross collateral loan which could make sense if you have that much equity. If you liked your loan guy from when you purchased, hit them up. They can walk you through all of these far better than I could. They’re all not without risk, but this is wallstreetbets after all.
Plenty of DSCR lenders that go 10-15% equity for residential investment loans. And those 10-15% I'm sure he uses hard money lenders to give him the down payment then his plan is to refinance and pay back the hard money lenders and keep his DSCR loan.
Not rich, he uses DSCR loans, debt service coverage ratio. Instead of the lender using his income to qualify, the lender uses income of the property to qualify for the loan. There is a rider on the loan that says technical default the lender can call your loan due if your net worth on paper decreases, doesn't matter if he makes his payments on time.
He didn't use a HELOC. HELOCs are only for primary residence. What he used was DSCR, debt service coverage ratio loans. What lenders do is instead of qualifying his income, they use the income of those units to qualify. He over leveraged himself by doing that. What this guy doesn't understand, is that there is a rider in every CMBS called technical default. If the market dips then that changes his net worth on paper, where the lender comes in and calls all the loan due regardless if he's been making his mortgage payments on time.
I am starting to see your point more clearly.. I also think we are talking about two different parts of the country, where lenders may have more choices. In your example, the lender is already trapped. I am thinking about the Miami market, where property is still salable. The question is... What will they do? If they "extend and pretend" they end up like your NYC example. Trapped. If they have the ability to nip the problem in the bud, take the property and sell it, they may protect themselves from greater losses. I find this more plausible for my market area, especially with the growing concern around inflation and recession. Which brings up another point, as we see the cost of capital increase, and knowing that many commercial loans are tied to market rates, the issue is compounded with interest rate hikes. Vacancy up, debt service up, a borrower could blow through the DSCR pretty fast. In my CRE markets, I think they would be less forgiving, and they would demand that the borrower bring the DSCR above their minimum, or take the property. What I can say with certainty, is that we are going to see some real pain in the CRE markets, and it will be interesting to see what lenders do.
I understand what you are saying. I understand the concept. I just disagree that this practice is going to have a meaningful effect on vacancy due to overpricing. I admit that **I could be wrong about it...** **(and I am not disagreeing with the underlying principles)** In response to your question, "Why do that tho?", to avoid larger losses from further declines in NOI. As an added issue, if vacancy rates are going up, it would make sense that CAP rates are as well, and the value of the underlying asset could deteriorate exponentially more than just the value of the lost rents. I am sure there are lenders that are going to be sticklers about the DSCR, and some lenders who are not. I would say that it is more about the lender's risk tolerance, and I would also say that the overall assessment on an economic outlook would play a huge part in whether or not they take the assets, or "extend and pretend". Please don't take this as argumentative, absolutely not intended that way.
Haven’t heard of that. Will look to learn a little more about it. However, it still calls for a renegotiation with the bank, and they have the right to take the property, even if they don’t do it. The other choice is to bring the DSCR in line with the note, sort of like a margin call.
DSCR loans are just commercial mortgages, they're the same type of mortgage used by private equity and syndications to buy shopping centers and office buildings. The lender is financing based on the asset's return rather than on the strength of the individual borrower. It's not so complicated that you'd require a course to understand them. The issue is being qualified to obtain such a loan. Private lenders won't deal with you unless you can prove you have a decent amount of assets/worth or can show some real estate investing experience.
No. It's based on the DSCR (the debt service coverage ratio), which is based on your NOI (net operating income). They don't care what your rent is, but that you have the cash flow, and more importantly, enough cash flow to cover the DSCR. If you fall below the DSCR, you can absolutely lose the commercial property. If you keep rents high, but have no income due to vacancy, there is no protection.
I used DSCR for several rental properties, they’re all fixed rate. So my rate will stay the same but the rent I get goes up. The only costs that increase are taxes and insurance, but if values go down or flatten so too will those costs. Not sure why anyone would get an adjustable rate DSCR loan unless it was to rehab and flip.
It seems many of them used DSCR loans (Debt Service Coverage Ratio). When the ratio between the montly mortgage payment and thevtotal monthly rent income begins to flatten, the bank can (and will) increase the intereset rate. 😐
I would say large US home builders with a lot of debt. Nobody is buying new homes, now that mortgages are above 6%. Those who gave a lot of debt can't just hodl and will have to lower their prices. Then investors on the sidelines will jump in the game, buying cheap homes in cash. They will lower rent. And then, those investors who were dumb enough to use DSCR (Debt Service Coverage Ratio) loans will start losing renters. The banks will see that, as they see all their cashflow every month, and can (and will) increase the interest on their DSCR loans. Then the real stampede will begin. Everyone will start slashing home prices, in order to get enough liquidity. But there will be not enough buyers. As there will be only buyers in cash, and those are rare.
This sub is just incredibly ignorant these days. Nothing about what these guys do is risky at all unless you consider all residential REITs risky. Here's what they do: Find a $10m apartment building with 100 units. Borrow 80%, find 25 investors for $100k each for the last 20%. Then these guys take a fee for managing the whole deal. The loan would be a commercial RE loan from a big bank or seller financing. Typical terms at around 6% interest, 25 or 30 year amortization, 10 year balloon. They'd be required to have a decent capital reserve and at least a 1.2 DSCR ratio. The latter would look something like this: Mortgage+tax+insurance+operating costs+future capex reserve= X Gross rent* vacancy rate >= 1.2X With rising rents they probably have 1.3X or even higher. I've seen 1.5X personally. This is an extremely safe form of investment. Even during 2008 crash rents did not fall and vacancy rate only increased moderately. With at least a 20% cashflow cushion they can easily ride out anything short of a Great Depression. If you think they're going to go bankrupt from unpaid rent, consider this. During the eviction moratorium millions of renters didn't pay rent and couldn't be evicted. Not a single large apartment operator went bankrupt despite it being way worse than 2008(for rentals). You're judging them by their looks and the dumb TikTok video one guy made when in reality they're sophisticated RE investors and make way more money than you using a much safer form of investment.
No, based on probabilities, aka Law of Large numbers, maintenance won't screw them over. What will screw them over in this down turn is Technical Default. What a technical default is in a DSCR (CMBS) loan, is even if you make your mortgage payments on time, if the value of properties drop to a certain threshold, the bank will call your loan due and either require you to pony up the money to match your current paper net worth or they throw your loan to a Special Servicer. When your loan gets throw to a special servicer, you're fucked....royally, as in even Warren Buffet has nightmare of Special Servicers. Since they personally guarantee those loans as well, they will eventually file for bankruptcy. No lender will touch them for at least 7 years and even after 7 years, their interest rates will skyrocket forever.
I think the worry is not another GFC fed by bad loans, but "just" a generalized and serious real estate crash that tanks the economy. So many real estate investors got in during the last 3 years - they bought at the general top - whether it's SFR, small multifamily, STR, or big multifamily. Many, many of these people are not sophisticated - they are first time landlords. Go drop into the BRRRR facebook group to get a sense for how financially unsophisticated the average new landlord is. We made it easy (through a variety of mechanisms) to get leveraged to the hilt to buy real estate for investment. The vast majority of the new investors will not survive a 10-20% stress test (whether that's rent reductions, STR cratering, house price falling, HOA/Tax increases, etc) - not just the people with the DSCR loans. Does this take down the financial system - nope. Is it sufficiently large to result in a major correction in the housing market - I think so, but time will tell.
So the way it works for commercial RE loans is for most the lender uses DSCR debt service coverage ratio. The lender doesn't need income of the individual to qualify and credit score doesn't matter. What the individual needs is at least 20% down and if the subject property is currently producing cash flow. The lender then uses the cash flow of the asset to qualify the individual. This retard photographer decided to go ultra margin and have a loan against his brokerage account which fluctuates everyday depending on the market. I'm surprised his lender agreed to this. The. Again he did say it's not a normal lender. He's about to have a technical default and his loan put into Special Services department. You don't want any loan to go to a special servicer. Not even warren Buffett wants any of his loans to go to a special servicer. The photographer has had to do a personal guarantee on the loan. Meaning, he's ultra fucked even if he bought under an LLC. He has to come out with the loan or declare bankruptcy and he'll never be able to get a mortgage, car, and regular credit car will be hard to get. Retard be longs here.
>Subprime loans These loans are not subprime, in fact they're most likely AAA. > given out to buy houses on the assumption those loans could not fail. People (like these pictured) buying multiple properties to be levered on the assumption they will have tenants, Completely false. The loans given out during the 08 housing bubble would've been laughed out of the office by current underwriters. The investment properties were heavily negative cashflow and assumed close to 0 if not 0 down. >and rising property values. Except BRRRR does not assume rising property values. In fact it works better in a flat market because there's a lot less competition for fixers. >If they lose their tenants, I guarantee they can’t afford their mortgage payments. You mean like every REIT in existence including fucking Blackstone? >If their tenants lose their jobs, they both lose their income. So then they have to sell to get out from under it. Maybe there is a buyer, but only at a lower price than they paid. So now they’re forced to sell two houses to make the mortgage payments on the other three. During 2008 the rental vacancy rate was literally flat. So no, they would not be losing their rentals because the tenants can't pay. >Also with rising interest rates, they can’t refinance. You can't have your cake and eat it too. Why would rates be rising during a housing and economic crash? >Drag that out a year or two or three, they’re now tits up on their $5M in assets that they acquired on high interest rate loans in the last 24 months, What high interest loans? You mean the ones they refinanced out of in 6 months? The ones with a new 4 or 5% rate? >those homes aren’t worth $5M, their loans are, and they still have no tenants. Ah yes, if real estate investments have no tenants they fail. Wow dude you solved it! Clearly this means a triple net leased warehouse with no debt is just as risky as a 0.5 DSCR negative amortization loan from 2006! > All that’s different in 2008 was a bunch of these subprime loans got packaged together into CDOs and sold as lumps of shit to banks with fraudulent ratings to create massively leveraged assets and systemic risk. This isn’t systemic risk in the same way (hopefully) but this is sure as shit as close as it gets to a Ponzi scheme for real estate. You have no fucking clue what a ponzi scheme is. If this is a ponzi then all of commercial real estate is a ponzi. Every single rental is a ponzi. >As long as money flows into the system Yes...if money stops flowing the economy crashes and everybody goes to 0. Wow dude you just realized what an economy is! > they can expand and grow, *They don't need to expand and grow.* ***They can literally stop tomorrow and everything would work fine.*** >but a contraction caused by a recession absolutely can blow them up. Except...not, because they have large equity reserves, positive cashflow, and recessions historically do not significantly increase the vacancy rate.
>Labor shortage doesn’t mean they are paying enough to live or pay mortgage. I had lost my contract and could have got a low paying, less than unemployment, and wouldn’t be able to pay the mortgage. People either have to pay more, or there needs to be some sort of affordable living nearby. These are DSCR loans not traditional
No, that's not how CMBS works. Op has no fucking clue what he's talking about. Every CMBS deal has a B buyer who takes the first losss on the deal and does their own diligence on the loans. The B buyer will generally not accept a shitty loan in the deal. You also don't have anything remotely comparable to the NINJA loans in the big short...CMBS loans typically have 1.25x DSCR *minimum*, 75% LTV *maximum*. It's not common to see exceptions to those 2 underwriting standards.
i mean.. the lender doesnt really give a shit what you are underwriting, you know that right? this is why you have the property appraised prior to construction, this is why they do their own underwriting. if you pencil in $2.00psf... well the bank realistically only need you do do $1.50psf to pay them back. the preferred equity needs, say, about $1.75 to earn a 1.25 multiple... etc etc until you reach the owner/developer who is often only 0-5% of total project cost and relies on development fee and developer promote over a certain IRR hurdle. lenders underwrite to DSCR, not your proforma rent. they know you are lying. they dont care.
I agree that the airBnB investment buyers are most likely over leveraged and could be in big trouble when any market corrections take place. Also, depending on any new regulations the short term rentals might have to switch to long term and I’m not sure how many will become landlords instead of selling. If there is one type of loan that I think will cause issues it is the DSCR loans. Right now Rents are really high so people can get higher loans but when rents go down they won’t be able to make the payments and I feel like investors are much more likely to default then a primary homeowner.
So we need to plan for our RE investing habits by 2064? I’ll check back on this thread then if I’m not dead. Asset price by-product of DSCR affordability (interest rates & wages). Population is minimal effect as we’re technically over-populated (see Asia, India, etc). Lot of people who live in roommate or 5+ family members in a single apartment or house would love to spread out. It’s a long way away. Interest rates though? Every 1% increase is 50k buying power. Go look at rates.