For experienced real estate investors looking to expand into multifamily properties, understanding DSCR loans is key. While DSCR loans are widely used for financing single-family rental properties, their application in multifamily investing has grown significantly. This guide will explain how multifamily DSCR loans work, how they differ from traditional DSCR loans, and what investors should know to succeed in the multifamily space.

Understanding DSCR Loans

A DSCR loan is a type of real estate investment loan that bases approval on the income generated by the property rather than the borrower’s personal income. DSCR stands for Debt Service Coverage Ratio, which measures the property’s cash flow relative to its debt obligations.

Calculating DSCR

The formula for calculating DSCR is:

DSCR = Rent / (Mortgage Payments + Taxes + Insurance)

For example, if a property generates $5,000 in monthly income and has a mortgage payment of $4,000, monthly property taxes of $500, and monthly insurance of $300, its DSCR is 1.04. A DSCR above 1.0 indicates positive cash flow.

Why DSCR Loans Are Ideal for Real Estate Investors

• No Personal Income Requirement: Instead of focusing on the personal income of the borrowing entity’s guarantor's, lenders assess the property’s financial performance.
• Entity-Based Borrowing: Investors can close these loans in an LLC or corporation, providing asset protection.
• Investor-Focused Structure: Real estate investors often leverage tax benefits like depreciation and experience inconsistent year-over-year income. DSCR loans accommodate this by focusing on the property’s performance rather than individual earnings.
• Flexible Experience Requirements: Investors with personal mortgage history may qualify for entry-level DSCR loans, but multifamily DSCR loans often require prior investment property experience.
• Rate Determination: DSCR loan rates are based on an index (such as the 30-year Treasury) plus a margin, which varies based on credit score, DSCR strength, and experience. Typically, DSCR loan rates following the 30 YR US Treasury + 3%.

Defining a “Multifamily Property”

The term "multifamily" refers to any property with two or more residential units. However, DSCR loans follow different rules for properties based on their size:

• 1-4 units: Typically categorized as residential properties and evaluated similarly to single-family homes.
• 5+ units: Considered commercial multifamily properties, these are often evaluated using income-based appraisal methods rather than comparable sales data.

Additionally, mixed-use properties—such as a building with retail on the ground floor and apartments above—may qualify for multifamily DSCR loans if they meet specific unit thresholds.

Differences Between Standard DSCR Loans and Multifamily DSCR Loans

While DSCR loans were initially designed for single-family rentals, they now serve a broader range of properties, including multifamily buildings up to 10 units. Understanding the differences is crucial:

• Income Calculation: Single-family and 2-4 unit properties rely on market rent data for DSCR calculations. For 5+ unit properties, DSCR is calculated based on NOI, which considers expenses like property management, utilities, and maintenance.
• Appraisal Methods: Single-family and small multifamily properties are valued using comparable sales, while larger multifamily properties are appraised based on their income potential. The buyer pool for 1-4 unit properties is made up of mostly owner-occupants and so value is less based on the earning potential of the property as a rental. 5+ Unit properties on the other hand are made up of almost exclusively investors who buy based on a Cap Rate. Depending on the regional market income based valuations are calculated as NOI/Cap Rate.
• Experience Requirements: While entry-level investors can use DSCR loans for 1-4 unit properties with no prior investment experience, 5+ Unit multifamily DSCR loans often require experience with either a previous 5+ unit property or three smaller 1-4 unit properties.
• Minimum DSCR Thresholds: While single-family DSCR loans often allow a minimum DSCR of 1.0, multifamily DSCR loans require 1.15 or higher.
• Loan-to-Value (LTV) Limits: For single-family and 2-4 unit DSCR loans, LTVs can reach 80%, while multifamily properties are often capped at 75%.

How Multifamily DSCR Loans Differ from Traditional Multifamily Loans

Traditional multifamily loans, such as those backed by Fannie Mae or Freddie Mac, typically involve more documentation, stricter underwriting standards, and deeper reviews of personal finances. DSCR loans simplify the process by focusing primarily on the property's cash flow. This makes them particularly appealing for investors seeking faster closings or those with complex income structures.

Terms for Multifamily DSCR Loans

Investors with strong experience and credit scores can access favorable DSCR loan terms. For borrowers with:

• 3+ completed SFR (1-4 unit) investments or 1 previous 5+ unit multifamily investment
• Credit scores above 700
• Purchase LTV up to 75%

Rates often follow the 30-year Treasury index + 3.5% model, providing predictable payment structures for long-term investors.

Identifying a Strong Multifamily Investment Opportunity

Successful multifamily investors focus on properties that generate reliable cash flow while minimizing risk. Here are key factors to consider:

• Target Cap Rates of 10% or Higher: Properties with strong cap rates offer better cash flow potential and are more viable in fluctuating rate environments.
• Prioritize Occupancy: Properties with at least 90% occupancy track record perform well even in economic down turn.
• Invest in Landlord-Friendly Markets: States with stronger landlord protections simplify property management and reduce eviction-related issues.
• Avoid Highly Distressed Markets: While cash flow may seem attractive in cities like Baltimore, St. Louis, or Memphis, these areas often have higher vacancy rates, greater maintenance issues, and elevated tenant delinquency risks.

Multifamily DSCR Loan Case Study

For a practical example of how multifamily DSCR loans work, check out this case study. It outlines a real-life financing scenario that demonstrates the flexibility and benefits of DSCR loans for multifamily investments.

Best States for Multifamily Real Estate Investing

Multifamily investment opportunities exist across the country, but certain markets consistently produce strong returns. Based on Ridge Street Capital’s experience, some notable states for multifamily DSCR loans include:

• DSCR Loan Ohio – Affordable property values with strong rent-to-price ratios.
• DSCR Loan New York (Upstate and Long Island) – In Upstate New York, property taxes and insurance are typically very low compared to other national markets.
• DSCR Loan Georgia – Steady population growth and economic expansion support rental demand.
• DSCR Loan Texas – Particularly in cities like Dallas, Austin, and Houston, where rental demand remains strong and tenant laws favor landlords.
• DSCR Loan Massachusetts – Stable rental demand and strong property appreciation make this an attractive market.

How to Get Started with a Multifamily DSCR Loan

Getting started begins with sound investment analysis. Focus on properties that align with your experience level and financial goals. Once you've identified a suitable opportunity, Ridge Street Capital can provide financing options tailored to your project.

Get A Term Sheet | Get Pre-Approved | Book A Call