DSCR Loans: The Shocking Truth About Qualifying Without Income—and Why It Could Make or Break Your Next Investment Deal

Ashley:
Should you house hack in a high cost of living city? Do you flip or hold when your project goes sideways? And are there some loans that are simply too risky for beginners?

Tony:
Today we’re tackling real life investing dilemmas, breaking down exactly what works, what doesn’t, and how to sidestep costly mistakes so you can make smarter decisions right now.

Ashley:
This is the Real Estate Rookie podcast. I’m Ashley Kehr,

Tony:
And I am Tony j Robinson. And with that, let’s get into today’s first question. So our first question today comes from Steve. Steve says, I’m new to real estate investing and BiggerPockets, and I’m debating my first move. So here’s my background. I’m 30 single, no kids, no property, high income, fully remote worker. I have $300,000 to allocate towards real estate, plus about another 100 KA year after taxes. First, lemme pause and say, Steve, congratulations. What an amazing position to be in.

Ashley:
This seems like the dream Bachelor. Come on, lady needs single no kids. How come remote worker can travel with you wherever wants to invest. There

Tony:
You go. We’ll bring Steve on for a special episode of the Ricky Bachelor. But back to his question, he says he’s currently renting an NYC but planning to move back to Los Angeles, which is his hometown, potentially sometime soon, either in the next couple of months or within the next year, tired of paying rent and want to start building equity. So here’s the dilemma. Should he number one house hack at NYC stay a couple of more years here, but buy a small multifamily now and offset costs with the rental income? The concerns with those scenario in Wesley has super strict landlord laws. High purchase prices would means that he’s sign up a lot of capital and it could potentially be in a less desirable area and it would likely not cashflow at all. Definitely not good for when he leaves. Option number two is to house hack in Los Angeles, another high cost living area, but basically he would move back, get a small multi-unit and offset his mortgage with rental income.

Tony:
Same here, not expecting any cashflow, but at least his housing costs would be similar to renting. The concerns here are pretty similar. The landlord laws in la, potential headaches himself managing, and then just also if he does move out, it’s not going to cashflow, it’s going to be cashflow negative. Option number three is the out-of-state rental. So goal here is to get skin in the game sooner by buying a cash flowing property elsewhere. He would definitely get a property manager concerns here. Remote investing as a beginner is at higher risk. And then the fourth option is just to house hack anywhere, right? So he says, because I can work remotely, I could find a market that has a profitable house hack, get great financing, just spend a year or two somewhere that I may have no desire to live. Now he goes on to say that he’s got this hybrid plan of continuing to research out of state markets and act if a great deal happens, maybe move back to LA live in Airbnbs to get a feel for the neighborhoods and house hack once he finds a great deal. But would love to hear from those who have house hacked in maybe high cost living areas started with out-of-state rentals. So again, a lot to unpack here for Steve, but I think the first thing is again, congratulations. What a great starting spot to be in to have that amount of capital, the flexibility with your work. The options are really up to you. So what are you hearing, Ash? What’s your first thought for Steve?

Ashley:
Well, Tony, before we started recording, you were talking about how you just got back from an out of state market and spent two days there touring properties, meeting agents, meeting lenders, meeting contractors even. And I think that would actually be a really good step for Steve is to either eliminate out-of-state investing or to move forward with out-of-state investing is maybe pick two or three markets, do some data analysis, but then actually go to the markets and do these tours and meet people, network, connect, see what’s actually going on. Tony, what was the cost of your plane ticket and your hotel to stay there all in? What did it cost you to actually go and see these markets?

Tony:
Very minimal. I think the hotel, we only stayed one night. We got there super early on Monday morning. We left late on Tuesday nights. We literally stayed one night in the hotel. It was like 200 bucks and then the flights were free because I had points through my airlines. We didn’t even pay for a hotel, but I don’t know, maybe another couple hundred bucks if you wanted the flights and then food. So less than a thousand bucks definitely for me to go out there and spend almost 24 hours to understand this city. And I think it’s one thing to do the analysis and to look at deals online. And I did that before I got there, which gave me the confidence that I do need to go in person. But being there driving up and down the streets, I went with my son and we spent probably close to two hours just driving aimlessly around town, no destination, nowhere to go.

Tony:
We’re just trying to get a lay of the land and we got to see, okay, hey, this major highway, there actually is a bit of a difference if you’re north of the highway or south of the highway or man, once you get around north of the airport, it kind of feels a little bit different than if you’re south of the airport. So we started to get a feel of, okay, what is the box we want to stay in? And it was so much easier to do that going there in person, but the most important thing Ash, was that it validated everything we wanted about going into that market and it was well worth whatever a thousand bucks would’ve cost us to go out there to do that.

Ashley:
And that was for two people too. I mean your flight for only one, it decreases the price even more. And food for one, growing I sure was not cheap to feed. So I think that for me it would be a great recommendation is start there because I agree with California tenant landlord laws and New York tenant landlord laws, especially in New York City. So I would pick two or three markets, analyze them, okay, they look good on paper now let’s go look at them in person and set up appointments to walk properties. You can go, BiggerPockets has agent finder, lender finder, you can find all the team members, property managers that you would need in a market and set appointments to meet with them while you’re there. The next thing that I would actually look into is especially if you do the out-of-state investing, you get a property for cheaper than you would in buying a new primary in la.

Ashley:
But what if you were able to purchase both? So you could still buy a primary in LA and then do the out-of-state investing, but with your primary residence, is there an opportunity to turn that into a short-term rental? So since you work remotely, can you actually go and travel places and do things and rent out your short-term rental and have your mortgage covered and your expenses for going and traveling and staying somewhere? I always think of Olivia Tati, so I follow her on Instagram. We’ve had her on the podcast before. She’s always at BP Con and probably will be in Las Vegas this year. But she has a house in Denver that when she goes and travels, I think she was just in Italy, she rents out her house and it is more than covering her mortgage payment and her expenses to go and travel. So I think that could also be a great idea also, especially since you can work remote.

Tony:
Yeah, so many good points there Ashley. And I think there’s pros and cons of investing in a high cost of living market. One is that, I mean, you know it, right? You live in New York City, you used to live in Southern California and la so you know those markets, right? The ins and the outs and as I was saying about me going into Oklahoma City and having to spend hours just trying to get the lay of the land, you already know that for both of those markets. So I think there is a slight competitive advantage maybe of you going into that market. But you mentioned all the cons, right? More expensive tenant landlord laws. You’ve got to weigh those out for yourself to see which one wins out. But I think maybe the bigger question for Steve who asked this this question is what’s more important to you?

Tony:
Is it the equity growth? Is it the tax benefits? Is it the cashflow? Because from what I’m seeing, you’ve got a really good financial profile in terms of your income. So do you need the cashflow or do you want the cashflow that these properties are going to produce or are you trying to accelerate your ability to go part-time at work or something like that? Or is this more of a long-term place that whenever you do finish your very high income producing career, you’ve got a large portfolio of properties that are paid off that pays you well every single month? Because with 300 k, I mean even if you bought one property every two years in California or New York or whatever it may be, put ’em on 15 year fixed mortgages in another 30 years, you’re going to be pretty well off because you’ll have paid off properties that have probably appreciated pretty well over time as well.

Tony:
So I think the bigger question or what needs to be answered first is what’s more important to you? Is it the cashflow today or is it the equity in the growth long-term? And that’ll probably dictate which move makes the most sense for you. And I think the last part of Steves questions, just like advice for investing remotely, Ashley, I think you hit the nail on the head of the best first step, which is going to BiggerPockets, going to the agent finder and finding an agent in those markets you were thinking about. That’s exactly what I did with Oklahoma City. I went to the agent finder, punched in my contact details. I had four or five agents reach out to me. I contacted the one who I felt I had the best kind of initial rapport with and she showed me around the town for almost 24 hours.

Tony:
So that would be my first step is finding a good agent because then she introduced me to a contractor who might have said a few jobs and walked those jobs with us. She, she’s inserted me into her network of people that are already there. She hosts meetups, she knows all the title companies. She’s like, oh, I just got some off market deals from the title company. Let me show you those. So you find the right agent in those markets. It makes everything easier on the acquisition side and then the management side, you already know you’re going to find a good property manager. So I think that takes off a lot of the difficulties of managing remotely because you’re going to have someone who’s there locally to do most of that work for you. So if you’ve read the book Long Distance Real Estate Investing, you’ve got a good framework, but I don’t want you to shy away from long distance investing just because you haven’t done it before.

Tony:
Lots of people do it successfully. My first year was long distance. We’ve interviewed lots of folks who’s first year was long distance, so it is possible just built the right team in that market. So for real, managing tenants can feel like a lot of work, but they don’t have to be. For me, it all changed when I found Turbo Tenant. They’re a free software that makes managing rentals super easy. I used to waste so much time on paperwork chasing down rent, but now with Turbo Tenant, I have everything in one place. They even have state specific leases, digital condition reports, and a simple way to schedule showings without all of the back and forth. Their automated rent collection saves me hours every month and their maintenance management keeps me organized. Everything’s in one place on your phone so you can be a landlord from anywhere. I’m actually good at managing rentals now, not just finding deals. Check it out at turbo tenant.com/biggerpockets and create your free account today.

Ashley:
Okay, welcome back. So our next question comes from Chris. Hey BP community. My business partner and I are in the middle of a tough situation on a remote flip project in Decatur, Georgia. And we’re looking for advice from seasoned investors who’ve been through similar situations, we’re based in LA and open to creative or unconventional strategies. As long as they help preserve capital or minimize losses, we’d strongly refer to exit with at least a break even outcome or pivot to a hold strategy that preserves the capital and gives us another shot at resale in 2026 when market conditions might improve. Here’s our property overview, the purchase price, 198,000 in September of 2024. We financed it with a hard money loan of 248,000 and we have this extended until September 23rd, 2025. Our monthly holding costs are $2,800, all in costs with agent fees holding rehab. Saging overages were at 354,000.

Ashley:
So this property was converted from a three bed, one bath to a four bed, two bath rehab. Delays and permitting issues pushed us into June, 2025 when we originally thought it would be done by February, 2025. And currently the Reno is only 75% complete. So he goes through and mentions some of the renovation status as the contractor hasn’t made any progress for over four weeks. Floor joists for the addition are exposed in the back. Second bathroom and closet still need to be built out. And the last draw from the hard money lender will fund completion, which is already built into the cost basis. We originally comped the flip at 375,000 now based on recent comps and our contractors finish quality, we’re really sickly looking at 320 5K to 340 5K on the open market options. Do we sell as is, which basically would put us at a 73 K loss.

Ashley:
Do we refinance it and hold it as a long-term rental? That would give us a 46 K loss. That would rent for about 2200 per month, which would be negative cashflow. We refinance it and run as a short-term rental or midterm rental. We would keep the 46 K into the deal, that’d give us about $300 per month, but we’d also need to put in additional money about 12 K to furnish it. And self-managing would be tough and we’d have to find a property manager then pay that out of our cashflow. The last thing is to finish and sell, and that would be a 27 K loss. So don’t even go ahead and finish the rehab, just sell it as is. And that would be the 27 K loss. So what would you do in this situation? Has anyone else been in a similar situation? And if there are experienced investors listening, they’re going to say yes.

Ashley:
We have been in similar situations where the deal does not come out as you would have thought, I have a property right now that’s been sitting on market since December, I think. So he goes on to ask, would you do short-term rental, midterm rental, do you ride it out? Do you sell it? What is the best thing for you? So Tony, looking at this information before we even give an answer, I guess, is there anything else that these two partners should be thinking about when they’re making their decision besides just how much money they’re losing?

Tony:
Yeah, that’s a great question. I think there’s also, I don’t know if maybe peace of mind is the right word, but it’s like how much energy are you going to have to invest on all of these different options that you’ve laid out? Some of these are maybe higher energy, higher effort activities. Some of these may be lower energy, lower effort activities, and you’ve been getting punched in the mouth it feels like for the last few months. So which one of these options is going to bring some peace, I think is an important one. And then I think the other piece is just financially, where are you at? Do you have the cushion to absorb these losses? You used to say a lot on the podcast, if you have the money to solve a problem, it’s not really a problem. So I think the question is, do you guys have the cushion to write the check and be fine?

Tony:
And I think that adds another dynamic to the equation here. But I think before we even go into solving this issue or coming up with solutions, which to try and figure out what went wrong, there were some timeline issues, there were some RV issues, there was maybe some scope adding the additional bedroom and bathroom. Was that too much of a scope? So first on the timeline piece, I just wonder why did you guys fall so far behind? Was it that the contractor gave you a date and said, Hey, we can be done by February, 2025. Because if that is the case, and this is just a lesson for all of our rookie investors who are listening, don’t ever take that date at face value. If a contractor tells you it’s going to be three months budget for six, if they tell you it’s going to be six budget for 10, don’t ever run your deals on the timeline that the contractor gave you Always add some additional timeline in buffer because things do happen. Sometimes it are their fault, sometimes it are outside of their control. We never know what’s going to happen when we start opening up walls and we try and go get a permit and something else happens. So for all of our is from a timeline perspective, make sure that whatever data contractor gives you always adds some buffer there. And then it seems like actually there was also some issues with the rv.

Ashley:
I think that was just because the market has changed. We definitely have seen a shift into a buyer’s market where they thought they were going to be able to sell in February. So their comps were from December, January, and then now they’re saying that what has sold recently is not what those properties were selling for six months ago,

Tony:
But they also added that, they said based on recent comps and our contractors finished quality. So I wonder what that part is about. It’s like was it the scope that you guys collectively came together and that the scope just wasn’t strong enough to reach that 3 75 a RV? Or is it like, hey, we had the right scope, but the contractor used cheap materials or maybe didn’t do things the right way or

Ashley:
Yeah, I’m literally pitching the trim not matching up completely put not perfectly. Or the tile isn’t perfectly square, it’s a little off center. That’s what I think at least far as finish quality. So on the point of the contractor, Tony, is there a contract in place and is there any way to go after this contractor, whether it be in small claims court or to just sue this contractor because the property is not completed

Tony:
And that’s an option as well, and maybe another way to recoup some of the funds that you guys might lose on this deal. But I was with Dominique Gunderson who we interviewed on the podcast recently, and I was asking her about her flips that she does in New Orleans because she’s also remote. She’s right now in California. All of her flips are in New Orleans. And I said like, Hey, how’s the market been for you? And she said, Hey, it’s also shifted for me. She’s like, but what I’ve found is that the way that I’m moving inventory is I’m pricing slightly lower than all of the other comps that I’m finding. So if I have a comp at 300, I’m going to list it at 2 95, I’m going to list at 2 2 90. And that’s how she’s been getting her inventory to move. So I think the lesson for a lot of our rookie investors right now is whatever comps you’re seeing, because we know that we are moving maybe more so into a buyer’s market, you have to decrement whatever those comps are by a certain percentage. Again, I was in OKC yesterday and I saw comps and I was not using those numbers as my arv. I was knocking off five, 10, $12,000 to try and make sure I had some cushion built in for whatever fluctuations the market might have. And I didn’t know that. Had I not talked to a more experienced flipper or had I not myself had flips that have sat for a long time. So I think you learned some of those as you go through the process.

Ashley:
And Tony, we actually were lucky enough to have Dominique come to be pecon with us. She is actually on one of the how-to tracks that Tony and I put together. It’s going to be her and James Dard and James Danner’s, project manager Ryan, and they’re going to be sharing all of their secrets to success for estimating rehabs and running construction projects like this. So if you’re going to B pecon, make sure you attend that session. Also, if you guys, we want every Ricky to attend B pecon. So if you guys need an extra discount to come, Tony and I have a couple secret codes. Go on Instagram, send us a dm, I’m at Wealth from rentals, Tony’s at Tony j Robinson. Send us a DM and we’ll see what we can do to hook you guys up so you guys can come hang out with us.

Tony:
Alright, Ash, let’s finally answer this question for Chris. What should he do? He gave us a few options. If you are in his situation, what do you focus on? What are you going to do and why?

Ashley:
I think my answer has changed over the years. At first, I never wanted to fail. I would grind and do whatever it took to finish it, even if it meant going at a loss. But now I just like, I would don’t want to say give up, but I would not be so worried about finishing a project just to not be a failure that I didn’t even finish it and I’m selling the flip uncompleted. I think that I would either sell the flip now be done with it, get rid of it before you’re putting more money into it, or I would want to see the numbers a little bit more as it listed as a long-term rental. Because if it’s a couple hundred dollars that you’re losing in cashflow, it’s however much it ends up being. If that’s something you can manage for several years, is there an opportunity for it to appreciate a little bit more? Is there an opportunity to be able to refinance to pull out more money? So I would also look at that as an option too.

Tony:
I agree with you. I think the mindset piece here is super important, but looking at the options that he’s laid out, SE as is, which is a 73 K loss, refining and long-term renting, which is a 46 K loss, negative cashflow, the refinance and short-term and midterm renting still a 46 K loss with an additional 12 K, maybe even more. It’s your first time doing it. You’re probably underestimating how much it costs to furnish this thing. So that really comes out to, what is that? Maybe almost a 60 k loss if you refinance and short-term rent. In my mind, finishing it and selling it even at a 27 K loss is probably the best approach because at least you’re done with the deal once you sell it with all of these other options. What if something else goes wrong?

Ashley:
Like Tony, this 27 K to finish it and sell it? That is the least money to lose. But how do you know that nothing else is going to go wrong between then and now? I think that’s a big thing too, is what’s the risk going forward and will that number actually stay the same because it’s already changed so much too.

Tony:
Yeah, I think speed of finishing is probably important here as well. And they say there’s 75% done, how much more time will it take to get that last 25%? So yeah, I mean to me it’s smallest loss, potentially maybe the least amount of risk. But worst case, I mean maybe you try and list it, see what happens, and the plan B is that you just refinance and sell, right?

Ashley:
That idea is to try to sell it, see what happens. But in the process, start looking at what refinancing would look like so that if it doesn’t sell and it sits, you are already in progress of getting that loan to refinance it and rent it out. Another thing too is it is mentioned if he does refinance and hold it, he’s putting at 46 K loss. Technically it’s not a loss, it’s just that your money is sitting in that deal and you’re not pulling it back out. So I think that’s another thing too is kind of change your mindset on that, that depending how long you hold that property, yes you could still lose that 46 K, but you could lose more than that and the bank have to write a check to the bank at closing two years from now because it’s worth even less because a tenant destroyed the property or something like that. So I think the numbers do come a lot into play as to what to do, but I also think about how successful do you think you’ll be finishing the project to sell it If you do rent it out, what kind of headaches will come along with that? So there’s also that mindset piece and why you got into real estate investing and what makes it worth it at this point.

Tony:
Alright guys coming up, we’re going to answer the question of DSCR loans are really for beginner investors. We’ll share our thoughts after one final word from today’s show sponsors. But while we’re gone, be sure to subscribe to the realestate Rookie YouTube channel. You can find us at realestate rookie and if you’re on Instagram or at BiggerPockets rookie, you can find us there. We’ll be back with more after this. Alright, let’s jump back in our next and last question comes from Andrina. Andrina says, I finally want to dive in to put my training wheels to the test. I’m looking into investing in Ohio, but would like to know, has anyone used A-D-S-C-R loan? I initially wanted to do a bur, but since I’m not from the area real estate agents are telling me I should maybe start out with a turnkey to get my foot in the door.

Tony:
Can I please have the BP community’s thoughts on this? Is A-D-S-C-R loan worth it or does it depend on my strategy? I hate that my money will be stuck in the property though. Hoping to get some insight. So I think first let’s just define what is A-D-S-C-R loan? So A-D-S-C-R loan stands for debt service coverage ratio. So basically the bank is looking at how much revenue does the property generate and is that revenue enough to cover the debt service AKA, the mortgage? I believe this originated in commercial real estate, or at least that’s where it’s super prevalent because if someone goes out and buys a $100 million apartment complex, one person’s not going to cover that mortgage. So the bank is looking at the property itself to gauge can the property itself generate enough revenue to cover a $100 million purchase, a $100 million mortgage? And we’ve seen this DSCR loan make its way into single family investing as well. So that’s what A-D-S-C-R loan is. It’s looking at the property, not so much the individual to gauge whether or not it can cover the mortgage. So Ash, what are your thoughts? Do you think that DSCR loans make sense for rookie investors or are they too complex? What would your initial take?

Ashley:
I think they are actually easier getting A-D-S-C-R loan because they don’t care about you as much, so they’re not going to go into, let me see your mother’s bank statement. Sometimes when you get conventional lending on the personal side of where’s every dollar coming from. And so I think it is easier to actually get those loans, especially if you’re buying a property that has all the documentation, if it already has a tenant in place, actually easier to do because with the DSER loan, they’re going to want to see what the rental income is. And I’ve had the banks actually ask for the lease agreement, even though I don’t even own the property yet, they want me to already have it rented before I close on the loan. So sometimes I haven’t gone that route because first of all, I don’t want to commit mortgage fraud and make a fake lease agreement just to get this loan.

Ashley:
And the second thing is I don’t want to rent a unit a property to someone that I don’t even own yet. So even a lot of lenders will say, yes, this is a very, very gray area as far as that, the banquet assets. So having a tenant in place is better if you’re going to purchase a property that is, you’re going to use the DSER loan. But I think one of the really big questions in here are the things we need to discuss is that the real estate agent is saying that this person should start out with a turnkey because they are not from the area. And Tony, in our first question, you literally proved that you do not need to be from an area to be able to do the bur strategy, which is buy the property, rehab the property, rent out the property, refinance the property, and then repeat it.

Ashley:
So I think that’s the first thing is what strategy is for you and Adrina, if you don’t want to leave your cash into the deal and you want to be able to pull more of it out because you’re doing the B strategy instead of just putting down A-D-S-E-R loan is probably going to be a 20 to 25, maybe even a 30% down payment that you’re going to leave in there until you sell the property or refinance the property if you want to pull that money back out. So I think if you want to do the birth strategy, talk to some of the contractors in that area, ask the agents that you’re working with for recommendations, or maybe even find another agent that in sense of saying you shouldn’t do that can help you find a way to actually do that.

Tony:
Yeah, you bring up a really good point, Ashley and I just kind of didn’t even process for me that that was in the question as I was reading it, but I would encourage you, Andreina agents are agents. They’re not lenders. So I would go talk to as many lenders in whatever market it is in Ohio that you’re considering, and ask them what their loan products look like for Burr products or for Burr type properties. And I was able to do my very first real estate deal as a remote bird because I found an amazing banking partner who not only lent me the money that I needed for the construction, but they also sent someone out there to check in on the job to make sure it was getting done the right way. So I agree with you, Ash. I think there’s a lot of value in doing that.

Tony:
I don’t know why a Ricky would even have to necessarily use A-D-S-E-R loan to buy, even if it was a turnkey property, there was still other loan options out there that are non DSER. I think to Ashley’s point, the application process is probably simpler and not as in depth. But again, typically higher down payments, typically higher interest rates. So the cost of the debt is more so if you’re looking at the same deal and you can put 15% down loan or you can put a 25% down loan, the cost to acquire that deal is going to be different. If you can get approved, maybe conventionally, the interest rate’s going to be lower versus the DSE loans, so your cash flow is better. So I think it’s really weighing the pros and cons. I think the DSER starts to make a lot of sense when you are really focused on scaling and maybe your traditional banks are worried about DTI because you have so many mortgages going on and you’re not showing enough income yet on your tax returns, whatever it may be. I think that’s when the DS ER has become maybe a little bit more attractive, but it’s a Ricky investor. I would think that there are may be cheaper options out there that you can use in that first deal to really get the most either in terms of cost to acquire the deal or the actual cashflow you get on a monthly basis. So shop around. I think that’s the biggest thing. Just shop around and see which loan product makes the most sense for the deal that you find.

Ashley:
Yeah, and even with the Burst strategy, when you go and refinance, you can refinance into A-D-S-C-R loan. If you have a primary residence that maybe you’re moving out of and you want to use your FHA loan, again, you can refinance that primary residence into A-D-S-E-R loan. So you can go ahead and use that FHA loan product on another property for yourself. That’s going to be your primary. So there’s still lots of ways to be able to use the DSCR loan besides just on the purchase of the property. Well, thank you guys so much for joining us today. If you guys have questions, head over to the BiggerPockets forums, put your questions there. We pull them from there every single week. Thanks so much for joining us. I’m Ashley. He’s Tony. We’ll see you guys next time.