DSCR Lending Update by i Fund Cities | July 2024

Rocky Butani CEO of Lender Link, interviewed Ryan Herting and Bryan Ziegenfuse from i Fund Cities to learn about what’s happening with DSCR long-term rental financing as of July 2024. Watch the video or read the interview transcript below.

Interview Summary: DSCR Loan Market Update

Participants:

• Ryan Herting (Co-founder, iFundCities)
• Bryan Ziegenfuse (Co-founder, iFundCities)
• Rocky Butani (Lender Link)

Key Topics Discussed:

1. Current State of DSCR Loans and Market Trends

   • DSCR (Debt-Service Coverage Ratio) loans, also known as rental loans, continue to be a popular financing option.
   • The market has been relatively stable, with a decline in volatility, which has led to narrowing spreads and gradual rate reductions for borrowers.
   • Interest rates have dropped by approximately 75 basis points to a full percentage point compared to the peak in late 2023.

2. Loan Performance and Leverage Adjustments

   • iFundCities has been funding DSCR loans since 2019 and has witnessed steady growth in demand.
   • Standard leverage levels remain unchanged, with 80% LTV for purchases and 75% LTV for cash-out refinances being the common thresholds.
   • Markets like Austin, which experienced volatility, have begun to stabilize.
   • There has been a slight loosening in credit requirements for DSCR loans, particularly in short-term rental markets.

3. Impact of Interest Rates and Refinancing Trends

   • Borrowers who secured DSCR loans with interest rates in the 4% range are unlikely to refinance anytime soon.
   • Some refinancing activity is emerging among borrowers with bank loans that have five-year resets, as they seek alternative financing solutions.
   • Banks’ stricter lending policies have led to an increase in DSCR loan inquiries from traditional bank borrowers.

4. Multi-Family Property Financing

   • iFundCities funds 5-10 unit multi-family properties on both a DSCR and value-add basis, with permanent financing available for up to 25 units.
   • Underwriting for multi-family properties is more complex, factoring in cash flow projections, vacancies, and liquidity requirements.
   • The company focuses on Class B and Class A properties in Tier 1 MSAs, while C-class properties face greater scrutiny due to higher leverage risks.

5. Geographic Focus and Expansion

   • The company primarily operates in the Mid-Atlantic, Southeast, and South-Central regions (Texas).
   • Recent expansion into Southwest markets, including Southern California, Arizona, Colorado, and Utah, aligns with their strategy of having boots-on-the-ground expertise.

6. Federal Reserve Rate Cuts and Their Impact on DSCR Loans

   • The market has largely priced in the expected 1-2 rate cuts in 2024, meaning DSCR loan rates may not react immediately to a 25 basis point reduction.
   • Investors waiting for rate drops may not see significant changes in the near future.
   • iFundCities offers flexible loan structures like three-year prepay options, no prepay structures, and bridge products to help investors navigate uncertain rate environments.

Conclusion:

The DSCR loan market remains strong, with increasing investor interest and gradual rate reductions. While leverage and credit fundamentals have stayed largely the same, multi-family financing has become more nuanced. The potential for rate cuts is already factored into the market, meaning borrowers should focus on structuring deals that align with their long-term investment goals rather than waiting for further reductions.