DSCR vs. hard money for Connecticut fix-to-rent deals

Different jobs, not competing products

A hard money lender asks whether the property, after the work you plan, is worth enough to protect its loan, and whether you can finish the project. A DSCR lender asks whether the property, as a rental, earns enough rent to carry a long-term payment. A vacant three-family that needs heating systems, a roof and lead work usually cannot answer the second question yet, because the units are not rentable yet.

So the choice depends on condition and timing. A rent-ready two-family in a suburban Hartford or New Haven County town, with tenants or realistic market rents, can usually go straight to a DSCR purchase loan. A distressed multifamily that needs months of work usually needs short-term money first.

• Sized to — DSCR: rent against the full payment. Hard money: purchase price, rehab budget and after-repair value.
• Term — DSCR: long-term, often fully amortizing. Hard money: months rather than years.
• Payment — DSCR: principal and interest, or interest-only in some programs. Hard money: usually interest-only, sometimes with an interest reserve.
• Condition — DSCR: rentable and in reasonable repair. Hard money: can be distressed; that is the point.
• Cost — DSCR: priced for a long hold. Hard money: usually higher, with points and fees for the short term.
• Exit — DSCR: you hold the property. Hard money: a sale or a refinance, usually into DSCR.

Where Connecticut rehabs go off plan

Old buildings are the first problem. Connecticut’s two- and three-family stock is often a century old, with shared heating systems, original wiring, porches that need structural repair and, in pre-1978 units, lead paint that triggers state obligations when children under six live there. Inspect for those items before you budget for finishes. They decide whether units can be rented, and they are the items most likely to stretch a timeline.

Local process is the second. Building permits, certificates of occupancy and, in some cities, rental licensing or inspections have to be complete before units can be leased. Every month between the end of construction and the first lease adds short-term interest, and the refinance cannot size on rent that does not exist yet.

Foundations and taxes are the third. In northeastern Connecticut towns where pyrrhotite has damaged concrete foundations, a long-term lender or insurer may ask for testing or documentation at refinance. And a renovated property may be valued higher at the town’s next revaluation, raising the tax line that the DSCR ratio has to cover.

Plan the DSCR refinance before you close the hard money loan

The refinance is your exit, so underwrite it on day one. Estimate stabilized rents conservatively for every unit, use a real insurance quote and the town tax bill at the current mill rate, and run the payment through the calculator at a loan amount that repays the hard money balance, closing costs and any financed rehab. If the ratio only works at optimistic rents, the project depends on the appraisal.

• Seasoning: many DSCR programs want a minimum ownership period before they lend on a higher appraised value. Know that period before you choose a hard money term that matures first.
• Records: keep permits, certificates of occupancy, lead compliance paperwork, contractor invoices and dated photographs.
• Leases: signed leases at market rent for each unit make the refinance much cleaner than an appraiser’s estimate on vacant units.
• Entity: if you plan to hold in a Connecticut LLC, close the hard money loan in that LLC so title does not need to move before the refinance.

When to skip hard money entirely

If the property is already rentable, paying short-term pricing for a few months on a loan you will replace is expensive. Light work on occupied units can often be paid from cash after a DSCR purchase closes. As a broker, DSCR Loans Connecticut can look at the purchase, the rehab and the refinance together and show you where the numbers are thin before you commit to either loan.