Max LTARV for BRRR Method: Factor In DSCR For Bridge Loans

Bridge Loans For BRRR Rental Investing

When using a bridge loan from a private lender to purchase, rehab, rent and refinance -- BRRR, you should be sure to factor in DSCR on an ARV basis to determine your max LTARV. Failing to do so may leave you in a situation where you receive your appraisal report and are told that your max LTARV is substantially lower than what you had planned. This can detail a deal or put you in a situation where you need far more cash to close than you initially anticipated.

For our bridge loan, we can lend up to 75% of ARV based on an ARV appraisal that is ordered and reviewed prior to closing. If your exit strategy is to refinance out of our bridge loan and hold the property as a rental, we also look at the DSCR to determine the maximum LTARV (loan to after repair value). Here's our DSCR Calculator, 1.2 is our minimum DSCR at a given LTV.

Example 1:DSCR Allows Max LTARV

• Purchase: $600,000
• ARV: $800,000
• Market Rent (ARV): $6,000
• Max loan based on 75% LTARV: $600,000
• DSCR at $800,000 value, $6,000 rent and 75% LTV: 1.3
• Max loan confirmed: $600,000
• Max purchase portion (90% of purchase price): $540,000
• Max rehab loan portion ($600,000 - $540,000) = $60,000

In this scenario, the property appraised on an after repair basis with a market rent that supports the maximum loan to after repair value (LTARV).

Example 2: DSCR Prevents Max LTARV

• Purchase: $600,000
• ARV: $800,000
• Market Rent (ARV): $5,000
• Max loan based on 75% LTARV: $600,000
• DSCR at $800,000 value, $5,000 rent and 75% LTV: 1.07 (too low)
• Max loan at 1.2 DSCR: $525,000
• Max loan confirmed: $525,000
• Max purchase portion: $525,000
• Max rehab loan portion ($525,000 - $525,000) = $0

In this scenario, the property appraised on an after repair basis with a market rent that does not support the maximum loan to after repair value (LTARV). As a result, the borrower qualifies for a lower total loan amount, ultimately needing a higher down payment and to fund the rehab out-of-pocket.