DSCR vs. hard money for Colorado 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 house that needs a roof, a sewer line and a furnace usually cannot answer the second question yet, because it is not rentable yet.

So the choice depends on condition and timing. A rent-ready house in Aurora, Colorado Springs or Pueblo with a tenant or a realistic market rent can usually go straight to a DSCR purchase loan. A dated Denver bungalow or a distressed duplex 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 Colorado rehabs go off plan

Soil and sewer lines come first. Expansive clay soils along parts of the Front Range move foundations and slabs, and older Denver-area houses often have clay or cast-iron sewer laterals that fail a camera scope. Radon is common across the state and mitigation is a routine line item. Inspect for these before you budget for finishes, because they decide whether the house can be rented and they stretch timelines.

Hail and wildfire come second. A roof that is near the end of its life in a hail-prone county is an insurance problem at refinance as much as a construction problem. In foothill and mountain areas, wildfire exposure can make the long-term insurance quote much higher than the builder’s risk policy suggested. Whatever the long-term premium turns out to be, it goes straight into the DSCR ratio.

Local rules come third. Denver requires a residential rental license before a long-term lease, and its short-term rental rules are limited to primary residences, so a Denver fix-to-rent should be underwritten on long-term rent. Mountain towns license and cap short-term rentals separately. Permits, inspections and licensing all have to be finished before the first lease, and every month of delay is another month of short-term interest.

Plan the DSCR refinance before you close the hard money loan

The refinance is your exit, so underwrite it on day one. Estimate the stabilized rent conservatively, use a real insurance quote and the full tax bill including any metro district levy, 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 an optimistic rent, the project depends on the appraisal going your way.

• Ask about seasoning before you choose the hard money term, so the maturity date does not arrive before the refinance can close.
• Keep permits, final inspections, radon and sewer documentation, contractor invoices and dated photographs.
• Get the rental license where required and sign a lease at market rent before the refinance appraisal if you can.
• Close the hard money loan in the same Colorado LLC that will hold the property long term.

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 cosmetic work can often be paid from cash after a DSCR purchase closes. As a broker, we 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.