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While DSCR Loans are still a relatively young loan product (first established around the middle of the 2010s), their use has continuously expanded over time as the combination of popularity for investors due to ease of qualification and common-sense underwriting as well as rock-solid performance for investors buying the loans (i.e. low delinquency rates) has spurred lenders to offer more and more options to investors past the traditional limitation of just long-term rentals (12-month leases) on standard 1-4 unit properties.
Another key reason for the expansion of DSCR loan usage from 2022 through 2025 is the challenging environment for real estate investors: interest rates have surged, while property values and long-term rental rates have remained largely flat. This combination has been especially difficult for investors seeking cash-flow-positive rentals, because all three of these factors exert downward pressure on DSCR ratios, the primary measure of a property’s ability to cover its debt payments.
While some investors initially hoped that rising interest rates might be offset by falling property values (which would reduce loan amounts and, in turn, monthly debt service), that didn’t happen in most markets. Instead, loan amounts remained high due to stubbornly elevated home prices, meaning the full impact of higher rates was felt in monthly PITIA, compressing cash flow and making traditional single-family rental deals harder to pencil out.
This combination of factors pushed many DSCR Lenders to expand beyond traditional long-term rental loans for 1–4 unit properties. Many DSCR Lenders were willing to lend and many bond investors (note holders) still had robust appetite to add DSCR Loans to their portfolios, due to the strong historical performance (i.e. low delinquency rates of DSCR Loan borrowers and nice returns for note investors). But simply put, there weren’t many properties to lend on or loans to make and sell – the numbers just didn’t work for investors with good credit buying vanilla single family rentals under long-term leases. Most of these properties couldn’t cash flow and provide returns for well-qualified real estate investors, and those same well-qualified real estate investors suddenly had many other good options for their capital – like “risk-free” Treasury bonds paying around 5%. Many investors asked, why take on the risk and hassle of rental property ownership without the returns?
DSCR Loan buyers were hungry for low-risk loans paying market rates, repeatedly requesting loans with unrealistic standards, such as a borrower with a high credit score, putting 30% or more down on a single-family rental in order to obtain a barely cash flowing (i.e. around 1.00x DSCR ratio) property and paying north of 8% in interest rate. The catch was that these mythical borrowers and deals didn’t make much sense; an investor, and “quality” borrower to lend to, would likely make different investment decisions than these deals considering the alternatives. On the flip side, if these characteristics lined up on paper, a major reason was likely that the investor was “hiding something” (such as fraud or credit blemishes), something DSCR Lenders and note buyers definitely want to avoid.
A natural response to this phenomenon was a particular set of forward-thinking lenders was to expand DSCR Loan eligibility past the traditional unit limits (i.e. four-unit maxes) and traditional property usage requirements (i.e. long-term leases). Under a high-rate environment, often the only real estate investments that could comfortably cash flow and provide returns for investors meant breaking out of the traditional SFR LTR box. And the strong performance of DSCR Loans for note investors (i.e. the institutions that bought and held DSCR Loans) allowed loan buyers to bless program expansions with expanded guidelines and looser eligibility requirements, particularly around innovative and non-traditional property usage and leasing strategies.
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Chief among these program expansions were increase in eligibility and more aggressive qualification for short term rentals (such as airbnbs) and higher-unit-count properties (like multifamily properties with five or more units). Even though STRs and larger multifamily deals introduced new operational risks, they often presented the only viable path to cash flow in high-cost markets. For example, STRs frequently generate 2x the gross rental income of a comparable long-term lease, often the difference between qualifying or not in a high-rate environment.
Investor creativity hasn’t stopped there. With short term rentals and small multifamily still competitive, even more nuanced strategies have emerged, including, Medium-Term Rentals, properties leased for 30–90 day stays, often to travel nurses, contract workers, or relocating families, Single-Room Occupancy (SRO) or properties rented “by the room,” often using platforms like PadSplit to maximize yield. Additionally, many residential real estate investors have explored converting standard SFRs into Sober Living Homes, single-family properties leased to corporate tenants or nonprofits who operate group-style housing for individuals in recovery or transitional programs, a need which has continued to skyrocket along with the nation’s substance abuse crisis.
These newer use cases are still in early stages of adoption by investors and lenders alike but DSCR Lenders, always on the forefront of adaptability and customizing guidelines for investors (versus slow-moving banks and government-sponsored entities), have become the first call for many investors utilizing these alternative SFR leasing strategies. While they often make sense from a cash flow perspective, DSCR Lender comfort, qualification standards and eligibility still vary widely. But as the DSCR Loan market continues to mature, guidance around these more complex strategies will likely become more standardized.
Mid-Term Rentals, also called Medium-Term Rentals, have become an increasingly popular strategy for investors chasing stronger cash flow in a tough market. They’re often seen as the “Goldilocks” rental model: not too long, not too short, just right. For investors who want more income than a traditional 12-month lease but less hassle than a high-turnover Airbnb, MTRs offer a compelling middle ground. Generally, MTRs will be fully furnished and have lease terms in the thirty-to-ninety-day range.
Real Estate Investors focused on MTRs typically target niche and often specific renter profiles such as travel nurses and medical professionals, corporate interns and relocating executives, film crews or touring theater professionals, and families needing homes for a couple of months, such as between moves or after a fire or natural disaster. The properties are typically furnished and combined with the shorter terms than typical leases (which usually require a full 12-month agreement), often command significantly more rental income than long-term leases, but with less expenses compared with the frequent turnover of short-term rentals. It can offer many real estate investors a “best of both worlds,” enough rental income to provide cash flow in a challenging market without the extensive work involved in owning and operating an STR.
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Q: What Is an MTR (or Mid Term Rental)?
A: An MTR or (Medium Term Rental or Mid Term Rental) is a furnished rental property that is typically leased for longer than 30 days, but typically less than a year, mostly falling in the 30–90 day range. These properties are usually tailored toward a specific niche tenant, such as traveling nurses or summer interns.
By 2025, most DSCR Lenders, especially those already comfortable with short-term rentals, are fine with MTR usage. Properties being used for MTRs don’t usually need any special approval as long as the property itself is financeable and rents are reasonable.
However, there’s one caveat: while STRs have tools like AirDNA to help project rental revenue, MTRs don’t yet have a similar industry-standard standardized data platform, and many appraisers are hesitant to generate 1007 rent schedules based on monthly stays. As such, DSCR Lender qualification and underwriting for DSCR Loans secured by MTRs is still changing and not very standardized. That is, while MTRs are almost always eligible as a usage, the methodology DSCR Lenders use for rents in the DSCR calculation is varied and continually changing. If planning to secure a DSCR Loan for a medium term rental, it’s highly recommended to nail down the specifics of the qualification process, particularly around how the rental revenue will be projected.
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Although Single Family or 2-4 unit properties are generally okay if used for medium term rentals (or LTR or STR), the same cannot be said about a similar but distinctly different strategy: Single-Room Occupancy or “SRO.” SRO usage usually refers to when an SFR or similarly sized property is rented to separate tenants for each individual room, with each tenant then having access to shared or communal spaces in the rest of the home, such as shared kitchens, living areas and bathrooms. These arrangements, also called “boarding houses,” are an alternative leasing structure to the LTR strategy (i.e. one 12-month lease to a single tenant or family) or STRs or MTRs where the leases or arrangements are much shorter in stay, but still to only one tenant. The differentiating factor is how many tenants occupy the property at a time, with SROs allowing multiple tenants in the home at once.
Real estate investors have become attracted in recent years to the SRO strategy since renting by the individual room can provide more rents and cash flows versus if rented to just one user at a time, a very important consideration in a recent high-rate, high-price point market environment. While not a new concept, technology-enabled management companies such as PadSplit have helped investors own and operate properties with SRO much more easily, with specialized property management and technology (for leases, rent collections, etc.) that has made this an accessible strategy for more investors.
Unfortunately, properties with SRO usage are mostly ineligible across the board for DSCR Loans. Why are properties using SRO leasing a problem for DSCR Lenders?
Even if the numbers look great, there are numerous issues that remain stubbornly hard to resolve, especially for the conservative and risk-averse money managers that end up owning these loans. One is the stigma of the strategy: the model often brings to mind boarding houses, halfway homes, or other high-turnover living arrangements, and lenders tend to associate these setups with higher tenant risk: missed rent, inconsistent occupancy, and more wear and tear. Multiple tenants sharing a small space can lead to conflict, headaches and all the associated costs as anyone who has lived in a crowded dorm in college can attest. Tenants resorting to SRO living arrangements are more likely to have worse credit and a history of issues of criminality or substance abuse, and can be more likely to do damage or create problems for the property. This concern, while likely left mostly unspoken for legal reasons, is probably a big portion of the issue as well.
There are also additional reasons for the pushback. DSCR Lenders (and the eventual note holders) aren’t real estate operators. They don’t want to hold or manage a property long-term. Their main fallback, if things go south, is foreclosure. And when that happens, their first move is usually to sell the property quickly to recover capital, not to figure out how to run a room-by-room rental operation.
That’s why lenders put so much weight on the resale marketability of the property itself. If a home has been heavily modified for single-room use, think individual door locks, subdivided spaces, extra bedrooms, or if it’s way out of character for the neighborhood (like an eight-bedroom house in a block of three-bed colonials), the buyer pool shrinks fast. Fewer potential buyers mean more risk for the lender, even if the investment works well for the operator. The necessary alterations to make a home SRO-ready (including individual locks on doors and altering space to maximize bedroom count and workable shared living arrangements) count as deferred maintenance in appraisals in the form of costs to “undo” the alterations, which typically come in above the $2,000 threshold necessary for eligibility.
Despite these issues, these SRO properties still tend to make sense for real estate investors with good management skills and in SRO-suitable markets. It’s likely some DSCR lenders may be willing to finance SRO properties in the future, particularly those with minimal alterations (functional obsolescence), that fit in generally with the surrounding neighborhoods and market, and have solid tenant screening and lease documents in place.
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Q: Can I get a DSCR loan for a property leased to a corporate tenant?
A: Usually yes, most DSCR Lenders allow corporate leases, especially for mid-term rentals (e.g. travel nurse agencies, relocation firms). But sober living homes or institutional group housing are almost always ineligible, even if operated by a company, and especially if operated by a nonprofit organization (NGO).
Up next, Section 4 of the guide covers How DSCR Lenders Determine Your Interest Rate and Terms once you have confirmed you (the borrower) and the property qualify.
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