Where Strategy Drives Approval: Defense Wins Championships #
Aggressive scaling requires aggressive defense. As your portfolio grows, your exposure to liability and market shifts increases. Successful DSCR investors do not just hope for the best; they construct a fortress around their assets.
1. Entity Structure & Asset Protection #
Closing in your personal name is the rookie mistake that exposes your life savings to a single lawsuit.
The “Silo” Strategy #
- Individual LLCs: High-net-worth investors often place each expensive asset into its own individual LLC. If a lawsuit occurs at Property A, the assets in Property B and your personal home are legally “siloed” and unreachable.
- Series LLC: In some states, a Series LLC allows you to have one parent company with infinite “child” series, providing the protection of individual LLCs without the administrative cost of filing 10 different tax returns.
2. Strategic Insurance Coverages #
A standard “Landlord Policy” is often insufficient for DSCR investors. You need specific riders:
- Loss of Rents Coverage: The most critical rider for DSCR loans. If a fire or flood makes the unit uninhabitable, this insurance pays you the lost rental income. This ensures you can still pay the mortgage while the property is being repaired.
- Umbrella Liability Policy: A cheap, high-limit policy (e.g., $1M – $5M) that sits on top of your standard policies. It kicks in if a catastrophic lawsuit exceeds your standard coverage limits.
- Ordinance or Law Coverage: If a property is 50% destroyed, local code may require you to tear down the whole thing and rebuild to modern code. Standard insurance won’t pay for the upgrade; this rider does.
3. Vacancy & Reserve Management #
Volatility is guaranteed; bankruptcy is optional. Your survival depends on liquidity.
- The “6-Month Rule”: Never let your liquid cash reserves drop below 6 months of portfolio-wide operating expenses. This is your war chest.
- Lease Staggering: If you own 10 properties, ensure the leases do not all end in the same month. Stagger lease expirations so you never face a “mass vacancy” event that drains cash flow simultaneously.
4. Interest Rate Hedging #
For investors using 5/1 or 7/1 ARMs (Adjustable Rate Mortgages):
- Refinance Discipline: Set a calendar alert 12 months before your fixed rate expires. Do not wait until the rate adjusts. You need time to shop for a refinance or sell the asset if rates have spiked.
- Prepayment Penalty Awareness: Always map out your “Step-Down” prepayment penalties (e.g., 5-4-3-2-1%). Calculate the cost of breaking a loan vs. the savings of a refinance before you move.
