Equity Carry with DSCR Financing
4 min read
What About Equity Carry?
Equity carry is often misunderstood. It is NOT required to solve most financing gaps. Equity carry is a specific tool used when the seller wants a large upfront payment, when there is an existing mortgage that must be paid off, or when a bank loan is needed to create immediate cash for the seller.
In an equity carry deal, we usually combine a partial bank loan (like a DSCR loan) with a partial seller note. The structure should match the seller's actual goals, not force them into a loan they don't need.
"Equity carry is not better than seller financing. It is just different."
Important Reality Check
Equity carry deals are incredibly tricky and rarely work out the way sellers hope.
These deals only tend to make sense when the seller has 90% equity or more. At that level, the numbers can work for both sides. But if you have high equity in the 40-80% range, the math usually does not favor this structure.
Why? Because at today's interest rates, the DSCR loan payment alone often eats up most of the rental income. Add in the seller payment, taxes, insurance, and reserves, and there is little to no cashflow left for the investor. Most investors will pass on these deals.
If you have 40-80% equity, it is usually best to look for a traditional buyer. You have a property that can sell the normal way. A conventional sale will likely get you more money, faster, with less complexity and less risk than an equity carry structure.
What is Equity Carry with DSCR Financing?
Equity Carry is a creative finance strategy designed for sellers with high equity (typically 40% or more) who want a large cash payment at closing.
Here is how it is different from traditional seller financing:
- Traditional seller financing: The seller finances most or all of the price and gets paid over time.
- Equity carry with DSCR: The buyer uses a DSCR loan for part of the price so the seller gets a bigger cash payment at closing. Then the seller carries the rest and gets paid over time.
Key piece: DSCR loans are investor loans. They look mostly at the property's rent, not the buyer's personal income. Not every property qualifies, but DSCR can be a good tool for rentals.
How the Structure Works
In an Equity Carry deal, the purchase price is split into two parts:
First Position: A smaller DSCR loan (often around 30% to 40%)
In this strategy, the buyer chooses a smaller bank loan on purpose so the seller can carry the rest. This money goes directly to the seller at closing.
If there is an existing mortgage, the DSCR loan proceeds first pay off that mortgage, and the remainder goes to the seller as cash.
Second Position: Seller carry (the remaining amount)
The seller carries the remaining amount as a promissory note in second position behind the DSCR loan.
The seller receives monthly payments on this note, plus a balloon payment at the end of the term.
Why this option can help
At today's interest rates, some properties do not qualify for a full DSCR loan. The payment would be too high compared to the rent on paper. Using a smaller DSCR loan and having the seller carry the rest can lower the total monthly payment. This can help the deal work without discounting the price.
Real Example: How It Works
The Situation:
- Home Value: $400,000
- Existing Mortgage: $80,000 at 3.5% interest (old rate from 2021)
- Seller's Equity: $320,000 (80% equity)
- Monthly Rent Potential: $2,800
The Equity Carry Structure:
- DSCR Loan (35%): $140,000
- Pays Off Existing Mortgage: -$80,000
- Seller Cash at Closing: $60,000
- Seller Carries (65%): $260,000 in second position
The seller is not giving up equity. They are splitting when they get paid.
What the Seller Receives:
- At Closing: $60,000 cash (after mortgage payoff)
- Monthly: ~$750/month on carried balance
- At Balloon: Remaining balance paid in full
- Total Value: Full asking price of $400,000
Why Investors Love This Structure
Equity Carry deals offer several advantages for investors:
Low Cash to Close
Because the seller carries most of the price, the buyer usually does not need a large down payment. The buyer's cash is often limited to closing costs, reserves, and any repairs.
Average cost of the money
The seller-carried portion often has very low or no interest. Combined with the DSCR loan, the average cost of the money is often below market rates.
Better Than All-Cash
Investors get to control a property worth much more than their cash investment, boosting their return on investment significantly.
High leverage with real risk
This structure uses high leverage. That can boost returns, but it also increases risk. It works best when the rent is strong and the numbers are conservative.
Example: If the bank portion is at a higher rate, but the seller-carried portion is at a much lower rate, the average cost across the whole deal can be lower than using one big bank loan.
Want Even Better Rates? If the seller has an existing low-rate mortgage (3-4% from 2021), consider a Hybrid Deal (Subject-To + Seller Carry) instead. In that structure, the investor takes over the existing mortgage payments at the old rate. This keeps that lower financing in place. This can save thousands per year compared to getting a new loan at today's rates.
Why It's Better for the Seller
Most sellers don't want to be a landlord. They want their money so they can move on.
The "Equity Carry" deal is designed for high-equity sellers who want to get their full price without the hassle of property management.
- No management: The seller is the lender, not the landlord. The buyer handles repairs and tenants.
- Monthly income: Sellers get a monthly payment just like a bank would.
- Full price: Sellers often get their full asking price because the buyer is focused on the terms, not just the cash price.
Every deal is different. Some have balloons, some don't. The terms depend on what the seller and buyer agree to.
Understanding the Risk: Second Position
In an Equity Carry deal, the seller's note is in second position behind the DSCR loan. This means:
- First Position (DSCR Loan)
- The bank's loan gets paid first. If there is a default and foreclosure, the bank recovers their money before anyone else.
- Second Position (Seller's Note)
- The seller's note comes second to the first position loan. In a worst-case scenario, if the property sells for less than both loans combined, the seller may not recover everything.
If the property value drops or the property is sold under pressure, the second position can be at risk.
The Tradeoff: Sellers accept second position risk in exchange for a much larger upfront payment. A larger first loan amount can mean the buyer has more at stake in the deal, which can reduce the chance of default. It does not remove the risk.
Seller Protections in Equity Carry
Several safeguards protect sellers in second position:
- Large down payment: The DSCR loan means the buyer has significant investment in the deal
- Payment monitoring rights: Sellers can require notification if first position payments are missed
- Cure rights: Ability to step in and make first position payments to protect their interest
- Default protections: Some deals include tools that can speed up recovery if payments stop. Exact timelines depend on state law and the signed paperwork.
- Equity cushion: Starting with strong equity can help protect both parties, but markets can change.
Is Equity Carry Right for You?
This structure works best when:
- You have 90% or more equity in your property
- You want a large cash payment at closing (not just small monthly payments)
- You're comfortable being in second position behind a bank
- You want to receive full asking price (not a discounted cash offer)
- You'd like ongoing monthly income in addition to the upfront cash
Consider other options if:
- You have 40-80% equity → A traditional sale is usually your best option
- You want to be in first position only → See Pure Seller Financing
- You have low equity and need debt relief → See Mortgage Takeover
- You prefer hybrid Subject-To structure → See Hybrid Deals
Try the Calculator
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