[DSCR](/blog/what-is-dscr-ratio) Loans for Fire-Damaged Properties: Financing Restoration Investments

Fire-damaged properties represent one of the most overlooked niches in [real estate investing](/blog/brrrr-strategy-guide). While most buyers run from properties with fire damage, savvy investors see discounted purchase prices, reduced competition, and the potential for significant equity creation through restoration. In many markets, fire-damaged homes sell for 30-60% below comparable undamaged properties.

But financing these purchases requires a specialized approach. Standard [DSCR loans](/blog/dscr-loan-guide) typically require habitable properties, so investors need to understand which DSCR products accommodate renovation and how to structure these deals profitably.

Why Fire-Damaged Properties Attract Investors

The Discount

Fire damage creates motivated sellers and stigmatized properties. The original homeowner often takes an insurance payout and sells the property as-is at a steep discount. This creates a spread between acquisition cost plus renovation and the after-repair value (ARV).

Example deal:

• Comparable undamaged value: $400,000
• Fire-damaged purchase price: $180,000
• Renovation costs: $120,000
• Total investment: $300,000
• After-repair value: $400,000
• Instant equity: $100,000 (25%)

Reduced Competition

Most buyers—especially owner-occupants and casual investors—avoid fire-damaged properties due to:

• Perceived complexity of renovation
• Concerns about structural integrity
• Stigma and emotional associations
• Inability to finance with conventional loans

This reduced competition means better negotiating position and lower purchase prices.

Insurance Proceeds

In some cases, you can purchase a fire-damaged property where the seller assigns remaining insurance proceeds, or the property comes with insurance documentation that details the scope of damage—simplifying your renovation planning.

Can You Get a DSCR Loan for a Fire-Damaged Property?

The Short Answer

Not with a standard DSCR loan—but yes, with the right product. Here's why:

Standard DSCR loans require:

• Habitable property at closing
• Appraisal based on current condition
• No major health or safety hazards
• Functional systems (electrical, plumbing, HVAC)

A fire-damaged property typically fails all of these criteria.

DSCR-Friendly Alternatives

1. DSCR Bridge Loan / Fix-and-Rent Loan Some DSCR lenders offer bridge products specifically for renovation:

• Purchase based on ARV (after-repair value)
• Renovation funds held in escrow and released in draws
• 12-24 month term to complete renovation
• Refinance into permanent DSCR loan after repairs
• LTV based on 65-75% of ARV

2. Two-Step Strategy: Hard Money → DSCR Refinance

• Purchase with hard money or bridge loan (12-18 month term)
• Complete renovation
• Refinance into permanent DSCR loan based on stabilized rental income
• This is the most common approach for fire-damaged properties

3. DSCR Renovation Loan A growing number of lenders offer DSCR products with built-in renovation financing:

• Single close covering purchase + renovation
• Funds disbursed in draws as work completes
• Final DSCR evaluation based on completed property and market rent
• Avoids the cost of two separate closings

Evaluating Fire-Damaged Properties

Severity Assessment

Fire damage exists on a spectrum. Your approach and financing options depend on severity:

Cosmetic/Light Damage (Best for investors)

• Smoke and soot damage primarily
• No structural compromise
• Surface-level repairs: painting, flooring, cleaning
• Renovation cost: $20,000-$60,000
• Timeline: 4-8 weeks

Moderate Damage

• Some structural elements affected (roof, walls)
• Electrical and plumbing may need partial replacement
• Possible water damage from firefighting efforts
• Renovation cost: $60,000-$150,000
• Timeline: 2-4 months

Severe/Total Loss (Highest risk)

• Major structural damage requiring partial or full rebuild
• Foundation may be compromised
• Complete system replacement required
• Renovation cost: $150,000-$300,000+
• Timeline: 4-12 months

Critical Inspections

Before purchasing any fire-damaged property, invest in thorough inspections:

• Structural engineer assessment: Verify foundation, framing, and load-bearing elements
• Electrical inspection: Fire often damages wiring inside walls
• Plumbing inspection: Heat can compromise pipes and joints
• Mold and moisture assessment: Water from firefighting creates secondary damage
• Air quality testing: Smoke residue and potential asbestos exposure (in older homes)
• Environmental hazard check: Lead paint, asbestos, and other hazards exposed or damaged by fire
• Roof inspection: Even if the fire didn't originate on the roof, heat and water may have compromised it

Hidden Costs to Budget For

• Smoke odor remediation: Professional ozone treatment or sealing ($5,000-$15,000)
• Water damage from firefighting: Often causes as much damage as the fire itself
• Permit costs: Extensive renovation may require full permit packages
• Code upgrades: Repairs may trigger requirements to bring other systems up to current code
• Utility reconnection: Gas, electric, and water may need service restoration
• Debris removal: Fire debris hauling and disposal ($5,000-$20,000)
• Temporary utility installation: Generator and temporary water for construction

Step-by-Step: Buying a Fire-Damaged Property with DSCR Financing

Step 1: Find the Property

Sources for fire-damaged properties:

• MLS listings (search for "fire damage," "as-is," "investor special")
• Insurance company liquidation sales
• Auction sites and courthouse auctions
• Direct outreach to owners ([driving for dollars](/blog/driving-for-dollars-guide) after visible fire damage)
• Wholesalers specializing in distressed properties

Step 2: Analyze the Deal

Run your numbers conservatively:

• Get contractor bids before making an offer (or at minimum during due diligence)
• Add 20-30% contingency to renovation estimates for fire damage
• Calculate ARV using recent comparable sales in the neighborhood
• Project rental income based on comparable rentals for the renovated product
• Calculate your DSCR at the refinance stage to ensure you'll qualify

Step 3: Secure Acquisition Financing

Options in order of preference:

1. DSCR renovation loan (single close, if available for fire damage level)
2. Bridge/[hard money loan](/blog/hard-money-loan-guide) with plan to refinance into DSCR
3. Cash purchase with DSCR [cash-out refinance](/blog/cash-out-refinance-guide) after renovation

Step 4: Complete Renovation

• Hire contractors experienced with fire restoration
• Pull all required permits
• Address structural issues first, then systems, then finishes
• Document everything with photos and receipts (lenders want this for refinance)
• Get final inspections and certificate of occupancy

Step 5: Stabilize Income

• List the property for rent at market rate
• Place qualified tenants
• Establish 2-3 months of rental income history (some lenders require this for DSCR refinance; others accept a lease)

Step 6: Refinance into Permanent DSCR Loan

• Apply for permanent DSCR loan based on stabilized rental income and completed property value
• New appraisal reflects fully renovated condition
• Pay off bridge/hard money loan
• Extract equity if LTV allows (cash-out refinance)

Pros and Cons

Advantages

• Deep discounts: Purchase 30-60% below market value
• Less competition: Most buyers avoid fire-damaged properties
• Forced appreciation: Renovation creates immediate equity
• Tax benefits: Renovation costs may be partially deductible or depreciable
• Strong DSCR post-renovation: Low basis means lower mortgage relative to market rent
• Scalable niche: Develop expertise that creates competitive advantage

Disadvantages

• Renovation risk: Costs can escalate significantly with fire damage
• Hidden damage: Fire damage often extends beyond what's visible
• Financing complexity: Two-step financing adds costs and complexity
• Timeline risk: Renovation delays mean longer periods without income
• Insurance challenges: Some insurers charge premiums for previously fire-damaged properties
• Stigma: Some tenants may be hesitant to rent a former fire-damaged property (though most won't know after full renovation)
• Environmental hazards: Older properties may have exposed asbestos or lead

Insurance Considerations

During Renovation

• Standard homeowner's insurance won't cover a fire-damaged property under renovation
• You'll need a builder's risk policy during the renovation phase
• Cost: typically 1-4% of the total renovation budget
• Coverage: theft of materials, weather damage during construction, liability

After Renovation

• Once renovated, standard landlord insurance should be available
• Disclose the fire history to your insurer
• Some insurers may require an inspection before issuing a policy
• Consider higher coverage limits given the renovation investment

Maximizing Returns on Fire-Damaged Investments

Buy Right

The deal is made at purchase. Don't overpay—your discount from market value must be large enough to cover renovation costs plus a healthy profit margin.

Renovate Smart

• Focus renovation dollars on items that increase rental value
• Don't over-improve for the neighborhood
• Use the renovation as an opportunity to add value (additional bedroom, updated kitchen, ADU)
• Consider energy-efficient upgrades that reduce operating costs

Build Your Team

Success in fire-damaged property investing requires:

• Contractor with fire restoration experience
• Structural engineer on speed dial
• Insurance agent who understands investor properties
• DSCR lender with renovation or bridge products
• Property manager for post-renovation leasing

Is This Strategy Right for You?

Fire-damaged property investing with DSCR financing works best for investors who:

• Have renovation experience or strong contractor relationships
• Can handle the complexity of two-step financing
• Have cash reserves for unexpected costs
• Are comfortable with 3-6 month timelines before generating income
• Want to build equity quickly through forced appreciation
• Are willing to develop expertise in a niche with less competition

If you prefer passive, turnkey investments, this strategy probably isn't for you. But if you're willing to put in the work, fire-damaged properties can be among the most profitable deals in real estate.

Next Steps

Start by understanding [[how DSCR loans work](/blog/dscr-loan-no-income-verification)](/blog/dscr-loan-guide) and what lenders require for standard investment properties. Then explore bridge and renovation loan options that can serve as your acquisition financing for fire-damaged properties. The combination of deep discounts, forced appreciation, and strong post-renovation DSCR ratios makes this niche worth serious consideration.

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