What is a DSCR Ratio?

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The DSCR ratio is the foundation of successful DSCR investing. But what is it and how can you use it to build income?

When getting into the DSCR game, it’s important to run some numbers on the front end to evaluate potential deals. 

How do you know if your property is going to meet DSCR requirements? What’s the minimum loan you’ll need, and what’s the maximum you can shop for the purchase price?

Today we’re going to look at these calculations, walking through how you can get pretty good estimates for these numbers using the DSCR ratio and the average rent rate in your local area.

It All Starts With The Ratio

The DSCR ratio is simply the break-even point for that property. Essentially, if the ratio equals 1, then the total cost of the project is canceled out by the incoming rent.

These costs are decently easy to estimate by talking to other investors in your area. You can often find HOA or tax information online which will help you figure these numbers.

Understanding the DSCR ratio is the foundation for successful investing. 

By building your investment strategy off of this ratio, you know that, at the very least, you’ll break even by sticking to a DSCR ratio = 1. 

Once you’re sure you can break even, you can even set your rents slightly higher (or try to keep costs lower) to have a higher ratio of 1.25 (where you’ll have 25% higher income than outgoing cash). This typically comes in a later step which you can read about in a previous article. 

 

Read the full article here.

Watch the full video here:

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How to Boost Your Credit Score Overnight

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If you’ve ever wondered how to boost your credit score overnight, you’ve come to the right place.

Having a strong credit score is like having a really good baseball team. It doesn’t guarantee an instant win, but it sure helps! The better your team (and credit score), the more home runs you can look forward to in your investment season. 

When you win the credit score game, you win countless opportunities. These include good rates, good loans, and more opportunities that can, in the end, add up to hundreds of thousands of dollars.

What is a Good Credit Score and Why is it Important?

Typically, banks consider a credit score “good” when it’s 700 or higher. 

The higher your score, the better your chances of taking home a big trophy. 

It’s important to note that not every lender is equally concerned with credit score. Some private money lenders care more about the specific deal or their relationship with the investor. This can be really helpful to keep in mind if you need to apply for a usage loan or some other method of raising your credit score.

3 Strategies to Boost Your Credit Score

Let’s take a look at three easy strategies to help you prepare for this financial gain: 

1. Increase Available Credit to Lower Usage

Banks look for an ideal credit usage of around 30%. This means that you’re only spending about 30% of the available balance.

For example, if you have a maximum credit line of $1,000 and you’re frequently spending $800, that is 80% usage. When lenders see such high usage, it tells them you’re really pushing the limit of that credit. Often, high usage signals a struggle to meet financial obligations.

You can fix this in two ways:

The first is to apply for a higher spending limit as noted above. The second is to lower your usage. If you’re working in real estate investing, chances are lowering usage is difficult, so we recommend asking your credit card company for a higher limit. 

2. Pay Extra

Another significant factor in calculating your credit score is the monthly reported balances to the credit bureaus. 

A good way to quickly boost your credit score is to pay extra whenever possible. If you have a little extra cash at the end of the month before your statement is due, this is an easy way to keep a negative report from being filed.

The score will go up, and the credit bureau (and you!) will be happy.

3. Get a 60-90 Day Note or Usage Loan

If those first two strategies don’t really work for you, then you can always take a third approach: find a loan.

You can apply for a short-term 60 or 90 day note. These are available from most banks, or you could look to family and friends for the small loan. You can also go through private lenders like us for a usage loan. 

A usage loan allows you to move the credit card balance off of that card (and away from your credit score). It can fix usage issues instantly as might be obvious by the loan’s name.

Also, by moving that balance to a different place, you’ll often find better deals which can allow you to pay off the usage loan more easily than you could have paid off the credit card.

We Can Help!

If you take one, two, or all three approaches to boosting your credit score, then you should see better deals flying your way almost immediately.

If you want to discuss options such as a usage loan or even business credit cards, reach out to us at Info@TheCashFlowCompany.com. 

Our team is always ready to help.

We’re eager to set you on a path that helps you make the kind of money you need to live the life you want.

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BRRRR Method: How Bridge Loans Pay Off

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Bridge loans on the front end are the key to successfully entering the BRRRR method.

BiggerPockets launched the BRRRR acronym a few years ago. BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. This acronym outlines a helpful strategy for successful real estate investing. 

It centers around buying properties with built-in equity. After renovations, the investor can refinance therefore creating a sustainable cycle of investments. 

Strategic Loans

Instead of throwing a DSCR at the whole thing from the start, we suggest a different strategy of kickstarting your BRRRR cycle. 

1. Start with bridge loans.

The BRRRR method is all about sustainable investing. How can you use other people’s money to keep cash flowing in and out of your projects?

This means beginning with a loan that’s going to cover those starting costs so you can get ownership and claim that equity! Bridge loans are perfect for this (especially if you get a private money loan).

A bridge loan is more flexible than a DSCR so you can cover the purchase, rehab, even the closing costs. 

2. Add the DSCR.

Once you’re actually starting to rent out the property, that’s the time for the DSCR. DSCRs have more restrictions anyways, so they’re most effective when used for renting.

The DSCR can pay off the bridge loan and you can refinance the property for an even better outcome. 

The Beauty of the BRRRR Method

By using this loan strategy with the BRRRR method, we’ve worked with a client who was able to come up with a plan that should easily generate over $1,000/month of positive cash flow for himself. 

And it all started with strategically using other people’s money to enter the BRRRR cycle. 

This is the beauty of real estate investing. It’s accessible and profitable, even for beginners. 

 

Read the full article here.

Watch the full video here:

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How to Calculate DSCR Loan Amount

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How can you use the DSCR ratio to calculate DSCR loan amounts?

When getting into the DSCR game, it’s important to run some numbers on the front end to evaluate potential deals. 

How do you know if your property is going to meet DSCR requirements? What’s the minimum loan you’ll need, and what’s the maximum you can shop for the purchase price?

Easy. Start with the DSCR ratio, and then walk through these steps to figure out your payments.

Calculating DSCR Loans

1. Figure Out Local Rents

Using resources like Zillow or rent.com, you can look around to find standard rents for your area. This is the first step in getting future estimates (such as loan total, purchase price, etc.). 

Don’t start spending money before calculating whether or not you’ll actually be able to pay those costs back.

Let’s say standard rent in the area is around $2,500. This means that, in order to break even, we need to keep all of our monthly expenses below that $2,500. 

  • Rents = $2,500
  • Expenses ≦ $2,500

2. Monthly Expenses

For this example property, there are three monthly expenses. Taxes, insurance, and HOA fees. Other properties might have additional insurance or fees, so make sure you look at the neighborhood.

Here’s what we’re looking at for this example:

  • Taxes: $1,200/year ($100/mo)
  • Insurance: $2,400/year ($200/mo)
  • HOA: $200/month
  • Total Monthly Expenses: $500

Obviously at this point in the process, these numbers are only estimates. However, if you do research to have informed estimates, you can save a lot of money and headache down the road.

3. The Leftover = Maximum Mortgage Payments

If our estimated rent is $2,500/month and we subtract our $500 of monthly expenses out of that number, we’re left with $2,000/month. 

  • $2,500 (income: rent) – $500 (expenses) = $2,000 (leftover)

Now we’re ready to talk about the mortgage.

The leftover $2,000 is the maximum you could pay each month towards a mortgage. 

If we want to qualify for a DSCR and keep our ratio at 1, this gives us our upper limit.

Translating Expected Expenses Into Your DSCR Loan

So, how do we take this $2,000/month number and translate it into DSCR loan requirements?

How much could you afford in a loan?

The easiest way is to use our updated DSCR calculator. It’s free to download and easy to use!

By inputting the current estimates, you can use this download to calculate DSCR loan requirements. What do you qualify for? What terms can you expect?

Our current estimate would likely qualify for an 8% interest rate on a 30 year mortgage.

With those numbers, we can now really start planning.

The Maximum Loan Amount

As we mentioned above, we recently updated our DSCR calculator to include a worksheet that helps you figure out your maximum loan. Even if you’ve downloaded the calculator before, you can redownload to get the updated version.

You can also use sites like calculator.net, input the numbers, and see what you’re working with.

Once we use our DSCR calculator, we discover that the maximum loan we can get and still keep our DSCR ratio at 1 is around $272,500.

 

Read the full article here.

Watch the full video here:

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DSCR Loan Calculator: Understanding Fixed Costs

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Looking at a DSCR loan calculator and wondering what numbers you need to plug in to make everything come out even? 

If you’re new to the DSCR game, you’ve likely heard people talking about the DSCR ratio and how that number helps you set rents. But how do you actually calculate all of that? 

There are quite a few numbers that go into calculating a DSCR ratio (which is then often used to calculate rents).

What is a DSCR Ratio?

A DSCR ratio is simply the break even point. 

Essentially, you start by adding up all of your monthly expenses (mortgage payments, taxes, insurance, HOA fees, etc.). If you compare that number to the amount you’re charging for rents and those numbers are the same (you’re putting out and bringing in the same $$ amount), then you have a DSCR ratio of 1.

You never want a DSCR below 1 (spending more than you’re bringing in). However, a ratio of 1 simply means that you’re breaking even. In other words, you’re not actually making money unless you can raise the ratio (and raise rents) in order to bring in more money than you’re spending.

Lenders like to see positive cash flow, so it’s typically good to aim for a DSCR ratio of 1.25. That means you’ll make 25% more than you’re spending. 

How to Calculate Your Fixed Costs

The first step of figuring out the ratio is to get a really clear picture of your expenses. Expenses come in two parts: fixed costs and monthly payments for loans. 

Let’s look at fixed costs right now.

These fixed monthly expenses consist of things like HOA fees, insurance, taxes, and other exciting things.

For Example…

Let’s take a peek at some numbers based on a property we reviewed recently:

  1. Taxes. This property had $1,200/year in taxes. Divide that by 12 and you have $100/month. 
  2. Property Insurance. We’re going to look at $1,800/year or $150/month.
  3. Flood Insurance. This property didn’t have any HOA fees, but it did need flood insurance. That comes to $2,4000/year or $200/month.

In total, you have $450/month in expenses for this property before factoring in your mortgage payment.

When working with your DSCR loan calculator, don’t forget about the fixed costs. It’s a critical number in calculating the ratio that’s going to set you up for success.

 

Read the full article here.

Watch the full video here:

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DSCR Loan Requirements: Calculating Maximum Purchase Price

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How can you use estimated rent to get a clear understanding of DSCR loan requirements?

When getting into the DSCR game, it’s important to run some numbers on the front end to evaluate potential deals. 

How do you know if your property is going to meet DSCR requirements? What’s the minimum loan you’ll need, and what’s the maximum you can shop for the purchase price?

Today we’re going to look at these calculations, walking through how you can get pretty good estimates for these numbers using the DSCR ratio and the average rent rate in your local area.

What is a DSCR Ratio?

The DSCR ratio is simply the break-even point for that property. Essentially, if the DSCR ratio equals 1, then the total cost of the project is canceled out by the incoming rent.

These costs are decently easy to estimate by talking to other investors in your area. You can often find HOA or tax information online which will help you figure these numbers.

Understanding the DSCR ratio is the foundation for successful investing. 

By building your investment strategy off of this ratio, you know that, at the very least, you’ll break even by sticking to a DSCR ratio = 1. 

Once you’re sure you can break even, you can even set your rents slightly higher (or try to keep costs lower) to have a higher ratio of 1.25 (where you’ll have 25% higher income than outgoing cash). This typically comes in a later step which you can read about in a previous article. 

Calculating Maximum Loan Amount Using the DSCR Ratio

1. Figure Out Local Rents

Using resources like Zillow or rent.com, you can look around to find standard rents for your area. This is the first step in getting future estimates (such as loan total, purchase price, etc.). 

Don’t start spending money before calculating whether or not you’ll actually be able to pay those costs back.

Let’s say standard rent in the area is around $2,500. This means that, in order to break even, we need to keep all of our monthly expenses below that $2,500. 

  • Rents = $2,500
  • Expenses ≦ $2,500

2. Monthly Expenses

For this example property, there are three monthly expenses. Taxes, insurance, and HOA fees. Other properties might have additional insurance or fees, so make sure you look at the neighborhood.

Here’s what we’re looking at for this example:

  • Taxes: $1,200/year ($100/mo)
  • Insurance: $2,400/year ($200/mo)
  • HOA: $200/month
  • Total Monthly Expenses: $500

Obviously at this point in the process, these numbers are only estimates. However, if you do research to have informed estimates, you can save a lot of money and headache down the road.

3. The Leftover = Maximum Mortgage Payments

If our estimated rent is $2,500/month and we subtract our $500 of monthly expenses out of that number, we’re left with $2,000/month. 

  • $2,500 (income: rent) – $500 (expenses) = $2,000 (leftover)

Now we’re ready to talk about the mortgage.

The leftover $2,000 is the maximum you could pay each month towards a mortgage. 

If we want to qualify for a DSCR and keep our ratio at 1, this gives us our upper limit.

Translating Expected Expenses Into Your DSCR Loan

So, how do we take this $2,000/month number and translate it into DSCR loan requirements?

How much could you afford in a loan?

The easiest way is to use our updated DSCR calculator. It’s free to download and easy to use!

By inputting the current estimates, you should be able to get a pretty good idea of what sort of DSCR loans you’ll qualify for.

Our current estimate would likely qualify for an 8% interest rate on a 30 year mortgage.

With those numbers, we can now really start planning.

The Maximum Loan Amount

As we mentioned above, we recently updated our DSCR calculator to include a worksheet that helps you figure out your maximum loan. Even if you’ve downloaded the calculator before, you can redownload to get the updated version.

You can also use sites like calculator.net, input the numbers, and see what you’re working with.

Once we use our DSCR calculator, we discover that the maximum loan we can get and still keep our DSCR ratio at 1 is around $272,500.

Putting It All Together: Purchase Price

If our maximum loan is $272,500, this helps us know what to look for in a property. The goal of real estate investing is to leverage other people’s money to ultimately turn a profit for yourself. 

So if we use that loan amount and we estimate a potential down payment of 20% or 25%, what sort of purchase price can we look at?

Our DSCR calculator has a worksheet that will also walk you through these calculations, but you can see in the graph above that we can look for properties in the $350,00 bracket. 

Once again, looking at DSCR loan requirements, we know we need to have a plan to break even to qualify.

Work Backwards Before You Work Forwards

You’d be surprised how many people call us because they bit off a deal they couldn’t chew. It takes time to research the rents and expenses, but it’s worth it to protect your investments.

By working backwards from the estimated rents and fees, we were able to determine both our loan and the maximum purchase price. 

This method is ultimately built on the foundation of maintaining a DSCR ratio of 1 or better to ensure that we’re never losing money in our investments.

If you need help with this or if you want us to run through some numbers, we’re happy to help. Just email us at Info@TheCashFlowCompany.com.

You can also visit our YouTube channel for more tips and tricks for creating wealth through real estate investing.

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Don’t Kickstart Your BRRRR With a DSCR Loan

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A DSCR loan is great, but they’ll come into play at a later part of the BRRRR process. 

Let’s start with a real scenario we encountered a few weeks ago. A client from Michigan called. He’s done flips before and even kept a few rentals, but he’s new to the BRRRR method. 

In the past, he’s always used partners or cash to fund his investing. However, this property needs more money.

He’s buying it for $200,000, putting approximately $22,000 of rehab into it, and we’ll estimate closing costs around $7,000. That’s a total of $229,000 for a pretty basic investment property. 

Where can this client find the money, and how can he leverage it to his advantage?

He wanted to know if he could take out a DSCR loan to kickstart the BRRRR process.

Can You Use a DSCR Loan to Begin the BRRRR Method?

The short answer is technically yes. However, since you don’t currently own the property, you can’t claim the equity in it just yet which makes it a not-so-great deal.

For our example client above, a DSCR loan will only cover up to 80% of the purchasing costs. This leaves 20% leftover — a large amount of cash that our client and a lot of newer investors simply don’t have.

Additionally, a DSCR loan won’t cover renovations or closing costs.

If you’re trying to exclusively use a DSCR for a BRRRR, you’re going to see the payments begin to add up really quickly.

It’s typically better to wait until later in the process to bring in the DSCRs.

 

Read the full article here.

Watch the full video here:

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DSCR Calculator: How to Determine Your Rental Income

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What do you need to know in order to effectively use a DSCR calculator?

If you’re new to the DSCR game, you’ve likely heard people talking about the DSCR ratio and how that number helps you set rents. But how do you actually calculate all of that? 

What is a DSCR Ratio?

A DSCR ratio is simply the break-even point. 

Essentially, you start by adding up all of your monthly expenses (mortgage payments, taxes, insurance, HOA fees, etc.). If you compare that number to the amount you’re charging for rents and those numbers are the same (you’re putting out and bringing in the same $$ amount), then you have a DSCR ratio of 1.

You never want a DSCR below 1 (spending more than you’re bringing in). However, a ratio of 1 simply means that you’re breaking even. In other words, you’re not actually making money unless you can raise the ratio (and raise rents) in order to bring in more money than you’re spending.

Lenders like to see positive cash flow, so it’s typically good to aim for a DSCR ratio of 1.25. That means you’ll make 25% more than you’re spending. 

How to Calculate Your Fixed Costs

The first step of figuring out the ratio is to get a really clear picture of your expenses. Expenses come in two parts: fixed costs and monthly payments for loans. 

Let’s look at fixed costs first.

These fixed monthly expenses consist of things like HOA fees, insurance, taxes, and other exciting things.

For Example…

Let’s take a peek at some numbers based on a property we reviewed recently:

  1. Taxes. This property had $1,200/year in taxes. Divide that by 12 and you have $100/month. 
  2. Property Insurance. We’re going to look at $1,800/year or $150/month.
  3. Flood Insurance. This property didn’t have any HOA fees, but it did need flood insurance. That comes to $2,4000/year or $200/month.

In total, you have $450/month in expenses for this property before factoring in your mortgage payment.

How To Calculate Monthly Loan Payments

Once you know your fixed costs, there are a few other numbers to take into consideration before setting your rents. Once we know how much money is going out every month, we can figure out how much we need coming in.

The property in our example cost $250K and the investor paid a 20% down payment. 

  • Purchase Price = $250,000
  • Down Payment = 20%
  • 30-Year Fixed-Rate (8.5%) DSCR Loan = $200,000

The easiest way to calculate your monthly payments is to use a calculator designed for these numbers. We recommend using a site like calculator.net and selecting their amortization calculator. 

You can plug in the numbers, and it will do the work for you.

Once you plug in the numbers and hit calculate, you’ll see that your monthly loan payments are just under $1,538.

Updated Monthly Costs:

  • Fixed Costs = $450
  • Approximate Loan Payments = $1,538
  • Total = $1,988

Now that you know all of the money you’re paying each month, you know that to hit a DSCR ratio of 1, you’ll need to have rents of at least $1,988 in order to break even.

Using the DSCR Ratio to Set Rents

As we mentioned before, a DSCR ratio of 1 is fine – you won’t be losing money. But it’s not an optimal investment strategy. 

Lenders like to see you turning a profit, and you should too!

Returning to our above example, let’s say your outgoing expenses are $1,988. If you raise your rents by 25% (raising that DSCR ratio to 1.25 instead of 1), you’ll suddenly be making a 25% profit. 

Here’s how you get those numbers:

Breaking even on your real estate investing projects is great, but making money is the goal. Understanding how to calculate these numbers is a critical step towards successful investing

Check Out Our DSCR Calculator

To help you get an even clearer understanding of DSCRs, check out our DSCR calculator. It’s free to download and easy to use.

You’re also welcome to email us at Info@TheCashFlowCompany.com. We’re more than happy to answer questions and help you find the right deal.

We’re always looking for ways to help you succeed in your investment journey by giving you the knowledge and tools to win.

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How Can Credit Score Impact DSCR Loans?

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How can your credit score impact DSCR loans in the real estate investing world?

Credit score impacts investors potentially more than anything else. Lenders will adjust the rates and terms of loans based purely on the three digits of credit score on a person’s financial records. 

Leverage is the key to successful real estate investing, and understanding the impact of credit score is a critical facet of that leverage. 

This article uses real-life examples to illustrate the difference a good credit score makes in the investment world.

How Can Credit Score Impact DSCR Loans?

Let’s look at how DSCR loans can be impacted by a low credit score using two example clients:

  • One (Person 1) has a low credit score of 660
  • The other (Person 2) has a high score of 740

We see a lot of clients looking at cash out refinancing, so we’ll look at that type of project.

What’s the Difference?

If Person 1 has a 660 credit score, not only will they likely struggle to find lenders, but 65% is about the best they could look for. This directly translates into less money out of that property.

In contrast, Person 2 with a 740 score should be able to fairly easily get 75%. The more money out, the better your leverage.

As you can see in the chart above, not only does the person with a lower credit score get less cash out, but their rate is also higher which raises their monthly payments. 

Credit Score Matters

Although at first glance, it’s tempting to just look at the monthly payments and think, “It’s not that big of a difference,” don’t fall into that trap!

The person with the higher score not only has a lower monthly payment, but because they also got a higher Cash Out % which gave them an additional $35,000 out. 

Having that good credit score makes it possible to keep cash flowing. If you’re serious about investing, your credit score matters.

Read the full article here.

Watch the full video here:

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The BRRRR Method: When to Use DSCR and Bridge Loans

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How can you use the BRRRR method to get you in and out of a property with little-to-no money down?

Let’s start with a real scenario we encountered a few weeks ago. A client from Michigan called. He’s done flips before and even kept a few rentals, but he’s new to the BRRRR method. 

In the past, he’s always used partners or cash to fund his investing. However, this property needs more money.

He’s buying it for $200,000, putting approximately $22,000 of rehab into it, and we’ll estimate closing costs around $7,000. That’s a total of $229,000 for a pretty basic investment property. 

Where can this client find the money, and how can he leverage it to his advantage?

What is the BRRRR Method?

BiggerPockets launched the BRRRR acronym a few years ago. BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. This acronym outlines a helpful strategy for successful real estate investing. 

It centers around buying properties with built-in equity. After renovations, the investor can refinance therefore creating a sustainable cycle of investments. 

Can You Use a DSCR Loan to Begin the BRRRR Method?

The short answer is technically yes. However, since you don’t currently own the property, you can’t claim the equity in it just yet which makes it a not-so-great deal.

For our example client above, a DSCR loan will only cover up to 80% of the purchasing costs. This leaves 20% leftover — a large amount of cash that our client and a lot of newer investors simply don’t have.

Additionally, a DSCR loan won’t cover renovations or closing costs.

If you’re trying to exclusively use a DSCR for a BRRRR, you’re going to see the payments begin to add up really quickly.

A Better Plan

Instead of throwing a DSCR at the whole thing from the start, we suggest a different strategy of kickstarting your BRRRR cycle. 

1. Start with a bridge loan.

The BRRRR method is all about sustainable investing. How can you use other people’s money to keep cash flowing in and out of your projects?

This means beginning with a loan that’s going to cover those starting costs so you can get ownership and claim that equity!

A bridge loan is more flexible than a DSCR so you can cover the purchase, rehab, even the closing costs. 

2. Add the DSCR.

Once you’re actually starting to rent out the property, that’s the time for the DSCR. DSCRs have more restrictions anyways, so they’re most effective when used for renting.

The DSCR can pay off the bridge loan and you can refinance the property for an even better outcome. 

The Beauty of the BRRRR Method

By using this loan strategy with the BRRRR method, our client was able to come up with a plan that should easily generate over $1,000/month of positive cash flow for himself. 

And it all started with strategically using other people’s money to enter the BRRRR cycle. 

This is the beauty of real estate investing. It’s accessible and profitable, even for beginners. 

We’re Here For You

If you have any questions or want to discuss a project, reach out to us at Info@TheCashFlowCompany.com.

Please also check out the free tools on our website for downloads that can help set you up for success. Additionally, if you’re interested in the BRRRR method, make sure to explore our BRRRR roadmap. 

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