DSCR Loan Interest Rates: Explained
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What can you expect to pay on your DSCR loan interest rates? Here’s what it is (and why it matters).
You can still find a DSCR product for ratio 1 or negative cash flow properties.
DSCR loans have certain ratio thresholds. When you break these thresholds, your rate gets better. And better rates mean lower monthly payments. Which means… more cash flow!
Let’s go over some of these thresholds for DSCR loan interest rates.
Loans for a 1.25 DSCR
Say we have a property with $1,590 worth of monthly expenses, which we can charge a $2,000 rent on. Divide the rent by the expenses, and we get a DSCR of about 1.26.
One way of thinking about this is that the property is profiting 25% over the expenses. That’s good for the underwriter (and it’s good for you), so you’ll get a lower interest rate.
1.25 is a major threshold for DSCR lenders. In the current market at the beginning of 2022, the rate for a 1.25 DSCR is around 7.25%.
DSCR Loan Interest Rates for a 1 or Lower Ratio
If a property has negative cash flow, say 0.94, then the average interest rate would be 9+% on a DSCR loan.
For a breakeven ratio of 1, the typical interest rate right now would be more like 7.75%.
The Difference in DSCR Loan Interest Rates
Anytime you can lower the rate, that’s cash flow that goes into your pocket.
The difference between a negative DSCR and a 1.25 is about $220/month on your payment. Over the course of a year, that adds up to $2,600. If you have 5 rental properties, that’s $13,000/year. At 10 rental properties, it’s a $26,000 difference!
If real estate investing is going to be your career or retirement plan, buying properties that you know will cash flow is vital. A couple hundred bucks a month can snowball into hundreds of thousands over time.
This is why it’s important to know how to calculate DSCR quickly when you’re looking at buying a new property. Never put a contract on a rental property when you’re not sure if the cash flow fits your goals.
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