DSCR ratio and interest rates explained


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DSCR ratio and interest rates explained

Today we are going to discuss the DSCR ratio and explain interest rates. Many investors are intimidated by DSCR loans and are unsure as to where to start. However, the main thing that you need to take into consideration is whether or not the property cash flows. This in turn will have a significant impact on the interest rates for you DSCR loan. Let’s take a closer look! 

Calculating a DSCR ratio. 

Let’s go over how to calculate DSCR quickly and understand what it means for your property. The DSCR ratio is found by comparing a property’s income to its expenses. To clarify, the property’s income is the rent that is received for the property. On the other hand, the expenses include the monthly mortgage payment, taxes, insurance, and HOA. A ratio of greater than 1 means the property is cash flowing, which is what both you and your lender want to see. Also, for a DSCR loan, the higher this ratio is, the better the terms your loan will have.

Negative DSCR Loans

Contrary to popular belief, you can still find a DSCR product for negative cash flow properties. However, these loans come at a higher interest rate.To clarify, a negative DSCR loan is used when someone gets stuck with a property they can’t sell. Under these circumstances, having very little income on the property would be better than none at all. This is why it is imperative that you have a cash flowing property from day one! By taking your time and working through the numbers, you can in turn avoid being stuck with a property that is not helping you to move forward.

Knowing your thresholds! 

There are certain thresholds when you calculate DSCR loans. When you break these thresholds, you get a better rate. And better rates mean… more cash flow! Your monthly payments will lower.Let’s go over what some of these thresholds will look like.

Property Income Property Expenses DSCR ratio  Profit  Interest Rate for DSCR
$2,000 $1,590 1.25 25% 7.25%
$1,500 $1,590 .94 9%+

Remember, anytime you can lower the rate, that’s cash flow that goes into your pocket. In this example, 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!

Know your numbers to get ahead! 

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.

How can you calculate a DSCR ratio quickly?

To help keep the numbers straight when you calculate DSCR, you can download our free, simple DSCR calculator at this link.

Watch our most recent video to find out more about: How to calculate a DSCR ratio

If you have any other questions about how to calculate DSCR (or how to get a DSCR loan!), send us an email at Info@TheCashFlowCompany.com.