Tag Archive for: DSCR calculator

A Step-by-Step Guide to Qualifying for a DSCR Loan

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Getting a DSCR loan can feel a bit different from qualifying for a traditional loan. Instead of looking at your income, lenders focus on the property’s ability to pay for itself. Today we are going to walk through a Step-by-Step Guide to Qualifying for a DSCR Loan. This will help you check if a property qualifies. From understanding property income requirements to using a free DSCR calculator, this guide will walk you through each step to make sure you’re ready to get approved.

What Is a DSCR Loan?

A DSCR (Debt Service Coverage Ratio) loan is a little different from traditional loans. It focuses on the income of the property, not your personal income. In short, it’s all about whether the property can cover its own expenses.

Step 1: Understand the Role of Property Income

For a DSCR loan, lenders look at the property’s income compared to its expenses. This includes the mortgage payment, property taxes, insurance, HOA fees, and other costs. Here’s the key: if the property’s income can cover these expenses, it may qualify.

For example, let’s say your property earns $1,800 in rent each month. You’ll want to compare this income against the costs. If the income covers these costs, you’re on the right track.

Step 2: Use the DSCR Calculator

The Cash Flow Company offers a free DSCR calculator tool that can help you see if a property qualifies. With this tool, you can run through real scenarios. Let’s walk through an example:

  • Property Value: $300,000
  • Loan Amount: $240,000 (80% LTV)
  • Interest Rate: 6.5%
  • Monthly Taxes and Insurance: $450
  • Monthly Rent: $1,800

When you plug in these numbers, you’ll see if the property’s DSCR is over 1, which is the qualifying ratio most lenders look for. If not, don’t worry! You can adjust the numbers.

Step 3: Adjust Loan-to-Value (LTV) Ratios if Needed

If your DSCR is below 1, consider adjusting your LTV. In our example, at 80% LTV, the property didn’t qualify because the DSCR was below 1. Dropping to 75% or even 70% might make a difference.

When we lowered the LTV to 75%, the loan amount went down to $225,000. At this point, the DSCR is close to or above 1, showing the property could now qualify.

Step 4: Use Realistic Rent Numbers

Be sure to use accurate rent numbers. An appraiser will check the rent for the neighborhood, so you can’t estimate higher rents than what’s realistic. Use a conservative approach to avoid surprises during the underwriting process.

Step 5: Consider Interest Rates and How They Affect DSCR

Interest rates impact DSCR. If rates go up, your DSCR might drop below 1, meaning the property may not qualify. Some lenders may allow a lower DSCR but at a higher interest rate, which affects profitability.

Final Check: Make Sure It’s a Good Investment

Once you have a DSCR above 1, check if the property will make money or cost you monthly. You want a DSCR loan to boost your investment, not drain it. Use the DSCR calculator tool to run numbers for every property.

Get the Free DSCR Calculator

Head to The Cash Flow Company website and download the free DSCR calculator. This tool is your first step to understanding if a property qualifies before reaching out to lenders.

Need Help?

Knowing whether your property qualifies for a DSCR loan can save you time and effort. Try the DSCR calculator on each potential investment to see if it’s likely to generate positive cash flow. If you have any questions or need guidance on how to use the calculator, reach out to us! With the right prep, you’ll know if your property is set to make you money or if it’s better to pass.

Watch our most recent video to find out more about: A Step-by-Step Guide to Qualifying for a DSCR Loan

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DSCR Loan: Will My Property Qualify for a DSCR Loan?

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Many investors ask “will my property qualify for a DSCR loan?” The answer depends on the income your property brings in, not on your personal finances. DSCR loans are unique because they focus solely on the property’s ability to pay for itself through rental income. Let’s dive into what makes a property eligible and how you can check if yours qualifies.

What Determines DSCR Loan Qualification?

DSCR (Debt Service Coverage Ratio) loans are all about the income and expenses tied to the property itself. Unlike traditional loans, DSCR loans don’t look at your personal income. Here are the main factors to keep in mind:

  • Property Income Over Personal Income


    DSCR loans focus entirely on whether your property can cover its own costs. That means expenses like the mortgage payment, property taxes, insurance, and any HOA fees all need to balance out with rental income. If the property can cover these costs, it’s more likely to qualify for a DSCR loan.

  • Key Metric: DSCR Ratio


    To see if your property qualifies, you need to know its DSCR ratio. This ratio measures how well the property’s rental income covers the debt payments. A DSCR ratio of at least 1.0 means the property breaks even, while a higher ratio indicates better cash flow.

Example: Testing Property Qualification with the DSCR Calculator

Let’s go through an example to see if a property qualifies for a DSCR loan. You can use a free DSCR calculator (available at The Cash Flow Company’s website) to follow along with your own numbers.

  1. Input Property DataSuppose you’re looking at a property worth $300,000 and want an 80% loan-to-value (LTV). This would give you a loan amount of $240,000. Now, enter some other property costs:
    • Interest rate: 6.5%
    • Monthly property taxes: $250
    • Monthly insurance: $200
    • Monthly rental income: $1,800
  2. Check Loan ScenariosUse the DSCR calculator to see how different loan options affect qualification:
    • Interest-Only Loan
      In this example, the property qualifies with an interest-only loan since the DSCR ratio is above 1.0. This means rental income can cover the interest payments.
    • 30-Year Amortized Loan
      Here, the DSCR ratio falls below 1.0, meaning rental income doesn’t fully cover the 30-year loan payments.
    • 40-Year Amortized Loan
      Similar to the 30-year, the DSCR ratio is still below 1.0, so the property doesn’t qualify under this setup either.
  3. Adjust and TestIf your first scenario doesn’t qualify, try adjusting the loan-to-value (LTV) ratio. For example:
    • 75% LTV reduces the loan amount to $225,000, but the DSCR ratio may still be under 1.0.
    • 70% LTV brings the DSCR to exactly 1.0. This shows that lowering the loan amount can improve your chances of qualifying.

Understanding the DSCR Ratio and Loan Requirements

When it comes to DSCR loans, lenders usually look for a DSCR ratio of at least 1.0 to 1.1. While a 1.0 ratio is enough for many, aiming for 1.1 or higher gives you a better shot at qualifying and may offer better terms.

  • If DSCR Falls Below 1.0
    If your property’s DSCR ratio is below 1.0, it might not qualify, or it may require a higher interest rate to offset the risk. This affects profitability, so it’s crucial to find a balance where your DSCR ratio meets lender requirements and still provides a good return.

Using the Free DSCR Calculator to Qualify Your Property

You don’t need to guess if your property will qualify. Download the free DSCR calculator from The Cash Flow Company and test your property’s numbers before applying. By adjusting factors like the loan-to-value ratio, you can see where the property stands and avoid surprises.

Conclusion

Knowing whether your property qualifies for a DSCR loan can save you time and effort. Try the DSCR calculator on each potential investment to see if it’s likely to generate positive cash flow. If you have any questions or need guidance on how to use the calculator, reach out to us! With the right prep, you’ll know if your property is set to make you money or if it’s better to pass.

Watch our most recent video to see more about: DSCR Loan: Will My Property Qualify for a DSCR Loan?

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DSCR Loan: 40 Year vs 30 Year Loan

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Are you trying to figure out which loan term is the best fit for your real estate investment? Let’s dive into the differences between a 40-year vs 30-year DSCR (Debt Service Coverage Ratio) loan and see how each can affect your cash flow and ability to qualify for more deals.

What’s the Difference Between a 40-Year and a 30-Year Loan?

30-Year Loan
The traditional 30-year mortgage is a common option for real estate investors. It allows you to spread your payments over 30 years, keeping monthly payments lower than shorter-term loans. You’ll still pay off some principal each month, which helps you build equity.

40-Year Loan
A 40-year DSCR loan stretches out the loan term even more. This lowers your monthly payments even further. This extra decade can make a big difference in your ability to qualify for a loan, especially if your rental income is close to the debt service.

Lower Payments = Better Cash Flow

One of the biggest advantages of a 40-year DSCR loan is the lower monthly payment. This is perfect for investors focused on improving cash flow. In today’s market, where rents might not always cover all expenses, having a lower monthly mortgage payment can be a game-changer.

Here’s an example:

  • 30-Year Loan: A $250,000 loan at 6.65% interest results in monthly payments of $1,596.
  • 40-Year Loan: A $250,000 loan at 6.9% interest results in monthly payments of $1,535.

While the interest rate is slightly higher on the 40-year loan, your monthly payment is lower. This extra cushion can help improve your DSCR ratio, making it easier to qualify for more properties.

Example: Does a 40-Year Loan Help You Qualify?

Let’s look at a real-world scenario. Say you have a property where the rent is $2,000 a month, and you’re looking at a loan of $250,000.

For a 30-year loan, your monthly payment of $1,596 plus taxes and insurance might leave you with around $246 for other expenses. This might not qualify for the best DSCR terms.

But with a 40-year loan, your payment drops to $1,535. Now, with taxes and insurance included, you’ve got a bit more breathing room to meet the DSCR ratio requirements and qualify for the loan.

Which Loan Is Best for You?

It comes down to your goals. If you want to pay off the loan faster and build equity quicker, the 30-year loan is a solid choice. But, if your main focus is qualifying for more properties or increasing cash flow, the 40-year loan might be a better fit.

Prepayment Penalties – What You Should Know

DSCR loans often come with prepayment penalties, meaning you can’t pay off the loan early without a fee. But, there are options to avoid these penalties:

  • Zero Prepay: No prepayment penalty but a higher interest rate (about 1% higher).
  • One-Year Prepay: A middle-ground option with a lower prepayment penalty.

Both options give you more flexibility if you expect to refinance soon as interest rates change.

Conclusion: What’s the Best Loan for You?

Choosing between a 40-year and a 30-year DSCR loan depends on your cash flow needs and your long-term strategy. If you want to maximize your cash flow and qualify for more deals, the 40-year loan could be the better option. On the other hand, if building equity faster is your goal, the 30-year loan will work for you.

If you have questions about how these loans fit into your investment strategy, feel free to leave a comment or visit our site, The Cash Flow Company, for more resources, like our DSCR calculator.

Watch our most recent video to find out more about: DSCR Loan: 40 Year vs 30 Year Loan

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DSCR Loan: Market Update for Real Estate Investors

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The DSCR (Debt Service Coverage Ratio) market is evolving, and the good news is that it’s shifting in favor of investors. Rates are dropping, and new loan options are making it easier to qualify for deals. Here’s a market update for real estate investors!

What’s New in DSCR Loans?

40-Year Mortgage Options

A major shift in the market is the introduction of the 40-year mortgage. This option lowers monthly payments compared to a 30-year mortgage, which can make it easier for you to qualify for more properties. Here’s how:

  • Lower Payments: A 40-year mortgage spreads out the loan over a longer period, reducing your monthly payment.
  • Amortization: With a 40-year loan, you get a mix of amortization and lower payments, which can help you pay down the loan while keeping cash flow in mind.

For Example:

A $250,000 loan with $2,000 in monthly rent. With a 30-year mortgage at a 6.65% interest rate, your monthly payment would be about $1,596. After adding taxes and insurance, the expenses would leave you with around $246 left for the DSCR calculation. The property wouldn’t qualify.

However, if you switch to a 40-year mortgage with a 6.9% interest rate, your payment drops to $1,535. This difference could help you qualify for the loan. The 40-year option is designed to help investors like you get into more deals with less cash out of pocket each month.

No Prepayment Penalty Options

Traditionally, DSCR loans come with a prepayment penalty. However, new options in the market offer no prepayment penalty. This flexibility can benefit you if rates continue to drop and you want to refinance. Here’s what to consider:

  • Zero Prepayment Penalty: This option allows you to refinance at any time, but it comes with a catch—a higher interest rate, typically around 1% more.
  • 1-Year Prepayment Penalty: If you’re unsure about how long you’ll hold the loan, this might be a better option. You’ll get a lower rate than the zero prepay but still have the flexibility to refinance after one year.

These options let you pick the best path for your portfolio without worrying about being locked into a loan for several years.

Should You Go With a 40-Year Loan?

If you’re focused on cash flow or qualifying for more deals, the 40-year loan could be a great tool. For example, a client looking to buy a property with $2,000 in rent wouldn’t qualify with a 30-year loan. But by moving to a 40-year option, they could make the deal work.

More properties qualifying means more opportunities to build wealth.

What’s Next?

The DSCR market is becoming more flexible, and as rates go down, more products will continue to emerge. We’re here to provide a market update for real estate investors on a regular basis. If you want to explore options like the 40-year mortgage or no prepayment penalty, it’s a great time to look at how these products could boost your portfolio.

If you have any questions or want to run your numbers through our DSCR calculator, head over to our website. You’ll find tools to help you determine whether your property qualifies and how much cash flow you can expect.

Watch our most recent video to find out more!

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DSCR Loan Calculator: How to Find Your Ratio

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A DSCR loan calculator is an invaluable tool for real estate investors.

In the investment world, rental properties are a great source of wealth. The financial potential in fixing up places to then rent out is a very lucrative model, especially in the current housing economy.

What is a DSCR Loan?

DSCR loans are specifically designed for real estate investors who hold rental properties. 

The acronym literally stands for Debt-Service Coverage Ratio which is a fancy way of saying that the loan cares about the cash flow of a property.

The great news, especially for new investors, is that accessing these loans is less dependent on personal or business income. Even if you’ve just begun a new business, qualification for DSCR depends almost entirely on the potential value and expenses of the rental property itself. 

What is a DSCR Ratio?

The DSCR ratio is a simple calculation that compares income to expenses—the cash flowing in vs. the cash flowing out—on a single property.

Essentially, a DSCR ratio of 1 simply means that the income and expenses equal each other.

The DSCR ratio measures the break-even point of your investment. So long as you bring in the same amount of money as you invest, you won’t lose anything.

However, a DSCR ratio of higher-than-1 is even better. A higher ratio means that you’re bringing in more money than you’re spending—generating cash flow and building wealth.

Raising the Ratio

You can get a higher DSCR ratio in a few ways. 

1. Be mindful of your expenses.

Especially if you’re a new investor, make sure you’re shopping around for the best deals. 

Before you buy a property, research the typical costs for the area. Is there an HOA? Will you need any specialized insurance? Typical taxes?

Knowing these things beforehand can help you make more informed decisions and keep your costs lower.

2. Set rents intentionally.

Look at the average rents in your area. Remember, the higher your income (rents), the higher your DSCR ratio.

Let’s look at an example:

When rents equal our cash out, lenders may see your loan as “safe,” but it’s not making you any money. 

Instead, raising rents can help you end up with a higher DSCR ratio (and more money in your pocket).

When you raise rents, simply divide your expenses by your income (rents) to find your new ratio.

By raising rents by $200, we end up with a much better ratio (1.2) that actually creates wealth instead of simply covering expenses. 

Use Our DSCR Loan Calculator

To help you find your projected rents, expenses, and ratio, you can use our DSCR loan calculator. It’s a free, user-friendly download that will help you estimate your DSCR ratio to see if your investment property is going to break even.

Once you have an estimate for your ratio, it’s time to start looking for loans. 

Finding a DSCR Loan

Banks typically like to see ratios of 1 or higher. 

However, if you’re working with a property that might not break even, you can often still find a loan, but you might be stuck with higher rates.

You can also check out our website and inquire about the DSCR options we offer. 

Here at The Cash Flow Company, we scour the market to make sure we offer competitive rates and connect good people with good loans.

If you have questions or want to talk about a loan, reach out to us at Mike@TheCashFlowCompany.com.

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DSCR Loan Calculator: Understanding Monthly Payments

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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 Monthly Loan Payments

One of the most significant outflows of cash is the loan payment. In addition to fixed costs (think taxes, insurance, etc.), these payments are a significant factor of a DSCR plan. 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 Approximate Estimate = $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.

When working with your DSCR loan calculator, the monthly payments are a critical component to set you up for success.

 

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 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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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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The Benefits of a DSCR Loan for Investors Who Own a Rental

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How do you benefit from a DSCR loan? Why should you get one?

A DSCR loan can replace a conventional loan for real estate investors.

But what’s it all about? Let’s go over the benefits of a DSCR loan.

Benefits of a DSCR Loan vs Conventional

These loans are relatively simple:

  • There are no personal income requirements (no W-2s, tax returns, etc). Instead, it’s all based on the income and expenses of the property.
  • There are no business or experience requirements. Bank or conventional loans require a business to exist for 2 years or more before they’ll lend to you.
  • They don’t need to see your portfolio. For other loans, lenders may ask to see what other properties you’ve flipped or rented. DSCR loans only care about the rental property at hand.

DSCR loans come in all shapes and sizes (3-year, 5-year, 30-year, 40-year), with a broad variety of details depending on lenders.

What Is the “DSCR” Part?

A debt service coverage ratio loan focuses on the debt ratio of the property. Does the rent pay for the expenses?

  • Rent – The monthly income a property receives from tenants, based on comps.
  • Expenses – Despite all the expenses of a property, a DSCR loan only takes into account the mortgage payment, interest, taxes, insurance, and HOA fees.

One way to think of this ratio is: do you at least break even on this property?

To calculate a DSCR loan: Does Rent ÷ Income equal 1?

If yes, then you exactly break even. If it’s more than 1, then you have cash flow (and getting a DSCR loan will be even easier). But if this number is less than 1, the property costs more than it makes, and you’ll need a special kind of DSCR loan, likely with worse terms.

Benefits of a DSCR Loan

Let’s go over all the positives of a DSCR loan:

  • No income requirements for you – just the property.
  • It doesn’t matter how old your business is.
  • You can write everything off on your tax returns.
  • Lenders don’t consider your other properties in the underwriting.
  • You can buy in an LLC or company name.
  • They have interest-only DSCR options.
  • There is a variety of term lengths – from 3-year adjustable to 40-year fixed.
  • They can be used for short-term rentals, like Airbnb or VRBO.
  • A DSCR loan is a perfect long-term refinance loan for a flip project. It works great with BRRRR.

Read the full article here.

Watch the video here:

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