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.
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