Tag Archive for: cash flow

How to Calculate a DSCR Loan

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Today we are going to discuss how to calculate a DSCR loan. First we need to answer the question, “what is a DSCR loan?” A DSCR (Debt Service Coverage Ratio) loan helps real estate investors qualify based on rental income, not personal income. But how do you calculate it? Let’s break it down step by step.

What Is DSCR?

DSCR stands for Debt Service Coverage Ratio. Lenders use it to see if a property makes enough rental income to cover the mortgage. A DSCR of 1.0 means the rental income equals the loan payment. A higher DSCR means more cash flow.

DSCR Formula

The formula is simple:

DSCR=1,500/1,200 or 1.25

Now, let’s go step by step.

First: Find Your Gross Rental Income

This is the monthly rent collected from the property. If the rent is $1,500 per month, that’s your starting number.

Second: Calculate Your Total Monthly Debt Payments

This includes:

  • Principal and interest on the loan
  • Property taxes
  • Homeowners insurance
  • HOA fees (if applicable)

For example, let’s say your loan payment (including taxes and insurance) is $1,200 per month.

Third: Plug the Numbers Into the Formula

Using our example:

DSCR=1,500/1,200 or 1.25

What Does Your DSCR Mean?

  • 1.25 or higher – Your property cash flows well. Most lenders approve DSCR loans above this number.
  • 1.0 to 1.24 – The property covers the loan but has little extra cash flow. Some lenders may approve, but rates might be higher.
  • Below 1.0 – The property does not make enough to cover the mortgage. A lender will likely decline the loan.

Why DSCR Matters

A higher DSCR means:
First, Easier loan approval
Second, Better loan terms
Finally, More cash flow for you

Ready to Calculate Your DSCR Loan?

Use this formula to check if your rental property qualifies for a DSCR loan. The higher your DSCR, the better your loan options. Want help? Contact us today to find out more!

Now, go run your numbers and see if your property qualifies!

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Purchase a Multi-Unit Property with a DSCR

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Are you considering buying a multi-unit property, like an apartment building, but want to avoid the hassle of personal income verification? A Debt Service Coverage Ratio (DSCR) loan could be the solution for you. Today we will be discussing how using a DSCR loan to purchase a multi-unit property can get you on the right track! 

What is a DSCR Loan?

A DSCR loan is a type of financing that focuses on the income of the property you’re buying rather than your personal income. It’s perfect for investors who want to streamline the process, especially if their personal financials aren’t ideal. With DSCR loans, lenders look at the property’s cash flow compared to its expenses. If the property brings in enough income, you’re good to go!

Example:

If your property expenses are $1,000 per month, your rental income should be at least $1,200 to meet the typical DSCR of 1.2. That means your income is 120% of your expenses.

Can You Use a DSCR Loan for Multi-Unit Properties?

Yes! While DSCR loans are often associated with single-family homes or duplexes, they can also be used for multi-family buildings with five or more units. Whether you’re looking at a small apartment building or a larger complex, the loan works the same way, focusing on the property’s income.

However, keep in mind that for commercial properties like this, there are a few differences:

  • Loan Size: For multi-unit properties, DSCR loans typically start at around $1 million. If you’re looking for something smaller, this might not be the best option.
  • Loan Terms: You can expect shorter fixed-rate periods, such as 5 or 7 years. After that, the loan either adjusts or you’ll need to refinance.

What Do Lenders Look For?

To qualify for a DSCR loan on a multi-unit property, lenders usually have a few specific requirements:

  1. Minimum Property Value: The property should be worth at least $50,000 per unit. If you’re looking at a 20-unit building, that means the building’s value should be at least $1 million.
  2. Occupancy Rates: Most lenders require that 75% to 90% of the units are rented. This ensures the property is already generating income.
  3. Cash Flow: As with all DSCR loans, the property’s income should be at least 1.2 times higher than its expenses.

Example:

If you’re buying a 10-unit apartment building with each unit worth $50,000, you’re looking at a $500,000 loan. If your total expenses for the property are $5,000 per month, your rental income should be at least $6,000 to meet the 1.2 DSCR requirement.

Benefits of DSCR Loans for Multi-Unit Properties

There are a few key reasons why DSCR loans are popular for multi-unit properties:

  • No Personal Income Verification: Since the loan is based on the property’s income, you don’t need to provide personal tax returns or income statements.
  • Non-Recourse: Many DSCR loans are non-recourse, meaning you’re not personally liable if something goes wrong. The lender can’t come after your personal assets.
  • Simplified Process: The DSCR loan process is straightforward. You won’t need to deal with the endless paperwork typical of traditional loans.

When Is a DSCR Loan NOT the Best Option?

While DSCR loans are fantastic for stabilized properties, they’re not always the best choice if you’re planning a value-add or major renovation project. Most DSCR loans require a high occupancy rate, so if you’re buying a property with a lot of vacancies or under-market rents, you might have trouble meeting the 1.2 DSCR.

Example:

If you’re buying a property that only has 50% of the units rented and you’re planning to renovate the rest, this loan might not be for you. You would need to bring up the occupancy and rental income before it qualifies.

Can You Use a DSCR Loan for a Portfolio?

Absolutely! DSCR loans aren’t just for individual properties. If you have multiple single-family homes or other properties, you can bundle them under one loan. The main requirement is that each property must meet the minimum value and occupancy thresholds.

Ready to Learn More?

A DSCR loan can be a powerful tool for purchasing multi-unit properties. By using a DSCR loan to purchase a multi-unit property you can get yourself set up for success! If you have any questions or want to explore your options, reach out to us. We’re happy to help you find the right financing for your next investment.

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DSCR Loan vs Traditional Loan

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When it comes to financing your real estate investments, you’ll find several loan options, each with its pros and cons. Two popular choices are DSCR loans and traditional loans. Let’s break down the key differences between a DSCR loan vs traditional loan to see which option fits your needs.

What is a DSCR Loan?

A DSCR (Debt Service Coverage Ratio) loan focuses on the income that your property generates. It’s designed for real estate investors who may not qualify for traditional loans due to their personal income or the way they handle their finances.

Example: If you write off most of your income on taxes, a traditional loan may not be an option. But with a DSCR loan, the lender cares about your property’s income, not your personal income.

What is a Traditional Loan?

Traditional loans, like those backed by Fannie Mae or Freddie Mac, rely on your personal income, credit score, as well as your financial history. These loans are more common for people who have steady jobs and a consistent income.

Example: If you’ve had the same job for two years and have a solid income history, a traditional loan might offer you lower rates and fewer restrictions.

Key Differences Between DSCR and Traditional Loans

Loan Terms

  • DSCR Loans: Offer various options like 30-year fixed, 40-year fixed, or even interest-only for the first 5 or 10 years.
  • Traditional Loans: Generally have 30-year fixed terms, though some may offer 15-year or adjustable-rate options.

Tip: If you’re looking to pay off your loan quickly, a shorter term or interest-only period might be the best fit for you.

Prepayment Penalties

  • DSCR Loans: Usually come with prepayment penalties. This means if you pay off the loan early, refinance, or sell the property, you’ll have to pay a fee.
  • Traditional Loans: Typically don’t have prepayment penalties, allowing you to refinance or sell without worrying about extra fees.

Example: If you get a DSCR loan with a five-year prepay, and you sell in two years, you could owe a 5% fee on your remaining loan balance. That could be $10,000 on a $200,000 loan!

Interest Rates

  • DSCR Loans: Interest rates are usually 0.5% to 1% higher than traditional loans. This is because DSCR loans don’t verify your personal income, making them riskier for the lender.
  • Traditional Loans: Typically offer lower interest rates, especially if you have good credit and income history.

Flexibility for Investors

  • DSCR Loans: Perfect for investors who may not have consistent income or those who take advantage of tax deductions to reduce their taxable income.
  • Traditional Loans: Better for people who have stable jobs and income and can easily meet the loan requirements.

Example: If you’re an investor who writes off most of your income to reduce taxes, a DSCR loan is ideal. On the other hand, if you have strong personal income, a traditional loan might be the way to go.

DSCR loan vs Traditional loan: Which Loan Should You Choose?

  • Choose a DSCR Loan if:
    • You’re a real estate investor with inconsistent personal income.
    • You want a loan that’s based on your property’s income, not yours.
    • You’re okay with slightly higher rates in exchange for flexibility.
  • Choose a Traditional Loan if:
    • You have stable personal income and want to secure the lowest possible rate.
    • You don’t want to deal with prepayment penalties.
    • You’re not relying on your property’s income alone to get the loan.

Final Thoughts

Both DSCR loans and traditional loans have their place in real estate investing. However, if you’re looking for a flexible option that lets you focus on your property’s income, a DSCR loan is likely your best bet. But, if you have solid personal income, a traditional loan could save you money with lower rates and no prepayment penalties.

Finally, before you decide, always run your numbers and make sure the loan fits your long-term goals. Happy investing!

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Quickly Calculate DSCR Today

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Are you looking to know if your property will cash flow using a DSCR loan? Let’s break it down so you can quickly calculate the Debt Service Coverage Ratio (DSCR) on your next deal.

What Is DSCR?

The DSCR is a ratio lenders use to see if your property is making money or losing it each month. It’s a simple way to check if your property is cash flowing positively or negatively.

When you see a DSCR higher than 1, it means your property is making money. However, a number lower than 1 means it’s costing you money. For example, if your DSCR is 1.25, your property brings in 25% more income than it costs. Therefore, if it’s 0.94, it’s losing a bit each month.

How to Calculate DSCR

Luckily, the formula for DSCR is easy. All you need to do is divide the property’s income by its expenses.

Here’s the formula:

DSCR = Income ÷ Expenses

Now, let’s break this down step by step:

  1. Income: This is how much you’re collecting in rent.
  2. Expenses: Add up these four things:
    • Your monthly mortgage payment
    • Property taxes
    • Insurance
    • HOA fees (if any)

DSCR Calculation Example

Let’s look at a quick example to make this clear.

Say you own a rental property. Here’s how much it’s bringing in and costing:

  • Rent (Income): $1,700 per month
  • Mortgage: $1,290 per month
  • Taxes: $100 per month
  • Insurance: $100 per month
  • HOA: $100 per month

First, total your expenses:

  • Expenses: $1,290 + $100 + $100 + $100 = $1,590

Next, divide the rent by the expenses:

  • DSCR: $1,700 ÷ $1,590 = 1.07

With a DSCR of 1.07, this property is cash-flow positive. Therefore, you’re making money each month!

What If the DSCR Is Below 1?

Let’s say the rent is only $1,500 per month instead of $1,700. Here’s what happens:

  • Rent (Income): $1,500 per month
  • Expenses: $1,590

Now, divide the rent by the expenses:

  • DSCR: $1,500 ÷ $1,590 = 0.94

In this case, your DSCR is below 1, which means you’re losing money. To clarify, each month, you’ll need to pay $90 out of pocket to cover the costs.

Higher DSCR Means Better Rates

Here’s another example where the rent is higher. Let’s say you’re getting $2,000 per month in rent:

  • Rent (Income): $2,000 per month
  • Expenses: $1,590

Now, divide the rent by the expenses:

  • DSCR: $2,000 ÷ $1,590 = 1.26

A DSCR of 1.26 means your property is bringing in 26% more income than the expenses. Not only does this make your cash flow better, but it can also help you secure a lower interest rate.

Why Does DSCR Matter?

Lenders care about DSCR because they want to be sure your property is self-sustaining. If it’s not, they’ll see it as a risk. A higher DSCR can mean a better interest rate, which puts more money in your pocket. For example, a DSCR of 1.25 could get you a lower rate than a break-even DSCR of 1.0.

Imagine the impact of a lower interest rate across several properties. If your DSCR helps you save $220 a month, that’s $2,640 a year. If you have five properties, that’s over $13,000 in savings!

Final Tips to Quickly Calculate DSCR

Before you buy, check the DSCR to make sure the property will cash flow like you want it to. Here’s how:

  1. Estimate the rent based on similar properties in the area.
  2. Calculate your monthly mortgage payment, taxes, insurance, and HOA (if applicable).
  3. Run the numbers using the simple DSCR formula.
  4. Check that your DSCR is above 1 to ensure you’ll have positive cash flow.
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Why You Need a DSCR Loan in Today’s Market

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Today we are going to discuss why you need a DSCR loan in today’s market. Finding the right loan can make or break your investment strategy. For many investors, the DSCR loan is the perfect tool. Whether you’re just starting out or have been in the game for a while, DSCR loans offer a unique advantage that other loans don’t.

What is a DSCR Loan?

DSCR stands for Debt Service Coverage Ratio. But here’s the part that makes it stand out—it’s what we often call the “no income loan.” Unlike other loans that ask for your personal or business income, the DSCR loan only cares about the income your property generates. Imagine this: You don’t have to worry if you just started a business, are unemployed, or have written everything off on your taxes. The DSCR loan doesn’t ask for tax returns, employment verification, or personal income. That’s why it’s perfect for investors who might not show a lot of income on paper but have solid, cash-flowing properties.

Why DSCR Loans Work for Real Estate Investors.

Investors love DSCR loans because they are tailored specifically for rental properties that generate income. These loans are quick and simple compared to conventional loans because they avoid all the hassle of verifying your personal finances.

  1. No Personal Income Needed
    You don’t have to show income documents like tax returns or employment verification. It doesn’t matter if you’re new to real estate or have been writing off all your expenses—you can still qualify.
  2. Based on Property Income
    The main qualification is whether the property can cash flow. The lender looks at whether the property can cover its basic expenses: mortgage, taxes, insurance, HOA, and flood insurance. If the property pays these bills with its rental income, you’re good to go!
  3. Great for Rental-Ready Properties
    DSCR loans are designed for rental-ready properties, meaning you can move tenants in right away. They are not for fix-and-flip projects or properties needing major repairs. If the property is already in good shape, DSCR is a great option to start generating cash flow.

The Catch (If You Can Call It That).

Now, you might be wondering—what’s the catch? The only real limitation is that the property must be rental-ready. DSCR loans aren’t for properties that need a lot of work. If you’re looking at a fixer-upper, you’ll need to explore other loan types. DSCR loans focus on properties that can start making money immediately. Plus, these loans are only for rental properties, not properties where you plan to live. For example, if you want to buy a duplex, live in one half, and rent out the other, a DSCR loan won’t work.

Why DSCR Loans Are Beating Conventional Loans.

Here’s another reason to consider a DSCR loan: they’re now often cheaper than conventional loans. Traditionally, DSCR loans had slightly higher interest rates, but that has changed. In today’s market, over 70% of DSCR loans are coming in with rates lower than conventional loans. Why? Because DSCR loans are tied to different financial indexes, making them less affected by inflation and federal rate hikes. This means you can get the best of both worlds—a loan that doesn’t touch your personal finances and one that could offer you a better rate than a standard loan.

A Tool for Investors Looking to Grow.

If you’re an investor looking to buy and hold rental properties, a DSCR loan can help you grow your portfolio faster. Whether you’re buying single-family homes or multi-unit properties, this loan is designed to help you scale up without the usual roadblocks. And, if you’re curious about whether a property qualifies, contact us today! We are happy to help get you on the path of success.

In Conclusion.

Why do you need a DSCR loan in today’s market? DSCR loans are the ultimate tool for real estate investors in today’s market. Whether you’re just starting out or a seasoned pro who writes everything off, this loan can help you accumulate rental properties and grow your cash flow quickly. With rates often better than conventional loans and a simple qualification process, it’s no wonder so many investors are turning to DSCR loans.

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My Rental Property Isn’t Cash Flowing!

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Finding out that why your rental property isn’t cash flowing can be frustrating. This is a common concern, especially as interest rates rise. Let’s dive into why this happens and how you can better understand it.

Rising Interest Rates and Cash Flow

In recent years, interest rates have increased significantly. This rise has made it harder for rental properties to cash flow, especially if you’re using DSCR loans.

Example: Two Years Ago vs. Now

Two years ago, if you took out a $250,000 loan at an interest rate of 3.75%, your monthly payment would have been about $1,158. Today, if you take out that same loan at 9%, your payment jumps to around $2,011. That’s an $853 increase per month on the same property.

This rise in interest payments directly affects your cash flow. Even if your rent has gone up, it often isn’t enough to cover the increased costs. For example, rents might have gone from $1,500 to $1,700, but that increase is much smaller than the jump in your monthly payment.

How DSCR Loans Have Changed

DSCR loans used to require a simple one-to-one ratio, meaning your rental income just needed to cover your expenses to qualify. Now, many DSCR lenders require a higher ratio, like 1.1 or more. This means your property must generate more income than before to qualify for the loan.

On top of that, other costs like taxes and insurance have also increased, putting even more pressure on your cash flow.

What Happens When Interest Rates Drop?

Here’s where the silver lining comes in. If interest rates drop, your cash flow improves.

Example: Interest Rate Drops to 7%

Let’s say the interest rate drops to 7%. In that case, your payment on the same $250,000 loan would decrease to about $1,663. That’s a $348 savings each month compared to the 9% rate.

Example: Interest Rate Drops to 5%

If interest rates drop even further to 5%, your payment could go down to $1,342. That’s a massive $669 improvement in cash flow compared to the 9% rate.

Why You Should Still Consider Buying

Even though cash flow might be tight now, buying properties with good equity can still be a smart move. If you find a property with 25-30% equity and it’s at least breaking even, you could see great returns in the future when rates go down.

Example: Break Even Now, Profit Later

If you buy a property now that breaks even or comes close, as rates go down, you could refinance and suddenly have a property that’s cash flowing by hundreds more each month. Plus, when homes become more affordable, more buyers will enter the market, driving up property values.

Conclusion

While it’s harder to cash flow with rising interest rates, there’s still potential for long-term gains. By understanding how higher rates impact your payments and planning for future rate drops, you can position yourself for success. Focus on finding good deals with equity, and as rates decrease, your cash flow will improve, and property values will rise. The key is patience and strategy. Do you need to find out why your rental property isn’t cash flowing? Contact us today! 

 

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