Take Your Real Estate Portfolio to New Heights with DSCR

By  //  October 13, 2023

Real estate investment is one of the more solid strategies to start gaining passive income. And with the current post-pandemic housing markets, buyers are starting to see low property prices with great potential for appreciation. In other words, now is a great time to expand your portfolio.

What investors may not be aware of is a little thing called the Debt-Service Coverage Ratio and how it can impact their ability to fund new properties. Below, this article will discuss just what your DSCR is and how it can help your investments, opening new opportunities to expand your portfolio. Let’s go.

Understanding DSCR

Debt Service Coverage Ratio is a metric used to measure how well your rental properties are performing— or how well a potential property could perform. This metric takes the net operating income and divides it by the debt services or expenses necessary to run the property. Debt services can include things like principles, interest, taxes, insurance, association dues, utilities, and the like.

A DSCR of 1.0x means that a property makes just enough money to pay its debts. Lower than 1.0x means the owner is taking a loss, and higher than 1.0x means there is a positive cash flow.

How to Improve Your DSCR

You can improve your DSCR by either reducing your property-related expenses or by increasing the property’s value and income. Increasing income generally means raising rent, which may fall under strict restrictions based on where the property is located. 

Many investors opt to lower their expenses instead. One popular strategy is to refinance the property and then start using additional income streams or the equity from the property to pay down your property loan. Paying off debts related to the house helps reduce how much money you spend to run the property and grants you more income in the long run.

A short-term solution is to reduce other expenses, such as letting go of a landscaping service and handling the lawn yourself for a few months or finding ways to make the home more energy-efficient to reduce utility costs.

What Can a Strong DSCR Do For You

If you have a DSCR of at least 1.25x, you will start to qualify for DSCR loans. These rental loans offer more favorable application processes and terms for investors, making them a great way to start growing your real estate portfolio.

Lenders will look at your DSCR, your credit score, and your property management experience. The best DSCR lenders will also calculate the potential DSCR for the new property and look over the property’s appraisal. If they like what they see, you can access a great loan system for rental properties.

What Makes DSCR Loans Different?

DSCR loans are able to be taken out at higher amounts than standard loans, and they are easier to apply for since you don’t have to gather documentation for personal income verification. Loan amounts can vary anywhere from $100,000 to $5,000,000.

Repayment terms are longer than conventional loans, so you can arrange for a lower monthly payment to help balance your expected operating income. DSCR loans also have a higher loan-to-value ratio, so most investors can expect a down payment of around 20%— though there have been instances where they reached up to 40%.

It is important to note that DSCR loans have a higher interest than traditional loans, generally 1-2%.

A Quick Note About Portfolio DSCR Loans

Some lenders offer a special packaging loan called a Portfolio DSCR Loan. This is for when you have multiple DSCR loans with at least $50,000 remaining. You will also need a minimum credit score of 660. If you qualify, you can combine all of your DSCR loans into one convenient package with a single monthly payment. This can help improve your cash flow and make bookkeeping more convenient.

How You Can Use DSCR Loans

DSCR loans can be used in three ways: financing a new property, refinancing a current property, or cashing out a property. However, the property must be a rental property. These loans are specifically tailored for investors and may not be used for primary residences. This does mean that house hackers cannot benefit from the efficient process.

You can use DSCR loans to finance a wide variety of residential and commercial properties. However, they generally will not work for rural areas, condotels, log cabins, or properties with less than 750 square feet. Office spaces, shopping malls, apartment complexes, duplexes, single-family residences, and multifamily homes can all be funded through a DSCR loan.