Understanding DSCR Loans: A Game-Changer for Rental Property Investors

Rental property investments can be very lucrative, and a consistent way for investors to build a strong, wealth-building portfolio. Having reliable financing for rental acquisitions is important, but it’s not always easy to secure a loan from a traditional lender. They often have strict loan requirements, and a long application process that is not always suitable in time-sensitive scenarios. Brokers and wholesale partners can help their clients by adding DSCR loans to their offerings. This type of financing, provided by private lenders, has many benefits which set it apart from conventional financing solutions.

Continue reading to learn about how offering DSCR loans can be a game-changer for rental property investors, and how capital providers can win by providing them to their clients.

What is DSCR?

DSCR stands for Debt Service Coverage Ratio. In the simplest terms, it’s the ratio of monthly revenue from a rental property in comparison to its total monthly expenses. DSCR loans take this ratio into account to determine the profitability of a rental investment, and if it makes sense to provide financing for it. In other words, a lender can use this ratio to determine if the property qualifies for financing. A “good” DSCR ratio is anything starting at 1.10 and above, or essentially, a 10% buffer between revenue and expenses.

Why DSCR Loans Are a Game-Changer for Rental Property Investors

DSCR loans are easier to qualify for than conventional mortgages, and provide several other advantages as well. Personal income is not a requirement for these loans, as they are based on the property’s cash flow. This simplifies the application process and means that loans can often be approved faster too. Also, unlike traditional mortgage loans, there are no limitations on the number of DSCR loans a person can take out, which makes them ideal for rapidly scaling a real estate portfolio. Combine this with flexible loan structures that can be tailored to each deal, and you can see why they are such a powerful tool for investors.

How Brokers Can Help Investors Leverage DSCR Loans

Brokers can benefit from adding DSCR loans to their offerings, and recommending them in scenarios where conventional mortgages don’t fit the bill. First, be sure to educate your clients on the potential benefits of DSCR loans in comparison to traditional mortgages. Then you can assist them by helping analyze their property’s cash flow to determine loan eligibility. Finally, connect them with lenders who offer these programs and be sure to help with structuring their loan application, as each lender may have different qualification criteria.

Key Advantages of DSCR Loans for Rental Property

Here are some of the main advantages of using a DSCR loan for a rental investment which you can present to your clients:

• Increased Buying Power: Since loan qualification is not based on income, investors can secure financing for a wider range of projects, increasing their potential buying power.
• Faster Portfolio Expansion: DSCR loans typically have a less stringent application process, and no restrictions on how many loans can be taken out at once. This allows investors to rapidly expand their portfolios by securing financing for multiple properties.
• Customizable Loan Terms: Unlike traditional financing institutions, DSCR lenders are more willing to work with applicants to tailor loan terms to the specific needs of each project.
• Lower Documentation Requirements: DSCR loans do not have the same requirements as traditional mortgages, such as proof of income or W-2s. This allows investors to still secure financing even if they have unconventional income sources or are self-employed.

Potential Challenges and Considerations

Although DSCR loans can be a very powerful tool, there are still some challenges and considerations to make your investor clients aware of. First, understand that while interest rates for these loans are very competitive, they may still be higher than their conventional mortgage counterparts. Different lenders may also have different DSCR thresholds for loan qualification, but they generally range from 1.0 – 1.25. Ensuring the stability of cash flow is important, so lenders may check vacancy rates for the property’s market to ensure the borrower’s ability to repay the loan. Finally, be sure to indicate that DSCR loans do still have a down-payment requirement, and this can differ from lender to lender but may also be higher than a traditional mortgage’s.

Step-by-Step Process of Originating DSCR Loans

Here’s an outline of the general process of helping your clients secure a DSCR loan:

1. Find a suitable lender: Be sure to shop around and compare various options in order to secure the best possible terms for the investment.
2. Assess property cash flow: Determine the property’s NOI including all related expenses. This will help accurately estimate DSCR.
3. Prepare the loan application: This typically entails gathering all required documents, but will be more focused on property metrics than the borrower’s financials.
4. Negotiate loan terms: Leverage your expertise to secure terms that are tailored to your client’s particular investment deal.
5. Close the deal: Once terms have been negotiated, you can finalize the paperwork and get your client’s deal funded.

When Should Investors Consider a DSCR Loan?

Investors often run into issues when funding their deals, and here are the top scenarios where a DSCR loan can be the ideal financing solution. The first is when an investor is looking to expand their rental portfolio beyond the limits of traditional financing solutions; many of these, such as FHA loans, have a limit to the number of properties that can be financed with them. The second is if the investor has a property with strong cash flow, but a complex personal income situation which bars them from securing a conventional mortgage. If an investor is seeking more flexibility with loan terms and conditions, this is also where only DSCR loans can deliver the terms they’re looking for. Finally, if there is a time-sensitive deal, or if the investor is seeking loan approval with minimal documentation, DSCR loans are a perfect fit.

RCN Capital

The easiest way to save on an investment is to obtain financing from a real estate lender that can provide you with the best leverages and rates. RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors. If you are looking to finance a real estate project, RCN Capital has competitive loan options available.