Real estate has consistently been one of the best long-term investments people can make to build wealth. However, many potential investors find it difficult to enter the real estate investment world as they are unfamiliar with financing options and opportunities. This is where Debt Service Coverage Ratio (DSCR) loans can provide an accessible way for investors to get started on financing investment properties. In this post, we’ll discuss DSCR loans and explore what they are, how they work, and the opportunities they offer to both clients and agents.
Debt Service Coverage Ratio is a financial metric used to assess the ability of a property to generate income that can cover its debt obligations. Unlike traditional mortgage loans where the borrower’s income and creditworthiness are most important factors, DSCR loans primarily focus on the property’s income potential. This means you are qualifying the property’s ability to generate income rather than the income of a borrower. The DSCR is calculated by dividing the property’s Net Operating Income (NOI) by its total debt service, which is the total mortgage payment on the loan. A DSCR above 1.0 typically indicates that the property’s income can comfortably cover its debt obligations and is what a lender would like to approve. Higher DSCR values signify greater financial security. The formula is as follows:
DSCR = Net Operating Income / Total Debt Service.
DSCR loans offer a relatively low barrier to entry for new investors, enabling them to enter the real estate investment world without the need of conventional financing that typically has more stringent requirements. With the help of a Homeseed loan advisor and their partnering real estate agents, investors can find properties on the market that will allow them to benefit from both passive income generated by the property and long term equity growth associated with appreciation. Historically, real estate has proven to be a sound investment choice and DSCR loans provide a means to build wealth.
Real estate agents can use a DSCR loan through Homeseed to help sellers improve their property’s appeal by showing income potential. By identifying properties with strong DSCR potential, agents can provide valuable opportunities to clients who are looking to invest their money wisely for long-term growth. Working in tandem with a Homeseed loan advisor will undoubtedly allow them to provide a more comprehensive service to all of their clients.
To illustrate the power of DSCR loans with a real-world example, we recently had a client who wanted to do a cash-out refinance on an investment property to fund additional investments. After ordering an appraisal with a rent schedule, the licensed appraiser determined that the home could generate on average of $255/night for a total monthly income of about $7,700. With only a mortgage payment of about $4,000, the property’s DSCR would be roughly 1.4 and indicated that it had strong financial viability. The DSCR loan also provided better interest rates compared to hard money loans and the funds will allow the client to expand their real estate portfolio.