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Real Estate Debt Service Coverage Ratio Loans

Put the power of your cash flow to work for your investment and rental properties.

Debt Service Coverage Ratio
Loan Overview

The benefit of a DSCR loan is that it provides mortgage funds based on the income of a rental property. What does that do for business owners? It keeps your personal income out of the picture, allowing you to invest in larger projects even if your personal income alone would not qualify for the loan. By utilizing DSCR loans, you can rapidly grow your rental business.

How to Effectively
Calculate Debt Service Coverage Ratio

Some DSCR loans can go up to 85% of the value of the property. That means a buyer may only need 15% down. Why is this? The lender wants to confirm that loan payments will be covered by cash flow and that there will be sufficient residual funds to cover maintenance, payroll, property improvement and fund reserves to cover an increase in unleased units or emergencies such as failure in one of the property’s mechanical systems.

To figure the Debt Service Coverage ratio, take the net operating income of the target property and divide it by annual debt payment. If the current owner is self-operating, your lender may adjust up the operating costs to match standard in the market making it more challenging to evaluate the loan cap until you’ve had your potential deal assessed by a loan broker.

Debt Service Coverage Ratio Options

Acquisition

Utilize DSCR-based Commercial Real Estate loans to purchase new properties and expand quickly without putting your other assets at risk through a bridge or hard money loan.
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Refinance

Cash-out DSCR loans give operators funds to add to their emergency cash reserve, working capital, and even funds for a down-payment on a new property.
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Property Improvement

Build value by improving property. As size or class of the property increases, so does rental price, increasing gross revenue and the maximum loan size.
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F.A.Q’s

Q. Do DSCR loans provide better terms?
DSCR loans can make some acquisitions possible that might not be allowed under personal income based loans. In addition, there are no added fees for choosing a DSCR based loan. The best way to determine if a DSCR loan is right for your property investment strategy is to meet with a loan broker who can help you evaluate your overall business scenario.
Q. What do I need to apply for a DSCR loan?
To apply for a DSCR loan you’ll need to know the lease or occupancy rate, the revenue rate of the property, and annual operating costs and property tax. In an acquisition, these numbers are often finalized during the process, and meeting with your loan broker prior to your property search is an important step in preparing for negotiation.
Q. What is a good DSCR?
A good DSCR is usually considered to be around 1.25, meaning total costs will cover all expenses and provide 25% additional profit as a buffer against risk. A DSCR of 1.0 is too risky for many lenders because there is no room for error and no margin for profit.

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