For landlords looking to expand their portfolio or realize greater profitability, securing the right financing is key. To unlock full investment potential, Debt Service Coverage Ratio (DSCR) loans for rental properties have become a popular choice among savvy real estate investors.
Unlike traditional loans through conventional lenders that heavily scrutinize investors’ personal income and tax returns, private DSCR loan lenders take an asset-focused approach to approval processes. This makes both single and portfolio DSCR loans an attractive option among investment newcomers and those with diverse income streams looking to expand their portfolio.
But which DSCR loan is right for you–single vs. portfolio?
In this article, we’ll further explain what a DSCR loan is as well as provide insights into the best DSCR loans for investors based on their investment goals and strategy.
Unlike traditional loans through conventional lenders that heavily scrutinize investors’ personal income and tax returns, private DSCR loan lenders take an asset-focused approach to approval processes. This makes both single and portfolio DSCR loans an attractive option among investment newcomers and those with diverse income streams looking to expand their portfolio.
But which DSCR loan is right for you–single vs. portfolio?
In this article, we’ll further explain what a DSCR loan is as well as provide insights into the best DSCR loans for investors based on their investment goals and strategy.
DSCR Loans Explained
DSCR financing is specifically designed for LLC real estate investors. Most rental investors are “self-employed” under LLCs and have assets tied up in other investment properties. This makes it difficult to secure conventional loans through banks and credit unions with strict personal income and tax documentation (W2s) requirements.
DSCR loans through private lenders mitigate these financial challenges using the DSCR formula. DSCR loan lenders take a property’s rental income (in-place or potential) and PITIA (principal, interest, taxes, property, insurance, and association dues) into consideration using this formula.
DSCR loans through private lenders mitigate these financial challenges using the DSCR formula. DSCR loan lenders take a property’s rental income (in-place or potential) and PITIA (principal, interest, taxes, property, insurance, and association dues) into consideration using this formula.
DSCR Loan Calculator: Determining a property’s Debt Yield Ratio
formula = Rental Income / Principle + Interest + Taxes + Insurance + Association Dues
This formula determines a property’s DSCR ratio which identifies its profitability. In the eyes of private lenders, any property with a 1.25 DSCR ratio is considered profitable and can be financed regardless of personal income or W2 status, but some lenders will accept a lower DSCR.
DSCR Loan Requirements
Although they have unmatched flexibility and accessibility for rental investors, DSCR loans do have some requirements that typically include:
- 660 FICO score or above
- 20-25% down payment
- 1.05 DSCR ratio minimum
Most DSCR investment loans are designed for long-term rental investments, rather than short-term rentals like Airbnbs. DSCR home loans also can not be used to purchase a primary residence, owner-occupied home, or for fix and flip investment endeavors.
Single vs. Portfolio DSCR loans
Now that you understand how they work and why DSCR loans are beneficial for rental investors, it’s time to dive into single vs. portfolio DSCR loans pros and cons to determine which loan is best for your investment strategy:
Single Rental
Single Rental DSCR financing, or single rental loans, are ideal for borrowers who are:
- Beginners & Part-Time Investors: Beginners or part-time investors owning one or two rentals, who don’t anticipate expanding their portfolio benefit most from a single rental DSCR loan.
- Access long-term financing options with less requirements (W2s, personal income) and faster approval times.
- Gain financing flexibility and accessibility through DSCR’s asset-focused loan qualification approach.
- Experienced & Scaling Investors: Yes, believe it or not, single rental DSCR loans can be the ideal financing option for experienced and scaling investors with growth strategies. In particular, investors who are looking to scale by selling off past rentals for higher ROI investment opportunities. Single rental loans can provide investors with more flexibility when it comes to selling, purchasing, and negotiating rental terms.
- Easier to Sell: When selling a single loan within a blanketed rental portfolio DSCRs, buyers are subject to more complex underwriting, valuations, and risk assessment processes and the sale can be subject to a partial release fee. Single rental loans focus on one property, are more straightforward, and often easy to sell in comparison.
- Different Pre-Payment Options: With a single prepayment restriction baked into an entire portfolio DSCR loan, it can be more difficult to sell or refinance individual properties without triggering a penalty. On the contrary, single rental loan borrowers can negotiate prepayment terms on a property-by-property basis, helping to avoid prepayment penalties and secure more favorable prepayment terms.
- Close in Different LLCs: The ability to close various properties under different LLCs creates several key advantages for investors, including:
- Isolated Liability: With several investments under different LLCs, investors isolate liability to a single property.
- Enhanced Exit Strategies: With assets spread out among LLCs, investors have more flexibility to sell a property without affecting other investments and their financing.
Portfolio Rental Loans
Portfolio rental DSCR loans, or portfolio rental loans, are designed specifically for experienced investors with 2 or more properties looking to consolidate their rental portfolio to:
- Streamline Loan Approval Processes: Securing individual loans for each property is resource-depleting for investors. With a Portfolio DSCR loan, underwriting and administrative work is cut in half throughout loan origination–saving investors time and money.
- Enhance Operational Efficiency: With a blanket portfolio rental loan you are subject to a single monthly payment. With one invoice, investors further reduce loan management burdens and make it easier to track expenses and payments.
- Flexibility, & Cost Benefits: with one lender covering your entire rental portfolio, you get more than a lender–you get a partner. Private lenders have the flexibility to design portfolio loans with several cost benefits, including lower interest rates and more favorable terms.
CIVIC: Your DSCR Lending Partner
Finding the right capital partner can be as important as identifying the best DSCR loan to use. CIVIC has been providing investors of all sizes with the most reliable and flexible long-term DSCR financing options for over a decade.
Our Single Rental & Rental Portfolio loan options provide investors with:
Whether you are just starting out or looking to scale your rental investment portfolio, let CIVC find the best DSCR loan for you that aligns with your business goals. CLICK HERE to schedule a FREE consultation today!
Our Single Rental & Rental Portfolio loan options provide investors with:
- Flexible terms and approval processes with no W2s, paystubs, or tax returns required
- Loans underwritten on DSCR and property cash flow
- Non-recourse options available on Rental Portfolio
- SFR, warrantable condos, townhomes, PUD, and 2-4 units eligibility
Whether you are just starting out or looking to scale your rental investment portfolio, let CIVC find the best DSCR loan for you that aligns with your business goals. CLICK HERE to schedule a FREE consultation today!
