26. DSCR Loans Explained & How to use them to scale

Are traditional loans holding you back from building your real estate empire? Discover how DSCR loans can revolutionize your investing journey, even without stable income or a perfect W-2. This episode uncovers a game-changing approach for entrepreneurs, self-employed professionals, and dreamers eager to break barriers and create wealth through real estate.In this episode:

• What is a DSCR loan and how does it differ from traditional financing
• Why property income, not personal income, qualifies you for a DSCR loan
• The key requirements: credit scores, down payments, and reserves
• How to calculate your property's DSCR ratio (aim for above 1.25!)
• Using DSCR loans for buying, refinancing, and scaling your real estate portfolio
• Real-life examples illustrating how DSCR loans work in practice
• Why this product is perfect for entrepreneurs, freelancers, and those with variable income
• Benefits of DSCR loans over traditional financing: no tax returns, no W-2s, faster approval

••Possible downsides: higher interest rates and larger down payments

Transcript

SPEAKER_01 0:00

If you want to invest in real estate, but traditional banks keep telling you that your income does not qualify, then this video is extremely important to you. Because the truth is that many new investors don't really look good on paper to traditional lenders. Maybe your tax returns show a low income because maybe you write things off if you have like a business or you just take a lot of deductions. Maybe you're self-employed and you haven't hit that like two-year mark that lenders typically want for tax returns. But none of that means that you shouldn't be able to buy an investment property. That's where the DSCR loan comes in. And that's what we're going to be covering today. We are going to be talking about what a DSCR loan is, what are the requirements, the difference, and how you can use it to buy an investment property. And we're going to get a little bit into an example, and Lynn and I are going to share our recent DSCR loan investment properties. But before we get into it, don't forget that I do have a Latina real estate cheese my community that I am building on the school platform. So if you are an investor, if you are wanting to get into real estate investing, or maybe you're a realtor, lender, or a transaction coordinator, or even if you're just involved in real estate in any way, then I would love to have you join this community. I'm building this community for Latinas, representation, to support, motivate each other, and mentor and teach each other about investing in real estate. So I'll have that link down below. Make sure you check it out. It's free to join.

SPEAKER_00 1:42

What is a DSCR loan? DSER is an acronym that stands for debt service coverage ratio. DSER loans are actually a product that is not backed by the government. It's not backed by any type of federal or state funding. DSER loans are backed by private equity. So people that have real investment portfolios are able to lend their money at an interest rate in order to, like I said, make that gap between the traditional lending, when they you look at that it is your loan, it comes from private equity investing in a business. And the business is you, right? You as the small investors are trying to generate profit by having rentals. And private equity has become this like major now competitor in our when you're looking at investor products right now. When you have like fix and flip, when you have bridge loans, when you have interest-only loans, DSDR loans come in different, um, they're all about the same package, but they come at different with different benefits from lender to lender. If that sounds complicated, the concept is actually pretty simple. It's a loan product, just like FHA, just like conventional, just like traditional banking lending. But this product qualifies the property based on its income, not based on your personal income or tax return. Let me say that again. Traditional mortgages or conventional mortgages of FHA mortgages, they qualify you. ESER loans qualify the property. So instead of asking, what is your salary? What are your tax returns show? What is your debt-to-income ratio, the lender asks only one question: Does the property generate enough rental income to cover the mortgage payment? If the answer is yes, the loan can be approved. This is why DSDR loans have become extremely popular for specifically entrepreneurs, self-employed professionals, real estate investors, and a small business owner. Because many of these people have strong assets and cash flow, but they don't show as strong traditional W-2 income. If you're in a service business, like you're a server and the majority of your income comes from tips, or you have an online business and you do a lot of affiliate marketing or send digital products, or you're in a consulting business, which your income is not particularly fixed. It varies from month to month. But traditional lending for you usually carries a barrier. Why? Because traditional lenders want that stable to income that it's fixed. They want the two years of tax return showing that your income hasn't fluctuating that much. And they want you to have little to no deductions on your income. Entrepreneurs often write off expenses to reduce our tax liability, which means on paper, it might look like you make less than you actually do. Other reasons that are hard to qualify for traditional loans are maybe you have student loans, maybe your credit score isn't that great. All of these can make it difficult for you to for regular loans. So the market, because there is a gap on lending, came up with DSCR loans to remove that barrier. Because the lender focuses on the property's income potential, that's a major shift. And it opens the door for entrepreneurs to start building a real estate portfolio when you're not able to get traditional lending.

SPEAKER_01 5:13

What are some of the requirements for a DSCR loan? One of the biggest misconceptions of a DSCR loan, the only way that you could get a DSCR loan was through having a business through an LLC. But you could still get an a DSCR loan, even if you don't have an LLC. When I went to look for a DSCR loan, I did start an LLC, it just wasn't fully established yet. And so I reached out to a DSCR lender and he was like, actually, you know, I could do it under your name. And so I was like, oh. So, but I'm still going to use that LLC. But that is one common misconception is that you need an LLC, but no, you can still get a DSCR loan under your name. The other thing is that some DSCR lenders uh do check your credit score. It's usually around 620 to 700. You don't need it as high as um you would think. Um, you still need a down payment. So usually you need like 20 to 25% down payment. And as far as cash reserves, they do want to see at least three to six months of mortgage payment in reserves. Now, one thing about this is that when you hear this, you're like, oh, I need, you know, X amount of money in my savings. And like, I don't have that. I barely came up with the down payment. It could include your like 401k and other investments. So for me, I was able to use my investment account, like my stock investment account, and they use that as reserves as long as I had enough of that. So they were able to use that, and actually, for most of my properties, they use that as my cash reserves. So they just want to see that you have access to funds as a financial cushion. Another thing that's very important, they don't require tax returns or W-2 income, as Lynn mentioned. It really depends on the lender. For the most part, they won't, and they definitely didn't ask for my W-2 income because, again, they are qualifying the property. And they do this through what's called a DSCR ratio. They calculate the DSCR ratio for the property that you are interested in. And that ratio is usually the net operating income to the debt that they're going to lend you, right? The mortgage payment. What is a good DSCR ratio? If it's less than 1.0, then the property is not going to generate enough income to cover the debt. If it's equal to 1.0, then the income is exactly enough to cover the debt. But most lenders want to see a DSCR ratio above 1.25, a little bit more confidence that the property is going to generate enough income to not only just cover the debt, but also have a buffer for like vacancies and other unexpected costs. How can you use a DSCR loan? You could use this for buying a property or for refinancing a current property. A lot of people tend to use the DSCR loan to get out of, like if they bought a rehab property and they use like a hard money lender or private lender, they'll fix out, they'll buy the property with that hard money lender or private money lend and then fix it, rehab it, and then they get a DSCR loan to get paid back that lender, and then they just have a regular mortgage. So they can do that. You could buy single family homes, duplexes, multifamilies, and then you could use short-term rentals like Airbnb. Although I'm not too familiar with that because I just do long-term rentals. So, how does a DSCR loan actually work? So we're gonna walk through an example. I found a property that I submitted an offer for $165. Now, this property actually had has tenants, so they used the actual income, which is the $2,050 per month. My estimated mortgage payment is $1,400. And again, they calculated the DSCR ratio when I went shopping around for a loan. And sometimes you'll see that they just use the rental income and divide the mortgage payment because they usually go for $1.25 higher, which already includes all like the other operating expenses. With mine, it was $2,000 and $2,050 divided by the $1,400 mortgage payment, and it gave me a $1.46 DSCR ratio. And again, it's way way higher than the 1.25. So it's going to cover the mortgage and also have a nice buffer for uh vacancies and repairs and property management fees, things like that. So that means again, that for the lender, this is a a good property for them to allow me to get the loan through them. So uh it reduces their risk because, as Lynn said, these are you know private equities, these are people that just are lending out their money. They want to see a property that is strong enough that if something goes wrong, it's able to support itself. So that's why these DSCR loans are designed specifically for investment properties. So this is not for primary homes because again, they qualify from the current rental income or the potential rental income. So yeah, if you're living in the property, then it's not gonna necessarily qualify.

SPEAKER_00 11:05

And I definitely definitely want to stress that these are for rental properties, properties that you're gonna buy to generate income. This is not for second home, this is not for general occupants with properties. And when you're looking at Airbnbs, like Bilata mentioned, they do a market rental analysis of long-term buy and hold, long-term leases. So even though let's say you have done your research, you wanted to buy an Airbnb, and then you're um purchasing for $200K and an AirDNA says you're gonna bring $4,000 a month or income or profit or revenue, right? But then you go to DSEL lenders, they're still gonna look at that market rent analysis of a long-term lease. So if your market, for example, that property is renting at $2,000 long term, then that means your DSER ratio, it's probably gonna be about 1%, 1.0. So definitely look at that before looking at DSER products. I'm sure they're gonna let you know when you try to qualify for one, but it's important to know. Another thing about DSCR loans that we haven't discussed is that when you start learning about the real estate investments, the best rate you're gonna be able to get would be normally traditional lending. So if you go to a bank and you say that maybe you have a home, already primary residence, you have to have the income to support that you can already purchase an additional home. So your debt-to-income ratio would be looked at. And there is a lot of investors, for example, like me, I live in a higher cost of living area in my current primary residence, it takes up a big chunk of my debt-to-income ratio. And because I continue to purchase homes, my income to debt ratio tapped out. If my income to debt ratio would allow to purchase homes, I have an absolute max of 10 loans I could get at a traditional banking. So 10 loans is usually what people are trying to do, like a small investor that's acquiring homes, they want to hit that 10 minimum before they move to a DSDR loan product. Why? Because usually DSDR loan products come with a little shift in interest rate. So for example, if normal traditional banking lending interest rates are a 6.5 right now, your DSCR cost or interest rate would navigate higher than that, a 6.75 or 6.8. That is normal because this is a different product that, like we mentioned before, is backed by private equity. So that is one of the downsides. I think Billet and I has deranged us a little bit from looking at this product early on on our journey. But because in my particular situation, my income to ratio did not allow for more houses to go and purchase, I had to look at this DSCR loan product and utilize it. And once I did it, once I went through the whole qualifying a property as a business entity and looking at DSER loan ratios, I actually realized that this product is significantly easier to use and it's not that much more different from a traditional bank blending product. I want to talk about the advantages of DSTR loans, which we're gonna mention again. You don't need tax returns, you don't need W-2s, you don't need pay stuffs, which makes it faster for entrepreneurs and also people like me, W-2 workers that have a maxed out debt incorporation. For faster approvals, scaling your portfolio, meaning you can buy multiple investment investment properties using DSTR loans. And it's business friendly. Many investors buy properties through an LLC, which adds a layer of liability protection. So if you're that kind of person that wants to start a rental portfolio and you really truly want to put it on an LLC from a get-go, DSTR is probably the product you want to look be looking at. There is, like I mentioned, downsides, the higher interest rates that's uh a trade-off that you have for this product. And in some cases, they will ask you for bigger than payments, sometimes 20 or 25%, which is at this at this product, that's pretty common. Like we said, it's strictly for rental properties, and that flexibility can unlock opportunities that traditional loans block. If you are at this stop in your journey, that you think you're a business owner that shows little income, that you don't think you're gonna qualify, go to traditional lending, and it's stopping you from buying a rental home or rental house that you think it's going to work out for you, that you have done research. Look again because there are products like this, DSCR, that Yulet and I now have used that don't look at your income and just look at the property that's going to be the business that you're gonna entail on to.

SPEAKER_01 16:04

I heard about DSCR loans, but like how I mentioned earlier, I thought it was just for LLCs. You had to have an LLC, so I didn't even like look at it or whatever. I was able to just get traditional conventional loans through my income. But this time I was leaving the military, so that meant I wasn't going to have income anymore. And so I was like, okay, so how am I going to be able to continue investing? Because I was relying on my W-2 income to be able to qualify for these conventional loans. But now I'm not going to have an income because I wasn't planning to work. I was just going to go to school. Yeah, I get a little bit of money for school, but they don't count that as income because it's not a fixed income because you only get paid while you're in class. So they don't, so they don't count for that. So that is one of the reasons I had went and started my LLC. And then I was like, okay, now that I got the LLC in the works, I went to talk to the DSCR lender. And then that's when I found out, like, oh, actually, you don't need the LLC. And so that is one of the reasons I went for that was because I wasn't going to have any income. And that's one of the good things about DSCR loans, that you don't need it. As long as the property was uh the DSCR ratio was high enough, then I was going to be able to qualify. So that is one um thing that I I wish I knew. Now, hindsight that I know I'm gonna continue using it now, especially now that I want to do real estate investing full-time, which is the reason that uh I'm not going to go for a W-2. I want to do this full-time, and with this property, I'm going to self-manage for the first time and do some fixes. Well, my husband's gonna do the fixes. I'm going to coordinate the repairs, and so it's gonna be um a good learning process. But yeah, I'm glad that now the DSCR loan is available. So, yeah, so the DSCR loan was great for um both Lynn and I. That for her, she tapped that whole G, you know, her debt-to-income ratio with the properties that she was investing. So great option for her and for me, I just dropped the W-2 income altogether. And so I had no income to be able to qualify for any loan, but the DSCR loan was there, and there's other options as well that we did talk about seller financing, so a little quick little plug for that. I'll link it below. That's another option as well. So if you want to check out that episode, that video, I'll have it below and we talk about how seller financing works and you know, uh a little bit of how you can use that as well. But yeah, overall for Latinas or anybody that's trying to build like long-term wealth with real estate, again, this can be a very powerful tool. DSCR loans make it possible to invest even when your tax returns uh don't look like what a traditional lender wants to see if you don't have stable income or variable income or you just don't have income at all. Because again, they are qualifying the income potential of the property. So it's uh it's a different approach that makes I feel uh real estate investing available to a lot of people that didn't think that would be possible for them. So definitely if you are interested in investing in real estate, check out, look for a DSCR lender near you and just call them up and ask them. And um mine was really informative and gave me the breakdown and gave me all the knowledge I needed to go out there and start looking. Other than that, make sure that you like and subscribe, follow the podcast if you're listening on Apple, Spotify, or wherever you listen to podcasts. Follow the channel if you're watching on YouTube. If you have any questions about DSCR loans, drop drop them in the comments if you're watching on YouTube or send us a DM. But other than that, don't forget again, quick little plug that to join the school community. Check out the description show notes for other resources. And other than that, we'll see you in the next episode. Bye. Bye guys.