Not all investment property loans are created equal. Much like superheroes, some have awesome powers (aka, Wonder Woman), while others are kind of meh. (Looking at you, Aquaman.) Granted, whether you’re applying for a fix and flip loan or rental property loan or even a conventional loan, it’s all based on what your looking for when getting into the rental real estate business, as well as being based on your financials. That being said, there is one type of investment property loan that may be more powerful than all the others…

the DSCR loan.

But before we jump into the superpowers of a DSCR loan, let’s dig into what a DSCR loan actually is, shall we?

DSCR simply stands for “debt service coverage ratio.”  It’s a formula used to determine if there is enough cash flow from rental income received on the property to “cover” or “service” the outstanding monthly debt on said property. Your DSCR will not only determine whether you get financing for a property in the first place, but it will absolutely determine whether your investment will be successful over the long term. It’s crucial that you know your DSCR in order to properly evaluate the profit potential (as well as potential risk) of any rental property you might be acquiring.

The formula for calculating debt service coverage ratio is pretty straightforward. The DSCR for real estate is calculated by dividing the annual net operating income of the property (NOI) by the annual debt payment. Anything between a 1.1 and 1.2 DSCR calculation (meaning the rent is 100% to 120% of the monthly expenses) is considered a sufficient cash flow to cover the outstanding monthly debt, which typically consists of principal, interest, taxes, insurance, and any dues if part of a condo association. (Not-so-fun fact: A DSCR below 1.0 means the property doesn’t generate enough cash flow to cover its debt obligations and, frankly, you are kind of out of luck.)

Now that you know what a DSCR loan is, it’s time to go over its benefits and why it’s considered such a powerful loan. Here are just some of the pros of using this type of investment property loan:

*Underwriting from a money lender is NOT based on your personal income covering the debt, rather, it’s based on the ability of the income from the property to cover the debt for the property.

*No need for proof of income via tax returns or pay stubs.

*Your personal DTI (Debt to Income) ratio does not influence your ability to qualify for these DSCR loans. DSCR loans do not report to the three main credit bureau — Experian, Equifax, and Transunion.

*Faster closing times. loanguys.com can actually fund investment rental loans much faster than conventional lenders can. We can fund as quickly as 10 to 14 business days!

*No limit to the number of loans.

*Purchasing directly into an LLC, which is highly beneficial to some investors as holding a property in an LLC has potential tax benefits.

And the better your DSCR is —meaning, the higher the number— the more benefits you are likely to have from getting a DSCR loan such as:

*More likely to qualify for a loan.

*More likely to receive an offer with better terms.

*Increases your chances of lower interest rates and a higher borrowing amount.

*Indicates you or your business can manage debt while still bringing in income.

*Shows you or your business has a positive cash flow.

Now, because we believe in full transparency, there are some drawbacks to using a DSCR loan. Even Superman has his kryptonite, ya know? So, if you are thinking of applying for a DSCR for a rental property, know the following:

*They often require a higher down payment.

*Interest rates may be higher.

*Sometimes there is a repayment penalty.

Basically, you want to make sure you have enough of a financial cushion when you apply for a DSCR loan, that way you are able to cover any fluctuations in cash flow while still keeping up with payments. But what’s great about a DSCR loan (and again, yet another super power) is that you can calculate your DSCR, see if you can afford to take on a loan, and know exactly how you are going to use that loan BEFORE you borrow, eliminating any and all guesswork when you are applying for an investment property loan.

And there are ways to improve your DSCR, which will improve your chances of getting that loan. (And you can always reach out to loanguys.com for even more helpful tips.) Things like:

*Increasing your net operating income.

*Decreasing your operating expenses.

*Paying off some of your existing debt.

*Decreasing your borrowing amount.

So, when it comes to investment property loans, a DSCR loan really is power packed. Seriously, Aquaman wishes he could do the things a DSCR loan can do.