Death, Debt, or Your Ticket to Real Estate Freedom?

Foreign.

Dscr. What? Yeah. Today we're going to talk about a DSCR loan, what that means and how you can actually qualify to get one. And it's actually not as hard as you think. So buying a real estate property, let's say your own property, Right. A lot of people have mortgages on their home. What does that take to qualify? Well, a lot of times you are qualifying with your active income, which also is known as your tax return.

Right.

Ultimately they're going to look at your W2 income and they're going to look at your tax return and see what your debt coverage ratio is.

Okay.

I'm going to tell my editor, you better keep that in the video. Death service coverage ratio. That's hilarious. It is actually debt D, E, B T. But I do like the death part because if you don't pay your bill, it will turn into death.

And see, can you afford this home based upon your credit card expenses or auto loan or whatever else you have, they're going to take all that into consideration and they're going to take your income into consideration. So to see if you can qualify for the home that you were trying to buy. And then the other requirement for a conventional loan is it has to be your primary residence where DSER loan comes into play. And what that stands for is debt service coverage ratio. And that is actually an investment loan product that requires you to not live in the home. So it's really an investor only loan. And, and what they do is way easier than a conventional loan. So much easier. I've gotten plenty of DSCR loans before and they don't even ask if I have a job. Like they don't look at my income whatsoever at all. What they do look for is your credit score. If you are going to be the loan guarantor, they will run your credit just like a normal conventional loan. They will ask for bank statements. If you're not the one funding the deal. If you have another partner, let's say in your llc, they're going to be asking for their bank statements, right? Someone has to have the liquidity to close on the loan, obviously. And they have to make sure that you have the liquidity or someone in your LLC has the liquidity to qualify for the mortgage. But that's it. There is no digging into your personal credit card debt, your personal auto loans, your personal student loans and none of that stuff. They're just looking for credit score. Do you have the funds to close? That's it from an individual perspective. Now when we look at the property that's where it becomes a little bit different is in the conventional side, you're only qualifying based on you as an individual for that property. They're not looking at what the rental rates are for the area. What? Well, in the DSER product they are looking at the property itself. And that is the large driver deciding factor between whether you can get approved or not get approved for the loan. It's the performance or the projected performance of the property. So let's say you have leases in place currently, whether that be a long term tenant or maybe you're doing Airbnb. You have some rental history from Airbnb that you can show. The lender will use that as long as it's within fair market value ranges. Now let's say you have a midterm rental property where you are furnishing the property and you have traveling nurses there. So let's say long term rent is 1500 for the area, but you're getting 3000 because you have it furnished and you're using traveling nurses network and like you're doing something special.

Right.

It's really a niche product. The lender is not going to give you a loan based upon that. They're going to take one of two paths. They're going to do long term rent or they're going to do short term rent and that's it.

Okay, so the lenders are going to use two different sites and it depends on whether you're doing LTR or str. A lot of times they're going to be using Rent O Meter. So that is very specifically for long term rent. They're going to use Rent O Meter. It's a great site. It will give them some comps. They may have their own proprietary site that they use as well that they're going to run comps on. But Rent O Meter is a pretty good resource for a lot of lenders and it's a good resource for you to determine what the average rent rates are in the area for long term rent, short term rent. The lender is almost always going to use Air DNA. Live or die off Air DNA. I mean, I've talked to probably over a hundred lenders and every single one has used Air DNA for short term rentals. Now what they will also do is they will allow actual comps.

Right.

So if you have a STR property that's performing currently, they'll use those actuals as long as they're in line with market rates. So if it's way above, they're probably not going to use that and they're going to be conservative and use whatever air DNA tells them. But two great sites that I recommend you check out. I'll put the links down below for you to use as well.

There's not a whole lot of flexibility when it comes to DSCR products. They're not going to be able to use midterm rental. They're okay with you doing that, but the property itself has to underwrite based on long term rentals or short term rentals. So if it doesn't underwrite with the right DSER ratio, and we'll get into that in a second, it won't get qualified no matter what your actual rent is on the property. So DSCR product, a lot more focus on the rental rate of the property itself or the projected rates that you can get for the property. So what is the magic DSCR number or how do you even calculate it? Sure, let's get into that. So what they're going to do is they're going to look at the overall rent that you're bringing in and they're going to look at the overall debt that you're asking for financing on.

Right.

So let's say we take a $300,000 purchase price and you go to the lender and say, hey, I want a loan for 75% of the purchase price. So what that's going to be is a loan of $225,000. And then you got to factor in what your interest rate is. Let's just say Today's environment, it's 7.5%. You're going to get a loan amortized over 30 years. And what that's going to do is give you a principal and interest payment of around $1573 a month.

Right.

And that's not it. You also have to take into consideration what your tax is and what your insurance is going to be for the property. I typically underwrite for, let's say like a duplex, it's usually around like 135amonth. It's actually for me sometimes lower down to like 115amonth. But I always underwrite about $135 a month in my PITI calculation. And PITI, if you don't know what that means, it stands for principal, interest, taxes and Insurance. So for the last part, the taxes part, this is in regard to property taxes. You can go onto your local county website and look up the property and it will tell you the exact dollar of what property taxes are to the penny. Every time I'm underwriting A property. I go and download that bill and I know the exact dollar amount and I can just plug that into my model and I could see the calculation. So when we go through and we add up the 1573 from the principal and interest portion of the loan and then the insurance at 135, the taxes at 133, we have an overall debt service of 1841. That means our monthly payment is going to be 1841 every single month. So that takes care of the debt service or the expense part of the equation. Now we have to look at the revenue side, right? So we need to make sure that our rent is covering all of that. And one good question to ask your lender when you're looking at DSER loans is, is what do they include in the DSCR calculation? There's some lenders that are ultra conservative and there's some lenders that are really, really flexible because they want to crank out deals and get more loans done. So that's a really important question to ask because what I'm about to say as far as the DSCR calculation is not the same for every lender. Every lender has different requirements. So if we're just going with the most flexible DSCR calculation, what that looks like is rent over the le, which is the debt service that we talked about. So if we had rent at 1841 every month and our debt service was 1841 every month, that's a debt service coverage of one. That basically means that you can pay your bills barely. You know, you're breaking even at zero, right? And some lenders would argue you're not breaking even. And we'll get into that in a second. But that's what that calculation really means. You're dividing rent over the debt service, and that is one.

Right?

So if you want the debt service to be higher, which every lender wants it to be, as high as possible, and the sweet spot is 1.20. Now, it is hard to get to 1.2, especially in these days when properties are continued to appreciate in value and they're going up and up and up and up, and the rent rates aren't really catching up to that. So it's okay if you're not at 1.2, but you're going to get the best interest rates if you are at 1.2 and above on DSCR. What happens if you're not?

Right?

Let's say if you're at 1.1, that is still a good spot to be and you'll still get a loan. If you're at one or just barely over one, the underwriter's probably going to dig a little bit deeper. They may ask for a little bit more liquidity. They're going to want to know that you have the funds to cover any sort of, oh, moments where maintenance, you know, water heater pops or roof pops or whatever.

Right.

So you may have additional requirements, but they'll still probably give you the loan when you get below one, that's where you start to get into risky territory. There is a number where they just. A lender will just not lend on the deal. They'll just say, hey, this is not a bankable transaction. I've seen lenders go as low as 0.9.

Right.

So that means you're losing money every month, but you have to show that you have the liquidity to, to cover that gap every month. That's a natural question. If they're giving you a loan and the loan amount, monthly payment is more than what you're getting in rent, how are you going to pay the mortgage?

Right.

So that's what they want to know. So the lower that DSCR is, the more questions you're going to get in underwriting, the more scrutiny you're going to get. So hope that kind of clears the air on what a DSCR loan is. And it really is a great way to acquire properties and to acquire, acquire them quicker. And it's actually so much easier than qualifying with a conventional loan because if I was to go and buy property under my name under conventional loan, every single loan I get in my name is going to be in my credit report and they're going to factor that into my overall debt. And what they're also going to do is they're going to discount the rent by, let's say, 25%. So they're going to calculate all of the debt on my name, but they're going to discount the rent 25%, which doesn't seem fair to me. But a lot of people do that in conventional loans. So I love DSCR products. They're not reported on your personal credit, and I love that part, too. And it's so much easier to qualify and grow and scale when you're using a DSCR product. So if you have any questions, feel free to comment down below and hope that helps you out in understanding what DSCR is and how you can use that. So my handwriting kind of sucks. I don't know if we should be.

Using the sign or my sucky handwriting. It smeared it.

All right, all right.

We're going to try that again.

No. No.

Stupid.

I don't know if that looks stupid or not.

Wait, where did the card go?

Oh, there it is. Hey, it's Beckham.

High five. Boom.

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