To calculate DSCR ratio, use this simple formula:
DSCR = Rent / Principal, Interest, Taxes, Insurance, Association Dues (PITIA)
A debt-service coverage ratio of 1 indicates that the monthly expenses of a subject property are equal to the monthly expenses. For instance, if your monthly expenses are $1,875 per month and your rental income is $1,875 per month, you are breaking even. A good DSCR ratio is a 1.2 or higher. If your DSCR ratio is too low, there are some simple ways to optimize it:
1. Increase your down payment. Raising your down payment is the simplest way to improve DSCR. This will lower your rate, and therefore your monthly expenses and DSCR.
2. Buy down your interest rates. Some DSCR lenders will provide you with the opportunity to buy down your rate. This will increase your closing costs, yet decrease your monthly payments and debt-service coverage ratio.
3. Increase rents. If you do not already have a lease agreement in place, consider raising the rate to increase the amount of monthly cash flow and, therefore, debt-service coverage ratio.
4. Provide upsells to increase rental rates. If you are able to increase the rental income by providing upsells, such as renting to pets or providing a furnished rental, this will help you optimize your DSCR.
The DSCR loan process is much simpler than the conventional mortgage process. Let's break it down in three basic steps:
Financing a DSCR loan requires specific expertise and differs from other loans in terms of:
Underwriting Requirements: As an example, personal income history and tax returns are not considerations when underwriting a DSCR mortgage.
Appraisal Process: For a DSCR loan, an evaluation is needed of comparable rents in the area to determine market rent.
Borrower Types: Often a real estate investor finances properties in an entity, which in itself has some lending nuances. For instance, there are necessary entity documents needed to qualify.
According to NuWire, Arizona’s growing population, strong economy, and great weather make the state ideal for investors. Not to mention its $240,000 median home price makes the state affordable.
Phoenix is the number one Arizona city where we originate investment property loans. RentCafe reported the average rental income is $1,590, and the city is 44% renter-occupied. A close second in loan origination volume for us in Arizona is Scottsdale. Not to far from Phoenix, Scottsdale is slightly more expensive with an average rental income of $2,087. There are also less rental properties with a 33% rental occupancy rate (Source: RentCafe).
If you’re considering buying rental properties in Arizona, here’s where NuWire recommends you look in addition to Phoenix and Scottsdale:
Check out some of our recently closed DSCR loans in Arizona.