To calculate DSCR, use this simple formula:
DSCR = Rent / 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 $1,800 per month and your rental income is $1,800 per month, you are breaking even. A good DSCR ratio is a 1.2 or higher. If your debt-service coverage ratio is too low, there are some simple ways to optimize it:
The DSCR loan process is much simpler than the traditional mortgage process. Let's break it down in three basic steps:
Despite a higher entry point, Mashvisor finds California a worthwhile rental property market due to its employment opportunities, increasing property values, and high rental demand.
In fact, the California Association of Realtors (CAR) reported that home prices are expected to increase 5.3% in 2023. This means that simply by purchasing a property in California over another state, you will see a higher ROI through appreciation.
Los Angeles is our number one city to originate DSCR loans in California. According to FortuneBuilders, Los Angeles is a great city to purchase investment properties with rental income on the rise and home ownership becoming increasingly cost prohibitive. The median rent is $2,644, and it's growing at an 11% pace year-over-year.
Here are some additional cities where Mashvisor recommends looking for rental properties in California:
Thermal, CA: This California city boasts a $424,170 median property price, an $1,800 average monthly rent, and a 4.93% cash return.
Alterna, CA: Offering over a 7% cash return, this city has an affordable entry point at a $387,583 median property price. Plus, the average monthly rent is over $3,000.
Corning, CA: Corning is another great California town to invest in with a median property price of $411,750, and an average monthly rent of $2,253. That’s a 4.7% cash return.
Pomona, CA: Nearby the Claremont Colleges, Pomona has a median property price of $658,000 and an average monthly rent of $2,756.
Anaheim, CA: Home to Disneyland, Anaheim has a higher median property price of $825,103, yet also a high earning potential with an average monthly rent of $3,397.
If you're investing in short term rentals, Mashvisor recommends looking at San Diego, Malibu, and San Bernardino.
DSCR loans have become increasingly popular over the last several years for a variety of reasons. One reason is that capital markets have grown widely comfortable with non-QM loans, including jumbo loans, bank statement loans, foreign national loans, and asset based loans like DSCR loans. According to CoreLogic, the non-QM share of the national housing market doubled from 2020 to 2022 and accounted for 4% of the mortgage market in 2022.
Another key reason DSCR loans are on the rise is that the lack of mortgage loan affordability and low inventory are driving a trend toward rentership. California has the second lowest homeownership rates in the country and only 56% of households own the home they live in (Source: PPIC). The demand for rental properties is high and the rent prices cover the debt obligation on a given property. This makes DSCR loans excellent loan options for California investors.
Check out some of our recently closed DSCR loans in Florida.