DTI = "Debt to Income" Ratio. It means how much conventional (W2) income you have compared to the loan you are taking. The lender will qualify you through your work wages - very difficult if you have multiple properties or a non-W2 job! (freelance or self-employed!). Most real estate investors invest in rental properties for CASH FLOW, meaning that the property earns more money than debt service and provides monthly💰 in your bank account every month. Your tenants pay your mortgage, not your salary!

"DSCR" Loans qualify you based on cash flow from the property and don't look at W2 income, your job or tax returns s AT ALL. No DTI, No Problem. For real estate investors that are looking to advance past a rental property or two - DSCR is necessary to get past the DTI roadblock.

2/ LLC Protection

When building a scaled real estate portfolio, it typically becomes smart and necessary to protect your assets from legal liability - this means putting your properties in an LLC or other company entity. You have a lot to lose once you have built a RE empire. Conventional financing requires you to take out loans in your personal name only and doesn't allow LLC financing. This means you are set up for big risk as a big chunk of your assets and net worth will be tied up in properties - and you will have a lot of tenants and risk. DSCR loans allow financing in LLCs, partnerships, corporations and even trusts. Often, the extra cost and rate is WORTH IT once you have a nest egg to protect, as this allows you to much better manage and protect yourself from risk. Making an LLC is easy and smart!

3/ Partner

Another advantage of using an LLC (OK for DSCR loans, NOT OK for conventional financing) is the ability to partner up. Many real estate investors have built empires through working with complementary partners that bring different skill sets and capital to the table. Conventional financing doesn't allow you to get financing with a partner through an LLC, but for DSCR loans that is no problem at all. Further, some DSCR lenders will use the HIGHER of each partners' credit scores, qualifying for the best rates. Teamwork makes the dream work

4/ Loan Size

When it comes to real estate investing, Bigger is often Better. What has less headaches, one cash-flowing million dollar property or ten $100k properties? 🤔. Conventional financing has a current limit of $647k loan size (for 2022). This takes a lot of potential loans off the table due just to loan size. The limits for DSCR loans are much higher, typically around $3M or so. Investing in luxury properties with BIG cash flow? Go DSCR

5/Concentration Limits

Conventional also limits the amount of loans per individual, typically 10 (its a moving target, sometimes less based on credit/current environment). DSCR loans have no such limits. If you are trying to SCALE to #financialfreedom, DSCR is the only option!

In Summary: Yes DSCR loans may be a bit higher in rate/pts BUT - No DTI, No Size Limits, No Concentration Limits, LLCs and Partners OK. By all means go conventional starting out, but when ready to MAKE THE JUMP to professional & scaled RE investing, go DSCR for financial freedom.

Thoughts, feedback, contrarian views welcome!

Robin Simon

[email protected]

Austin, Texas

11 Votes