Real estate investment is a huge industry and many investors who are looking to diversify their portfolio will turn to property ownership to make a profit. After all, people will always need homes and businesses will always need properties. It is a market that is usually very lucrative, outside of the crash in 2008, and many of the richest people in the world are embedded deeply into real estate investment.
When you began your property investment journey, you likely did so because of the numerous benefits of real estate ownership. It produces heavy cash flow, especially if you own a rental property. Property value tends to increase over time if well-maintained. You can also receive significant tax breaks. But what if you want to scale your real estate investment portfolio to increase your profits?
An initial purchase of property may have required the use of a loan based on your income and other assets. But when you already have rental property experience, you gain access to a new tool known as a debt-service coverage ratio, or DSCR, loan. How does this tool help you invest in new properties?
Loans Based on Property Cash Flow
As stated before, most loans require that you have enough personal income or assets to guarantee the lender that you can pay the principal and interest. This may have been the case when you first invested in real estate. A DSCR loan program works a little bit differently. Instead of basing it on personal resources, it calculates the ratio of rental payments from the property to the expenses it takes to own it. In other words, you can obtain a DSCR loan if the expected cash flow from the property is greater than the expenses. This makes it much easier for real estate investors to scale up their portfolios because they do not have to use personal collateral to obtain the loan.
How the Ratio is Calculated
Calculating the DSCR is a simple formula. You simply divide the total amount of rent by all of the expenses. Expenses would include the principal and interest, taxes, insurance, and association dues. Depending on the lender, there may be a specific number for this equation that will determine whether or not you will receive the loan. If the ratio is less than 1, (the expenses are greater than the rent), then the cash flow is not enough to cover the loan payments and it may only be issued if you have enough personal income. If the ratio is greater than one, the cash flow is enough to cover the payments. Different lenders will have various requirements for issuing a DSCR loan, so conduct your research beforehand to know which lender you should choose.
A DSCR loan allows you to start investing in additional real estate properties based on your projected cash flow. However, DSCR loans also have no limit to the number that you can take out. This means that you can continue to purchase additional properties using new DSCR loans if you wish. Personal loans will be capped at a certain number, so if you want to grow your portfolio through real estate, these loans will allow you to do so on a larger scale.
Why Grow Your Real Estate Investment Portfolio?
There are many reasons why you should consider scaling up your real estate portfolio. For one thing, a more diverse portfolio is better protection for your profits. You have to be sure that rent will continue to come in, and if one property becomes compromised for whatever reason, there goes your cash flow. Secondly, the more rental properties you own, the more taxes you can write off. Also, as mentioned before, property value tends to appreciate over time, so your profits can increase so long as you employ a good management company for your various assets. Real estate investment provides a great strategy for growing your wealth and purchasing additional properties using DSCR loans will diversify your portfolio for greater protection against recessions or unforeseen problems.
Secure Your DSCR Loan Today
There are other requirements that will have to be fulfilled for you to secure a DSCR loan for your real estate investment, but they will depend on the lender you choose. Some will have a ratio minimum that your cash flow has to reach to secure the loan, while others may require that you have prior rental experience.
If you want to scale up your real estate portfolio for higher profits and better protection against a recession, then you must look into using this incredible tool. Before your next property purchase, do the research to find the right lender that is investor-friendly and can work with you to secure your DSCR loan. Then, you will be well on your way to a stronger and more diverse investment portfolio.