Real estate investing provides engineers with numerous benefits, including steady cash flow, excellent returns, and tax advantages, as well as the possibility of leveraging real estate to build wealth.
Unfortunately, breaking into the market to secure a property can be a daunting task for prudent investors. If you don’t have enough capital on hand, it can be difficult to figure out how to finance your property purchase.
Luckily, there is a type of investment property loan that can help investors make their dream become a reality, and that is DSCR loans.
However, before engineers learn how to apply for DSCR loan, it is imperative that they first understand how this type of loan works, how it is calculated, and what benefits they can reap from getting it.
What are DSCR loans and how do they work?
A debt-service coverage ratio (DSCR) loan is a type of loan businesses can use to purchase multifamily and commercial real estate. The loan is based on the amount of cash flow a business generates every month compared to the amount of debt service payments the business has to make.
In the commercial context, DSCR is used by lenders to determine whether a company has enough income to pay its debt services, including both the principal and the interest payments, for its loan. Most lenders require their borrowers to have a DSCR higher than 1.00 as that indicates that their company can repay its annual debt payments.
If the DSCR is lower than 1.00, then the business can struggle with repaying its obligations, end up being in great debt, and potentially even bankrupt.
Can Engineers benefit from DSCR loans?
The DSCR loans are a great choice for various types of investors, including:
- Investors and engineers who don’t want to provide employment information such as tax returns, payslips, or W2s;
- Investors and engineers who want to buy and trade real estate;
- Self-employed engineers and investors with complex incomes who want to deal with complex tax return more efficiently;
- Investors and engineers who own multiple different types of properties such as multifamily properties, commercial office spaces, hotels and resorts, and private mortgages.
The amount of money you get through a DSCR loan depends on the type of real estate property you are planning to invest in and the macroeconomic conditions. Usually, the highest loan investors can take up to three to five million dollars.
How to calculate DSCR
The debt-service coverage ratio is calculated by dividing the annual gross rental income by the debt obligations of the property. The annual gross rental income measures the company’s performance, calculated as operating income after deducting interest and taxes.
The debt obligations refer to the total debt service or the sum of all payments on outstanding debt minus interest and principal payments.
For instance, if your company has an operating income of $100,000 and pays $10,000 in interest payments and $20,000 in annual debt service, then the DSCR will be calculated as follows: $100,000 / ($10,000 + $20, 000) = 1.5.
This means that your engineering company has 1.5 times more annual gross rental income than it makes debt payments, which is actually great.
If you want to improve your DSCR, there are several things you can do such as increase your amortization period, take an interest-only loan, decrease leverage, increase revenues, cut expenses and improve your credit score.
Benefits of DSCR loans for Engineers
There are many benefits engineers can reap from getting DSCR loans. For instance, they don’t need to provide tax returns, especially for self-employed investors. In addition, new investors have the opportunity to jump-start their real estate investment by avoiding the lengthy process of other typical mortgage uses.
Investors also have the possibility to commit to many properties simultaneously and have unlimited cash-out, meaning you can take as much cash as you need when you need it. This way you can take your business to the next level if you are a seasoned real estate investor.
Final thoughts
Whether you are looking to invest in a real estate property or want to expand your already existing one, you can greatly benefit from getting DSCR loans. These loans are specifically designed for engineering businesses that are having difficulties making debt service payments, providing them with numerous benefits.
For more information on the matter, refer to our guide and learn everything you need to know about DSCR loans and how they can help you expand your investment portfolio sooner than ever before.
