Establishing a limited liability company (LLC) for real estate investing protects investors from lawsuits and separates their business from their personal affairs. Unfortunately, having an LLC does little to help investors secure loans through traditional avenues, like banks and credit unions. That is why many investors have turned to debt service coverage ratio (DSCR) loans for LLC real estate investing.
While DSCR loans have been around for years, economic fallouts following the COVID-19 pandemic have made DSCR loan interest rates and requirements more attractive than many traditional loans. Fast forward to 2024, and current market conditions and trends have further popularized DSCR rental loans.
Below, we’ll briefly explain DSCR loans for LLCs and explain why current market conditions have made DSCR investor loans the go-to financing option in the residential real estate market:
DSCR Loans Explained
DSCR loans for LLCs are unique and beneficial because they do not focus solely on an investor’s personal income and don’t require any tax returns for approval. With most real estate investors “self-employed” under their LLC, minimizing the importance of a W2 makes DSCR loan requirements more investor-friendly.
But how do DSCR loans work?
Unlike traditional lenders who require at least two years of steady employment and income just to consider applicants, DSCR loan lenders use a debt service ratio calculator. This includes a formula to determine an applicant’s eligibility. The DSCR loan calculator considers a property’s rental income (in-place or potential) and an investment’s principal, interest, taxes, property insurance, and association dues or “PITIA.”
DSCR Formula = Rental Income / Principle + Interest + Taxes + Insurance + Association Dues
Why DSCR Loans for LLCs are Ideal in Today’s Economy
As mentioned, the COVID-19 pandemic increased real estate prices and lowered interest rates. This consequence made DSCR loan products highly competitive with traditional loans.
Since the initial rate drop experienced during the pandemic, current interest rates for conventional loans have risen significantly, though they are beginning to lower now. Additionally, heavy government and institutional oversight and strict guidelines leave little wiggle room for investors to lower rates.
DSCR Interest Rates in 2024
As of September 2024, DSCR loan interest rates were at 7.0% on average. These loans were designed with real estate rental investors and investments in mind–with avenues to lower interest rates even further.
The top four ways to lower DSCR loan rates are:
- Higher DSCR Ratios: The higher the ratio, the more potential an investment shows. Properties with higher DSCRs can get interest rates as low as 5.99%.
- LTV Ratio: Loan-to-Value ratio is the loan amount to the value of the rental property. The lower the LTV ratio, the lower the interest rate.
- Credit Score: While DSCR lenders are flexible, most require a credit score above 660. Higher credit scores, however, are usually rewarded with 2 to 3% lower interest rates.
- Buy Down: Some borrowers can “buy down” the rate. This refers to paying additional fees during the closing on a property–every 1% of closing fees paid can lower a DSCR mortgage loan’s rate by 0.50%.
Current Market Conditions
While inflation and interest rates have stabilized throughout 2024, U.S. housing affordability remains near an all-time low. Housing costs have driven many Americans into the rental market. Experienced investors evaluating industry dynamics and investment opportunities have pivoted to the single-family rental market.
As of May 2024, single-family rental costs have seen their highest growth rate in over a year (3.2%), according to CoreLogic Single-Family Rent Index. With the single-family home rental market exploding, it is the ideal time for investors to take advantage of DSCR loans for LLCs designed for long-term rental investments.
On top of soaring rental income potential, year-over-year (YoY) home appreciation values make long-term single-family investment properties more attractive in today’s market. Low inventory, ongoing inflation, and current rates lead industry insiders to believe house prices will continue to rise significantly throughout 2024 and beyond. With the average U.S. YoY home appreciation rate at 6.49% at the end of 2023, long-term single-family rental investment properties provide steady cash flow and significant asset appreciation.
DSCR Loans for LLCs: The Go-To Single-Family Rental Financing Tool in 2024
When it comes to weighing DSCR loan’s pros and cons, interest rates are generally the one deterrent for investors. However, with averages nearing traditional rates, and opportunities to lower interest rates even further, the DSCR loan market has been on an upward trajectory. Additionally, with the single-family rental market catching fire, DSCR loans for LLCs and their benefits are more advantageous than ever before.
With DSCR loan options, investors have the following advantages:
- No Personal Income Requirements: Rather than obsessing over personal income, DSCR loans for LLCs consider a property’s current or potential income throughout the loan process–making it easier for lenders to say “yes.”
- Less DSCR Loan Requirements: Unlike conventional loan applications, DSCR loans have significantly lighter documentation requirements. Investors must only provide:
- Two months of bank statements showing 3 to 6 months of liquid reserves to cover debts in the case of vacancy, turnover, etc.
- Occupant lease(s) (if applicable)
- Insurance (property, flood, tornado, fire, liability, etc.)
- Renovation documentation–receipts, invoices, or work orders regarding any rehabilitation work on the property.
- No Penalty for Tax Write-Offs: DSCR loans through private lenders ignore taxable income altogether. This eliminates the stigma of tax write-offs regarding minimizing taxable income and makes it easier for investors to get approved.
- Faster Approval Processes: Working with private lenders makes the DSCR loan process a breeze. With less governmental and institutional oversight, fewer requirements, and more flexibility, private brokers provide the sensibility and speed necessary to capitalize and succeed in the real estate rental market.
Roc Capital: Your Reliable Source for DSCR Loans
To succeed in today’s fast-paced real estate rental market, investors need access to fast and affordable financing. Roc Capital provides the speed, flexibility, and reliability needed to outpace the competition and scale your business. We offer competitive DSCR loan packages tailored to meet the unique needs of our borrowers.
Roc Capital’s Rental Portfolio and Single Property Rental programs offer:
- DSCR blanket loan with no W2s, paystubs, or tax returns required
- Competitive 30-year term loan options
- Maximum rental flexibility
- SFR, warrantable condos, townhomes, PUD, and 2-4 units eligibility
