June 17, 2021

How Much Value Does an ADU add in California? Add Value to Your Property!

What are ADUs and what impact have they had on homeowners?

ADUs- Accessory Dwelling Units are on the rise and have played an important role in addressing access to affordable housing for many families. In California, regulators see the construction of ADUs as a possible solution to the housing crisis in the state. 

ADUs are affordable types of homes to construct in California because they do not require the homeowner to incur costs such as paying for land, major new infrastructure, structured parking, or elevators. Upon construction, an ADU should add a source of income for the homeowner while providing people with an option for affordable housing. 

 

What are the developments in laws governing approvals of an ADU?

It is now incredibly fast to get approval to construct ADUs as compared to the past where the decision would take at least 120 days, the new law requires the decision be made in 60 days. This is a relief to many homeowners as the backlog of ADU applications can finally get approved meaning an opportunity for income generation assets.

 

How much value does an ADU add to a property?

The impact of adding ADUs to single-family properties is that the property’s value increases. However, ADUs do not necessarily add value to the value of a property as they can require a lot of money to construct.

Although market-rate rents for ADUs tend to be slightly higher than those of similarly sized apartments, they represent the most affordable rental choice in neighborhoods with single-family houses. 

 

Why build an ADU?

In many cases, it is not sustainable for the elderly or low-income families to live independently in a household. An ADU provides a very realistic and practical option for the family if they want to provide support without being overbearing since the house can preserve a significant degree of autonomy for the person living there.

 

What is the future of ADUs?

With the rising prices of rentals and prices of properties sky-rocketing at a high rate, ADUs are likely to become an even more popular trend in the coming years as demand for affordable, multi-generational living space grows.

 

June 16, 2021

How to get a mentor in real estate

Who is a mentor?

A mentor in real estate offers advice and coaching as you begin your career in the real estate industry. Mentoring can be a tough job and it requires the mentee and the mentor to establish mutual respect between each other and to have goals that align allowing the mentee to learn and advance in their career. How to choose a mentor, therefore, becomes a critical topic that requires careful consideration. 

 

What are the alternatives to getting a mentor?

The real estate market requires the expertise of qualified agents, realtors, brokers who have the potential to grow in confidence and in decision making due to the competitive nature of the industry. An alternative to getting a mentor in real estate is enrolling in an academy or looking for a program online.

 

What mindset should you have before approaching a mentor?

Our guest Sam Weaver, President of Fortune Weaver sat down to speak about his experience when he started out in Real Estate specifically in flipping properties.  What was interesting about the discussion was that he mentioned that when he started out, he did not work for free because he had to, the mindset that he had was that his teacher had what he wanted and he needed to do whatever he needed to do in order to get it. He was willing to spend as much time as possible learning from him while at the same time bringing in investors and adding value to his mentor’s business.

After spending a couple of months working for his mentor and bringing him investors, he realized that he was spending money and not making any, which is a dangerous position to be in. When he asked his mentor about the possibility of getting paid, his mentor’s response was ‘I thought you would never ask’ and that taught him a very important life lesson. You should always ask for what you want in life or else no one will just give you things if you do not ask.

 

Should you work under a mentor for free?

What we can pick from this interview, is when starting out in Real Estate, always have an open mind when it comes to starting small, with or without pay. If the opportunity you have will give you:

  • Real-life experience, 
  • Legitimate exposure
  • An affiliation that will add value to your Resume

Go for the free, awesome learning experience and overlook your current situation in order to get to your long-term goals. Accept opportunities that come that will allow you to achieve your career goals.

 

What are some of the lessons that a mentee can learn from a mentor in real estate

Important lessons that a mentee can learn from a mentor include generic lessons such as business strategy, career planning, and leadership qualities, as well as more tailored lessons in real estate such as client onboarding, real estate trends, and how to close a sale. These are just a few of the topics that can be expounded on, the list is endless!

 

 

June 15, 2021

Strategies estate planning attorneys implement - gift taxes

What is the gift-tax exemption?

The estate tax exemption refers to the amount below which your estate is not subjected to any federal taxes when you pass away. This is likely to change and is expected to increase this year- 2021. 

 

The federal estate tax exemption for 2021 is $11.7million

Right now, the estate tax and the gift tax are coupled to each other. So you get $11.7 million to give away while you are still alive or when you pass away- the amount is $23.16 million for a married couple. This may not be a bad idea if you are planning on passing on real estate property and appreciating asset if you can give them to your children now and it’s worth $2,000,000 but in 20 years from now it’s going to be worth $4,000,000, you only get dinged on your estate and gift tax limitation for $2,000,000. 

 

Are many Americans going to be affected by the changes?

Given the size of the estate tax exemption, very few estates are actually affected. Important to note that Biden’s Administration has stated that they are not interested in seeking retroactive tax changes so this would be in effect going forward. 

 

What is the implication of Biden’s new gift tax/ inheritance tax?

Part of the proposal for the change in state tax is to break that limitation and the proposal that’s being pushed now is to have a $3,500,000 estate tax but only a $1,000,000 gift tax. This means that you can only give away 1 million worth of assets when you are alive and then pass on the remaining $2,500,000 when you pass away. So breaking that can change the estate tax planning because you could give away assets now and be able to eliminate future appreciation. 

 

What can you do?

Speak to your estate advisor as there are a number of estate planning techniques that can be used to minimize the effect of the increase in the gift tax rate for example estate freeze techniques that will allow you to give away the upside/ appreciation.

 

 

June 14, 2021

Joe Biden's New Tax Plan Explained

2022 Proposed/ Potential Tax Changes for Property Investors

Currently, the taxes are at one of the lowest points historically. There is only one direction for tax rates to go- up! By the end of the year, we will have a little more clarity on the direction of the taxes and perhaps something passing through Congress and getting signed into law by Joe Biden.

1031 exchanges- which are available to real estate investors whereby they can sell one property and purchase a replacement property or another piece of real estate for investment purposes and defer the gain on the sale of that original piece of property that they held.

Let’s say you purchased a house at $250,000, it is now worth $400,000.

If you were to sell that property, you would have to pay tax on $150,000 of gain.

Instead, if you do a 1031 exchange, what you do is sell that property making sure that you qualify for all the parameters of section 1231 and buy a replacement property. So after buying another residential real estate property to rent out. If you’re able to do that, then you can take that $150,000 gain that you have and defer it into the purchase price of your new property. People can do these 1031 exchanges to push off paying taxes for years. One proposed change to the tax law is the potential elimination of this 1031 exchange. That would mean even if you sell your original property, your original investment property, and replace it with another property, you’re still going to have to pay tax on that $150,000. So as an investor, you’re not going to have as much money available to go out and buy replacement property.

What is being said about the 1031 exchange is that there might be a complete elimination of 1031 exchanges. Another proposal is that they might limit it so that you can only defer a certain amount of gain into your next property and the third proposal is that if your income is below a certain threshold you’ll still be allowed to do a 1031 exchange. The problem with the third proposal is that when you sell property, you have a gain that is likely to push you to whatever threshold there is, so 1031 won’t be available to you. If you are planning to do 1031 exchanges, it may be better to do it this year versus holding off until 2022 because if this goes into effect, and it’s not so clear whether they will make it retroactive, it would affect your game plan. 

 

What would be the impact/ consequences of Joe Biden’s tax plan? When will the new taxes go into effect?

When tax laws are passed, they can be made effective at any point in time. Generally, new laws like these are prospective, which means that if the new tax laws are passed, they would most likely be in effect in January 2022. However, there is also a chance that as soon as the tax laws are signed, they could get into effect immediately.

With that said, it’s so important to act quickly if you are thinking of doing a 1031 exchange. A lot of real estate investors buy and hold property for a long time to get passive income from rent checks coming in every month and those are the people who will not be too impacted by the new tax laws immediately. However, for investors who are looking to start with a starter home and eventually sell that and move into bigger properties, the next 6 months is probably a time to be thinking about whether they want to hold that property in the long term or go out and seek another property.

 

2022 Proposed changes for estate inheritance taxes

Normally, what happens when someone passes away and all the assets that person owns are above a certain dollar threshold the estate pays tax on that before it gets passed on to the heirs. 

Let’s say someone dies and they had accumulated real estate stocks, a business, or any amount of wealth that is over a certain dollar amount, the estate is going to have to pay tax. Right now, that amount for the estate tax is $11.7 million per person. So in the case that someone died today with $11 million of assets, the heirs can inherit it with no estate tax. That limit is set to sunset back to $5 million per person in 2025. At the moment, the inheritance tax is at 40% and there are also talks about increasing the tax rates to 45% or even having a tiered structure that gets up to 65% inheritance tax on estates over a billion dollars. 

The other side of the equation when it comes to inheritance tax is what’s called step up. So in case someone dies today and they had $5,000,000 and this amount is all held up in an apartment building that was bought 20 years ago, the apartment was initially valued at $1,000,000 at the time it was initially purchased. If the person was to pass on the apartment to heirs, they would inherit a step-up basis. So their basis in that property would be $5,000,000 which is the fair market value when the person died and that theoretically means that they could turn around the next day and sell that property for $5,000,000 and not pay any federal or state taxes on that. 

There’s a proposed tax law now to eliminate that step up in value. So in the above example, the heirs would inherit the property on the deceased’s basis. So in the case, the heirs wanted to sell the property, they would have to pay tax on the gain on the property. This elimination of the step-up has been proposed before and has been struck down because it’s very complex to try and track that especially in a multi-generational situation where the property moves from one person in one generation to another. 

 

Strategies estate planning attorneys implement- Gift taxes

Right now, the estate tax and the gift tax are coupled to each other. So you get $11.7 million to give away while you are still alive or when you pass away. That may not be a bad idea if you are planning on passing on real estate property and appreciating asset if you can give them to your children now and it’s worth $2,000,000 but in 20 years from now it’s going to be worth $4,000,000, you only get dinged on your estate and gift tax limitation for $2,000,000. Part of the proposal for the change in state tax is to break that limitation and the proposal that’s being pushed now is to have a $3,500,000 estate tax but only a $1,000,000 gift tax. This means that you can only give away 1 million worth of assets when you are alive and then pass on the remaining $2,500,000 when you pass away. So breaking that can change the estate tax planning because you could give away assets now and be able to eliminate future appreciation.

 

The government wants to get rid of bonus depreciation by 2022

When you buy an asset, something that lasts more than a year, the government generally doesn’t allow you to immediately write off the full value of that. You have to depreciate it over time. 

For example, if you buy residential real estate property that the government says has to be depreciated over 27.5 years. Commercial real estate has to be depreciated over 39 years. So bonus appreciation does not apply to actual physical real property. It applies to property that is tangible so for example vehicles, computers, furniture, and fixtures, etc. There’s something in the tax law now that’s called bonus appreciation that allows you to write off 100% of the cost of those assets. So you get an immediate deduction when you purchase those. This is only a federal deduction the state does not have an equivalent. Right now, you’re going to write off 100% of the purchase price of those assets. There’s a chain when that came into effect and it was scheduled to go gradually go away anyway. So it reduces from 100% now to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and then it gets eliminated by 2027. 

There is a proposal to eliminate bonus depreciation potentially starting next year so bonus depreciation is there in the tax law as a way to stimulate the economy. If you know you can go out and buy a refrigerator or a new car or upgrade your computer system and you know you are getting a 100% deduction for it, that spurs the consumer to spend money and this, in turn, stimulates the economy. This is scheduled to go away sooner than it was initially planned.

 

Ordinary tax rate & capital gain taxes changes for 2022

Examples of ordinary income are- wage income, business income, rental income, and interest income. Right now, the maximum ordinary income tax rate is 37% on incomes for a married couple over $600,000. The proposal on that is to restore the old tax rate and that would increase the income tax rate to 39.6% as a maximum federal tax rate on incomes over $400,000. So not only is the proposal out there to increase the tax rate, but it’s also to lower the tax bracket so it applies to more people. 

Capital gains income comes into play when you have held an investable asset for more than 1 year. An investable asset is for example if you buy a stock, you own your own business and you want to sell it or a piece of property. If you hold any of these for more than a year, the gain is taxed somewhere between 0% and 20% depending on your other income items. The proposal is to change and eliminate capital gains tax rates for incomes over $1,000,000. 

 

It’s so important now to start thinking ahead and consider what plans you have for real estate. There could be a potential for a lot of taxes on certain types of transactions that were not there before.

 

June 14, 2021

2022 proposed changes for real estate inheritance taxes

What does Biden want to change with regards to inheritance taxes?

Normally, what happens when someone passes away and all the assets that person owns are above a certain dollar threshold the estate pays tax on that before it gets passed on to the heirs. 

Repealing step-up basis would mean that the heirs would have to pay taxes on any gains that were unrealized passed on by the prior owner.

 

What would repealing step up in basis mean?

If someone dies and they had accumulated real estate stocks, a business, or any amount of wealth that is over a certain dollar amount, the estate is going to have to pay tax. Right now, that amount for the estate tax is $11.7 million per person. So in the case that someone died today with $11 million of assets, the heirs can inherit it with no estate tax. That limit is set to sunset back to $5 million per person in 2025. At the moment, the inheritance tax is at 40% and there are also talks about increasing the tax rates to 45% or even having a tiered structure that gets up to 65% inheritance tax on estates over a billion dollars. 

 

What is the stepped-up basis?

The other side of the equation when it comes to inheritance tax is what’s called step up. So if someone dies today and they had $5,000,000 and this amount is all held up in an apartment building that was bought 20 years ago, the apartment was initially valued at $1,000,000 at the time it was initially purchased. If the person was to pass on the apartment to heirs, they would inherit a step-up basis. So their basis in that property would be $5,000,000 which is the fair market value when the person died and that theoretically means that they could turn around the next day and sell that property for $5,000,000 and not pay any federal or state taxes on that. 

 

Biden aims to end step-up in basis benefit for estates

There’s a proposed tax law now to eliminate that step up in value. So in the above example, the heirs would inherit the property on the deceased’s basis. So in the case, the heirs wanted to sell the property, they would have to pay tax on the gain on the property. This elimination of the step-up has been proposed before and has been struck down because it’s very complex to try and track that especially in a multi-generational situation where the property moves from one person in one generation to another. 

 

What should you do in light of the proposed changes?

An increase in capital gains or inheritance tax and the complete elimination of the step-up basis will capture billions in taxes to fund the U.S budget and this is most likely going to hurt the rich the most. Now is the time to plan and re-look inherited investment and speak to your estate advisor or accountant on tax planning and how to make the most of the situation with a solid estate plan.

 

June 13, 2021

How To Flip a House & Make $100k Profit!

How did we find the seller?

The seller was on the market back in 2018 but wasn’t able to sell his property at that time with the listing price that he had put the property at initially. I reached out to him as a licensed real estate agent, to see if he would be interested to put his property back on the market as a traditional listing but he mentioned that he wanted nothing to do with the listing process, he wanted an investor to buy the property in as-is condition. 

Back in the day when I would come across sellers wanting to do house flipping, my mind was just thinking about working with the sellers as a traditional real estate agent and making a commission versus thinking about it from an investor standpoint on house flips. Now as a more seasoned real estate agent and investor, I give the client exactly what they want. If they want to do a listing, I do exactly that however, if they want a private cash offer, I’m happy to go in that direction and serve them.

What are some of the lessons I learned when flipping houses?

First and foremost, I always flip under an LLC (Limited Liability Company) which reduces some of the liability, and for tax purposes, it’s better. Talk to your accountant about this option.

Secondly, I realized that the 10 pages of the California purchase agreement can be kind of confusing at times, especially when you have other investors offering a 1-page or 2-page contract. Whenever you are working with a client, it is different than when you are buying a property. Always keep it short, simple, and easy for them. 

What was the original offer on the property and how did the negotiations go?

In the negotiations, my original offer to the seller was $510,000 but the seller informed me that they had a higher offer on the table at $560,000 and asked if I could match that offer. Unfortunately, I wasn’t able to match this offer because I didn’t think that I would be able to make money, be profitable or earn income at that price and I advised the seller, to go for the higher offer price. After further discussion on the property, he also informed me that the other offer of $560,000 had extra conditions such as repairs and that he was more comfortable with my offer. We ended up settling at $520,000 plus closing cost, the price came up to $525,000

How do you calculate profit or margins on a flip?

MAO (Maximum Allowable Offer) = (After repair value x 85%) - repairs 

 * After repair value is the value of the property after you have done all the repairs 

** The 85% covers commissions, taxes, insurance, holding costs, and profit

Our flip margin

$ 639,000 (assuming the property would sell at this price)  x 0.85- $20,000 (repair costs on the property)

MAO= $523,000

 

You can play around with the 85% if you want to be a little bit more conservative or aggressive. Remember, the larger the number, the more profit you are going to make!

What are some of the costs associated with a flip property?

The cost breakdown for this particular property was a follows:

Purchase price: $520,000 

Seller closing costs: $5,000

Buyer closing costs: $5,000

Total cost= $530,000

Always factor in the holding costs if you are not buying in cash. So this will be the interest rate if you are looking to borrow from a bank/ lending institution. Whenever you are purchasing the property, you get to choose how much to put down as the deposit, the more the amount you put in as downpayment, the lower the points and the lower the interest rate. The less the downpayment, the higher the points and the higher the interest rate. 

In this case, the loan amount was $ 364,000

There were 2 points charged which came up to approximately $ 8,000

Charged interest rate of 10%= $3,000 per month

Taxes= $500 per month (the taxes are always based on the purchase price)

Insurance and utilities

Total cost = $ 567,000 (break-even point)

What was the renovation budget and what did you spend it on?

The actual budget was $20,000 but we spent $18,000 so we were $2,000 under budget.

The breakdown was as follows:

Carpet- $3,000

Paint- $12,000

Bathroom reglazing- $ 1,000

Staging the property and miscellaneous costs- $ 2,000

 

The old me, when I was renovating properties would have wanted to renovate the entire property even if it had a good kitchen, I would have wanted to update it to the most modern one with top-notch appliances. Now, we do as much as we can to make the property functional and modern and this does not necessarily have to be a full home renovation!

What are some of the mistakes that you made earlier on in your career in flipping?

When flipping homes, one of the mistakes I made earlier on was not staging the properties flipped meaning that the buyers would walk into a property that they could not really visualize what the property would look like after they bought it. Now, for all our flips, we do staging and even offer this service to our clients because I have realized that it is very important to guide the potential buyers so that they can really visualize their future homes as this increases the home’s perceived value.

What did I sell the property for and how much did I make?

We ended up selling the property at $757,000 while it was originally listed at $ 675,000. We increased our original listing price because a house on the same street came in the market and was being sold at around $700,000 and had no pool. So we had a bidding war that took the property price even higher than we had anticipated.

From the $757,000, there was $ 45,000 in commission, $26,000 came back to me because I am a licensed real estate agent and so I can list and sell my properties and there was approximately $7,000 in closing costs.

This made the final profit on the property= $164,000

This takes into account the money that we made from the property and the $26,000 in commission. Originally, I was only expecting to make between $20,000- $50,000 but the marketplace ended up appreciating during the time that I was holding the property which really benefitted me. Not all flips go like this, some of them take longer to sell. My advice is that the faster you can get in and out, the better off you will be. 

 

June 10, 2021

How to Estimate Flooring Cost on a Flip

How do you estimate flooring on a flip?

Flooring is one of the most important parts of a house flip operation. Whether you are thinking of replacing or repairing the flooring of your flip project, you need to, first of all, see what kind of flooring there are in the neighborhood and what similar houses are like in the neighborhood. Always try to do something similar or better because you always want your property to be at the same level in terms of value with neighboring properties. 

 

Any advice or tips when doing flooring for rental properties?

If you are doing flooring for a rental property, you shouldn’t be spending too much money. There are a variety of options to find and choose from when doing flooring- from carpet to hardwood floors, tiles, etc. When estimating the cost, consider using cheap but durable materials like vinyl or laminate. The best vinyl prices for example range from as little as $1 per square foot to $5 per square foot for premium vinyl. You can still achieve the best flooring by using good quality materials that are not too expensive.

 

How can you reduce the cost of flooring when doing a flip?

When flipping, try to develop a good relationship with the contractor. Then you can buy the materials yourself and then give them to the contractor who will only then calculate and do an estimate as to how much to charge for labor. When you mix labor and material, contractors will attempt to make money in the mix. That also ensures the quality of the materials you are using.

 

 

June 9, 2021

How to choose the right contractor

How do you go about choosing the right contractor?

Before undertaking a home remodel project, home improvement, new construction, or renovation, it’s so important to pick the right contractor. Too many homeowners end up with stalled projects or work not done to the best quality because they did not spend time looking for the appropriate contractor. Even worse, they end up spending more money and resources covering up a botched construction project by covering up a poorly done job by the initial remodeling contractor or general contractor. 

How to select the perfect contractor is a vital question in any construction project. First off, you need to invest some time in doing interviews. Interview at least 10 contractors before you pick one. As you talk to every single one of the contractors, your gut will tell you whether they are the right one to go for or not. You also need to do some background research and ensure that there are no negative reviews about them online. That goes hand in hand with ensuring that they are actually licensed!

Finally, once you hire a contractor, ensure that you pay them well. Make sure the contractors also make money so that they do not cut corners, buying cheap materials so as to save on cost. If you put the contractor in a tight spot, it’s going to affect your end game. Make sure everyone you are hiring for your project is happy so that everyone wins!

 

How can you get better at managing a construction project as a beginner in real estate?

Learn as much as you can about the construction process yourself. As you do this, you will get better at understanding exactly what goes on during the construction process.  If it helps, follow the contractor around, ask as many questions as you’d like so you have a general understanding of what’s happening. It also helps to read the home inspection reports so that you can identify any issues that need your attention. 

 

What is a home inspection report and what can you use it for?

A home inspection report is a written document usually done by a home inspector that is delivered to a homeowner once the home inspection is done. It usually contains images and descriptions of issues with a property and the potential impact if the issues are not addressed. 

 

A common mistake people make is seeing home inspections as a cost as opposed to an investment. The home inspection report can unveil things that were not proper or unexpected in the real estate transaction. In some cases, cracks may not be evident or it may not be easy to tell if the property has foundation issues but with a home inspection, you get a piece of mind because it reveals potential significant and expensive underlying problems with a property.

 

June 9, 2021

How To Estimate Repairs Costs on a Flip

What does an average home usually cost to renovate?

To determine the very exact price estimate or cost of renovating or flipping a property varies depending on the area, state, and obviously, how much work needs to be done on the home. 

 A breakdown of remodels can be classified as follows:

  • Low-end house remodels- depending on the size of the home, this may include projects that are aimed at improving the aesthetics of the home/ cosmetic changes such as light landscaping, replacing flooring, lighting, and other minor repairs.
  • Mid-range house remodel- this kind of remodel may include a full remodel of one or 2 living areas- kitchen or bathroom for example as well as some exterior renovations
  • High-end house remodels- this is a more detailed remodel and is the most expensive as it may involve replacing the roofing, plumbing, electrical system, etc.

You should also keep in mind that the cost of the renovation will vary by around 20%-30% depending on other factors not related to the direct construction costs such as:

  • Accessibility of the property
  • The contractor you hire to work on your property
  • Unexpected hidden costs resulting from water damage, mold, rot, etc

What should you consider before undertaking a flip project? 

Before taking on a flipping project you need to have a budget in mind because this is a huge investment that can take up a lot of your time, resources, and money. There are people you will need to pay- architects, designers, contractors, etc. materials you will need to buy, the entire project can range from a few hundred dollars to tens of thousands of dollars depending on the work that needs to be done.

 

How to calculate repair costs in a renovation project

The best way of estimating the remodel cost of any real estate project would be to speak to a contractor or architect so that they can guide you in breaking down the costs involved. Before you begin with the renovation project, evaluating the current house plan and making a checklist of the things you would want to change so as to best fit your lifestyle and needs should take precedence. There are also tools out there such as a repair cost estimator that you could use to gauge how much money it would cost you to undertake the renovation project.

 

How long should you take on a renovation project?

Ideally, you should not take more than 6 months on one project as the cost may begin to pile up. Try and stay on a remodel project for 2- 3 months then move on to another project. Ensure you speak to your contractor about your desired timeline for completion so that you are on the same page.

 

Is it cheaper to remodel or build a new house?

It’s generally cheaper to remodel/ do a home renovation depending on the factors listed above. It’s important to note that repair expenses can skyrocket if you later find out that the house has major structural issues that may affect the integrity of the house. In addition, a renovation will boost the value of your home.

June 6, 2021

What is a DSCR loan?

What does DSCR stand for?

Debt Service Coverage Ratio is one of the ways lenders can evaluate whether you can repay a loan or not. Before calculating your DSCR, you need to have accurate information about your income and debts.

DSCR formula= Net operating income/ total debt service

What do you need to qualify for a DSCR?

These loans are good for investors, people who want to buy rental property or getting into the real estate investment side of things. Before qualifying the borrower, the lender will also require that you have a high FICO score whereby they will be able to determine your creditworthiness, at least 20% downpayment for property, and 6 months of reserves. The lender will also conduct a rental appraisal whereby they will send in a market appraiser to see what the current market rate is. As long as the estimated rent coming in is higher than the mortgage, you would qualify for a DSCR i.e. the property should produce enough income to cover the debt. With that said, it’s important to note that you don’t need income or a job, just 6 months reserve, and a down payment to qualify for a DSCR loan.

What is a good DSCR?

After calculating your debt service coverage ratio, you will be able to know the state of your financial health. In the case that your DSCR is high, the better because it indicates that you are making enough to pay your debts.

What are some of the ways you can use to increase your DSCR ratio?

Reduce your existing debt- calculate how much you already have in debts- mortgages or loan value. if you already have existing debt, start to pay off these debts before applying for a loan because this will affect your DSCR.

Increase your sources of income- you can do this by spending less so that you have more of your income left.