This is where my hard work starts to pay off! The refinancing phase stands as the holy grail of Real Estate Investing, and here's the incredible part—it's a TAX-FREE event! Yes, you read that correctly. When you opt for a refinance, the funds you receive are entirely TAX-FREE  (The IRS cannot impose taxes on a loan transaction).  In this particular case, the refinance gave me a check for $860.33, but there have been instances where I have received checks for as much as $310,549.28, all of it entirely tax-free! (Click here to see a copy of this check)

 

For this refinance, I used Visio Lending, a lending company offering a specialized product known as a DSCR loan, which stands for "Debt Service Coverage Ratio" loan. What sets this type of loan apart is the unique feature which doesn't require tax returns or personal income verification. The Loan is entirely dependent on the performance of the property. Furthermore, Visio Lending provides competitive rates on up to 30-year fixed mortgages. However, it's vital to conduct your own research as various financing options are available. To explore more financing options, refer to the "Bigger Pockets Daily" episode, which covers multiple possibilities.

 

https://www.biggerpockets.com/blog/creative-financing

 

The Debt Service Coverage Ratio (DSCR) is a measure used by lenders to assess the ability of a property to generate enough income to cover its debt payments, including the mortgage and interest. In simpler terms, it helps determine whether a property can generate sufficient rental income to meet its loan obligations.

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Here's how it works:

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1. Income: The numerator (Top Number) of the ratio represents the property's income, typically the rental income it generates from tenants. This income may also include other revenue sources like parking fees, laundry income, or any other sources of income associated with the property.                                                                                                                                                     

2. Debt: The denominator (Bottom Number) of the ratio represents the property's debt obligations. This includes the mortgage payment, interest, property taxes, insurance, and any other relevant expenses related to the property's financing.

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The formula for calculating the DSCR is as follows:

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DSCR = Net Operating Income (NOI) / Total Debt Service

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• Net Operating Income (NOI) is the property's income after deducting operating expenses (like property management fees, maintenance costs, and utilities) but before deducting mortgage payments.

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• Total Debt Service includes the principal and interest payments on the property's mortgage, as well as other relevant expenses.

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Interpretation:

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• A DSCR greater than 1 indicates that the property generates enough income to cover its debt obligations. A higher DSCR, such as 1.2 or 1.5, suggests greater financial stability.

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• A DSCR less than 1 means the property's income is insufficient to cover its debt payments, indicating a higher risk for lenders. The average DSCR requirements I have seen is 1.2 throughout my lenders.  (As I did not have a high paying W2 job when I first got started investing in Real Estate, I had to find different options to get investment loans. But, if you do have a high paying W2 job, there are more lending options available to you like conventional and FHA if you are going to house hack, which is what I did with my CoLiving home)

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• House Hacking is a real estate investment strategy where the property owner occupies part of the property while renting out the remaining space to tenants. The goal is to reduce or entirely cover the owner's living expenses through rental income. This approach can be applied to various types of properties, including multi-family homes, single-family homes with accessory dwelling units (ADUs), or even houses with multiple bedrooms where individual rooms are rented out like I did.                                                                                                                                                                                                                                                                             House hacking serves as an entry point for many first-time investors, allowing them to learn about property management and real estate investing with lower financial risk. It can also assist in accelerating the growth of a real estate portfolio by leveraging rental income to pay down the mortgage faster or save for additional investments. House hacking's benefits include potential tax advantages, gaining investment experience, and the possibility of living mortgage-free.

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For lenders, a higher DSCR is typically more favorable because it suggests that the property is less risky and more likely to generate the necessary income to meet its financial obligations. As a beginner in real estate, understanding DSCR can help you evaluate the financial feasibility of an investment property and whether it's likely to secure financing. Below, you will find my closing statement with all of the numbers and the appraisal of the property at the time of closing. Notice that my actual cash received at closing exceeded $860, as I didn't have to make a mortgage payment for the first three months, thanks to the "Interest Reserves" incorporated into the closing costs.

(click this link to view as PDF)