So You Want to Be a Real Estate Investor? The Fundamentals of DSCR and Income Property Financing by Clay Edmonds

Investment property financing is simple—but not always easy.

Unlike traditional mortgage loans that require tax returns, W-2s, job verifications, and a full review of your debt-to-income ratio, DSCR financing relies on the property’s rent or potential rent.

DSCR stands for Debt Service Coverage Ratio. With this type of loan, you’re not qualifying based on your personal income. The property is the income generator. If the rent covers the monthly mortgage payment—including principal, interest, taxes, insurance, and any recurring fees such as HOA or condo association dues—you may be eligible.

In some cases, you might already have a lease in place that justifies the rental income. In others, a market comparable rent study can be used to establish the rental value. We also provide this as part of our custom home value reports, which include an estimate of market rent—a valuable tool if you’re evaluating a property for investment purposes.

You will typically need:

• A 20% down payment
• A reasonable credit score

And just as importantly, lenders want to see a demonstrated intent to repay—reflected in your credit history. That’s why good repayment history matters.

This type of financing is not new. It is the method of underwriting used to finance large apartment buildings, shopping centers, office buildings, hotels, and other income-generating real estate.

That’s where I started my career—in commercial mortgage banking. I was trained as a real estate analyst in this field, which gave me a deep understanding of how income-generating properties are evaluated. As part of that training, I also took courses with the Appraisal Institute to better understand how to value properties—particularly for investment purposes. I applied that knowledge to help structure and finance the acquisition and redevelopment of over 6,000 apartment units as affordable housing—projects that required complex debt service coverage ratio financing on a large scale. Over the course of my career, I’ve underwritten and arranged approximately three quarters of a billion dollars in financing for other investors’ properties. So when I talk about DSCR financing, it’s not theoretical—it’s foundational.

In these larger loans, lenders want to know whether the rental income covers not just the mortgage, but also operating expenses, property management, reserves for maintenance, and still leaves room for positive cash flow.

Today, similar principles are being used in acquiring single-family homes, duplexes, and 1- to 4-unit properties for investment purposes using DSCR financing. Non-QM (non-qualified mortgage) lenders have stepped in to offer this simplified, asset-focused underwriting on a smaller scale.

While we call it DSCR financing, I like to call it income property financing because that’s really what it is. You’re buying the property to generate income, not to live in it.

As an investor, you still need to make important decisions:

Some non-QM lenders will finance a property with 20% down, a reasonable credit score, and a debt service coverage ratio of 1.0—meaning the rent equals the mortgage and expenses. That gets the deal done, but there’s no monthly cash flow. In some cases, a lender might even allow a small shortfall.

That’s where investor strategy comes into play.

If you’re buying in a market like Charlotte, North Carolina, where cash flow is available, it might make more sense to prioritize monthly profit. That extra income can help you cover rising costs and reinvest in growing your portfolio.

In places like Florida, where values have increased rapidly and appreciation remains strong, some investors accept break-even or near break-even cash flow. Their focus is on equity growth. A 10% annual increase in value might far exceed any immediate cash flow benefit, especially if the long-term plan is to sell or refinance once rents rise.

There’s no one-size-fits-all approach. But if you understand the fundamentals of income property financing, you can make informed decisions about how, where, and why to invest.

If you’d like to know more about how to evaluate investment properties and what factors matter most to your goals, it’s best to speak with someone who specializes in this field. We’re happy to help.

Contact us at MortgageSimplified.net and let’s talk about your investment goals.