DSCR Loans in Wisconsin Expert Insights

Wisconsin: A great place to invest in real estate

Situated next to the glorious Great Lakes, Wisconsin may be known across the nation for its cheese industry, but there is so much more to the state that makes it an excellent investment opportunity.

And with a DSCR loan, investors can easily qualify for financing without the traditional requirements of other loans. This makes it the perfect product for entrepreneurs and house-flippers who can’t prove their income as easily.

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Why get a DSCR loan in Wisconsin?

A debt service coverage ratio (DSCR) loan is financing that is based on the property’s revenue and not the investor’s individual income.

Since qualifying for this loan is much easier for those with complex tax returns, such as property investors, it’s a great opportunity to secure funding to invest in a new area.

The median home value in Wisconsin was around $260,000 as of November 2022, says the Wisconsin Realtors Association. The biggest cities include Madison, Milwaukee, and Green Bay, to name a few.

How does a Wisconsin DSCR loan work?

Since investment property payments can be paid by the property’s rental income, many financial institutions recognize that the property’s cash flow—not the income of the investor—is the crucial factor to consider.

A DSCR loan compares the rental income with the debt (mortgage) payment. If the income is the same or higher, the loan might be approved.

How is DSCR calculated for Wisconsin properties?

Calculating a DSCR loan is relatively straightforward. First, take the property’s monthly rental income (for all units, if more than one) and compare it to the monthly mortgage payment.

For example, a property with a $2,000 / month rental income and a monthly mortgage payment of $1,500 has a DSCR of 1.33.

A higher ratio is considered a better investment. In the above example, a DSCR of 1.33x means the investment property achieves 33% more income than required for a mortgage payment. Most mortgage lenders require a DSCR of 1.25 minimum.

If you calculate your DSCR and come up with a number that’s below 1.0, that means your mortgage payment will be greater than the amount of rental income you’re likely to earn. Some lenders might approve this scenario, but you’ll need substantial cash reserves in the bank to be approved.

The DSCR equation

Anyone can calculate DSCR with this simple equation:

DSCR = Income / Payment

Let’s look at what is included in income and payment.

DSCR income: The income part of the equation is the rental income from tenants. For commercial properties, you’d use the net operating income or NOI. Determining NOI is not quite as simple as looking at rental income. It must also include things like maintenance and management. For the purposes of this article, we’ll mainly be looking at DSCR loans for residential property.

DSCR payment: First, you need to determine a full payment to get an accurate calculation. Working with your mortgage lender, you can determine what your payment will be by summing up the following parts:

• Principal
• Interest
• Taxes
• Insurance
• Homeowner’s Association Fees (HOA), if any

There are two ways DSCR is expressed—either as a decimal (e.g., 1.25) or as a factor (e.g., 1.25x—which means the property will bring in 25% more income than a full mortgage payment)

Example: How higher rent can improve DSCR

Example: How lower payment can improve DSCR

What is the minimum DSCR ratio for Wisconsin?

Most of the DSCR mortgage lenders you’ll find will only consider a debt coverage ratio of 1.25x or higher.

Occasionally, you’ll find a lender who might allow a DSCR of 1.0x or even less. Some lenders don’t have a minimum at all. If you are unsure about your DSCR scenario, you can always submit it to DSCR mortgage lenders here for review.

DSCR loan requirements

A DSCR loan is frequently easier to qualify for than a conventional loan, especially if you have income that is hard to verify.

For example, a full-time real estate investor will often write off a fair amount of expenses on their tax returns, clouding the actual amount of income they earn.

Let’s look at the most common qualification standards for DSCR loans in Wisconsin:

Loan-to-value (LTV): DSCR loans typically have a loan-to-value (LTV) ratio of 80%, requiring borrowers to have a 20-25% down payment.

Credit score: The standard minimum score is 640, but some lenders are willing to go lower.

Loan purpose: DSCR loans are designed for a house purchase, refinance, or cash-out payment.

Property types allowed for DSCR loans: Depending on the lender, DSCR loans are designed for single-family residences, residential multi-unit properties (1-4 units), commercial apartment buildings (5+ units), standard and non-warrantable condos, hotels, townhomes, and a few more.

Property usage: Most lenders allow both long-term and short-term rentals. No primary residences, since the loan is based on how much income the property generates.

Loan types: Various loan types are accepted; 5-year ARM, interest-only ARM, and more.

Income and employment, debt-to-income ratio: No personal employment or income needs to be verified. Therefore, no debt-to-income (DTI) ratio is calculated in these cases.

Maximum loan amounts: Some DSCR lenders will offer loans up to $5 million.

Maximum properties owned: Most lenders won’t limit the number of properties a prospective borrower can own.

Prepayment penalties: Many DSCR loans will include a prepay penalty. Make sure to check the loan documents and ask the lender about penalties.

Using an LLC to close: Allowed.

Seller paying closing costs: Several DSCR lenders will allow the seller to contribute to the closing costs up to certain limits.

DSCR mortgage rates in Wisconsin

The general rule for DSCR loans in Wisconsin is that if you can achieve a higher DSCR, you can usually qualify for a better mortgage rate.

Many mortgage lenders will offer DSCR rates that are about 1-2% higher than a traditional mortgage loan.

The 5 best areas to invest in Wisconsin

Wisconsin industries go beyond agriculture, including significant investments in healthcare and manufacturing. It’s also the nation’s biggest producer of cranberries and ginseng. This economy provides many jobs that attract people to the state, making it a safe bet to invest here.

Madison

Every year, this thriving city draws countless people for big events, jobs, or to attend the University of Wisconsin-Madison.

The median listing price in Madison is $370k, significantly below the national median of $454,900 (as of the third quarter of 2022). The median sold price for homes was above asking at $380k. Rental rates also increased by 1.4% over the past year.

Milwaukee

Millennials comprise 80% of tenants in rental properties here, with a median rental price of $830, slightly higher than the median rent price for the state.

Residents are attracted by jobs, the craft brewing scene, a burgeoning downtown, and an affordable cost of living.

Racine

The cost of living in the kringle capital is 8% below the Wisconsin average, which makes everyone’s dollar go further. This fact makes Lake Michigan’s neighbor an attractive option for first-time buyers on a tight budget.

The median listing price in Racine was only $192.5k, trending up 10% as of July this year (year over year), making this city an affordable and appreciating option for one or more investment properties.

Appleton

Appleton has a population density that is 36% greater than the Wisconsin average yet enjoys a cost of living that is 7% lower than the state average.

The demographics of Appleton are younger than average, with a median age of 35 years, meaning lots of young renters looking for lower rental prices.

Wauwatosa

This smaller city has much to offer, including job opportunities, a family-friendly feel, and good schools.

As a result, Wauwatosa attracts many young families that make up more than 82% of its population. As of July 2022, the median listing price was $349.9K, an upward trend of 16.7% year-over-year.

5 tips for real estate investors in Wisconsin

What should investors consider when purchasing in Wisconsin?

Consider local needs

Even if you’re familiar with the state, you may not understand the needs of locals from area to area. Scrutinize the characteristics of the locations you’re interested in by connecting with professionals in the area.

Are there demands for single-family rentals? Or are townhomes and condos more to people’s preferences? Or do multi-unit properties ultimately provide the most ROI?

Wisconsin late fees

In Wisconsin, there is a mandatory grace period of five business days for late fees on tenants’ rent. Fees may be $20, or 20% of the monthly payment, whichever is greater. You also have the option of charging a higher late fee, but you must be able to prove that it’s reasonable.

Become familiar with Wisconsin’s weather

Tourism is a big deal for the Badger State, bringing in over $20 billion to date and supporting or creating almost 170K jobs.

But the weather will often dictate when and where tourism will flourish or wane. Cold winters mean any warm weather attractions have a limited benefit to the area, and vice versa.

Research local job opportunities and growth

While many places in Wisconsin are dominated by the dairy industry, it’s better to find an area that diversifies. More than one supporting industry means the local economy isn’t reliant on one foundation piece to ensure growth and prosperity.

Consider professional property management

While you can research any state’s laws and regulations, there is much to be said for hiring a company that is deeply familiar with the benefits and quirks of a particular state.

FAQ

Start your DSCR loan

DSCR loans open up opportunities for many real estate investors who wouldn’t usually be able to secure a mortgage for their properties. For the right investor, a DSCR loan makes sense—and could easily be the way to create solid returns for years to come.