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Why do people get DSCR Loans? This is a simple question that has a variety of answers and nuance. The overarching reason people use DSCR loans is to build wealth through real estate via cash flow or asset appreciation (and often, but not necessarily, both). Real estate investing has a long and distinguished track record in the United States of being the method and recipe for wealth building for millions of individuals and continues to be a favored strategy of people charting a course toward financial freedom.
Achieving returns on real estate generally comes down to two methods: Cash Flow and Appreciation. Cash Flow refers to the periodic (e.g. monthly, annual) income earned from real estate assets, generally the difference between revenues (rents) and the expenses associated with owning the property. Appreciation refers to the (positive) change in value of the asset (in this case, residential real estate property) over time. While residential real estate values can both appreciate (go up) and depreciate (go down, but not to be confused with the tax/accounting principle), over time, and especially in the United States in recent decades, values have appreciated tremendously and steadily.
In fact, over the last 20 years, residential real estate values have increased by 6.6% per year, representing a cumulative 260% increase! So, for example, on average, a property bought at $140,000 in 1995 would be worth $503,800 in 2025! Seeing this concept and data for the first time is often extremely illuminating for many people and the origin story of many a real estate investor inspired to jump into real estate.
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While earning cash flow is an important and significant aspect of the returns on real estate investing, the real magic and recipe for achieving financial freedom and true wealth for most investors in real estate is through appreciation. And the secret sauce to achieve the outsized returns necessary for many investors to reach their lofty goals is through using leverage (or debt financing) to enhance returns through property appreciation.
While the financial mechanics of how this works can be complex, at a high level it is because using debt (like DSCR Loans) allows investors to buy more properties while capturing all or 100% of the appreciation experienced by those properties. Without debt, an investor will still receive all of the appreciation, but will have significantly less capital available to purchase more properties.
This concept is best illustrated by an example. Take as an example investors Anna and Bella, each of whom has one million dollars ($1,000,000) to invest in real estate. Anna chooses not to use leverage and buys one property for a price of $1,000,000. Bella, chooses to use loans (i.e. leverage) to buy four properties for a price of $1,000,000 each, while taking out a $750,000 loan on each of the properties, while using $250,000 for each “down payment,” representing her equity.
In this example, Anna and Bella both have $1,000,000 in equity to start, the difference is that Anna has put it all toward one property and Bella has spread it out among four properties. So, at this point, neither person has actually increased any wealth (equity), rather they have just shifted their assets (and in Bella’s case, liabilities) around. Here is a breakdown:
Anna and Bella Initially:
$1,000,000 in Assets (Cash), $0 in Liabilities, $1,000,000 Equity (Equity = Assets – Liabilities; $1,000,000 = $1,000,000 - $0)
Anna Post-Purchase:
$1,000,000 in Assets (Real Estate), $0 in Liabilities, $1,000,000 Equity
Bella Post-Purchase:
$4,000,000 in Assets (Real Estate), $3,000,000 in Liabilities, $1,000,000 Equity
Note that despite the different purchase strategies, Anna and Bella didn’t change their wealth (equity), as the equity amount is $1,000,000 for both investors; for Anna just one unencumbered million-dollar property, for Bella, four million-dollar properties, but a debt load of $3,000,000 ($750,000 * 4).
So far, no difference in wealth.
However, lets assume that five years pass and all of the properties have appreciated by 25% (which is in line with the average cumulative compounded rate in the United States over the past 20 years as cited above).
In this plausible scenario, lets take a look at how each individual’s wealth has changed (assuming no pay down in principal on Bella’s loans and not taking into account any cash flow or other variables).
Anna After Five Years:
$1,250,000 in Assets (Real Estate, appreciated value), $0 in Liabilities, $1,250,000 in Equity (Equity = Assets – Liabilities; $1,250,000 = $1,250,000 - $0).
Anna has gained $250,000 in wealth in five years.
Not bad. But let’s check in on Bella.
Bella After Five Years:
$5,000,000 in Assets (Real Estate, appreciated value), $3,000,000 in Liabilities, $2,000,000 in Equity. (Equity = Assets – Liabilities; $2,000,000 = $5,000,000 - $3,000,000).
Bella has gained $1,000,000 in wealth in five years. Or four times as much (400%) as Anna.
How does this work? Is the math right? Yes. This magic of leverage, or using debt in real estate investing, works primarily because ALL (100%) of the gains from appreciation go to the investor. The lender that gave the loans to cover a portion of the purchases, in this example, the $750,000 loans to cover 75% of the purchases (i.e. 75.0% LTVs), only can collect interest and get paid back the original amount (as long as the borrower, Bella in our example, makes the required payments). By using debt, Bella was able to earn a million dollars from her initial million-dollar investment, a 100% gain, while Anna was able to earn just $250,000 (a 25% gain). Again, not bad, but a much smaller return.
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In addition, even small increases in leverage have multiplicative effects. Let’s add a third investor to our example, keeping everything the same for new investor, Caleb, except instead of buying four million-dollar properties with 25% down on each (four $750,000 loans, 75% LTVs), Caleb buys five million-dollar properties, with 20% down on each (five $800,000 loans, 80% LTVs).
Caleb Initially:
$1,000,000 in Assets (Cash), $0 in Liabilities, $1,000,000 Equity (Equity = Assets – Liabilities; $1,000,000 = $1,000,000 - $0)
Caleb Post-Purchase:
$5,000,000 in Assets (Real Estate), $4,000,000 in Liabilities, $1,000,000 Equity
And after five years, assuming again 25% appreciation;
Caleb After Five Years:
$6,250,000 in Assets (Real Estate, appreciated value), $4,000,000 in Liabilities, $2,250,000 in Equity. (Equity = Assets – Liabilities; $2,000,000 = $5,000,000 - $3,000,000).
Caleb has gained $1,250,000 in wealth in five years.
Here we see the multiplicative effect of even just a small change in LTVs, Caleb now has a 125% return from appreciation (versus 100% for Bella and 25% for Anna). Just an extra 5% in leverage (80.0% LTV vs. 75.0% LTV) and a lowered down payment by just $50,000, Caleb has gained an additional 25% return and $250,000!
Now, it’s of course not so simple and easy. There are many caveats that must be considered in real estate investing, especially in the use of leverage. Most important, leverage cuts both ways and real estate values are not always guaranteed to go up. While the track record of growth is strong, even those solid returns over the last few decades had their ups and downs, and the wrong timing can lead to ruin and losses. While leverage can “work its magic” by multiplicative returns and ability to acquire properties more quickly and prolifically, that also applies to losses if values go down.
To illustrate, if in our sample above, property values decreased by 25% instead of appreciated, then Bella and Caleb, instead of hitting it big with big increases in equity value and larger portfolios of four or five seven-figure properties would be wiped to $0. This is because, similarly to how the debt balance stays the same when the value of the property goes up, the debt balance stays the same if property values go down as well. Bella and Caleb for example would have the following portfolios in this scenario:
Bella After Five Years (Values Fall 25%):
$3,000,000 in Assets (Real Estate, depreciated value or $750,000 * 4), $3,000,000 in Liabilities, $0 in Equity. (Equity = Assets – Liabilities; $0 = $3,000,000 - $3,000,000).
Caleb After Five Years (Values Fall 25%):
$3,750,000 in Assets (Real Estate, depreciated value or $750,000 * 5), $4,000,000 in Liabilities, $-250,000 in Equity! (Equity = Assets – Liabilities; ($250,000) = $3,750,000 - $4,000,000).
Both of these would be pretty disastrous and maybe an insurmountable obstacle to achieving wealth and financial freedom (losing the entire million dollars each). In these cases, especially for Caleb, defaults would be likely and the properties would likely be lost as well.
Anna, on the other hand in this scenario, while far from an ideal place, would be in way better shape. Let’s see what her portfolio would look like:
Anna After Five Years (Values Fall 25%):
$750,000 in Assets (Real Estate, depreciated value), $0 in Liabilities, $750,000 in Equity. (Equity = Assets – Liabilities; $750,000 = $750,000 - $0).
This example illustrates the key real estate investing concept (and indeed, financial in general concept) of risk and reward. Generally, the higher the risk an investor takes, the larger possible returns exist, but also the higher chance of losses. How much leverage to take is a huge component of how much risk an investor wants to take, and how much return he or she aims for. Risk is not good or bad, rather it is a calibration to how much someone wants to balance their opportunity for higher returns and the chances of losses to achieve them. As illustrated in our example, Anna’s low-risk investing (with no leverage) looked terrible when properties appreciated but a ton better in an environment where values drop.
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In addition to the very real risks that come with leverage, there are many more caveats to our examples as the real world, especially real estate, is far messier. First, we didn’t account for cash flow, the other key pillar of returns in real estate investing. The lower the debt balances and leverage used, the higher the cash flow as debt service costs are much less (and not only because of lower balances, lower LTVs often mean lower rates and PITIA payments too). Cash flow can be material in measuring total real estate returns and makes the difference in returns based on leverage overall.
Of course, each property is unique too, and there aren’t unlimited properties available with nice and even numbers and growth rates to measure in the real world. Personal situations also are unique to each individual investor, as risk tolerances can vary as well as opportunities, tax considerations, qualifications and more. Overall, there is no “right or wrong” answer in risk and leverage choices in real estate investing, except maybe that it is always the right move to be a fully informed borrower and always to run the numbers and tailor strategies to yourself and your goals. And if you are reading this, you are likely on the right track!
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