Why Leased Properties Are Ideal for Refinancing with DSCR Loans

Last updated: March 13, 2025

Real estate investing is a dynamic field where strategic decisions can significantly impact profitability and portfolio growth. For investors managing rental properties, refinancing is a critical tool to unlock equity, reduce interest rates, or secure better loan terms to fuel further expansion. Among the financing options available, Debt Service Coverage Ratio (DSCR) loans stand out as a powerful choice, particularly for rental property owners. Unlike traditional mortgages that hinge on a borrower’s personal income, credit score, and debt-to-income ratio, DSCR loans shift the focus to the property’s ability to generate income. This unique approach makes them ideal for investors aiming to scale efficiently. However, one often-overlooked factor can dramatically influence the success of refinancing with a DSCR loan: whether the property is leased at the time of application. A leased property not only strengthens an investor’s case but also unlocks a range of financial and operational advantages that make refinancing smoother and more cost-effective.

Understanding DSCR Loans

At the heart of a DSCR loan lies the Debt Service Coverage Ratio, a metric that evaluates a property’s financial health by comparing its rental income to its total debt-related expenses. Specifically, the DSCR is calculated as DSCR = Rent ÷ PITIA

Here, "Rent" is defined as the lower of the actual leased rent (what tenants currently pay) or the appraiser’s opinion of market rent from the appraisal report, reflecting the property’s income potential. PITIA stands for Principal, Interest, Taxes, Insurance, and Association fees (if applicable), encompassing the full monthly cost of maintaining the loan and property. For example, if a property has an actual rent of $2,000 per month but the appraiser’s market rent is $1,800, the lender uses $1,800 as "Rent." If the monthly PITIA is $1,440, the DSCR would be 1.25x ($1,800 ÷ $1,440 = 1.25).

Some lenders require a minimum DSCR of 1.25 which means the rent must cover at least 125% of the PITIA to ensure a buffer against income fluctuations or unexpected costs.

Depending on borrower credit score and guidelines of the specific institutional credit investors that buy DSCR loans after origination, lenders including OfferMarket Capital can accept a lower minimum DSCR such as 1.0 which implies breakeven cash flow before maintenance and unexpected costs and vacancy is factored in.

A higher DSCR signals a safer investment for the lender, increasing the chances of approval and unlocking better terms, such as lower interest rates or higher loan amounts.

This property-centric formula distinguishes DSCR loans from traditional financing, making them a game-changer for real estate investors.

Why Having a Leased Property Matters for DSCR Loans

When refinancing with a DSCR loan, the status of the property—leased or vacant—plays a pivotal role in shaping the outcome. Below are five key reasons why leased properties outperform vacant ones during the refinancing process, each contributing to a stronger financial profile and better loan terms.

1. Stronger Financial Analysis

The cornerstone of DSCR loan underwriting is a robust financial analysis of the property’s income potential. A leased property offers a clear, verifiable income stream through actual rent, documented by lease agreements and payment histories. This allows lenders to directly compare the lower of actual rent or market rent to PITIA.

For instance, if a property is leased for $2,000 per month and the appraiser’s market rent is $1,900, the lender uses $1,900. With a PITIA of $1,520, the DSCR is 1.25x ($1,900 ÷ $1,520).

Contrast this with a vacant property, where actual rent is zero, forcing lenders to rely solely on the appraiser’s market rent. If the market rent is $1,900 but discounted due to vacancy risks, the DSCR suffers.

For multi-unit properties like duplexes, triplexes, or quadplexes, some DSCR loan program guidelines impose stricter rules, disallowing more than one unit to be vacant at the time of refinancing or reducing maximum LTV by 5%.

If a triplex has three units with a market rent of $1,000 each but two are vacant, the lender might use $1,000 actual rent plus discounted market rent for the vacant units, yielding a lower DSCR.

A leased property, especially one fully occupied, provides concrete income data, strengthening the investor’s application and reducing lender skepticism.

2. Market Rent vs. Actual Rent

A critical component of DSCR loan evaluation is determining the "Rent" figure—actual leased rent versus the appraiser’s market rent, with the lower value prevailing. For a leased property, this offers a tangible benchmark. If a home has a market rent of $2,500 per month but is leased for $2,600, the lender uses $2,500, ensuring the DSCR reflects the more conservative income. With a PITIA of $2,000, the DSCR is 1.25x ($2,500 ÷ $2,000). This alignment with market rent signals the property’s full potential is being realized. But do not lease the property below market rent! If you lease the property below market rent in haste, your DSCR lender will use the lower lease amount in their DSCR calculation.

For a vacant property, the lender relies solely on market rent—say, $2,500—but often applies discounts. Some DSCR program guidelines impose a ‘haircut,’ using only 90% of the appraiser’s opinion—$2,250 in this case—to calculate DSCR, lowering it to 1.125x ($2,250 ÷ $2,000) and potentially disqualifying a target loan-to-value (LTV) ratio like 80%. If leased below market rent (e.g., $2,000), the DSCR drops further to 1.0x ($2,000 ÷ $2,000), risking rejection. A leased property at or near market rent thus offers a clear advantage in maintaining a strong DSCR.

3. Better Interest Rates and Loan Terms

Lending is a risk-based business, and DSCR loans use risk-based pricing. A leased property with a solid DSCR – let's say 1.35 from $2,700 rent and $2,000 PITIA – demonstrates consistent income, reducing lender risk. This will secure a lower DSCR loan rate at max LTV (80% for rate and term and 75% for cash out).

A vacant property, reliant on an appraiser's conservative opinion of market rent, let's say $2,250, would result in a lower DSCR and a slightly higher interest rate and may not be eligible for max LTV. Leased properties unlock better terms by proving income stability.

4. Easier Approval Process

A leased property streamlines underwriting by providing actual rent data, accelerating due diligence. Lease agreements and rent rolls show income, let's say $2,000 actual rent compared to $2,100 market rent, using $2,000 and a PITIA of $1,600 for a DSCR of 1.25 – making approval smoother.

Vacant properties complicate this. With no actual rent, lenders rely on market rent ($2,100) or 90% of market rent ($1,890), sometimes dramatically changing the DSCR and eligibility.

When an appraisal report comes in with an objectively low market rent, it can be difficult successfully appeal for a reconsideration of value if there is not an actual 12 month lease for the appraiser to review. Appraisers often rely on imperfect data from the MLS where real estate agents who do not specialize in leasing upload below market rent leasing data. Expert landlords and property managers in the same market may be leasing comparable properties for 10 to 30% higher monthly rent.

For example, a rental property owned by an OfferMarket client appraised with a market rent of $3,200. The client leased the property for $4,000 and OfferMarket submitted a reconsideration of value. The appraiser revised their opinion of market rent in their 1007 Rent Schedule to $3,800 and the client qualified for 75% LTV on their cash out refi instead of 70%.

Had the client focused on leasing the property sooner, they might have refinanced faster and with less hassle.

5. Improved Insurance Considerations

Vacant properties face higher insurance premiums due to risks like vandalism, increasing PITIA. A $1,200 annual policy for an occupied rental might jump to $2,000 if vacant, raising monthly PITIA from $1,600 to $1,700. With $2,000 rent, DSCR drops from 1.25 to 1.18, risking lender thresholds.

A leased, occupied property keeps insurance lower, boosting DSCR and lender confidence. This interplay between occupancy, PITIA, and DSCR highlights leasing’s strategic edge.

Maximizing DSCR Loan Benefits When Refinancing

To optimize DSCR loans, investors should:

• Secure Stable, Long-Term Leases: A two-year $2,000 lease ensures reliable rent versus short-term risks.
• Align Rent with Market Rates: Match or exceed the appraiser’s $2,000 market rent to maximize DSCR.
• Prioritize Property Maintenance: Reduce insurance and retain tenants, keeping PITIA low.
• Document Income Meticulously: Prove $2,000 rent with records for swift approval. Provide rental comps furnished from experienced investor and property managers in your local market to provide to the appraiser so they can determine the most accurate opinion of market rent.
• Take Advantage of Lower Rates: It's a volatile interest rate environment and when rates come down, the window of opportunity may be missed if you don't have a leased property and your processing documentation organized.

Conclusion

DSCR loans empower investors by prioritizing property income over personal finances. Rental property investors with leased properties excel in refinancing with optimal terms compared to borrowers who choose to proceed with the property vacant.

By optimizing DSCR you access better rates, higher LTV and a streamlined approval.

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