Last Updated on March 9, 2025 by Tanya Janse van Rensburg
It sounds like a good idea to fix up a rental home. Fix it up, charge more rent, and watch your money grow.
But there's one big thing you need to know first: how will you pay for it?
If you're considering a loan, traditional banks can make things difficult. They want to see a strong debt-to-income relationship and proof of income.
They won't give you any money if you don't meet their requirements. That's why DSCR loans are so popular with investors.
These loans are based on the property's cash flow, not yours. The rental income must be enough to cover the loan payments.
You do not have to show proof of your salary or tax records.
But how does DSCR change your chances of getting a loan for a renovation?
Let's break it down.
Lenders use the Debt Service Coverage Ratio (DSCR) to decide if a property makes enough money to handle a loan.
They divide the rental income by total loan payments. If the result is above 1.0, the property at least pays for itself.
Most lenders want to see a ratio of 1.2 or more. Your loan rates will be better if your DSCR is higher.
DSCR can help or hurt you when you're renovating. If an upgrade brings in more rental income, your DSCR goes up, which makes it easier to get funding.
The DSCR goes down, though, if the costs are high and the rent increase is small.
This makes lenders wary. That's why it's not enough just to fix things up; you also need to make sure the numbers make sense.
If planning a renovation, you must run the numbers first. Lenders calculate DSCR using this formula:
DSCR = Rental Income ÷ Loan Payments (PITIA: Principal, Interest, Taxes, Insurance, Association fees if applicable).
For example, if a property earns $50,000 in annual rent and has total yearly loan payments of $40,000, the DSCR is 1.25.
That's a healthy number. But if renovations increase your debt without raising rent enough, the ratio could fall, making financing harder.
Some lenders, like Griffin Funding, specialize in DSCR loans that let investors qualify based on property income alone.
This makes it easier to get financing, but only if your projected DSCR holds up.
That's why smart investors focus on upgrades that directly impact rental value, ensuring their numbers make sense before applying for a loan.
Lenders don't just look at your current DSCR when deciding on a loan. They also estimate what your post-renovation numbers will look like.
If the upgrades increase rental income enough, your DSCR will improve, making approval easier.
However, if the renovation costs outweigh the expected rent increase, your DSCR could drop, putting your loan at risk.
Most lenders prefer a DSCR of at least 1.25. If your property is already close to that, securing financing is fairly straightforward.
But if it's hovering near 1.0 or below, lenders might require a larger down payment or extra reserves, or even deny the loan altogether.
Some investors work around this by using interest-only DSCR loans.
These lower monthly payments at the start give time for renovations to be completed and rental income to rise before full payments kick in.
It's a helpful strategy, but only if you're confident your upgrades will boost cash flow.
Getting approved for a loan is one thing. Keeping your DSCR in good shape while handling renovation costs is another.
A common mistake investors make is assuming any upgrade will justify a rent increase. But lenders don’t see it that way.
The key is to focus on functional improvements that boost rental value.
Modernizing kitchens, upgrading outdated bathrooms, or adding an extra bedroom can increase rent and improve your DSCR.
On the other hand, high-end finishes or luxury add-ons that don’t bring in more rent can push your DSCR in the wrong direction.
Securing financing for a rental renovation requires more than just a solid plan—it demands a strong DSCR.
Lenders prioritize properties with stable cash flow, so you must ensure your upgrades increase rental income enough to maintain a healthy ratio.
By focusing on renovations that directly boost property value, calculating your DSCR before applying, and choosing the right loan structure, you improve your chances of approval.
Smart investors don’t just renovate; they strategize, ensuring every dollar spent leads to a stronger financial position.
Before you dive into your next project, run the numbers, choose the right lender, and make sure your investment works for you.
