What Is DSCR? The Debt Service Coverage Ratio or DSCR is one of the least understood elements of buying Real Estate. The calculation is a fundamental part of determining if a rental investment property is going top make money. Most Investment Property Lenders use DSCR as the cornerstone of determining the rate & loan cost on loans for a property.
The more you understand about DSCR, and the more you begin using it in your investment property decisions, the better loans, lower rates 7 fees will come your way.
You can also use DSCR to figure out how much to pay for a property or how much you can get on a cash out refinance. When a Lender looks at DSCR and a property they are always determining the risk profile which they get from DSCR. That includes looking at the property differently than maybe you do.
They are calculating how much Income the property will generate vs the monthly cost.Basically, calculating the DSCR. See what a Houston Fix & Flip Loan is.
The quick way to figure the DSCR is to determine the monthly rental income vs the payment. So now you know what DSCR is. If you are buying the property just deduct the down payment from the purchase price to determine the loan amount. Choose what you think the interest rate will be and use any amortization chart to get a monthly payment.
Add taxes & insurance. If you are not sure of the taxes just use an average. We like to use 1.25% of the purchase price divided by 12 monthly payments to get the monthly property taxes estimate. Then add about $ 100 for Hazard Insurance.
The total PITI, principal, interest, taxes & insurance compared to the income gives you the DSCR. If the DSCR is 1.40 or higher it would mean the monthly rent is 40% more that the monthly payment of PITI. For Investment property Single Family Rentals we like a ratio of 1.40 or more. If your not getting a DSCR of 1.40 or more , reconsider your investment. Since DSCR can effect your loan so much.
If you are a Real Estate Investor, you will come to learn the importance of DSCR. It not only helps you calculate the Income from a Rental Property, your Hard Money Lender will use it in determining what interest rate you will get. Using the example of a recent Houston Investment Property Loan, the DSCR of 1.40 gave the Houston Investor a rate almost 1% lower than a DSCR of 1.15.