Rental Investing & DSCR

Rent is the starting point

Some rental income pays for property taxes, insurance, repairs, management and other expenses. Empty units and unpaid rent also matter. Cash flow is the money remaining after the expenses and loan payments included in your analysis. Plan separately for major replacements.

What DSCR means

DSCR stands for debt-service coverage ratio. Debt service means required loan payments. In general, the ratio compares the income a lender counts with the debt payments it counts, using the same time period. It is not a profit margin.

Ask what goes into the ratio

Some one-to-four-unit rental programs compare qualifying rent with housing payments that include principal, interest, taxes, insurance and applicable association dues. Commercial analysis commonly starts with net operating income. Definitions differ, so two DSCR figures may not be comparable. Ben can clarify which income and debt-service definitions apply to a proposed structure.

Look beyond one ratio

Even a property that covers the payments included in a lender’s calculation can need additional cash for repairs, vacancy or expenses omitted from that calculation. Review the lease, realistic rent, operating costs and reserves.

Your quick checklist

• Use realistic rent, not only the advertised rent.
• List operating costs and likely vacancy.
• Ask which income and payments the lender counts.
• Keep a reserve for repairs and periods without rent.