How to calculate DSCR For Investment Properties
DSCR: The DSCR is a key factor when applying for investment property loans. Lenders typically look for a DSCR of at least 1.2, meaning that the property’s rental income should be 120% of the monthly mortgage payment, including principal, interest, taxes, and insurance (PITI). A higher DSCR is often preferred by lenders.
Calculating the Debt-Service Coverage Ratio (DSCR) for investment properties is essential when assessing the property’s ability to generate sufficient rental income to cover its debt obligations. To calculate DSCR, follow these steps:
**DSCR = Net Operating Income (NOI) / Debt Service**
How to calculate DSCR For Investment Properties
1. **Calculate Net Operating Income (NOI):**
NOI is a key component in the DSCR calculation and represents the property’s income after deducting all operating expenses, except for debt service (mortgage payments). The formula for NOI is:
NOI = Gross Rental Income – Operating Expenses
– Gross Rental Income: This includes all rental income generated by the property. Be sure to include income from all units or sources on the property.
– Operating Expenses: This includes property management fees, property taxes, insurance, utilities, maintenance costs, and other expenses directly related to the operation of the property. Do not include mortgage payments in operating expenses.
2. **Calculate Debt Service:**
Debt service represents the total mortgage payments you need to make on the property. It typically includes principal and interest but may also include property taxes and insurance (PITI).
3. **DSCR Calculation:**
Once you have the NOI and Debt Service, use the following formula to calculate DSCR:
DSCR = NOI / Debt Service
The result will be a ratio. A DSCR of 1.0 means that the property’s rental income exactly covers the debt service. A DSCR greater than 1.0 indicates that the property generates more income than is needed to cover the debt service, which is generally seen as a positive sign by lenders.
4. **Interpret the DSCR:**
– DSCR > 1.0: This suggests that the property generates more income than needed to cover the debt service, which is a positive sign for lenders and investors.
– DSCR = 1.0: The property’s income just covers the debt service, which means there’s no extra cushion. It may be riskier to lenders, and some may prefer a higher DSCR.
– DSCR < 1.0: This indicates that the property’s income is insufficient to cover the debt service, and it’s considered a higher-risk investment. Lenders may be hesitant to provide financing with a low DSCR.
Keep in mind that acceptable DSCR levels can vary among lenders and the type of loan you’re seeking. It’s essential to understand the specific DSCR requirements of your lender and assess the investment property accordingly. A higher DSCR typically provides more security and makes it easier to secure financing for investment properties.
How to calculate DSCR For Investment Properties
