Real estate transactions are by nature complicated. It makes since. When hundreds of thousands and possibly millions of dollars are involved, using every financial metric available to cross and dot your financial “t’s and i’s” can’t be over emphasized.

One such metric, critical to the financial decision process, is the Debt Service Coverage Ratio (DSCR). DSCR measures to what degree the operating income of a rental property investment can cover it’s debt obligations. It provides insight on an income producing property’s financial health and viability.

With this knowledge, we’ll delve deep into Debt Service Coverage Ratio. We’ll discuss it’s significance regarding rental property investments. And, most importantly we’ll provide you with real world strategies to use this metric to your advantage, by optimizing your decisions for maximum returns.

As with any decision making process, the better your intel, the better chance you have of making the right choices.

Rental property is purchased on it’s ability to produce income. So a successful rental property generates positive cash flow with a satisfactory or above return on investment. The better your property’s income meets or exceeds it’s debts, expenses and obligations, the more attractive it is to lenders, financiers and investors.

Debt Service Coverage Ratio

The keyword is “Ratio”. Knowing this we can simplify your understanding of how the Debt Service Coverage Ratio works.

Take for instance a lender has a DSCR requirement of “1.20”. This means that for every “dollar” your property has in debt obligations they want to see “one dollar and twenty-cents” of income returned. The higher you go above the “dollar” break even point the less chance there is of a default.

Risk Assessment:

Your property must do more than pay for itself. It has to be able to absorb unexpected financial events. And, it also has to produce a reasonable income for you as the owner.

Debt Service Coverage Ratio gives you the insight you’ll need to determine your property’s vulnerability to future distress. A low DSCR (high risk investment) is a sign of potential financial strain.

Lender Requirements:

By understanding that lenders use your DSCR as a key factor in their decision making process, you’re able to be better prepared for the loan process.

Calculate your Debt Service Coverage Ratio before applying for a loan. If your DSCR is good, you know you’ve met a key lender criteria. If it’s under performing, you know your property needs some work to bring it up to par before you apply for a new loan. That way, instead of getting denied because of a poor DSCR, you can give your lender what they need to increase your chances of approval.

Another point to make is, even if you were approved with a low Debt Service Coverage Ratio, how favorable do think your loan terms would be? It’s all but guaranteed that you’ll get a higher interest rate and a lower loan amount. In your lenders eyes, the greater the risk, the less favorable your financing options.

Debt Service Coverage Ratio isn’t just for lenders. Rental property investors can benefit by using it to make informed decisions. Whether you’re looking to grow your portfolio or you just want to optimize your rental income and expenses, DSCR helps you quantify your risk and rewards in your decision making process.

MORE COMING SOON!!