Debt Service Coverage Ratio … DSCR.  Steve and I are working with a couple of sets of clients who are looking to invest.  Some are local, some are international, all are interested in what opportunities we have available here in the New River Valley, but not all know how to determine whether the debt service is covered by the income.  I thought this might be a good time to study real estate investing 101 …

Anytime you’re considering investing in income-producing property, you need to know whether or not the income can outpace expenses.  That only makes sense – you’re not investing to LOSE money, right?  And when you take out a loan on the property, the bank wants to know whether THEY’RE going to make money as well, which is why they want to know your Debt Service Coverage Ratio.  It’s really easy to figure out … let’s assume that you’re looking at a duplex that costs $250000, and rents for a total of $2400 a month.  Here’s the breakdown:

•    Gross Annual Rent – $28800
•    5% Vacancy Rate – $1440
•    Gross Income – $27440
•    Real Estate Taxes – $1450
•    Hazard Insurance – $500
•    General Maintenance and Upkeep – $2000
•    Utilities – $1500
•    Management Fee 10% – $2880
•    Reserves – $2000
•    Total Operating Expenses – $10330
•    Net Operating Income (NOI) – $17110

So after expenses, you’d make more than $17000 on this property.  Wait, you put down 20% of your own cash but you’ve still got a loan you’re paying every month, so that debt service has to be factored into the equation.

•    Loan Amount – $200000
•    Interest Rate – 7% at 30 years
•    Annual Debt Service – $15891.24

Now we’re getting somewhere.  To figure out the Ratio, divide your Net Operating Income of $17110 by the Debt Service of $15891.24 = 1.07.

Not too bad – you’re looking for anything higher than 1, which means that you’re making money.  Ready to get started?  Email me to discuss it in more detail.  Have a property that doesn’t have a Debt Service Coverage Ratio of 1.0?  No problem – let’s discuss ways we can improve that ratio.  I just looked at one of my properties, the DSCR is .85 … guess I need to look at some rent increases!