What is the Debt-Service Coverage Ratio (DSCR)?

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Real Estate Agent 0488515

Debt Service Coverage Ratio in real estate lending is a ratio used by lenders to determine income property loans.

In theory debt service coverage ratio is a formula which equals net operating income divided by total debt service.

Here is an example for an investment property:

The buyer wants to borrow $80,000 at 6.5 percent for 30 years.

The monthly principal and interest payment = $505.65.

The monthly insurance is $66.67.

The monthly taxes are $208.33

The total monthly payment is $780.65

The monthly rent for this property is $1000.00

The adjusted rent (we call it a haircut equals 75% of the monthly rent) = $750.00. We allow for 25% of the monthly rent will be used to cover vacancies and repairs.

To calculate the DSCR we use the formula (adjusted rent / total monthly payment) / 100. In this example (750/780.65) / 100 = .96%

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Rainmaker
1,617,689
Bob "RealMan" Timm
Ward County Notary Services - Minot, ND
Owner of Ward Co. Notary Services, retired Realtor

I avoided commercial property sales because I have trouble with the math Richard Weeks . You lost me even before you got to the numbers.

Sep 25, 2018 08:45 AM #1
Rainmaker
3,044,998
Richard Weeks
Dallas, TX
REALTOR®, Broker

Thanks Bob.  Let me know if I can ever help.

Sep 25, 2018 10:23 AM #2
Ambassador
3,338,720
Debe Maxwell, CRS
www.iCharlotteHomes.com | The Maxwell House Group | RE/MAX Executive | (704) 491-3310 - Charlotte, NC
Charlotte Homes for Sale - Charlotte Neighborhoods

Wonderful explanation of DSCR, Richard! I like that you call your servicing/vacancies, etc. fee 'haircut fee' - I hadn't heard this one!

Sep 25, 2018 08:06 PM #3
Rainmaker
3,044,998
Richard Weeks
Dallas, TX
REALTOR®, Broker

Thanks Debe

Sep 26, 2018 04:19 AM #4
Rainer
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Bill Meloy
Palm Beach Gardens, FL
Private Money Specialist

Nice Job Richard. This is a very important part of being able to lend on investment properties. This breaks it down very well. The only thing I would add is that the "haircut" or vacancy allowance is not standard among investors, and there are investors who have less than 25%

Sep 26, 2018 10:09 AM #5
Rainmaker
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Richard Weeks
Dallas, TX
REALTOR®, Broker

Bill thanks for you comments.  I agree the 25% might be high.  If the borrow can document vacancy % and repairs we will use those numbers.

Sep 26, 2018 10:40 AM #6
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Rainmaker
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Richard Weeks

REALTOR®, Broker
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