Multifamily Real Estate Investor Rob Rowsell explains the Debt Service Coverage Ratio Formula. How, when, and why should you use the DSCR (or DCR) loan formula? If you can’t answer those questions, then this video is a must watch!
Debt Service Coverage Ratio Formula
In this clip, Rob explains a crucial formula for members in our monthly Inner Circle Community Gathering.
The Debt Service Coverage Ratio Loan formula is as follows: DSCR = NOI (Net Operating Income) divided by Annual Debt Payments. This includes the loan principal, so do take care if you have an interest only loan. In that instance, you will want to review the amortization schedule in order to determine your true percentage rate.
Why is it important to understand this formula? Banks use it to determine if they will grant a loan to your project, as well as the amount. In Rob’s experience, banks prefer a 1.25% ratio. Sometimes, he can’t get that number because of renovation plans. When his team crunches the numbers, the project still makes sense financially. In this instance, lenders occasionally will allow a bridge loan, in which the property investors have a set amount of time to up the Debt Service Coverage Ratio and make the loan worthwhile. If the investors fail to make the difference in that time, a penalty will apply to cover the bank’s losses. Make sure you read the fine print of your loan agreement and plan accordingly!
Join Our Multifamily Investing Community Today
Do you own your own multifamily rental properties? If not, do you plan to do so one day? Then you should consider joining our online financial group, the ATL Inner Circle Community! Each month, investing pro Rob Rowsell will teach you what you must do in order to build wealth in the real estate business. It’s not quite as easy as it looks! Property taxes, liens, and legal fees can all be hard to navigate, so having a successful guide in your corner like Rob is a must! Sign up today!