DSCR Loan Calculator: Understanding Fixed Costs
Categories: Blog Posts
Looking at a DSCR loan calculator and wondering what numbers you need to plug in to make everything come out even?
If you’re new to the DSCR game, you’ve likely heard people talking about the DSCR ratio and how that number helps you set rents. But how do you actually calculate all of that?
There are quite a few numbers that go into calculating a DSCR ratio (which is then often used to calculate rents).
What is a DSCR Ratio?
A DSCR ratio is simply the break even point.
Essentially, you start by adding up all of your monthly expenses (mortgage payments, taxes, insurance, HOA fees, etc.). If you compare that number to the amount you’re charging for rents and those numbers are the same (you’re putting out and bringing in the same $$ amount), then you have a DSCR ratio of 1.
You never want a DSCR below 1 (spending more than you’re bringing in). However, a ratio of 1 simply means that you’re breaking even. In other words, you’re not actually making money unless you can raise the ratio (and raise rents) in order to bring in more money than you’re spending.
Lenders like to see positive cash flow, so it’s typically good to aim for a DSCR ratio of 1.25. That means you’ll make 25% more than you’re spending.
How to Calculate Your Fixed Costs
The first step of figuring out the ratio is to get a really clear picture of your expenses. Expenses come in two parts: fixed costs and monthly payments for loans.
Let’s look at fixed costs right now.
These fixed monthly expenses consist of things like HOA fees, insurance, taxes, and other exciting things.
For Example…
Let’s take a peek at some numbers based on a property we reviewed recently:
- Taxes. This property had $1,200/year in taxes. Divide that by 12 and you have $100/month.
- Property Insurance. We’re going to look at $1,800/year or $150/month.
- Flood Insurance. This property didn’t have any HOA fees, but it did need flood insurance. That comes to $2,4000/year or $200/month.
In total, you have $450/month in expenses for this property before factoring in your mortgage payment.
When working with your DSCR loan calculator, don’t forget about the fixed costs. It’s a critical number in calculating the ratio that’s going to set you up for success.
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