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# How to calculate a DSCR ratio

Today we are going to discuss how to calculate a DSCR ratio. Many investors are intimidated by a DSCR loan and are unsure as to where to start. However, the main thing that you need to take into consideration is whether or not the property cash flows. Properties that do cash flow will in turn have a pretty good shot at getting approved.

## Where do you start?

To clarify, DSCR stands for the debt service coverage ratio. This ratio is used by underwriters to determine if a property is positively cash flowing. It’s an important metric to understand how to maximize your leverage by getting the most out of your investments.

## Calculating a DSCR ratio.

Let’s go over both how to calculate DSCR quickly, as well as discovering what it means for your property. The DSCR ratio is found by comparing a property’s income to its expenses. The property’s income is the rent that is received for the property. On the other hand, the expenses include the monthly mortgage payment, taxes, insurance, and HOA. If the ratio of greater than 1, that means the property is cash flowing. This is good for not only you, but your lender as well. The better the DSCR ratio the better the loan terms.

### Example 1:

 Property Income Property Expenses DSCR ratio \$1,700 Mortgage payment \$1,290 Taxes: \$100 Insurance: \$100 HOA: \$100 Income / Expenses \$1,700 / \$1,590 \$1,700 \$1,590 Total: 1.07

In this example the ratio is great! The break-even point for a DSCR is a ratio of 1. Underwriters and lenders like to see a ratio of at least 1 because it ensures that the property can take care of itself. In doing so, the lenders know that you won’t need to take money out of your pocket to cover the expenses. This is assurance for them, and makes them more likely to approve the loan with good terms. In sum, a 1.07 ratio means the property is positively cash flowing, and it’s a good investment.

### Example 2:

 Property Income Property Expenses DSCR ratio \$1,500 Mortgage payment \$1,290 Taxes: \$100 Insurance: \$100 HOA: \$100 Income / Expenses \$1,500 / \$1,590 \$1,500 \$1,590 Total: .94

In this example the DSCR ratio is less than 1, which means that the property is negatively cash flowing. This is why it is imperative that you estimate the rent on a property before purchasing it. By having a property with a \$1,500 income, it wouldn’t be a good investment. Also, it wouldn’t qualify for a good DSCR loan. However, the same property with a rent of \$1,700 would be a good investment because it cash flows..