Are you looking to know if your property will cash flow using a DSCR loan? Let’s break it down so you can quickly calculate the Debt Service Coverage Ratio (DSCR) on your next deal.

What Is DSCR?

The DSCR is a ratio lenders use to see if your property is making money or losing it each month. It’s a simple way to check if your property is cash flowing positively or negatively.

When you see a DSCR higher than 1, it means your property is making money. However, a number lower than 1 means it’s costing you money. For example, if your DSCR is 1.25, your property brings in 25% more income than it costs. Therefore, if it’s 0.94, it’s losing a bit each month.

How to Calculate DSCR

Luckily, the formula for DSCR is easy. All you need to do is divide the property’s income by its expenses.

Here’s the formula:

DSCR = Income ÷ Expenses

Now, let’s break this down step by step:

1. Income: This is how much you’re collecting in rent.
2. Expenses: Add up these four things:
   • Your monthly mortgage payment
   • Property taxes
   • Insurance
   • HOA fees (if any)

DSCR Calculation Example

Let’s look at a quick example to make this clear.

Say you own a rental property. Here’s how much it’s bringing in and costing:

• Rent (Income): $1,700 per month
• Mortgage: $1,290 per month
• Taxes: $100 per month
• Insurance: $100 per month
• HOA: $100 per month

First, total your expenses:

• Expenses: $1,290 + $100 + $100 + $100 = $1,590

Next, divide the rent by the expenses:

• DSCR: $1,700 ÷ $1,590 = 1.07

With a DSCR of 1.07, this property is cash-flow positive. Therefore, you’re making money each month!

What If the DSCR Is Below 1?

Let’s say the rent is only $1,500 per month instead of $1,700. Here’s what happens:

• Rent (Income): $1,500 per month
• Expenses: $1,590

Now, divide the rent by the expenses:

• DSCR: $1,500 ÷ $1,590 = 0.94

In this case, your DSCR is below 1, which means you’re losing money. To clarify, each month, you’ll need to pay $90 out of pocket to cover the costs.

Higher DSCR Means Better Rates

Here’s another example where the rent is higher. Let’s say you’re getting $2,000 per month in rent:

• Rent (Income): $2,000 per month
• Expenses: $1,590

Now, divide the rent by the expenses:

• DSCR: $2,000 ÷ $1,590 = 1.26

A DSCR of 1.26 means your property is bringing in 26% more income than the expenses. Not only does this make your cash flow better, but it can also help you secure a lower interest rate.

Why Does DSCR Matter?

Lenders care about DSCR because they want to be sure your property is self-sustaining. If it’s not, they’ll see it as a risk. A higher DSCR can mean a better interest rate, which puts more money in your pocket. For example, a DSCR of 1.25 could get you a lower rate than a break-even DSCR of 1.0.

Imagine the impact of a lower interest rate across several properties. If your DSCR helps you save $220 a month, that’s $2,640 a year. If you have five properties, that’s over $13,000 in savings!

Final Tips to Quickly Calculate DSCR

Before you buy, check the DSCR to make sure the property will cash flow like you want it to. Here’s how:

1. Estimate the rent based on similar properties in the area.
2. Calculate your monthly mortgage payment, taxes, insurance, and HOA (if applicable).
3. Run the numbers using the simple DSCR formula.
4. Check that your DSCR is above 1 to ensure you’ll have positive cash flow.