If you hang around real estate investing long enough, you’re likely to hear the acronym DSCR.
So what does it mean, anyway?
DSCR is short for Debt Service Coverage Ratio. It’s a type of loan used primarily for properties that generate rental income, like duplexes and apartment buildings. These loans factor a property’s ability to generate enough rent to cover its mortgage payments.
The DSCR is calculated by dividing a duplex’s monthly mortgage payment into its rent. For example, let’s say a Minneapolis duplex with two 3 bedroom units generates $4000 a month in rent. Principle payments, interest, taxes and insurance (PITI) are $3000 per month. $4000/$3000 = 1.33 percent.
In this case, the property generates 33 percent more revenue than what is needed to pay the debt. To a banker, that means it is likely to take in enough income to cover the loan and then some.
Do banks like to see a minimum DSCR? Yes. Most lenders want to see a minimum DSCR of .90 or higher.
A DSCR loan is in many ways a safer bet for a lender.
And since it focuses more on the revenue the property generates than a buyer’s personal finances, it can also be a tremendous tool for real estate investors.