This is the next installment in a multi-post series on financing your rental investment properties using the BRRRR strategy.

You have got a great property you bought for cash, renovated it and placed a tenant at $750 per month. During the refi, the lender orders an appraisal, and it comes back at $120K. You want the maximum 75% LTV cash out which is $90K. Not so fast. One significant lender requirement is the DSCR.

Huh?

It’s called the debt service coverage ratio. Essentially, it calculates whether you have enough rental income to pay the lender’s debt. Okay… so how do I calculate the DSCR?

I am glad you asked.

First, determine your monthly expenses for the property based on the gross rent. Let us break it down and use average costs for my market, Birmingham AL as an example.
10% for property management
8% for maintenance
1.1% for taxes (based on purchase price)
0.75% insurance (based on purchase price)
5% vacancy rate
Other expenses such as HOA but let us assume there are none for this example.
That is total expenses of 24.85%
Based on $750 rent, your yearly gross is $9,000 and your yearly operating expenses are $2236. That gives you a $6,764 yearly net income on your current cash position.

Not too shabby.

You want the maximum loan amount of $90K ($120K x 75%) with a note at 5% interest on a 30 yr/30 am. That comes out to $5,796 total yearly mortgage payments. Finally divide $6,764 (yearly net income) by $5,796 (yearly mortgage payments) = 1.17 DSCR. Most all banks require a 1.2 DSCR so you fall just below the minimum requirement.

Will the lender make an exception on 0.3? No. You must meet the 1.2 DSCR. So the loan is denied? No. For this example, decreasing the 75% LTV to 72.5% LTV loan amount will lower your yearly mortgage payment to $5,604 and increase the DSCR to the minimum 1.2. That equates to $3,000 less cash out.

PRO TIP: Always know what your DSCR is and how to calculate it before you apply for a loan.

Looking for funding? REI Trader, LLC has purchase, refi and fix and flip loan programs for your SFR, rental and multifamily portfolios. For rates and terms, please email jonathan@reitrader.com

Jonathan Mednick has been real estate investor since 2002. He is a co-founder of REI Trader, LLC. and a licensed real estate broker since 2011 with Real Equity, Inc. He has extensive experience in all areas of real estate investing and lending. To date, he has completed over 1,700 projects.

Posted by Jonathan Mednick On July 8, 2021 // 0 Comments

Category : Blog