What is DSCR and why does it matter for investment property loans?

DSCR (Debt Service Coverage Ratio) measures a property's ability to cover its debt payments with rental income. It's calculated by dividing the property's annual net operating income by its annual debt service (mortgage payments). Lenders typically require a DSCR of 1.0 or higher, meaning the property generates enough income to cover the loan payments. A DSCR of 1.25 means the property generates 25% more income than needed to pay the mortgage, providing a safety cushion for lenders.

What is a good DSCR ratio for investment properties?

A good DSCR ratio for investment properties is typically 1.25 or higher. Most lenders require a minimum DSCR of 1.0 to 1.25, with higher ratios qualifying for better interest rates. A DSCR of 1.0 means the property breaks even on debt payments, 1.25 provides a 25% cushion, and 1.5 or higher is considered excellent. Higher DSCR ratios indicate lower risk and may qualify you for lower rates and better loan terms.

How do you calculate cap rate for a rental property?

Cap rate (capitalization rate) is calculated by dividing the property's annual net operating income (NOI) by its current market value or purchase price, then multiplying by 100 to get a percentage. The formula is: Cap Rate = (Annual NOI / Property Value) × 100. For example, if a property generates $50,000 in annual NOI and costs $500,000, the cap rate is 10%. Cap rate helps investors compare different properties and determine if a property is priced fairly based on its income potential.

What is a good cap rate for commercial real estate?

A good cap rate for commercial real estate typically ranges from 4% to 10%, depending on the property type, location, and market conditions. Class A properties in prime locations often have cap rates of 4-6%, while Class B and C properties may range from 6-10% or higher. Higher cap rates indicate higher potential returns but also higher risk. A cap rate above 10% may signal a distressed property or challenging market, while rates below 4% suggest premium properties in highly desirable areas.

What is cash-on-cash return and how is it calculated?

Cash-on-cash return measures the annual return on the actual cash invested in a property. It's calculated by dividing the annual pre-tax cash flow by the total cash invested (down payment, closing costs, and initial repairs), then multiplying by 100. The formula is: Cash-on-Cash Return = (Annual Pre-Tax Cash Flow / Total Cash Invested) × 100. For example, if you invest $100,000 cash and receive $12,000 in annual cash flow, your cash-on-cash return is 12%. This metric helps investors understand the actual return on their out-of-pocket investment.

What is a good cash-on-cash return for rental properties?

A good cash-on-cash return for rental properties typically ranges from 8% to 12% or higher. Returns below 8% may indicate a property isn't generating sufficient cash flow relative to the investment, while returns above 12% are considered excellent. However, acceptable returns vary by market, property type, and investor goals. Conservative investors may accept 6-8% in stable markets, while value-add investors may target 15%+ returns. Always compare cash-on-cash returns to alternative investments and consider factors like appreciation potential and tax benefits.

Do DSCR loans require income verification?

No, DSCR loans do not require personal income verification such as W-2s, tax returns, or pay stubs. Instead, lenders qualify borrowers based solely on the property's rental income and debt service coverage ratio. This makes DSCR loans ideal for self-employed investors, those with complex tax returns, or investors who want to avoid traditional income documentation. Lenders focus on the property's ability to generate sufficient rental income to cover the mortgage payment, typically requiring a DSCR of 1.0 or higher.

What's the difference between cap rate and cash-on-cash return?

Cap rate and cash-on-cash return measure different aspects of investment performance. Cap rate measures the property's overall return based on its value and net operating income, regardless of financing. It's useful for comparing properties and determining fair market value. Cash-on-cash return measures the actual return on your invested cash, accounting for leverage and financing. A property might have a 6% cap rate but a 12% cash-on-cash return due to favorable financing. Investors use cap rate for property valuation and cash-on-cash return to evaluate actual investment performance.

What is After Repair Value (ARV) in real estate?

After Repair Value (ARV) is the estimated market value of a property after all planned renovations and repairs are completed. It's used by fix-and-flip investors to determine maximum purchase price and profit potential. ARV is calculated by analyzing comparable sales (comps) of similar renovated properties in the same area.

How accurate are ARV calculators?

ARV calculator accuracy depends on comparable sales data quality and quantity. High confidence estimates (based on 3+ recent comps within 0.5 miles) are typically accurate within 5-10%. Medium confidence (2-3 comps or older data) may vary 10-15%. Low confidence estimates should be verified with professional appraisals. Always use multiple valuation methods for important investment decisions.

What makes a good comparable sale for ARV?

Good comparables should be: 1) Sold within the last 3-6 months, 2) Located within 0.5 miles of subject property, 3) Similar in size (within 20% square footage), 4) Same number of bedrooms/bathrooms (±1), 5) Similar condition and renovation level, 6) Same property type (single-family, condo, etc.). The more criteria matched, the more reliable the ARV estimate.

How do I calculate profit using ARV?

Profit calculation: ARV - Purchase Price - Repair Costs - Holding Costs - Selling Costs - Financing Costs = Net Profit. Example: $300K ARV - $200K purchase - $50K repairs - $5K holding - $24K selling (8%) - $6K financing = $15K profit (5% of ARV). Target minimum 10-15% net profit margin on ARV for acceptable fix-and-flip deals.

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After Repair Value estimates are based on comparable sales data and market analysis algorithms. Actual property values may vary based on specific property conditions, market timing, renovation quality, and local market factors. This tool provides estimates only and should not replace professional appraisals. Always verify valuations with licensed appraisers and conduct independent market research before making investment decisions.

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