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 Maximum Allowable Offer (MAO) in real estate?

Maximum Allowable Offer (MAO) is the highest price an investor should pay for a property to achieve their desired profit after accounting for all costs. Formula: MAO = ARV - Repairs - Desired Profit - Selling Costs - Holding Costs - Financing Costs - Contingency. It ensures you don't overpay and protects your profit margin.

How is MAO different from the 70% rule?

The 70% rule is a simplified formula (MAO = ARV × 0.70 - Repair Costs) that provides a quick estimate. MAO calculation is more precise, accounting for actual selling costs, holding costs, financing costs, and contingency. MAO typically results in a lower, more conservative offer than the 70% rule, providing better protection for investors.

What should I include in holding costs?

Holding costs include: 1) Property taxes, 2) Insurance, 3) Utilities (electric, water, gas), 4) HOA fees if applicable, 5) Loan interest payments, 6) Security/maintenance costs. Calculate monthly total and multiply by expected holding period (typically 4-8 months for flips). Average holding costs run $500-$1,500/month depending on property value and location.

Should I use dollar amount or percentage for desired profit?

Both methods work, but percentage is more scalable. Dollar amount ($20K-$50K) works well for consistent property values. Percentage (10-20% of ARV) automatically scales with deal size and is preferred by experienced investors. Higher-risk markets or properties should target 15-20% profit margin, while stable markets may accept 10-15%.

Max Allowable Offer (MAO) Calculator

Calculate the maximum price you should pay for a fix-and-flip property to achieve your desired profit

How to Use This Tool

The Max Allowable Offer (MAO) is the highest price you should pay for a property to meet your profit goals after accounting for all costs. This calculator helps fix-and-flip investors quickly determine if a deal makes financial sense.

Example: If a property has an After Repair Value (ARV) of $300,000, needs $50,000 in repairs, and you want a $30,000 profit, the MAO might be around $185,000 after accounting for selling costs, holding costs, financing, and contingencies.

Property Details

Search Property Address (Auto-populate ARV)

Search for a property to automatically populate the After Repair Value (ARV) from market data

After Repair Value (ARV)

Repair Costs

Desired Profit

Dollar Amount ($)Percentage (%)

Max Allowable Offer

$170,307

Cost Breakdown

Selling Costs:$24,000

Holding Costs:$3,600

Contingency:$5,000

Points:$4,273

Interest:$12,820

Desired Profit:$30,000

Project Summary

Total Project Cost:$241,000

Estimated Total Costs:$99,693

Estimated Net Profit:$30,000

Net Profit %:17.6%

Cash Needed to Close:$26,304

Based on 10% down payment + 2% points

Investor Notes

The 70% Rule: A common rule of thumb is that your MAO should be around 70% of ARV minus repair costs. This calculator gives you more precision by accounting for all actual costs.

Contingency Buffer: Always include a contingency (10-15%) for unexpected repairs. Properties rarely cost exactly what you estimate.

Holding Costs: Don't forget monthly costs like insurance, taxes, utilities, and loan payments. These add up quickly if the project takes longer than expected.

Exit Strategy: Make sure you have a clear plan to sell the property. The ARV should be based on recent comparable sales, not wishful thinking.

Disclaimer: Estimates only. Loan programs and rates are subject to change. This tool does not constitute financial advice. Always consult with qualified professionals before making investment decisions.

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Calculation Methodology

Understanding how our calculator works helps you make informed investment decisions. Below are the methods and formulas used in our calculations.

Data Sources: Our calculations use industry-standard formulas, current market data, and underwriting guidelines from major lenders. Rates and requirements are updated regularly to reflect market conditions.

MAO Calculator Disclaimer

Maximum Allowable Offer calculations are estimates based on your inputs and standard cost assumptions. Actual repair costs, holding costs, selling costs, and market values may differ from estimates. This tool does not account for all possible expenses or market fluctuations. Always verify ARV with professional appraisals, obtain contractor quotes for repairs, and consult with experienced investors before making purchase offers.

Not financial advice. For educational and estimation purposes only.

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