Lender DSCR Is Not Investor Cash Flow
A residential gross-rent DSCR can qualify while the investor earns little or loses money. To understand economic performance, build a second worksheet starting with expected collected rent. Deduct an allowance for vacancy and credit loss, management, maintenance, owner-paid utilities and recurring operating costs. Then account for debt payments and money set aside for major replacements.
Avoid double-counting property taxes and insurance. If the worksheet subtracts full PITIA, those items are already included in the payment. If it subtracts principal and interest only, taxes and insurance still belong in operating costs. A replacement reserve is a planning allowance for roofs, systems and appliances; treatment of that reserve within a commercial lender’s NOI or net cash flow can vary.
Principal repayment may build equity, but it is still a cash outflow. Appreciation is uncertain and does not pay this month’s bills. Likewise, depreciation is a tax concept rather than a maintenance budget. Keep pre-tax cash flow, tax outcomes, equity growth and sale proceeds as separate measures. Commercial underwriters often deduct operating costs before calculating coverage, making their ratio more sensitive to expenses than a residential rent-to-PITIA calculation. Even then, the investor should review actual expenses, future capital work and liquidity independently.
Worked example
Rent is $2,400 and PITIA $2,000, giving 1.20 DSCR. Subtract vacancy $120, management $192, maintenance $120 and replacement savings $100: planned monthly cash after these allowances is 2,400 − 2,000 − 120 − 192 − 120 − 100 = −$132. Qualification does not equal profitability.
Mini glossary
- Vacancy allowance
- Budget for periods without collectible rent.
- NOI
- Operating income after operating expenses, before debt service.
- Capital expenditure
- Spending on longer-lived property improvements.
Put it into practice
Prepare side-by-side lender and investor worksheets using identical rent assumptions. On the investor sheet list costs omitted from PITIA and show a replacement reserve. Explain why both worksheets can be correct while reaching different conclusions about whether the investment suits your goals.
Recommended reading
Use these primary sources for context. Individual lender requirements can change; confirm the current program for your transaction.