Mar 3, 2021
The DSCR calculation formula is as follows:
Net Operating Income / Annual Debt Service = DSCR
The lender will have the underwriter follow these steps when calculating income and expenses to determine the DSCR.
To help you with your DSCR calculation bear in mind that the underwriter will:
Utilize 5% to 7% vacancy depending on the loan program to calculate occupancy. Even if the project is 100% occupied, lenders use this measure to minimize risk.
Prepare annual proforma for income and expenses.
Use the current rents that reflect on the rent rolls. The lender will not use projected future rents.
Use a 5% fee for management. Even if you self-manage or pay a lesser percentage, this is the average that most lenders use for qualification purposes.
Make sure that the property taxes are reflected correctly in the expenses.
In the expenses for the pro-forma, increase the expenses by approximately 3%, especially for utility expenses.
Initial reserve for replacements should be calculated at $1,000 per unit, and can range anywhere from $250 to $400 per unit per annum thereafter. This account is for major repair items such as windows, roofs, HVAC systems, water heaters and major replacement items.