The world of multifamily investing revolves around numbers. And one of the most critical metrics lenders use to assess a deal’s viability is the Debt Service Coverage Ratio (DSCR). While a DSCR of 1.25 is often considered the benchmark, at Steady Work Capital, we believe that for true peace of mind, investors should aim for a higher target.
DSCR: A Lifeline During Unexpected Storms
DSCR tells you how much income a property generates compared to its annual debt obligations. A DSCR of 1.25 means your property’s net operating income (NOI) covers your debt service by a factor of 1.25. In simpler terms, for every $1 you owe in debt payments, you’re bringing in $1.25 in income.
This cushion is crucial. Real estate ownership comes with unforeseen expenses. Maybe a major appliance needs replacing, or the roof develops a leak. A healthy DSCR ensures you have the breathing room to handle these unexpected costs without jeopardizing your loan payments.
Why 1.25 Might Not Be Enough
Let’s face it, maintenance and capital expenditures (CapEx) are inevitable. Factoring in a realistic budget for these expenses is essential for an accurate picture of your property’s cash flow. Here’s where the 1.25 benchmark can fall short.
- Conservative Buffer: By aiming for a higher DSCR, say 1.45 or even 1.5, you build in a safety net. Even after accounting for maintenance and CapEx, you’ll have a comfortable buffer to cover those unexpected bumps in the road.
- Long-Term Stability: A higher DSCR translates to stronger long-term stability for your investment. It gives you the flexibility to weather market fluctuations or temporary dips in occupancy rates.
At Steady Work Capital, we take a conservative approach to underwriting multifamily deals. We understand the importance of looking beyond the minimum requirements. When we analyze a property, we factor in realistic projections for maintenance and CapEx, ensuring your DSCR reflects a true picture of the property’s financial health.
By setting a higher DSCR target, you’re not just securing financing, you’re laying the groundwork for a successful and resilient investment. Contact Steady Work Capital today, and let’s discuss how we can help you find the perfect multifamily deal with a DSCR that provides peace of mind.
