I'm trying to wrap my head around this DSCR thing lenders keep mentioning when I ask about commercial mortgages. Um, how exactly do they calculate it, and what's considered a good number? Kinda lost here, honestly.
Yeah, DSCR can seem intimidating at first, but it's actually pretty straightforward once you get past the jargon. Basically, lenders divide your property's net operating income (NOI)—that's your revenue minus expenses—by your annual debt payments. Most lenders like to see a DSCR of at least 1.25 or higher, meaning your income comfortably covers the loan payments with some cushion. Personally, I'd aim even higher if possible... gives you breathing room in case things slow down unexpectedly.
Totally agree about aiming higher. When I bought my first rental property, I barely squeaked by with a DSCR around 1.2... thought I'd be fine, but then the furnace died mid-winter. Lesson learned—always better to have extra wiggle room.
"thought I'd be fine, but then the furnace died mid-winter."
Ha, been there... furnaces always seem to pick the worst possible moment, don't they? Curious though, did your lender factor in maintenance reserves when calculating your DSCR? I've noticed some lenders are pretty generous with their assumptions, while others barely leave room for a broken faucet. Makes me wonder how much cushion is really enough—especially when Murphy's Law seems to love rental properties...
