Entering a rental
Enter the purchase price, the total monthly rent for every unit, and your down payment as a percentage. Add the annual property taxes, the insurance premium and any HOA dues. Enter the rate you've been quoted. The example below uses the 5.75% opening rate so the math is easy to follow.
Use real taxes. A Florida rental doesn't get the homestead exemption, so the tax bill on an investment property runs well above what the current owner-occupant pays. Check the county property appraiser's site and figure on the non-homestead rate, often near 1.9% of the price in South Florida.
You'll get four numbers: the DSCR at this price, the rent needed for a 1.00 ratio, the rent needed for a 0.75 ratio, and the highest price the rent supports at 0.75.
The formula
DSCR stands for debt service coverage ratio. The formula is short:
DSCR = monthly rent ÷ PITIA
PITIA is principal, interest, taxes, insurance and association dues, the full monthly cost of carrying the loan. A 1.00 ratio means the rent pays it exactly. Above 1.00, the property throws off cash. Below 1.00, you cover the difference.
Your personal income never enters the formula. The property qualifies on its own rent, which is why DSCR loans fit investors who write off most of their income, own several rentals already, or don't want a debt-to-income ratio in play.
AAA Capital Funding counts 100% of the rent and finances down to a 0.75 DSCR. To find the rent needed at a target ratio, multiply PITIA by that ratio. To find the highest price at 0.75, the calculator divides the rent by 0.75 to get the largest PITIA allowed, then solves for the price that produces it.
A $400,000 rental with 25% down
An investor buys a $400,000 single-family rental, puts 25% down and expects $2,900 a month in rent.
| Item | Monthly |
|---|---|
| Loan amount | $300,000 |
| Principal and interest at 5.75% | $1,750.72 |
| Property taxes ($7,600 a year) | $633.33 |
| Insurance | $283.00 |
| PITIA | $2,667.05 |
DSCR is $2,900 ÷ $2,667.05, which is 1.09. The rent covers the payment with about $233 a month to spare.
Rent needed for 1.00 is $2,667.05. Rent needed for 0.75 is $2,000.29. So this deal still qualifies at AAA if the market rent comes in as low as about $2,000.
Now push the price. Holding the rent at $2,900, the down payment at 25%, taxes at 1.9% of the price and insurance at $283, a 0.75 ratio allows PITIA up to $3,866.67. That supports a price of about $601,300.
Reading the ratio
A ratio under 1.00 doesn't stop the deal at AAA, but it means you're feeding the property each month, so plan reserves for it. To push the ratio up, put more down, buy down the rate, or look for a property with more units on the same price. A duplex or fourplex often carries a higher ratio than a single-family home at the same price.
If you'd rather live in one unit and rent the others, compare this against the house hacking calculator, since owner-occupied loans need far less down. The cash to close calculator shows what you'll bring to the table, and the DSCR loans guide covers who these loans fit and more ways to raise the ratio.
When you have an address and a rent number, call AAA Capital Funding at 888-601-8344. We'll price the deal across the wholesale lenders we work with and show you how the ratio moves the rate.