Whats more important Cost per door or DCR?

15 Replies

@Trent Barga

Lenders will routinely assess a borrower's DSCR before making a loan. A DSCR of less than 1 means negative cash flow, which means that the borrower will be unable to cover or pay current debt obligations without drawing on outside sources—in essence, borrowing more. Too close and you may end up paying out of pocket in some instances if unexpected expenses arise

@Trent Barga ,

Last time I checked lenders required DSCR to be over 1.3. With 1.2 you may have to opt for a bridge lender, provided there is value-add component that can push your DSCR higher.

Of course, initial DSCR is inversely proportional to your purchase price: the higher the price, the lower is initial DSCR that is based on the current income.

Originally posted by @Trent Barga :

Have a deal that works on the DCR between 1.2+ but the cost per door is too high.

What do you give the most weight to?

 Why is the cost per door 'too high?'

Both are important as it relates to an appraisal for debt. But, neither says very much about the worth of the investment. All this says is that relative to the in-place revenue you are paying a fairly high price per unit. But, that, in and of itself, doesn't mean the investment is good or bad. More context is needed.

I don't put as much weight on cost per door. If the numbers work, they work. Prices are soaring as inflation does the same, so cost per door continuously looks high.

@Justin G. Well they are asking $108k per door - they either 2/1 or 1/1 and in our market SFH that are 2/1+ don't even sell for that price. With the current market and how many people are trying to find/buy MF this one has been sitting for a while.

I think that the debt service coverage ratio will be the most important ratio used by lenders. As a general rule of thumb, an ideal ratio is 2 or higher. A ratio that high suggests that the company is capable of taking on more debt.

Originally posted by @Trent Barga :

@Justin G. Well they are asking $108k per door - they either 2/1 or 1/1 and in our market SFH that are 2/1+ don't even sell for that price. With the current market and how many people are trying to find/buy MF this one has been sitting for a while.

 I am not sure what size of multifamily property this is. There is not enough info to really make an accurate decision but keep in mind commercial real estate is not based on comps. 

@Trent Barga

I hope all is well with you.

I like using the DSCR because it is a worst case scenario metric for me. Cost per door doesn't matter if you are not making enough to cover the mortgage. Without the mortgage, you don't have cost per door, you don't have cash flow, you don't have a property.

Also, you can change cost per door when you take the property over. This is an area where a good deal, can become a great deal. If you can lower the cost per door then that will also increase your DSCR.

I hope this helps you on your journey. Feel free to reach out if you want to talk more RE investing.

Beleza,

Charles Anthony