Debt Service Coverage Ratio and Cash On Cash Return - No Loan to Calculate?

3 Replies

How can I calculate DSCR and CoC prior to making an investment if i do not currently have a loan on the property? Don't I need to know exactly what my loan will be before I can calculate this accurately? I have not spoken to any banks or private money yet but I know these are important metrics that need to be figured out before I approach them. How do I get a handle on these numbers beforehand without an already existing loan?

I have to disagree with @Uwe S. a bit on this. Cash on cash is your total return divided by your cash invested. If you have a loan, it reduces the cash invested, but also reduces your return. But if you don't have a loan you can still do this calculation. Return is your NOI (realistic, not the pumped up numbers sellers and their agents offer). Cash invested is the purchase price plus all the costs to make the purchase and any fix-up the place needs.

But for DSCR, you have to have a loan. If you mean you don't know what terms you will get, do some research. Start making calls. As a starting point, I would use, say, 6%, 15 year amortization and 30% down. You might do a little better or a little worse, depending on a lot of factors. But that should be in the ball park, assuming you're talking about an apartment building. But the best way to get the terms is to start making calls and asking about the type or property you're considering, your personal situation, and what's being done in your area.

You should be able to anticipate the loan payments. Figure what the LTV will be (say 75%) and there are loads of calculators online that can give you the numbers. Perhaps it is 75% of purchase or 75% of ARV if you plan to refinance after renovations.

Then do as @Jon Holdman said.