Lender vs. Real-World DCR: Why Your Property Isn’t Cash-Flowing Like the Bank Said

[Denise Evans]

If you've ever bought a rental property that "met the lender's DCR requirements" but still ended up with less cash flow than expected, you're not alone. The reason usually comes down to one thing: the lender’s DCR isn’t the same as the real-world DCR investors live with.

1. The Lender’s DCR – Theoretical and Optimistic

Lenders calculate Debt Coverage Ratio (DCR) by dividing Net Operating Income (NOI) by Annual Debt Service.
Their version of NOI is usually based on:

• Market rent (sometimes even above actual rent)
• Standard vacancy allowance (often 5%)
• Limited expenses — typically taxes, insurance, and maybe management at 8–10%

That’s it. No reserves, no turnover costs, no maintenance costs. The result looks great on paper:

“1.25 DCR — strong deal!”

But here’s what lenders don’t include.

2. The Real-World DCR – Where the Money Actually Goes

In the real world, you don't get to skip the costs of running a property. True DCR should include all the recurring and predictable expenses you'll actually pay to keep tenants happy, properties safe, and the city off your back.

Here are a few commonly missed or underestimated expenses that destroy real DCR:

• 🐜 Termite Bonds & Pest Control: Annual termite protection and monthly pest control are non-negotiable in many climates, especially in the Southeast.
• ❄️ HVAC Maintenance Contracts: Annual tune-ups and semiannual filter replacements aren’t optional if you want your system to last. Tenants rarely (if ever) replace filters themselves.
• 💸 Rental/Occupancy Taxes: Some cities and counties charge a rental tax and/or business license fee based on gross collected rents. Easy to miss, but always due.
• 🔑 Turnover Costs: Cleaning, painting, rekeying, yard refresh, and lost rent between tenants. Even a 5% vacancy assumption might be low for SFRs.
• 🏢 Management Add-On Fees: Late-fee splits, renewal fees, maintenance coordination charges — those small “extras” in your management contract can add hundreds per year.
• 🏠 Insurance Reality vs. Loan Requirement:
  You might use a high-deductible, low coverage (enough for the mortgage only), low-premium insurance policy so you can hit the lender's DCR requirements. But in the real world, you'll probably want better coverage — including the often-overlooked Tenant Discrimination Claims Rider, which protects you against Fair Housing claims that most basic landlord policies don’t cover.

3. Why It Matters

The lender's DCR is about loan risk, not investor success. They just want to ensure you can make the payments.
Your DCR should measure financial resilience — the property’s ability to pay everything and still leave you with a profit.

Savvy investors underwrite for a minimum 1.25–1.30 real-world DCR after including all the expenses above. That’s what keeps your portfolio stable when maintenance costs spike or rents dip.