DSCR 1.25 at 20% down is fragile: a $100 rent miss wipes out over half

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DSCR 1.25 at 20% down is fragile: a $100 rent miss wipes out over half

David LurveyPro Member
Technology · Sarasota, FL · Member since 2026 · 30 posts · 6 votes

I screen 1–4 unit homes for sale against the bar most investors I talk to want: DSCR 1.25 with 20% down. This week, across eight metros, 518 of about 34,000 homes I could price clear it.

A Memphis Realtor made a point on my Kansas City thread that a few hundred dollars of rent can move a house across the line, so I ran it everywhere. What if every rent estimate is too high?

- At the estimated rent: 518 clear 1.25
- Rent $100 a month lower: 223
- Rent $200 a month lower: 78

More than half of the homes that clear 1.25 do it by less than $100 a month of rent, and 85% by less than $200. Kansas City, the deepest list, goes 236 → 114 → 47. Houston goes 43 → 14 → 4.

Why it's so tight: at 1.25 the cushion is 25% of the payment. On a $140k house renting around $1,400, that's about $280 a month, so one wrong comp eats a third of it.

What I take from it:
- 1.25 on paper is a starting point. A signed lease nearby decides it.
- The homes worth a second look are the ones still standing at $200 less rent, not the ones sitting right at 1.25.
- All of this is before vacancy, repairs, capex and management.

How it's built: 30-year loan at 7.25% (7.625% for 2–4 units), county tax and insurance defaults, HOA as listed, and two independent rent estimates for a 12-month lease. Site-built resale only.

How much rent cushion do you need before you trust a DSCR number?

Disclosure: I run NetsPositive, the screener these counts come from.

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  • Nicholas Cokas
    Member since 2021 · 86 posts · 79 votes
    20h

    David, the rent cushion is only one of three problems. On your $140k / $1,400 example, that $280 also has to absorb two inputs that move when the house changes hands, and a screen running county defaults is carrying them at the seller's numbers.

    Taxes. County defaults usually carry the current owner's bill. In Florida, a sale removes the assessment cap and the value resets to market the first January 1 after closing. Texas doesn't reset to the sale price, but the seller's homestead exemption and 10% appraisal cap come off that same January 1, and the reappraisal catches up to the market. Either way, a house assessed at $110k repriced to $140k at a 2.0% Houston rate is about $600 a year more, or $50 a month, starting with your first full tax year. And if the seller had a homestead exemption, that leaves with them too. With the Texas school exemption now at $140k, losing it can double the jump or more.

    Insurance. A county average and a landlord quote on a specific 1970s roof are different numbers. A $600 to $1,200 a year gap is common right now in Houston, so call it $50 to $100 a month, and this one does hit the day you close.

    Stack them on your example: rent $100 light, taxes up $50, insurance up $75. Rent of $1,300 against $1,245 of PITIA is a 1.04. The house that was sitting at 1.25 with $280 of cushion is now a coin flip, and no comp was off by more than $100.

    So the answer to your question: it isn't a rent number. I want the deal to clear 1.25 after taxes are reset to the purchase price and insurance is a real quote, with rent at the lower of your two estimates. If it still clears, a $100 rent miss is survivable. If it only clears at the seller's tax bill, the cushion was never there.

    Your $200-light filter is the right instinct. Two columns beside it would finish the job: tax at list price times the county rate, and a quote-based insurance figure. That also matches the loan file: the insurance in PITIA is a real quote by closing, and many DSCR lenders estimate taxes at the post-closing amount, so a screen on county defaults can pass deals the lender's math won't.

    Which does your screen use for taxes, the current assessed value or the list price? That one choice probably moves more of the 518 than the rent does.

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    • David LurveyPro Member
      OP
      Technology · Sarasota, FL · Member since 2026 · 30 posts · 6 votes
      3h

      Good question, Nicholas: purchase price, not the current assessed value. In states that reassess on sale, like Florida and Texas, the screen taxes the home at the county's rate on the price, or the current bill if that's higher, so a homestead-capped bill never makes a house look cheaper. In Houston that's 2.1% of price.

      Insurance is the weaker part. It's a county default per square foot with an uplift in flood zones, not a quote. You're right that a real quote can move a thin deal across the line, and it belongs on the same checklist as the signed lease.

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  • John RacinePro Member
    Rental Property Investor · Casselberry, FL · Member since 2008 · 165 posts · 89 votes
    20h

    Nicholas covered the two costs that move at closing. I'd add the two that never show up in a DSCR at all, the ones in your last bullet: vacancy and management.

    I don't think of the cushion as a dollar amount on gross rent. I put the costs in first and see what's left. On every purchase, the property has to work as a long-term rental. I underwrite 10% vacancy and include a management fee even if I plan to manage it myself, so the cost is already accounted for if I hand it off, sell or refinance later. Break-even after that is my absolute minimum. A small profit is what I'm really looking for, and I don't count tax benefits.

    Run a 1.25 through that and it shrinks fast. Take 10% vacancy and a typical 8–10% management fee off the rent, and a 1.25 lands around 1.0, before a single repair and before Nicholas's tax and insurance adjustments. So the 78 homes still standing at $200 less rent are closer to what I'd call a deal than the 518.

    Where I'll get more comfortable is a property with a second strategy available. I'm mostly looking for 2+ unit properties where one or more units could go mid-term, because in my portfolio mid-term has consistently beaten a 12-month lease even after utilities. But that premium is upside. It isn't what makes the deal work, and most DSCR lenders size the loan off long-term rent anyway.

    How many of the 78 that survive are 2–4 units? My guess is the extra doors carry a lot of them, since one empty unit doesn't take out the whole rent.

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    • David LurveyPro Member
      OP
      Technology · Sarasota, FL · Member since 2026 · 30 posts · 6 votes
      3h

      Of the 78 that survive a $200 rent miss, 15 are 2–4 units, 62 are single-family and 1 is a townhome. 2–4 units are only 47 of the 519 that clear 1.25, about 1 in 11, but they're 15 of the 78 survivors, about 1 in 5. About a third of the 2–4s hold up against a $200 miss, against roughly 1 in 7 single-family homes.

      Part of that is arithmetic: $200 is a smaller share of a whole building's rent roll than of one house's rent. Still, it backs up your point that the 2+ unit deals carry more margin.

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  • Muyees Ayilara
    Lender · Boynton Beach, FL · Member since 2026 · 212 posts · 88 votes
    4h

    David, great breakdown. This is exactly what I see on the lending side. A 1.25 DSCR on paper looks safe, but if it only holds by $100 a month in rent, it is not really safe. One bad comp, one vacancy, or one repair and that deal is underwater. I agree with your take — 1.25 is a starting point, not a green light. The deals worth a second look are the ones that still work at $200 less in rent, not the ones sitting right at 1.25. Appreciate you running this across 8 metros. That $100 rent miss wiping out over half the deals is a number every investor should see before they trust a DSCR.

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    • David LurveyPro Member
      OP
      Technology · Sarasota, FL · Member since 2026 · 30 posts · 6 votes
      1h

      Thanks, Muyees. "A starting point, not a green light" says it better than I did.

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  • James JonesPro Member
    Investor · Collierville, TN 38017 · Member since 2017 · 1k+ posts · 696 votes
    2h

    David, you are right to stress test it. I do the same thing on every deal: I underwrite the rent at the low end, not the estimated rent. For me that is Section 8 rent $1,395 to $1,950 on a 3-bedroom or larger, and I check the 1% rule on the all-in. If the deal only works at the top rent, I pass. I also run the refi at 70 to 80% loan-to-value, because a DSCR loan that needs perfect rent is not a plan, it is a hope. A $100 rent miss should not cut your cash flow in half. If it does, the all-in is too high or the rent is too optimistic. Drop the rent $200 and see if the deal still works. If it does not, the price is wrong, not the model. What does your deal look like at the low rent?

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    • David LurveyPro Member
      OP
      Technology · Sarasota, FL · Member since 2026 · 30 posts · 6 votes
      1h

      At the low rent, James: the screen keeps a low end for every home, the bottom of the two estimates' range. For the typical home that clears 1.25, it runs about $135 a month under the main estimate. On that low rent, 143 of the 520 still clear 1.25 at 20% down, and 259 at 25% down. That's the list I'd start from, and it lands between the $100 and $200 stress tests.

      Agreed on the rest: if it only works at the top rent, the price is wrong.

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  • Matthew CrivelliBusiness Member
    Lender · MA · Member since 2021 · 1k+ posts · 1k+ votes
    1h

    I'd separate the lender's qualification ratio from your actual cash-flow cushion. For many one-to-four-unit DSCR programs, the ratio compares qualifying rent with the mortgage payment, taxes, insurance and association dues. That doesn't necessarily account for vacancy, repairs, management or capital expenses.

    Confirm which rent figure the lender accepts, get an insurance quote and check how the purchase could affect property taxes. Taxes don't automatically reset to the purchase price everywhere. Then stress-test lower rent and higher expenses, and run a separate operating budget. A property can pass the lender's DSCR requirement and still leave you short of cash. Also, 1.25 isn't a universal minimum; requirements vary by program.

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  • David LurveyPro Member
    OP
    Technology · Sarasota, FL · Member since 2026 · 30 posts · 6 votes
    1h

    Agreed on both, Matthew. On taxes, the screen goes state by state. Florida and Texas reassess on a sale, so it uses the county rate on the purchase price. Connecticut, Missouri and Indiana don't, so the current bill may hold for a while; the screen still uses the rate on the price, which is what you'd pay after the next revaluation, so it errs high there.

    And 1.25 isn't meant as a lender minimum. It's the bar investors in these threads said they want, which is why the screen shows 1.0, 1.25 and 1.5.

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