Whats more important Cost per door or DCR?

Question

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?

Barry Ruby · Answer

@Trent Barga the DSCR is low at 1.2 because the per door price is too high. There is no one or the other. These two metrics are interdependent.

Nick B. · Answer

@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.

Kim Meredith Hampton · Answer

@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

Charles Clark · Answer

@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

Bud Gaffney · Answer

@Trent Barga cash flow

Justin Goodin · Answer

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.

Nathan McIntire · Answer

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.

Trent Barga · Answer

@Adam Lacey Good note. Yeah trying to take inflation into account given our somewhat secluded location compared to the rest of the market. Small town.

Trent Barga · Answer

@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.

Trent Barga · Answer

@Nick B. thanks Nick! Yeah I keep running numbers different ways. Priced well over what it should be - Their current asking price a lender told me I'd need 50% equity unless I can get it below $3 million

Whats more important Cost per door or DCR?

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