Debt Coverage Ratio, Cap Rate & Cash on Cash Return

[James Syed]

Hi BP,

When analyzing an investment property 3 numbers are extremely important along with others;

1. Debt Coverage Ratio

2. Cap Rate

3. Cash on Cash Return

Most lenders look for DCR of 1.20 or better, most investors want at least 8% cap rate or better and a minimum of 10% cash on cash return (in majority of cases).

Keeping investor interest in mind,

Would it be a better deal, if investors gets a minimum of 1.5 DCR and say like 6-7% cap rate. I had situation where my DCR was 1.5 however my cap rate was around 6% only which I thought was too low.

I'd appreciate any suggestions / ideas on this matter.

[Ed Wood]

Just to step in here so people buying SFR, Duplexes, Triplexes and 4 Units. For conventional financing lenders do not look at the DCR, Cap Rate or Cash on Cash Return they look at a borrowers overall debt to income ratio using the borrowers personal income W2 or self employment and sometimes the rental property income depending on the program and borrowers landlord experience less the borrowers primary mortgage PITI and other monthly liabilities.