[Calc Review] Help me analyze this deal

[Curtis Brown]

This is my first BRRRR calculator analysis and I'm scratching my head on a couple of things. I've listed my major questions below. Any other insight shared will be greatly appreciated. Thanks!

- How is the pro format cap rate calculated?

- What is debt coverage ratio and why is it important?

- Why is gross rent multiplier important?

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*This link comes directly from our calculators, based on information input by the member who posted.

[Brad Bellstedt]

1. Pro forma calculations. NOI (8,358) divided by the ARV (140,000) = the pro forma cap rate of 5.97%.

2. Debt coverage ratio. How much money does the property cashflow after debt services are paid each month. Investors and lenders want to see generally 15-20% or more because that means (in theory anyways) that the property produces enough cashflow to pay the mortgage back and keep the building maintained. Each lender may have a different/specific criteria for how much access cashflow they require before they will lend on the property. 

3. Gross rent multiplier. Not really all that important. I've found its just an easy way to qualify a property on an apples to apples comparison. By no means should any investments be made on solely this figure. It's more of a gauge as to whether or not you want to dig deeper on this property or discard and move onto another. (That's how I use it anyway. It doesn't account for expenses so it's not reliable measure of much of anything.)

In this case it's counting how many year of rent collecting would it take to get back the initial purchase price of $45,000. (2.88 years X 12 months = 34.5 months X $1,300/month  = $44,928.)

Hope that helps!