Debt Coverage Ratio: What Is The Range?
when buying a property for long term rental what debt coverage ratio do you dismiss a deal at? More so what range do you on average consider worth the investment?
when buying a property for long term rental what debt coverage ratio do you dismiss a deal at? More so what range do you on average consider worth the investment?
There is no "range", as a Debt Coverage Ratio number is never too high. My threshhold is 1.25 or better. Debt Coverage Ratio is not used as a sole discriminator because the number can be manipulated by changing the size of the downpayment. I use Debt Coverage Ratio in conjunction with Internal Rate of Return for my decision process.
Both of these numbers together answer the question: "Is the cash flow good enough".
Do you have a property with specific numbers in mind that you want to discuss?[ Edited by DaveT on Date 02/21/2004 ]
Not really I just wanted a better idea of what investors shoot for when doing a quick lookover.
The type of property that you are going to rent will also determine what DCR you will want to use. With older buildings that require higher maintenance, properties in areas that are not appreciating, or lower income areas, you will want to use a DCR that is higher than normal. Unfortunately, I don't know of a good source for what the DCR should be for different situations. In my own area, investing in lower income properties, I like a DCR of 2+ but I have gone as low as 1.25 and had good cashflow on a nice house in a good(for rentals)area.