DSCR Direct

Let me walk you through a complete DSCR deal analysis from start to finish. I am going to pick a realistic property, run every single number, and show you exactly how an experienced investor evaluates whether a deal is worth buying. By the end, you will know how to analyze any DSCR deal on your own.

The Property

We are looking at a 3-bedroom, 2-bathroom single-family home in Memphis, Tennessee. Listed at $275,000. Built in 2005. 1,450 square feet. Brick exterior, decent neighborhood, close to schools and a shopping center. The property is currently tenant-occupied with a lease paying $1,850 per month. Comparable rentals on Zillow and Rentometer confirm that $1,800 to $1,900 is the market rate for this type of property in this area. We will use $1,850 as our rent number.

Purchase and Loan Numbers

Purchase price: $275,000. Down payment: 20% which is $55,000. Loan amount: $220,000. I am assuming a DSCR loan at 6.0% interest, 30-year fixed, with a 5-year prepayment penalty. Monthly principal and interest: approximately $1,319. Property taxes based on Shelby County rates: approximately $230 per month. Homeowners insurance: approximately $130 per month. No HOA on this property. Total monthly PITIA: $1,679.

DSCR Calculation

DSCR equals monthly rent divided by monthly PITIA. That is $1,850 divided by $1,679, which gives us a DSCR of 1.10. This is above 1.0, meaning the property generates more income than it costs to carry. A 1.10 DSCR is solid - not exceptional, but comfortably above breakeven. With a 740+ FICO and 80% LTV, this scenario should qualify for competitive DSCR pricing from multiple lenders.

Operating Expenses Beyond PITIA

PITIA covers the mortgage, taxes, and insurance, but there are other costs to account for. Vacancy: I budget 5% of gross rent, which is $93 per month. Even in a strong rental market, you will have some turnover. Maintenance and repairs: 8% of gross rent, or $148 per month. This covers routine maintenance, appliance repairs, and minor fixes. Property management: If I hire a manager, that is typically 8% to 10% of rent - let us say $167 per month at 9%. Capital expenditures (roof, HVAC, water heater over time): 5% of rent, or $93 per month. Total operating expenses beyond PITIA: $501 per month.

Actual Cash Flow

Gross rent: $1,850. Minus PITIA: $1,679. That leaves $171 in net operating income after debt service. Now subtract our additional operating expense reserves: $501. True net cash flow: negative $330 per month if we account for all reserves. Wait - does that mean this is a bad deal? Not necessarily. The vacancy, maintenance, cap ex, and management numbers are reserves, not guaranteed expenses. In months where you have a paying tenant and no repairs, your actual cash flow is $171. Over a year, you are collecting $2,052 in cash flow above PITIA. The reserves are real and important to budget for, but they do not hit your bank account every single month.

Cash-on-Cash Return

Let's calculate the return on the cash you invest. Total cash to close: $55,000 down payment plus approximately $7,000 in closing costs equals $62,000. Annual cash flow above PITIA (before reserves): $2,052. Cash-on-cash return: $2,052 divided by $62,000 equals 3.3%. Including the reserve expenses, the cash-on-cash return on actual out-of-pocket monthly flow is lower. However, this does not capture the full picture of your return.

Total Return: The Complete Picture

Cash flow is only one part of your return. Equity paydown: In year one, about $3,400 of your mortgage payments go toward principal, reducing your loan balance. That is forced savings. Appreciation: Even conservative 3% annual appreciation on a $275,000 property adds $8,250 in year one. Tax benefits: Depreciation on a residential property ($275,000 building value over 27.5 years equals roughly $10,000 per year in paper losses) offsets rental income and can reduce your overall tax bill. Add it all up: $2,052 cash flow plus $3,400 equity paydown plus $8,250 appreciation equals $13,702 in total first-year return on $62,000 invested. That is a 22.1% total return. Tax benefits make it even better. This is why real estate investors focus on total return, not just cash flow.

The Verdict and Next Steps

This is a solid B-class rental deal. The cash flow is modest but positive. The DSCR qualifies for competitive rates. The total return is strong when you account for equity build and appreciation. I would buy this property. To analyze your own deals like this, use the deal analyzer at dscrdirect.net/tools/deal-analyzer. Enter the purchase price, estimated rent, and expenses and it will calculate your DSCR, cash flow, and returns automatically. To see what rate you would qualify for, run your scenario through the pricer at dscrdirect.net.