What can you afford to invest in?

There are many factors to determine what you qualify for, but one test to pass is the required DCR (Debt Coverage Ratio) lenders require to be met on investment properties. Different property types have different DCR’s, and requirements can change per loan depending on what the buyer DCR is.

Assume your company wants to buy a building to move operations to. Take the NOI (Net Operating Income) on your tax return and then add back items that duplicate costs and are intangible. These item examples are rent, and depreciation. You then take the adjusted NOI and divide by 12 months.

Example: NOI + depreciation + rent = $100K / 12months = $8,333. / required 1.2 DCR

= $6,944 qualifying monthly payment.

If you take a price of the subject building, a rate of Prime plus 2 to 2.75% @ 25 years amortization, plus estimated tax and insurance if you did not deduct it from your NOI, you will see if it falls below your DCR. You can also use a constant interest rate of about 6.5% to 6.75% for guessing purposes.

This is a very rough down and dirty way to get close to making sure you are looking in the right price range. This works for investment property as well. Use the NOI of the property like a multi family complex instead of your personal return!

Brett Swearingen