Once you are familiar with the process and are up to speed on processing and structuring these deals, you can move on to the bigger deals.

Terminology

One potentially new term you should familiarize yourself with is debt-service-coverage ratio (DSCR). This is the ratio of net income from the property to debt service from the proposed loan; the industry average is around 1.2.

With DSCR, we are analyzing the gross rents that the property produces minus any expenses the owner may incur, such as taxes, insurance and utilities. This will be the primary analysis the lender performs to see if your loan will qualify.

For instance, on a 10-unit apartment building, you would need to clarify how much rent each tenant pays. At $750 per unit, for example, 10 apartments would give you gross monthly rent of $7,500 per month.

You would then have to clarify the expenses for taxes, insurance and utilities. You also have to factor in the costs of maintenance, management, replacement reserves and vacancy. The monthly total could be $3,000.

You subtract this number from the gross monthly rent, and you have net operating income of $4,500 per month.

The net operating income is the figure the lender uses to qualify your borrower for the specific loan amount based on interest rate and amortization or DSCR. If you provide the income and expense numbers to the lender, it will often do the DSCR calculation for you.

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