DSCR-First: The Discipline Behind Every Real Estate Deal I’ll Consider
Every real estate deal I evaluate starts with one number: the debt service coverage ratio. Not the cap rate. Not the appreciation potential. Not the location premium. The DSCR. If the property cannot service its debt with a comfortable margin of safety, nothing else matters.
This sounds obvious. In practice, it eliminates 80% of the deals that cross my desk. Most multifamily offerings look attractive on a pro forma. Most of them fail the DSCR test when you apply conservative assumptions about vacancy, expenses, and interest rates.
What DSCR Actually Measures
DSCR is net operating income divided by total debt service. A DSCR of 1.25 means the property generates 25% more cash flow than required to make the loan payments. A DSCR of 1.0 means the property generates exactly enough to cover debt, with zero margin for error.
My floor is 1.25. My preference is 1.30 or higher. That buffer absorbs a bad quarter, an unexpected vacancy spike, a capital expense that wasn’t in the budget, or a rent collection shortfall. Below 1.25, the property is operating without a safety net. One bad month and the debt service is at risk.
Buyers who stretch to make a deal work at 1.10 or 1.15 are buying a property that requires everything to go right. In real estate, everything does not go right. Boilers break. Tenants leave. Insurance premiums increase. A DSCR below 1.25 isn’t aggressive investing. It’s leveraged optimism.
Why Cap Rate Is Not Enough
Cap rate tells you what the market is willing to pay for a dollar of income. It does not tell you whether the income can service the debt at the price you’re paying with the financing terms available to you.
A 7% cap rate property sounds attractive. But if you’re financing at 75% LTV with a 7.5% interest rate, the debt service on that property may consume nearly all of the NOI. The cap rate is strong. The DSCR is weak. The property generates income on paper but leaves you with no cash flow after debt payments.
Cap rate is a market metric. DSCR is an operator metric. Market metrics tell you what other people think. Operator metrics tell you whether the business plan works.
The Conservative Underwriting Stack
Every property I underwrite uses a set of conservative assumptions that stay constant regardless of how the broker’s pro forma presents the deal.
Vacancy: I model 8-10% regardless of what the current occupancy shows. A fully occupied property today does not guarantee full occupancy next year. Historical vacancy in the submarket matters more than the current snapshot.
Expense growth: I model 3-4% annual expense inflation. Insurance, property taxes, maintenance, and utilities have consistently grown faster than CPI in the markets I target. A pro forma that holds expenses flat is a fantasy, not a model.
Rent growth: I model 2-3% unless there is specific, documented evidence of a stronger growth trajectory. Most pro forma projections model 5-7% rent growth to make the returns look attractive. I discount that aggressively.
Capital reserves: I budget $300-500 per unit per year for capital expenditures, whether the building appears to need it or not. Deferred maintenance has a way of revealing itself in year two. The reserve is there to absorb it without a capital call.
When I run a deal through this stack and the DSCR still holds above 1.25, the deal has survived the stress test. When it doesn’t, I pass. The discipline is in applying the same assumptions to every deal, not selectively relaxing them when a deal looks otherwise attractive.
What This Filters For
The DSCR-first approach filters for a specific type of deal: stable, cash-flowing properties with modest improvement upside, purchased at prices that work with conservative financing. These are not glamorous acquisitions. They are solid doubles, not home runs.
The target profile is 8 to 30 units, deal sizes from $750K to $2M, stabilized cash-on-cash returns in the 6-9% range, and value-add returns that can reach 10-15% through targeted improvements. Individual unit HVAC and water systems. Low deferred maintenance. Neighborhoods with median household income above $45K and stable tenant demographics.
This buy box eliminates properties that require heavy renovation, speculative appreciation bets, or complex operational turnarounds. It selects for properties that generate cash flow from day one and improve steadily with basic operational discipline.
The real estate strategy is not about finding the best deal on the market. It is about filtering for deals that meet a consistent standard of financial safety, operational simplicity, and long-term durability. DSCR is the first filter because it is the most consequential. Everything else is secondary to whether the property can service its debt and still produce cash flow when things go wrong.
Own durable assets. Operate with discipline. Preserve capital. Compound intelligently.
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