Managing cash flow is one of the most critical components of profitable real estate investing. And, monitoring your Debt-Service Coverage Ratio is one of the best ways to evaluate whether your properties are generating enough cash to turn a profit.
So in this article, we show you how to manage your cash flow by monitoring your Debt-Service Coverage Ratio (DSCR).
Debt-Service Coverage Ratio (DSCR)
One of the realities of running a business is that companies often take on debt to grow. Therefore, the ability to service debt is very important for a business to thrive and produce a profit.
That’s where the Debt-Service Coverage Ratio metric comes into play, which is a measure of the cash flow available to pay current debt obligations due within one year, including interest, principal, sinking-fund, and lease payments.
As a real estate investor, calculate your DSCR by dividing your net operating income by your total debt service.
DSCR=Net Operating Income/Total Debt Service
The net operating income (NOI) is your company’s revenue minus expenses. The total debt service includes all debt obligations due within the next year (interest, principal, sinking-fund, lease payments).
For example, a property that rents for $1,200 per month, with monthly operating expenses of $250 and monthly debt service of $600, has a 1.58 DSCR.
A DSCR ratio less than 1 is negative cash flow, and a number greater than 1 is positive cash flow.
If you want to aggressively manage your cash flow, target a DSCR ratio of 1.3 or higher.
Manage Your Cash Flow
Managing cash flow involves more than monitoring your DSCR. So, here are some tips to maximize profits by lowering expenses, and getting the most out of your cash flow.
- Continually monitor your cash flow by using accounting software to generate reports and updates.
- Cut waste, which will lower expenses, increase cash flow, and increase profits. Review utility, insurance, maintenance, and repair costs.
- Sell assets you no longer need, such as vehicles, cleaning equipment, and furniture.
- When financially advantageous, lease equipment rather than purchase it.
- Use a property management company to manage cash flow and increase profits, especially if you own several rentals.
- Use an online property management system that is mobile optimized for rent collection, and immediately address late payments.
- Don’t pay vendors until the due date, unless you receive a discount for early payment.
- Shop for lower interest rates on revolving lines of credit.
Graystone Investment Group
Graystone Investment Group is an experienced Investment Group, wholesaling single-family and multifamily investment properties in metro Tampa Bay.
Unlike other wholesaling groups, we find properties that we resell to investors at discount prices, while also connecting them with private financing. We also coordinate with rehab and management companies we’ve worked with for years, at no extra charge.