DSCR & the 70% rule

Two of the most-used sanity checks in real-estate underwriting: the debt-service coverage ratio, which is how lenders decide whether the property itself can carry the loan, and the 70% rule, which is how flippers cap what they'll pay. Here is how each is calculated and how REIzer uses them.

DSCR — debt-service coverage ratio

DSCR = Net Operating Income ÷ Annual debt service

Net operating income (NOI) is all rental income minus operating expenses — taxes, insurance, vacancy, maintenance, capital-expenditure reserves, management — but before the mortgage. Annual debt service is the full yearly loan payment, principal plus interest. The ratio answers one question: how many times over does the property's income cover its debt?

DSCR	Reading
≥ 1.25	Lender-friendly — comfortable cushion; most DSCR lenders underwrite at 1.20–1.25 minimum
1.00 – 1.24	Borderline — rent covers the mortgage with little room for surprises
< 1.00	Negative coverage — you feed the deal out of pocket every month

Note that DSCR uses NOI, not cash flow: it deliberately ignores how much cash you put down. A deal can have positive cash flow at 40% down and still show a weak DSCR — the ratio exposes how dependent the deal is on your equity subsidizing the loan.

How REIzer uses DSCR

Reported on every rental-strategy analysis (LTR, STR, BRRRR post-refi, Multifamily, New Construction BTR).
A weighted input in every rental scoring rubric.
Stress-tested as max rate: the highest interest rate the deal can absorb while holding DSCR at the 1.20 lender minimum.
Available as a target in the MAO solver — "what's the most I can pay and still hit DSCR 1.25?"

The 70% rule

Maximum purchase price = 0.70 × ARV − Rehab cost Equivalently: (Purchase + Rehab) ≤ 0.70 × ARV

ARV (after-repair value) is what the finished, renovated property should sell for, based on comparable sales. The rule says your total acquisition cost — purchase plus rehab — should stay at or under 70% of that number.

Why 70%? The missing 30% is not all profit. It has to absorb selling costs (agent commissions, closing, transfer taxes — typically 6–10%), holding and financing costs over the project (often 5–10% on hard money), and still leave a profit margin worth the risk. Pay more than 70% all-in and you're leaning on near-perfect execution: any overage, market dip, or extra month of holding comes straight out of your profit.

How REIzer uses it

The Fix-n-Flip analyzer runs a pass/fail 70% rule check as a weighted input in the flip scoring rubric.
It's a coarse screen, not the whole underwrite — REIzer also computes the precise version: after-tax profit, after-tax margin vs ARV, annualized ROI, and the break-even cushion (how far the sale price can fall before the deal only breaks even). A deal can pass the 70% rule and still be thin once taxes and real holding costs are in.