With that in mind, it’s important to understand how everything factors into your Net Operating Income (NOI). This is the final number after all your additional expenses are taken into account, and ultimately, expresses how much revenue you could generate in a year. Without recognizing the DSCR and how it works with your NOI, your investment property might not serve you as well as you initially had hoped. Here are some of the factors that contribute to your NOI.

Debt Service Coverage Ratio (DSCR)

The Debt Service Coverage Ratio (DSCR) is a simple way of measuring the ability of an investment property to pay all its operating expenses and any debt that may be against the property. When leveraging your investment property with a non-recourse loan, it is important to know if the property is capable of covering all its expenses from the rental income produced.

Operating Expenses

This is measured by taking the gross rental income minus all typical operating expenses such as:

• Taxes
• Insurance
• Vacancy (we use 7% annually)
• Maintenance
• Utilities
• HOA fees
• Management costs

The figure left after subtracting these operating expenses from the income produced is called Net Operating Income. The Net Operating Income or NOI is then divided by the principal and interest payments and that equation is a ratio of the NOI divided by the Principal and Interest.

An example would be if a property produced $15,000 in gross rental income for the year, minus operating expenses of $6500 with an $85,000 non-recourse loan on it. That would result in a Net Operating Income or NOI of $8500. ($15000-$6500).

Now taking the NOI of $8500 divided by the debt service of $5963 (payments on an $85,000, 25-year loan at 5.0%) results in a Debt Service Coverage Ratio (DSCR) of 1.43 or explained another way, the NOI is 143% of the debt service.

That figure is a good one in that our bank requires at least a 1.25 DSCR for a property to qualify for a loan. Keep this equation in mind when analyzing any rental property you are considering using leverage to buy or refinance.

You need at least a 1.25 DSCR to qualify for a non-recourse mortgage

With First Western Federal Savings Bank, you could qualify for a non-recourse mortgage to help you acquire a property, specifically to turn into a rental property. Whether this property is rented out for long-term tenants or vacation purposes, this can potentially be a great use of your self-directed IRA — and serve as an excellent form of real estate investment. Look into our various resource pages, check out our YouTube channel, and contact First Western Federal Savings bank to inquire about a non-recourse mortgage!

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Mathew Sorensen, Partner, KKOS Lawyers, and author of The Self Directed IRA Handbook and Roger St. Pierre, Sr. VP, First Western Federal Savings Bank, on Buying Real Estate with Your IRA and a Non-Recourse Loan. This webinar will be an excellent resource for you, your staff, your friends, and/or your clients and where we have covered the following topics:

• What is a Non-Recourse Loan and Why Does Your IRA Need a Non-Recourse Loan? (legal rules)
• Non-Recourse Loan Options and Loan Products and Terms.
• Non-Recourse Loan Property Example.
• What is Unrelated Debt Financed Income Tax (UDFI and UBIT)? I will actually go through a sample property bought with debt and then rented and later sold. We will go over specific numbers (income, expenses, depreciation, etc.) and will show how UDFI tax works on a 990-T tax return and how tax it is paid on the debt. I will go over exact numbers from an actual return (not just estimates) and this will be very specific. We will go over more detail then I’ve ever seen on the topic. We’ll take out the fear of the un-known as we are now preparing and filing 990-T tax returns for IRAs in our law firm and have become very familiar with the process, rules, and tax.
• The Benefits of Leveraging your IRA with a Non-Recourse Loan.
• We’ll also take questions from attendees and will record the show.

Please check it out and leave me a comment with your thoughts or questions, we would love feedback!

Again, you can access that special webinar HERE

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