How the DSCR ratio works on a Tennessee rental

The two halves of the fraction

Debt service coverage ratio is a landlord’s version of a simple question: does this property pay for itself? The numerator is the rent the property can command — usually a market-rent figure documented by an appraiser, sometimes a signed lease, occasionally a documented short-term rental history where the permit allows it. The denominator is the full monthly housing obligation on the loan you are asking for: principal and interest, plus one twelfth of the annual property taxes, plus one twelfth of the annual insurance premium, plus any monthly HOA dues.

Notice what is not in the denominator: your other properties, your salary, your business revenue. That is the entire appeal of the product for real estate investors. The property is the business, and the lender underwrites the business.

Notice what is also not in the numerator: anything you project. If the property is vacant at closing, the rent figure is an appraiser’s opinion of market rent, documented with comparable rentals. That opinion is the number the lender uses, whether or not your own pro forma is higher.

Worked arithmetic, with illustrative dollar figures

Take a Knoxville house renting for $1,650 a month. Say annual property taxes on the county’s current appraisal are $1,900 and a landlord policy runs $1,700 a year, with no HOA. Suppose the quoted principal-and-interest payment on the loan amount you want comes to $1,060 a month at the rate and term you entered. The monthly obligation is $1,060 plus about $158 of taxes plus about $142 of insurance, or roughly $1,360. Divide $1,650 by $1,360 and the ratio is about 1.21 — the property covers itself with a modest cushion.

Those dollar amounts are arithmetic illustration, not a quote, and the payment is an input you compute yourself from the rate you are actually offered — the calculator on this site exists for exactly that. Change one variable and the answer changes: a larger loan that pushes the payment to $1,400 drops the ratio to about 1.09. A smaller one that brings it to $900 lifts the ratio past 1.30.

This is why arguing about the ratio in the abstract is wasted effort. The number is a function of four or five inputs, and each one is negotiable in a different way — price, down payment, program, or the evidence you supply to the appraiser.

Tennessee inputs that quietly move the answer

The county tax bill is the input Tennessee investors most often get wrong. Tennessee assesses residential property at one-quarter of appraised value and applies the local county and city rate per $100 of assessed value. Counties reappraise on cycles, and a purchase price well above the last appraisal can move your bill upward. A file modelled on the seller’s tax bill may look comfortable and then miss once the new bill arrives. Model the post-closing figure from the assessor or trustee.

Insurance is the second. Tennessee’s severe-storm and tornado exposure — particularly in Middle and West Tennessee — makes the wind/hail deductible and the premium itself a real underwriting line. Properties along the Cumberland, Tennessee and Mississippi rivers and their tributaries may also sit in FEMA flood zones, which adds a flood premium. Every premium dollar lands in the denominator.

The third is the rent opinion. A signed lease at a strong number, comparable rentals in similar condition, and a property that photographs as finished all support a higher opinion than a vacant house with a seller’s pro forma. In Memphis especially, condition and rent evidence move together.

What the bands mean in practice

Investors talk about ratio bands as shorthand, provided you remember the floor is set by the lender and not by the internet. Below 1.00, the rent does not cover the obligation — the property needs cash from you every month before vacancy, maintenance or management are counted. Between roughly 1.00 and 1.20, the property covers on paper with little room for the ordinary cost of owning a building. Between roughly 1.20 and 1.35 there is a working cushion. Above that, the property is doing real work. Where any specific program draws its minimum is that lender’s decision, and floors differ.

The essential caveat: a ratio of 1.25 is not the same as positive cash flow. Most programs do not deduct vacancy, management or maintenance in the coverage test. A property that covers at 1.25 can still lose money every month once a realistic vacancy allowance, a management fee and a maintenance budget come out. The ratio tells you what a lender will accept; your own spreadsheet tells you whether you should buy it.

• Below 1.00 — the property does not cover itself; approval would rely on strength elsewhere.
• 1.00 to 1.20 — covers on paper with almost no cushion for real ownership costs.
• 1.20 to 1.35 — a working cushion for taxes, insurance and vacancy surprises.
• Above 1.35 — comfortable coverage; useful where storms or reappraisals move costs.

When the number comes up short

A short ratio is information, not a verdict. The levers are structural: a lower loan amount against the same rent, a different program with a different floor, or better rent evidence for the appraiser. Sometimes the honest answer is that the property does not work at the price — and finding that out before closing is the entire point of running the math.

Bring us the address, the expected rent and the loan amount you have in mind, and we will run the coverage against actual wholesale program floors rather than internet folklore.