How to calculate DSCR on a Colorado rental, and which expenses count

Start with the denominator, because that is where the arguments are

Principal and interest comes from the loan amount, the rate and the amortization term. It is the only piece of the payment you can change by negotiating. Property taxes come from the county assessor, divided by twelve, and should be based on the actual parcel bill rather than a rule of thumb. Insurance comes from a real landlord quote for that address. HOA dues come from the association’s current budget, not the listing.

Add all four. That total is what the rent has to cover. If someone quotes you a coverage ratio without asking for the tax bill and the insurance premium, they are guessing at two-thirds of the denominator.

What normally stays out of the lender’s ratio

A lender’s coverage ratio is a debt-service test, not a profitability test. Vacancy allowance, property management fees, routine maintenance, landscaping, utilities paid by the owner, and capital reserves are typically excluded because the ratio is designed to answer a narrow question: does the rent cover the debt and the unavoidable ownership costs?

That does not mean those costs are imaginary. They are the difference between a property that services its debt and a property that makes money. An investor who underwrites to the lender’s number and stops there is underwriting a loan, not a business. The practical approach is to compute both: the ratio the lender will use, and the cash flow you will actually experience after vacancy, management and maintenance.

• Included in the lender ratio: principal, interest, taxes, insurance, HOA dues, and on some programs an association special assessment already levied.
• Usually excluded: vacancy, management fees, repairs, capital reserves, owner-paid utilities, and leasing costs.
• Sometimes included: flood insurance where required, and mortgage insurance on certain structures.

The numerator: what counts as rent

For a long-term rental, the lease is the evidence. Lenders generally use the current executed lease, and if the property is vacant they rely on the appraiser’s market rent opinion with comparable support. For a multi-unit building, each unit’s lease is reviewed and the rent roll has to reconcile with the leases and with the deposits.

For short-term rentals the numerator gets harder. Projected nightly revenue is not the same as documented revenue, and programs differ on whether they will use a market rent opinion, a historical revenue statement, or a blend. In every case the number has to be supportable from documents rather than from an industry average. A resort property that has been operating for two years with a clean revenue history is a very different file from a spare bedroom with a listing that went live last month.

Three worked scenarios

Take a hypothetical Denver duplex — the figures here are illustrations of arithmetic, not market data — purchased with a loan that produces principal and interest of $2,290 a month. Taxes on the parcel run $310 a month and the landlord policy quotes at $185. There is no HOA. The total housing payment is $2,785. If the two units lease for a combined $3,550, the ratio is 1.27. Change one input — say the insurance quote comes back at $340 because the roof is eighteen years old — and the payment rises to $2,940 while the ratio falls to 1.21. Same building, same rent, different file.

Now a hypothetical Pueblo three-bedroom with principal and interest of $1,140, taxes of $95, insurance of $150 and no HOA. The payment is $1,385 against rent of $1,450, a ratio of 1.05. That is thin. Add a $120 HOA and the ratio drops below one. This is the geography of coverage in Colorado: modest prices produce modest payments, but the fixed costs of ownership do not shrink with the price, so the margin on a cheap property can be narrower than it looks.

Finally, a hypothetical Summit County condo with principal and interest of $2,410, taxes of $190, insurance inside the master policy of $70, and HOA dues of $525. The payment is $3,195. A long-term lease at $2,600 produces a ratio of 0.81 — negative coverage. The same unit rented nightly in peak season might gross considerably more across a year, but that income is seasonal, regulated, and management-intensive, and it needs documentation rather than optimism to be counted.

Why your number and the underwriter’s number differ

Three things usually explain the gap. First, the rent: you used the lease, the underwriter used a market rent opinion that came in lower, or the reverse. Second, the tax: you used last year’s bill, the underwriter used a projected bill based on the new purchase price. Third, the insurance: you used a quote from a carrier that will not write the policy the lender requires, or you forgot that the premium includes a percentage wind and hail deductible that raises the cost.

The fix is procedural. Pull the county assessor record for the parcel before you model anything. Get a bindable landlord quote for the address before you write an offer. Use the executed lease, and if there is no lease, ask what comparable units are actually collecting rather than what the listing projects. The calculator on this site exists so you can run those numbers yourself, with a rate you supply, before a lender ever sees the file.

How to move a ratio that does not clear

There are only four levers, and three of them are usually available. Put more equity in to shrink the loan and the principal and interest. Buy a property with a lighter tax and insurance load. Verify a higher rent through a lease or a stronger comparable set. Or restructure the terms — a longer amortization lowers the payment, though it also lowers the equity you build.

What does not work is hoping the appraisal comes in high enough to justify a rent the market does not support, or buying at retail in a market where new supply is arriving and assuming rent growth will rescue the coverage. If a property only works after three years of appreciation, it does not work as a coverage-based loan today.