Why DSCR Is The Number That Makes Or Breaks A Morby Method Deal
The Morby Method works because you control properties without using your own credit or cash. But the moment you turn that subject-to property into a rental, one ratio decides whether a DSCR lender will refinance you out, or leave you stuck holding the bag: Debt Service Coverage Ratio.
If you cannot calculate DSCR before you close, you are gambling. If you can, you are investing. This guide breaks down the DSCR calculation for a Morby Method deal in plain language, with a worked example you can copy.
Before you read further, run your numbers through our deal analyzer so you can plug in real figures as we go.
1. What Is DSCR In A Morby Method Deal?
DSCR measures whether a property's rental income covers its debt obligations. Lenders use it as the single most important metric on investment rentals because it removes personal income from the equation.
For a traditional buy-and-hold, that is straightforward. For a Morby Method deal, it gets nuanced because you are usually taking over an existing loan subject-to, plus possibly carrying seller financing on top. Both layers of debt must be counted.
The standard DSCR target for most lenders is 1.20 or higher. Some accept 1.0, the aggressive ones want 1.25, and the truly conservative want 1.30. Know your lender's threshold before you submit.
2. The DSCR Formula Every Investor Should Memorize
Here is the core formula:
DSCR = Net Operating Income / Total Debt Service
Where:
- Net Operating Income (NOI) = Gross Rental Income minus operating expenses (taxes, insurance, HOA, management, repairs, vacancy reserve). It does NOT include the mortgage payment.
- Total Debt Service = All required loan payments on the property. In a Morby Method deal, that means the underlying sub-to PITIA payment, plus any second lien payment to the seller if you structured seller financing.
This is the real estate math that separates investors who cash flow from investors who look like they cash flow.
3. Step By Step: DSCR Calculation For A Morby Method Deal
Step 1: Determine Gross Rental Income
Use the lower of market rent or your actual lease. Lenders typically order a rent appraisal, so do not inflate this number. If market rent is $2,200 and your lease is $2,100, use $2,100.
Step 2: Subtract Operating Expenses
Include property taxes, insurance, HOA, property management (usually 8 to 10 percent), maintenance reserve (5 to 8 percent), and vacancy reserve (5 percent). Do not include the underlying mortgage payment here. That comes next.
Example on a $2,100/month gross rent:
- Taxes and insurance: $400
- HOA: $0
- Property management (10 percent): $210
- Maintenance reserve (5 percent): $105
- Vacancy reserve (5 percent): $105
Total monthly operating expenses: $820.
NOI = $2,100 minus $820 = $1,280/month, or $15,360/year.
Step 3: Calculate Total Debt Service
Add up every required payment tied to the property.
- Underlying sub-to loan (P&I): $1,050/month
- Taxes and insurance (already in NOI, not here)
- Seller-financed second, if any: $200/month
Total monthly debt service: $1,250, or $15,000/year.
Step 4: Divide NOI By Debt Service
DSCR = $15,360 / $15,000 = 1.02
This deal barely pencils. Most DSCR lenders will decline it. You would need either higher rent, a lower purchase price, or a smaller debt stack to hit a comfortable 1.20.
4. Using A Morby Method Calculator To Speed Things Up
Hand math is great for understanding the concept, but in live deal flow you need speed. A dedicated Morby Method calculator lets you enter the sub-to loan terms, seller financing terms, market rent, and expense assumptions, then instantly see DSCR, cash flow, and equity position.
This is exactly why we built our deal analyzer. It runs the numbers the way a DSCR lender will, so you know your refinance runway before you ever sign a deed.
The common mistake investors make is calculating DSCR using only the underlying first lien and forgetting the seller second. That paints a rosy picture that falls apart at the lender's desk. Always include every required payment.
5. Practical Takeaway: Underwrite To 1.25, Not 1.0
Here is the discipline that separates pros from hobbyists. Underwrite every Morby Method rental to a 1.25 DSCR minimum. If the deal still cash flows $200 to $300 per door at 1.25, you have a real margin of safety for insurance hikes, tax reassessments, and rent softness.
If a deal only works at 1.0, walk. The refinance risk is too high. You will either get denied, get a worse rate, or get forced into a personal loan product that defeats the entire purpose of the Morby Method.
Want help structuring your next subject-to deal so it actually clears DSCR lender standards? Visit our homepage to learn how Silent Wealth helps Florida investors close creative finance deals that cash flow from day one.
Ready to run your deal the right way? Schedule a consultation at silentwealth.us and let's pressure test your numbers together.