The building
All figures are illustrations, not a loan offer or a market claim. Plug in your own building and your own quote in the 5-10 unit DSCR calculator.
- 8 units: four one-bedrooms at $1,050 and four two-bedrooms at $1,250
- Gross monthly rent: $9,200 ($110,400 a year)
- Seller's tax bill: $13,000 a year
- Your estimated next tax bill on your price: $21,000 a year
- Insurance quote: $9,600 a year
- Owner-paid water, sewer and trash: $500 a month
- Loan you want: $850,000
- Principal and interest from your quote: $5,600 a month ($67,200 a year)
Step 1: Gross-rent coverage on the seller's taxes
Monthly payment including taxes and insurance, using the seller's tax bill: $5,600 + $1,083 + $800 = $7,483.
Coverage: $9,200 ÷ $7,483 = about 1.23. That looks fine, and it is the number many buyers stop at.
Step 2: Gross-rent coverage after the tax reset
Replace the seller's taxes with the likely next bill: $21,000 a year is $1,750 a month.
Monthly payment: $5,600 + $1,750 + $800 = $8,150.
Coverage: $9,200 ÷ $8,150 = about 1.13. Still above 1.00, but the cushion has shrunk. One vacant two-bedroom ($1,250) would take gross rent to $7,950, under the payment.
This is why Texas property taxes matter so much on small apartment buildings.
Step 3: NOI coverage, normalized
Many small-balance programs measure coverage on net operating income. Normalize the expenses the way an underwriter would:
| Line | Annual |
|---|---|
| Gross rent | $110,400 |
| Vacancy and credit loss allowance | -$5,500 |
| Property taxes (next bill) | -$21,000 |
| Insurance | -$9,600 |
| Water, sewer, trash | -$6,000 |
| Repairs and turnover | -$6,400 |
| Management | -$8,800 |
| Replacement reserves | -$2,400 |
| Net operating income | $50,700 |
NOI coverage: $50,700 ÷ $67,200 = about 0.75. On this basis, the $850,000 loan does not work.
Step 4: Solve for a workable loan
Suppose the program you are looking at wants NOI coverage of at least 1.20 (a hypothetical threshold for this example; programs differ). The most annual debt service the building supports is $50,700 ÷ 1.20 = $42,250, or about $3,521 a month in principal and interest.
Your quote produced $5,600 a month on $850,000, which is about $6.59 of monthly payment per $1,000 borrowed. At that same payment factor, $3,521 a month supports a loan of roughly $534,000.
So on these assumptions the building supports a loan of around $534,000, not $850,000. The difference has to come from a larger down payment, a lower price, higher rents that are actually on leases, or lower expenses you can document.
Step 5: Check the gross-rent basis too
With a $534,000 loan, principal and interest is about $3,521 a month. Gross-rent coverage after the tax reset: $9,200 ÷ ($3,521 + $1,750 + $800) = $9,200 ÷ $6,071 = about 1.52. Comfortable on that basis. A program that uses gross-rent coverage may size the loan larger than one that uses NOI, which is exactly why we compare programs on the same building.
What to take from this
- Always replace the seller's taxes with the likely next bill.
- Run coverage both ways: gross rent against the full payment, and NOI against principal and interest.
- Solve backward for the supportable loan before you agree on a price.
- Keep the inputs honest. Lenders will normalize them anyway; see normalizing a T-12.
When you have your own numbers, send the scenario and we will compare how different wholesale programs size the same building.
Step 6: Stress-test one bad month
Small buildings feel vacancy sharply. Before you commit, run the numbers with one unit empty and with an insurance premium a bit higher than your quote. If a single vacant two-bedroom or a premium increase pushes gross-rent coverage under 1.00, plan for larger reserves or a smaller loan.
In this example, with the $534,000 loan and one two-bedroom vacant, gross rent falls to $7,950. Against a $6,071 monthly payment, coverage is still about 1.31. That cushion is what lets an owner absorb a turnover or a repair without feeding the building from personal savings.
Do the same exercise for a tax protest that fails and for a slow lease-up after a renovation. The goal is not to predict the future but to see which assumption the deal is most sensitive to, so you know what to check hardest during the option period.
Questions investors ask
Why did coverage drop so much in this example?
Two reasons: the tax bill reset to the buyer's price, and normalized operating costs such as vacancy, management and reserves were subtracted to get NOI.
Is 1.20 the required DSCR for 5-10 unit loans?
No. It is a hypothetical threshold for the example. Each program sets its own coverage requirement and calculation method.
How do I find the payment for a different loan amount?
Use the calculator with your own quote. For a quick estimate, divide your quoted payment by the loan amount and apply the same factor to other loan sizes.
This guide summarizes Texas rules generally and is not legal or tax advice. Figures are illustrations using user-style inputs, not loan offers. Nothing here is a commitment to lend.