Easy Ways to Calculate Insurance on Your DSCR Deal

When you’re dealing with DSCR (Debt Service Coverage Ratio) loans, getting the insurance calculations right is essential. The lender expects you to have the proper coverage to protect the property and their investment, but you also need to make sure you’re not overpaying or leaving yourself exposed. So, let’s break this down in simple, actionable steps to help you confidently calculate insurance on your DSCR deal.

This guide is designed to be easy to follow, even if you’re not a math whiz—because, let’s be honest, none of us got into real estate to be accountants.

What Is DSCR, and Why Does Insurance Matter?

For those new to DSCR loans, here’s a quick refresher:

  • DSCR loans are typically used for investment properties and focus on the property’s cash flow rather than your personal income. The magic number here is the DSCR ratio, which compares the property’s income to its debt obligations.

  • Insurance is crucial for these deals because lenders need to know their investment is protected. Without proper coverage, a catastrophic event could leave you (and them) in financial trouble.

The key areas of insurance we’ll cover are:

  1. Coverage A (Building Coverage)

  2. Liability Coverage

  3. Rental Loss Coverage

Let’s dive in.

Step 1: Calculate Coverage A (Building Coverage)

Coverage A is the insurance that covers the structure itself. For DSCR deals, this coverage should equal at least the loan amount. Why? Because the lender’s primary concern is protecting their investment.

  • Example: If your loan amount is $300,000, Coverage A should be set at $300,000 or higher.

  • Pro Tip: Don’t confuse the property’s market value with the cost to rebuild. Insurance is based on replacement cost, which might be more or less than what you paid for the property.

How to Check Replacement Costs

You can usually get a replacement cost estimate from your insurance agent. It’s based on factors like:

  • Square footage

  • Construction materials

  • Local labor costs

Always confirm this estimate aligns with the lender’s requirements.

Step 2: Determine Liability Coverage

Liability insurance protects you if someone gets hurt on your property or sues you for damages. Most lenders require a minimum of $300,000 in liability coverage for DSCR loans.

  • Why $300,000? This is a standard amount that provides a good balance of protection without inflating your premium.

  • Pro Tip: If your property has high-risk features (like a pool or stairs without railings), consider increasing liability coverage to $500,000 or $1 million. It’s usually not that much more expensive.

Bonus Tip: Add Umbrella Insurance

Umbrella policies provide extra liability coverage that kicks in after your primary policy is maxed out. If you own multiple properties, this is a smart way to protect your assets.

Step 3: Calculate Rental Loss Coverage

Rental loss coverage is a lifesaver if your property becomes uninhabitable due to a covered event (e.g., fire, hurricane). It compensates you for lost rental income while repairs are made.

  • Formula: 12 months × Market Rent

  • Example: If the market rent is $2,000/month, your rental loss coverage should be at least $24,000.

Can You Go Lower?

Sometimes lenders allow flexibility here, but it’s risky to underinsure. If you’re comfortable with the possibility of losing income for a few months, you might opt for a lower amount. However, it’s generally safer to stick with the full 12 months.

  • Pro Tip: For properties in areas with longer repair times (like coastal regions prone to hurricanes), you may want to go higher than 12 months.

Step 4: Review Additional Coverages

While the big three (Coverage A, Liability, Rental Loss) are mandatory, there are other coverages you should consider:

1. Flood Insurance

  • Required if your property is in a flood zone.

  • Check FEMA maps to see if your property qualifies.

  • Cost varies widely based on location.

2. Windstorm Insurance

  • Common in hurricane-prone areas.

  • Often excluded from standard policies, so you’ll need to add it separately.

3. Earthquake Insurance

  • Necessary for properties in seismic zones.

4. Ordinance or Law Coverage

  • Covers the cost of upgrading your property to meet current building codes during repairs.

  • Especially useful for older properties.

Step 5: Get Quotes and Compare

Once you know the coverage amounts, it’s time to shop around. Don’t just go with the first quote—compare options from at least three insurers. Here’s what to look for:

  1. Premium Costs

    • Make sure the premiums fit within your property’s cash flow.

  2. Deductibles

    • Higher deductibles lower your premium but increase your out-of-pocket costs for claims.

  3. Coverage Details

    • Double-check that the policy meets lender requirements and includes everything you need.

  4. Discounts

    • Ask about discounts for bundling policies or installing safety features like smoke detectors.

Step 6: Submit Proof to Your Lender

Once you’ve secured the policy, your insurance agent will provide a certificate of insurance (COI). This document shows the lender:

  • Coverage amounts

  • Policy start and end dates

  • Lender listed as an additional insured party

Make sure the COI is submitted to your lender promptly to avoid delays in closing.

Common Pitfalls to Avoid

  1. Underinsuring the Property

    • Trying to save on premiums by skimping on coverage can backfire if disaster strikes.

  2. Ignoring Deductibles

    • A deductible that’s too high could strain your finances during a claim.

  3. Overestimating Rental Loss

    • Be realistic about your market rent. Overinsuring might lead to unnecessary premium costs.

  4. Missing Deadlines

    • Failing to provide proof of insurance can delay your loan approval or closing.

Wrapping It Up

Calculating insurance on your DSCR deal doesn’t have to be complicated. Just remember the three main components: Coverage A (loan amount), Liability ($300,000 minimum), and Rental Loss (12 months of rent). From there, tailor the policy to your property’s unique needs, shop around for the best rates, and submit the necessary documents to your lender.

Getting this right ensures your investment is protected and keeps your lender happy—a win-win for everyone.

So, the next time you’re working on a DSCR deal, pull out this guide and calculate your insurance with confidence. After all, real estate investing is about creating wealth, not headaches!

Written by Jorge Vazquez, CEO of Graystone Investment Group & its subsidiary companies and Coach at Property Profit Academy. Let me teach you how at http://propertyprofitacademy.com.