Advantage Software LLC How is the Debt Coverage Ratio Calculated and Used?
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      Debt Coverage Ratio
 
 
  The debt coverage ratio or DCR is also known as debt service coverage ratio.  The debt coverage ratio is a widely used benchmark which measures an income producing property's ability to cover the monthly mortgage payments.  The DCR is calculated by dividing the net operating income (NOI) by a property's annual debt service.  Annual debt service equals the annual total of all interest and principal paid for all loans on a property.  A debt coverage ratio of less than 1 indicates that the income generated by a property is insufficient to cover the mortgage payments and operating expenses.  For example, a debt coverage ratio of .9 indicates a negative income.  There is only enough income available after paying operating expenses to pay 90% of the annual mortgage payments or debt service.  A property with a DCR of 1.25 generates 1.25 times as much annual  income as the annual debt service on the property.  In this example, the property produces 25% more net operating income than is required to pay the annual debt service and operating expenses.

Example:  We are considering buying an investment property with a net operating income of $24,000 and annual debt service of $20,000.  The DCR for this property would be equal to 1.2.  This means that it generates 20% more annual net operating income than is required to cover the annual mortgage payment amount.

 
  
 
 
 
                                                          Net Operating Income          $24,000
                Debt Coverage Ratio  =  -----------------------------  =   -----------  =    1.2
                                                           Annual Debt Service            $20,000
 
 
  Many lending institutions require a minimum debt coverage ratio value to procure a loan for income producing properties.   DCR requirements for lending institutions may vary from as low as 1.1 to as high as 1.35.   From a lending institutions perspective, the higher it is, the more income there is available to cover the mortage payments and thus the less the risk.

Net Operating Income or NOI is calculated as follows.

 
  
 
                      Income
                          Gross Rents Possible                       35,000
                          Other Income                                      2,000
                      Total Gross Income                              37,000
                          Less Vacancy Amount                        3,000
                      Gross Operating Income                      34,000
                          Less Operating Expenses                 10,000
                      Net Operating Income                          24,000
 
 
  Operating Expenses include the following items; advertising, insurance, maintenance, property taxes, property management,  repairs, supplies, etc. 

Lenders use the debt coverage ratio to determine if an income producing property has sufficient income to cover the operating expenses and debt service.  To acquire a loan for an income producing property, the debt service coverage ratio must usually be greater than 1.1 and most lenders require a DCR ratio greater than 1.2.  For this reason, the On Target software includes this important ratio in the Executive Summary report.  The Executive Summary summarizes the most important data from all of the other On Target reports.  To purchase the On Target real estate investment analysis software for $99.95, click on   Purchase Software   You can learn more about On Target by clicking on the following link.    Software Features   The On Target real estate analysis software includes a 30 day money back guarantee and free support.

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