Advantage Software LLC How is the Debt Coverage Ratio Calculated and Used?
   "Innovative Real Estate Software Solutions"        
  Home   Order Software   Software Description   Sample Reports   Sample Graphs    FAQ    Advanced Topics  
  Advanced Topics  
  Break-Even Point  
  Capitalization Rate   
  Capital Gains Rates  
  Cash on Cash Return  
  Debt Coverage Ratio  
  Deducting Rental Losses  
  Discounted Cash Flows  
  Bank Foreclosures  
  Tax Foreclosures  
  Gross Rent Multiplier  
  Income Approach  
  Internal Rate of Return  
  Loan-to-Value Ratio  
  Modified IRR  
  Net Income Multiplier  
  Net Operating Income  
  Operating Expenses  
  Operating Expense Ratio  
  Ratios - Range of Values  
  Real Estate Leverage  
  Loan Points  
  Beyond Rich Dad  
  Real Estate Appreciation  
  Return on Investment  
  Tax Brackets  
  Tax Deductions  
      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.

                          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.

                             Copyright 2000 - 2014 Advantage Software LLC