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Definitions
Internal Rate
of Return
Modified Internal Rate of
Return (MIRR)
Net Operating Income (NOI)
Loan to Value Ratio
(LTV)
Cash on Cash Return
Capitalization Rate
Gross Rent Multiplier
(GRM)
Debt Coverage Ratio
(DCR)
Real Estate Terms |
Debt Coverage Ratio (DCR)
Also known as the Debt Service Coverage
Ratio (DSCR), the debt coverage ratio measures your ability to pay the
property's monthly mortgage payments from the cash generated from renting
the property. Bankers and lenders use this ratio as a guide to help them
understand whether the property will generate enough cash to pay rental
expenses and whether you will have enough left over to pay them back on the
money you borrowed.
The DCR is calculated by dividing the
property's annual net operating income (NOI)
by a property's annual debt service. Annual debt service is annual total of
your mortgage payments (i.e. the principal and accrued interest, but not
your escrow payments).
EXAMPLE:
Assume NOI of $20,000 and debt payments of
$15,000. The DCR is 1.33, ($20,000/$15,000 = 1.33).
A debt coverage ratio of less than 1 (e.g.
.75) indicates that there is not enough cash flow to pay the property's
rental expenses and have enough left over to pay mortgage payments.
Obviously, a lender will not be willing to loan you money to purchase a
property not generating enough cash to pay him/her back.. In the above
example, the DCR of 1.33 means that the property will generate 1.33 times
more (or 33% more) in cash that is required to pay the mortgage payments.
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