How To Calculate Debt Coverage Ratio
We discussed the meaning of debt coverage ratio as it relates to real estate cash flow in our last article. Now let’s see how to calculate it.
CALCULATION: Debt Coverage Ratio = Net Operating Income / Debt Service
EXAMPLE ONE: Let’s assume a borrower is requesting a mortgage with annual payments of $40,000 on an real estate investment property that generates a net operating income of $50,000. The DCR computes at 1.25 ($50,000 / 40,000 = 1.25).
EXAMPLE TWO: Now let’s assume a mortgage with annual payments of $50,000 on the same net operating income of $50,000. The DCR computes at 1.00 ($50,000 / 50,000 = 1.00).
EXAMPLE THREE: Lastly, let’s assume a mortgage with annual payments of $55,500 on the same net operating income of $50,000. The DCR computes at 0.90 ($50,000 / 55,500 = 0.90).
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