The Debt Coverage Ratio

Up to this point, you've seen how financing (mortgage amount, interest rate, amortization period) can increase or decrease your annual cash flows and ROI. In addition, the lender may apply a debt coverage ratio (DCR) as one of its underwriting criteria. The lender may want to see whether the property's NOI is large enough to provide a margin of safety. For example:

$38,618 (Debt service)

Among lenders who incorporate debt coverage ratios into their underwriting decisions, a DCR range of 1.1 to 1.3 is usually considered reasonable. If a property's NOI fails to provide enough cushion for the lender, rework the terms of the financing. Investors frequently work their deals not only to meet their own cash flow requirements but also to meet a lender's required debt coverage ratio.

Credit Score Booster

Credit Score Booster

There are many misconceptions about credit scores out there. There are customers who believe that they don’t have a credit score and many customers who think that their credit scores just don’t really matter. These sorts of misconceptions can hurt your chances at some jobs, at good interest rates, and even your chances of getting some apartments.

Get My Free Ebook

Post a comment