Debt Service Coverage Ratio, also known as DSCR, is a metric used that compares a company’s cash flow against its debt obligations. In simple terms, are you generating enough money to pay your mortgage? Most banks will require a 1.25 DSCR rate to lend. For example,, if your mortgage was $1000 per month, your income after expenses must be $1,250 per month or more for the bank to finance the deal. The bank wants to make sure you are able to pay them back if they lend you money.
NOI/Debt Service= DSCR
NOI= Net Operating Income, which is your total income minus your operating expenses(not mortgage)Debt Service= Principal and Interest Payments on your loan
Example: Property Purchase Price: 1,000,000Revenue: $10k month approx expenses 40%10,000 12= $120,000 .6 = $72,000PP: 1,000,000 75%= $750,000 .07(interest rate) = $52,500 Interest + Principal= $59,87772,000/59,877= 1.2 DSCR
Is this a good deal? I will give you the infamous “It Depends” answer. This is one factor to help determine if it is worth digging deeper in the deal. On this particular deal I would take a deeper dive to get the exact numbers and expenses along with the current interest rate and terms which will better help me examine the property.
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