Debt Service Ratio
Debt Service Coverage Ratio (DSCR) is the amount of cash flow available to meet annual interest and principal payments on debt.
=Net Operating Income/Debt Service
Annual Debt Service $10,000
Debt Service Ratio= $15,000/$10,000=1.5
This number is not very important for residential Hard Money Lenders and Private Residential Lenders. However, it is a very important number to Commercial Real Estate Lenders and Banks. The Debt coverage ratio measures the project/company ability to maintain its current debt. That is why the higher the number the better.
In order to acquire real estate financing, most banks and hard money lenders require the project to have a 1.25 or higher debt service ratio. Simply put, that means the borrower /investor has 25% excess income to meet his obligations. A ratio below 1, would mean the borrower does not have enough income from the project to meet his debt obligations.
Why is this number important?
The debt coverage ratio will definitely impact the investors ability to get real estate funding at reasonable terms and conditions. So, when doing due diligence on your next investor commercial property, be sure to analyze the debt service ratio of the project, it will help you sleep at night!
HOUSTON HARD MONEY LENDER