Wednesday, October 31, 2007

DCR - Debt Coverage Ratio

Whenever you are dealing with banks and investors, you are asked what the DCR or Debt Coverage Ratio is. This post will briefly explain what it is, how it is calculated and why they would want to know this information.

Debt Coverage Ratio (DCR) is a ratio of NOI to the loan payment. A ratio of 1 means that NOI is equal to the loan payment. Higher the DCR, more money you have left over after the loan payment. Conversely, lower the DCR, more money you will have to take out of your pocket to cover the loan payment.

Typically, banks look for DCR of at least 1.2 . This means that for every loan payment of $1.00, your NOI equals $1.20. Which means that you have a profit of $0.20 for every dollar. Some banks will allow less DCR and it will depend on the type of investment, terms, and your finances. If you are not sure, ask the loan officer for their required DCR.

To calculate the DCR, you divide the NOI by the loan payment. For Example: If the property's NOI is $12,500 per month and your loan payment is $10,000 per month: You divide $12,500 by $10,000 which equals 1.25. This means that the DCR for this investment is 1.25


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