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Debt Coverage Ratio

By Juan Cabrera, MBA realbench.net

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The Debt Coverage Ratio indicator determines whether the real estate investment property generates enough money to cover the annual debt.
A Debt Coverage Ratio of 1.00 means you have exactly, greater than 1.00 means you have enough and some left, and less 1.00 means you don't have enough to pay the mortgage. Most banks like the real estate investment property to have a DCR of 1.20 or higher before they give you a mortgage.

The following values have an impact on the Debt Coverage Ratio calculation for the real estate investment property:
    -MONTHLY RENT
    -VACANCY RATE
    -MORTGAGE PAYMENTS
    -ANNUAL EXPENSES

How to calculate the Debt Coverage Ratio?

Annual Net Operating Income

Debt Coverage Ratio = --------------------------------------

Annual Debt Service

Example:

An investor purchases a single home investment property for $62,000 with a monthly rent of $1,000.

Monthly Rent	: $1,600
Vacancy Rate	: 3%
Monthly Mortgage Payment	: $1,200
Total Annual Expenses	: $3,000

STEP 1: Calculate Gross Annual Income

Gross Annual Income = Monthly Rent * 12
Gross Annual Income = $1,600 * 12
Gross Annual Income = $19,200

STEP 2: Calculate Annual Mortgage Payments

Annual Mortgage Payments =
Mortgage Payment * 12

Annual Mortgage Payments = $1,200 * 12
Annual Mortgage Payments = $14,400

STEP 3:Calculate Vacancy and Credit Loss

Vacancy and Credit Loss =
(Gross Annual Income * Vacancy Rate)/100

Vacancy and Credit Loss =
($19,200 * 3%)/100

Vacancy and Credit Loss =
$576

STEP 4:Calculate Gross Operating Income

Gross Operating Income =
Gross Annual Income - Vacancy_Credit Loss

Gross Operating Income =
$19,200 - $576

Gross Operating Income =
$18,624

STEP 5:Calculate Net Operating Income

Net Operating Income =
Gross Operating Income - Total Annual Expenses

Net Operating Income =
$18,624 - $3,000

Net Operating Income =
$15,624

STEP 6: Apply Formula

	Annual Net Operating Income
Debt Coverage Ratio	= --------------------------------------
	Annual Debt Service

	$15,624
Debt Coverage Ratio	= --------------------------------------
	$14,400

Debt Coverage Ratio = 1.09

RealBench is an excellent Real Estate Software that automatically calculates the Debt Coverage Ratio, as well as other eight real estate indicators. Purchase this efficient real estate system now.

ARTICLE CATEGORY:
Debt Coverage Ratio, dcr, Real estate Debt Coverage Ratio, Investment Debt Coverage Ratio

Gross Rent Multiplier	Cash on Cash Return	Profitability Index	Internal Rate of Return	Debt Coverage Ratio
Break Even Ratio	Loan To Value Ratio	Capitalization Rate	Net Cash Flow	Real Estate Risk Management and Metrics

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Last Updated May 28, 2010