SS134: What is Debt Service Coverage Ratio (DSCR)

SS134: What is Debt Service Coverage Ratio (DSCR)

Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing What is Debt Service Coverage Ratio (DSCR).

When applying for a mortgage on an investment property, the lender will calculate the debt service coverage ratio. In this episode, Charles discusses what the DSCR is, and why it is used by lenders.

Watch The Episode Here:

Listen To The Podcast Here:

Talking Points:

  •       The debt service coverage ratio or DSCR, is one of the most popular formulas that commercial real estate lenders use. It provides a quick, and simple assessment of the loan’s risk.
  •       It compares the property’s income to its debt obligations (the mortgage). The debt service coverage ratio is calculated by dividing the net operating income by the annual debt service. For example; if a property’s annual net operating income is $125,000, and its annual debt servicing cost is $100,000; the property has a 1.25x DSCR. If the property has a DSCR under 1x, it will have difficulty paying back its loan. For example; a property has an annual net operating income of $75,000 but, its annual debt servicing is $100,000; the DSCR is .75x. In other words, the property does not generate enough income to pay its annual debt obligations.
  •       Most apartment building lenders will want to see a 1.15x-1.25x minimum DSCR. Riskier properties will require a higher DSCR. These properties may include hotels, motels, or older apartment buildings in less-than-ideal locations, and they might require a 1.3x-1.5x DSCR to get funded.
  •       The better the property, and the more creditworthy the tenants are, the lower the DSCR can go for funding. A shopping center with a large, established, anchor tenant might be financed with a DSCR of 1.2x.
  •       The last point with the debt service coverage ratio is ensuring you are utilizing the right numbers in your calculations. The debt servicing includes your interest and principal payments, and it is done annually. The net operating income is your annual NOI, and it should be done using EBITDA or earnings before interest, taxes, depreciation, and amortization.

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing what is debt service coverage ratio or DSCR.

Charles:
Have you always wanted to invest in real estate, but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding and didn’t want tenants calling you. Since 2006, I’ve been buying income producing properties and great locations that provide us with consistent passive income. While we wait for appreciation in the future and take advantage of tax laws while we’re waiting and unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out to investwithharborside.com. If you like the idea of investing real estate, if you like the idea of passive income partner with us at investwithharborside.com, that’s investwithharborside.com.

Charles:
The debt service coverage ratio, or dscr, is one of the most popular formulas that commercial real estate lenders use. It provides a quick and simple assessment of the loans risk. It compares the property’s income to its debt obligations. The mortgage, the debt service coverage ratio is calculated by dividing the net operating income by the annual debt service. For example, if a property’s annual net operating income is 125,000 and its annual debt servicing cost is 100,000, the property has a 1.25 x dscr. If the property has a dscr under one x, it will have difficulty paying back its loan. For example, a property has an annual net operating income of $75,000, but it’s annual debt servicing is $100,000. The dscr is seven five x. In other words, the property does not generate enough income to pay its annual debt obligations. If the debt servicing obligation matches the N noi, it would have a dscr of one x. Most apartment building lenders will wanna see a 1.15 x to 1.25 x minimum.

Charles:
DSCR riskier properties will require a higher dscr. These properties may include hotels, motels, or older apartment buildings in less than ideal locations, and they might require a 1.3 x to 1.5 x dscr to get funded. Now, the better the property and the more credit worthy the tenants are, the lower the dscr can go. For funding. A shopping center with a large established anchor tenant might be financed with a dscr of 1.2 x. Now, the last point with debt service coverage ratio is ensuring you’re utilizing the right numbers in your calculations. The debt servicing includes your interest and principal payments, and it is done annually. The net operating income is your annual n o why, and should be done using EBITDA or earnings before interest, taxes, depreciation, and amortization. So I hope you enjoyed. Please remember to rate reviews of subscribe, submit comments, and potential to show topics at globalinvestorspodcast.com. Look forward to two more episodes next week. See you then.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

Links Mentioned In The Episode:

Are You a Fan? Subscribe, Rate, Review & Share – Click Here To Learn How

What question do you always wish I would ask but I never do?

Connect with the Global Investors Show, Charles Carillo and Harborside Partners:

Scroll to top