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:
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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.
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