A full explanation of the debt service coverage ratio. What the metric means, how you calculate it, and it’s importance in multifamily real estate investing! The debt service coverage ratio (DSCR), also known as “debt coverage ratio” (DCR), is a measurement of the cash flow available to pay debt obligations. Generally, the higher your DCR ratio, the easier it is for you to be able to obtain a loan on your property. Watch our explainer video to learn more about this real estate investment metric and leave us a comment down below with any questions!
Jaren is interested in purchasing a 20 unit multifamily complex!
Jaren meets with his lender Tegan who brings up a metric that Jaren is unfamiliar
with, debt coverage ratio (DCR).
Jaren asks Tegan to discuss debt coverage ratio and it’s importance.
Tegan explains that the debt coverage ratio measures a property’s ability to cover it’s
monthly mortgage payments from the cash flow it receives from renting it out!
Tegan says that the debt coverage ratio is calculated by net operating income/ debt payments.
For example. If Jaren were to purchase a 20 unit property and his net operating income was $25,000 each month with a $20,000 mortgage payment, his Debt coverage ratio would be 1.25 meaning that his property is
generating 25% more in cash flow to cover all expenses!
Tegan explains that the DCR is an important metric because it shows bankers and lenders whether a property will be able to generate enough cash flow to pay back a loan!
Jaren thanks Tegan for her explanation of the debt coverage ratio and he is excited to use the DCR metric to better analyze his potential deals!