#debt service ratio
Updated February 21, 2016
When a lender looks at an apartment or multifamily property, whether a mortgage will be granted, and for how much, could be determined using the DSCR, or Debt Service Coverage Ratio. It s a simple calculation, but very important. The lender isn t really concerned much with individual credit scores or histories of the owners. The investment s purpose is ROI, Return on Investment, and cash flow, so the cash flow is the primary consideration.
Actually, investors should value the lenders care in making sure the cash flow calculations are correct for an apartment project. They will want to see financials that show income and expenses. They will then determine if these numbers look like they ll continue into the future, or possibly get better or worse. When the numbers show that the cash flow will adequately cover the debt service, it validates the investment selection and valuation skills of the investor(s).
While there are many places to see how to calculate the DSCR with a project and mortgage amount already in place, it is more likely a buyer will want to know how much they can borrow on a project they re considering buying. The investors do their own calculations and look to their chosen lender to validate the numbers they came up with. Both investors and lenders have a common goal in this respect. Is the project going to be profitable enough to service the debt with adequate profit left over?
We ll look at this from two directions, getting the current DSCR and evaluating a property with a lender-required DSCR. This calculation backs into that amount using a common lender minimum acceptable DSCR of 1.20. Then we ll do it the other direction, getting the DSCR.
Time Required: 20 minutes
Rent totals of $187,000/year – 9% vacancy credit loss ($16,830) $170,170
Gross Operating Income – All Expenses NOI, or Net Operating Income
$170,170 – 72,470 (expenses) $97,700 NOI
$97,700 / 12 months $8142/month NOI
$8142 monthly net income / 1.20 minimum DSCR $6785/month maximum mortgage payment .
Most mortgage calculators will let you enter the payment, interest rate and time to calculate loan amount .
$223,000 NOI / $172,000 Annual Mortgage Payments 1.30 DSCR
1.3 is better than 1.2 in this case, so probably an acceptable DSCR. However, if a new loan is being sought on an operating project, current NOI would be used as we did at first to see what might be available as a mortgage amount .
When the numbers work, investors and lenders can feel good about the project funding and future profitability.