“DSCR” Debt Service Coverage Ratio Explained

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Debt service coverage ratio determines the maximum LOAN PAYMENT and LOAN AMOUNT that can be placed on a property, based on the property's income... In this video, I show you how it works.

DSCR FORMULAS:
1. Debt Service Coverage Ratio = NOI / Debt Service
2. Maximum Annual Debt Service = NOI / DSCR

Debt Service Coverage Ratio - DSCR is an underwriting term used by lenders that effectively sets a minimum for the amount of net operating income available to cover the debt service. The ratio is often set right around 1.25, sometimes it's 1.2, sometimes it is 1.3, depends on the industry, the market, the market timing, and the product type.

Debt Service Coverage Ratio tells us how much extra cushion we need to have in our net operating income over the debt service or the annual loan payments. In this case, a 1.25 debt service coverage ratio means that the NOI needs to be 125%, or 1.25 times the amount of the annual loan payments. Debt service coverage ratio sets a limit on how much risk the lender's going to take in terms of what they loan compared to the cash flow on the property. They don't want to put borrowers in a position where they have barely enough net income to cover the debt service or, even worse, not enough net income, so the debt service coverage ratio builds in the amount of cushion that they want. Lenders can adjust this for competitive reasons, or market reasons, but it typically is about .25 over the debt service amount.

Example: $100,000 NOI / 1.25 DSCR = $80,000 Max Debt Service

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[RealEstateFinanceAcademy]

What lessons or concepts would you like me to teach you? Tell me below! - Trevor

[jeahhh]

Trevor, thank you for doing these videos! Love your video layout with the pastel colors. Very cool!

[alexandervalladares]

Trevor your videos are very easy to understand… Thank you and keep up the great work.

[joeljay]

DSCR isn’t just used for property however and I was trying to determine the formula as a small business owner to produce my own DSCR despite not owning property.

[EntrepreneurDrive]

Thanks so much for the explanation and the drawing board. I've been playing around with some of the calculators on some commercial real estate sites and I did not know what the dscr meant. Was trying to figure it out by plugging in different numbers but the negative (-) output that the calculator giving me was confusing me. Now I understand that the negative number is just the debt of the monthly mortgage payment (capped)

[joselevel]

Trevor your videos are amazing!! Just remember to lower your teleprompter so you look straight to the camera budy! Amazing work. Thank you so much

[Carson-ih]

I think I'm calculating DSCR correctly, but does NOI equal revenue subtracted by the annual debt payment? I'm calculating NOI as revenue - operating expenses (excluding debt), and dividing that sum by annual debt payments.

[mdenny]

Great video. The teaching method and visual is very helpful. Thank you!

[expagentkay]

Coolest screen ever! The future is here! Finally, yet why arent more vids using it?

[ryanshannon]

First video I've viewed of yours. Solid explanation and very simple to understand, even for an economist!

Thank you, sir!

[hugomeza]

nice information... I'd love to know how you made this video

[DoxRaea]

A great material and very relevant information fascinated me the way you explain the subject, thank you for sharing, you have all my support!...

[nbafashion]

Would you use the Net operating income, EBITDA, or Net income?

[jorgenicolasgonzalez]

Your explanation was fabulous, great video. However, I had one question at the end. If with a NOI of 100, 000, a DS or loan amount of 80, 000 is obtained annually, why does it result in a loan amount of 1, 112, 000 over 35 years?

[SIMSVENDINGLLC]

Love the board and pen! That’s so cool

[gotaboard]

How does this guy write backwards like this. Mind blown

[eptrolando]

Can you make one like this including all the affecting factors but also including how your credit might affect this type of loan? Thanks :)

[ryanferguson]

Hi, Trevor. What should an average DSCR be for new investors who are using syndicators for their first deal? I'm trying to underwrite deals as a beginner, but I need to know what my dscr should be if I use investors to fund the down payment.

[mrivc]

Hey Trevor, thanks. Very informative. How can I find the tool you're using to write on this clear screen? I'm a flight instructor and would love to make videos like this

[cuteypies]

I just realized he is writing mirror writing