Debt Coverage Ratio (DCR)
The definition of debt coverage ratio (DCR) or debt-service coverage ratio (DSCR) is on the pages of all finance coursebooks. It reveals the ability of an individual - but most often of a company - to pay off what it owes (principal, interest, commissions) over a period of time. The higher it is, the better.
Debt coverage ratio (DCR) or debt-service coverage ratio (DSCR) is the result obtained after dividing the net operating income to the debt service. Maybe we should also explain what the debt service is, as it may sound too abstract. The debt service refers to all the cash needed to cover the cost generated by a debt (loan or leasing agreement). The net operating income is the difference between a company’s revenues or turnover and its operating costs, the equivalent of earnings before interest and tax (EBIT).
The debt coverage ratio (DCR) is used both in accounting, when a company wants to find whether it’s able to pay all its debts in time or not, as well as in lending, when a lender may verify the creditworthiness of an applicant. When the result is subunitary, the mission bells should start ringing.
In real estate, the debt coverage ratio (DCR) is used to identify the rentability of a real estate investment, for example, during a SWOT analysis. If a rental property generates a net income of $5,000 a month and the monthly payment for a mortgage is $4,000, the DCR is 1.25 - very close to the inferior threshold of 1.2 below which a rental property hardly pays for itself, so it might turn out to be a very bad investment. The DCR can be increased only by augmenting the net operating income, like increasing the rent or by cutting other business expenses.
Popular Real Estate Terms
Legal order for a person to present at a deposition or trial documents in his possession, such as related to a real estate transaction. ...
When a real estate owner wants to know what their property tax liability is, they calculate the assessment ratio for their property. An assessment ration is a relationship between a real ...
Removing a debt by making full payment. A mortgage discharge is a document formally specifying that a mortgage debt have been paid. It is typically recorded in a local property deeds ...
An increase in the income tax basis of a property that is a result of a tax-free exchange. As a result of an inheritance, for example, the basis of the inherited property was stepped up to ...
City apartment building that is overcrowded, poorly constructed or maintained, and generally part of a slum. In law, a tenement also refers to possessions of an individual that are ...
The meaning of a development impact fee or impact fee defines a one-time cost the local government imposes on a brand new or planned development project (regularly on a property developer.) ...
Limited period of time granted by state law to an individual who has had his or her property foreclosed on and sold to regain possession of the property by repaying the debt that was ...
New cost less accumulated depreciation to date. ...
The meaning of the term tort outlines a wrongful act resulting in injury or damages. For example, trespassing on someone’s private property can end up destroying a part of it. ...
Have a question or comment?
We're here to help.