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
Building more than six stories high serviced by elevators. ...
Lender (such as a bank) that has the property of the borrower as collateral (security, lien). If the mortgage is not paid, the property may be sold to make payment on the outstanding ...
Functional utility in real estate typically defines a property’s usefulness to the homeowner or lessee. The more purposes it can fulfill, the better. For instance, you can call a ...
payment of a debt before its due such as a mortgage payment or insurance premiums. ...
Way of valuing real estate that computes the discounted present value of an expected stream of income, including rental income and future capital gains or losses. ...
A triangular shaped end of a building where a double sloped roof meets at the top of the triangle. A gable begins at the eaves of a roof and terminates at the roof ridge. ...
A correlation defines how two variables relate to one another. We can confirm a correlation if an alteration in one variable can change the other’s behavior. Using quantifiable data ...
Room in a home where the occupants spend their leisure time. ...
State tax based on the value of property received through inheritance. The tax is paid by the recipient not the estate. Tax paid to the government or state upon the death of the taxpayer ...
Have a question or comment?
We're here to help.