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
Provision in a lease agreement in which the lessee is given the right to buy the property at the end of lease term. In many cases, the option price is attractive to encourage acquisition. ...
Also known as “cap rate” or “income yield”, Capitalization Rate is a useful way to compute the rate of return on a real estate investment. It is commonly used in the ...
A proposal to buy property at a specified price. The seller of the property has the options of accepting the offer, rejecting it, or making a counteroffer. For example, John signs a listing ...
An individual's possessions at his residences, such as furniture. A listing of items and their costs is recommended to obtain proper insurance coverage and as support for insurance ...
The real and personal assets of a person at the date of death. The distribution of the assets to the heirs depends on the provision of the will. If no will exists, the distribution is based ...
model depicting on paper what a structure physically looks like. The dimensions are draw on a proportionate basis to the real thing. An example is a scale of an existing or proposed office ...
Small one story frame house or cottage. ...
Relationship between individuals or entities whereby rights given to one are returned in kind to the other. An example is where one person has the right to use facilities of another with ...
Unregistered stock or bond that pays the holder dividends (if stock) or interest (if bonds) as well as the selling price when sold (if stock) or principal (if bonds are held to maturity). ...
Have a question or comment?
We're here to help.