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
The American Dream has cemented the role of homeownership into the collective conscience of the US population. Homeownership provides a place for families to stay that is their own, as well ...
Institutions acting as intermediaries between suppliers and users of money. The financial markets are where those wanting funds are matched with those having surplus funds. The financial ...
Certification granted by the Realtors National Marketing Institute, which is affiliated with the National Association of Realtors. ...
Area that is located between a rural and urban area. ...
Measurement of investment return that relates current income to the investment cost. Example: Brian Whyke bought a parking lot for $150,000, which generates annual revenue of $90,000, ...
Written acknowledgment that money has been paid by someone as a deposit into an account or for the purchase of property or services. Examples are a receipt given by the bank for a deposit ...
Calculator having various financial functions including present value, purchase price, property appreciation, lease costs, loan and mortgage amortization. ...
A hidden or overlooked defect that may manifest itself at a later point in time. For example, a defect in a water pipe is not immediately discovered, and it later results in a massive water ...
The metaverse definition can be described as a digital environment that is simulated through the use of augmented reality (AR), virtual reality (VR), and blockchain technology, combined ...
Have a question or comment?
We're here to help.