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
Right to property depends on some occurrence. ...
Placed by the federal government on a individual's real property for federal estate tax or income tax law violations. In the case of a federal estate tax lien, upon the owner's death, the ...
Increase in the value of property caused by inflation. For example, John buys a home for $150,000. Because of inflation, the home is worth $200,000 five years later. The inflation equity in ...
Articles of personal property installed by a tenant under the terms of a lease for purposes of use in his or her trade or business, Trade fixtures are removable by the tenant before the ...
Individual making the payments in a mortgage or pledging a mortgage or property. ...
A corporation that owns housing units and whose tenants purchase shares in the corporation equivalent to the value of their housing unit. Also called co-ops. ...
Principal highway designed to divert traffic around a major urban area in order to limit congestion and expedite traffic flow. A belt highway is connected to the urban area by main highways ...
The transfer of a property deed from one person to another without publicly recording it. The recording of a deed in a public office gives constructive notice of the act of the sale and ...
Rights granted to owners of property restricted to conservation use, historic preservation, or some other low density function to sell to other landowners allowing them to develop their ...
Have a question or comment?
We're here to help.