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Step No 4 Calculating the Debt Service Coverage Ratio or DSCR of the real estate property. When all the three steps above are done calculating DSCR is just like putting values in a very simple formula Diving Net Operating Income by the Annual Debt Service gives you the Debt Service Coverage Ratio i e DSCR NOI ADS. This simple four-step process helps you calculate Debt Service Coverage Ratio DSCR of your real estate property. Let s calculate Debt Service Coverage Ratio for a property in the following example to make our minds even more clear. Suppose a small building with ten apartments for rental at 1000 each for the year. The first step is to calculate the GOI Gross Operating Income of the property as follows Revenue from all the 10 apartments in the building 10 1000. 10 000 To calculate the GOI we reduce the revenue by 5 to deduct the losses from vacancy and non-payments GOI 10 000 5 of 10 000 10 000 500 9 500. Once you have the GOI the next step is to calculate the Net Operating Income. NOI For the purpose of Net Operating Income you need to know the operating expenses during the year.
Let’s assume all the operating expenses during the year will be 4 250. However, the NOI will be calculated simply by deducted these expenses from the GOI as calculated above NOI, GOI Operating Expenses 9 500 4 250 5 250. Now the last step is to put the NOI and the total debt service in the formula to calculate Debt Service Coverage Ratio. Let's assume that the total debt service is 4 100 for the year including principal payment interest and other services charges DSCR can be calculated now as below DSCR. Net Operating Income NOI Total Debt Service 5 250 4 100 1 28. Now, what does a DSCR of 1 28 means? This means that the property will generate 28 more income than the liability to repay. Hence, the financial institutions would be willing to lend money Usually financial institutions accept DSCR above 20 while considering your real estate loan applications.
