In commercial multifamily real estate, there’s a language that is spoken when you are connecting with brokers, property managers and other investors in the profession. To avoid sounding like a novice, an investor must be fluent with the real estate terminology to be taken seriously. Let’s take a minute to breakdown one of those terms.
A ratio that is considered as a measure of the cash flow available in hand to pay off the debt is known as the Debt Servicing Coverage Ratio. The Debt Servicing Coverage Ratio widely known as DSCR can be derived by dividing the net operating income by the total debt service. A DSCR of 1.0 depicts of having enough net operating income to cover 100% of your debt service. Usually, the ratio is 1.25 or higher.
- For example, a 200-unit apartment community with an annual debt service of $700,000 and a NOI of $900,000 has a DSCR of 1.29
- Net operating income / total debt service = debt service coverage ratio
By learning these concepts and terms, you’re separating yourself from the novice investor looking to be more active than passive. Here’s where you can learn more multifamily investing terms.