Debt Coverage Ratio

From Investment Wiki

The relationship between a property's Net Operating Income (NOI) and Annual Debt Service (ADS) [NOI divided by ADS]. This ratio is often used by lenders as a criterion for income property mortgage loans.

Defined as the relationship between the Net Operating Income and annual debt service Formula - NET OPERATING INCOME / Loan Payment ($20,600 / $14,126 = 1.46)

The current property has an annual debt service of $14,126 and a Net Operating Income of $20,600. Dividing the Net Operating Income by the annual debt service yields a debt service ration of 1.46.

The Debt Coverage Ratio measures an income property’s ability to cover monthly loan payments and is often used as underwriting criteria for income property mortgage loans. A Debt Coverage Ratio of less than 1.0 means that there is insufficient cash flow generated by the property to cover required debt payments.