“DSCR” Debt Service Coverage Ratio Explained
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- เผยแพร่เมื่อ 19 มิ.ย. 2024
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Debt service coverage ratio determines the maximum LOAN PAYMENT and LOAN AMOUNT that can be placed on a property, based on the property's income... In this video, I show you how it works.
DSCR FORMULAS:
1. Debt Service Coverage Ratio = NOI / Debt Service
2. Maximum Annual Debt Service = NOI / DSCR
Debt Service Coverage Ratio - DSCR is an underwriting term used by lenders that effectively sets a minimum for the amount of net operating income available to cover the debt service. The ratio is often set right around 1.25, sometimes it's 1.2, sometimes it is 1.3, depends on the industry, the market, the market timing, and the product type.
Debt Service Coverage Ratio tells us how much extra cushion we need to have in our net operating income over the debt service or the annual loan payments. In this case, a 1.25 debt service coverage ratio means that the NOI needs to be 125%, or 1.25 times the amount of the annual loan payments. Debt service coverage ratio sets a limit on how much risk the lender's going to take in terms of what they loan compared to the cash flow on the property. They don't want to put borrowers in a position where they have barely enough net income to cover the debt service or, even worse, not enough net income, so the debt service coverage ratio builds in the amount of cushion that they want. Lenders can adjust this for competitive reasons, or market reasons, but it typically is about .25 over the debt service amount.
Example: $100,000 NOI / 1.25 DSCR = $80,000 Max Debt Service
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What lessons or concepts would you like me to teach you? Tell me below! - Trevor
Hi, DSRA perhaps?
Trevor, thank you for doing these videos! Love your video layout with the pastel colors. Very cool!
You’re welcome! Thank you for the feedback.
Great video. The teaching method and visual is very helpful. Thank you!
My pleasure! Happy to hear they are helpful. Thanks for the note! - Trevor
Trevor your videos are very easy to understand… Thank you and keep up the great work.
Glad you like them, Alex. Thanks for the note. - Trevor
DSCR isn’t just used for property however and I was trying to determine the formula as a small business owner to produce my own DSCR despite not owning property.
Love the board and pen! That’s so cool
Thank you!
A great material and very relevant information fascinated me the way you explain the subject, thank you for sharing, you have all my support!...
Thank you. I’m glad you liked it! - Trevor
Thanks so much for the explanation and the drawing board. I've been playing around with some of the calculators on some commercial real estate sites and I did not know what the dscr meant. Was trying to figure it out by plugging in different numbers but the negative (-) output that the calculator giving me was confusing me. Now I understand that the negative number is just the debt of the monthly mortgage payment (capped)
Hello! You're welcome. I'm glad you like it!... The best way to think about the positive and negative numbers on your financial calculator is to see them as you would see the cash going in & out of your pocket. For example, if you are a borrower and you are receiving a loan, the loan amount (PV) would be positive cash flow into your pocket, and the loan payments (PMT) would be negative because they are cash out of your pocket back to the lender. The lender's perspective would be the opposite - the cash to the borrower in the beginning (PV) would be negative because it's cash out of their pocket, and the payments back to the lender (PMT) would be positive. Both methods work the same way. I'll post some more videos on using Financial Calculators, and I'll add some free resources on how to use a Financial Calculator on my website trevorcalton.com
Thanks again for your comments and for watching! - Trevor
so helpful, thank you!
You’re welcome, Yasmeen. Happy to help! - Trevor
Trevor your videos are amazing!! Just remember to lower your teleprompter so you look straight to the camera budy! Amazing work. Thank you so much
Thank you, Jose!
very helpful thank you!
You're welcome! Glad you found it helpful! - Trevor
This video is so clear thank you Sir
My pleasure. Happy to help! - Trevor
Thank you Trevor!
My pleasure Anna Lisa. Thank you for watching! - Trevor
This is so clear and helpful! Thank you for this!
My pleasure. Glad it was helpful! - Trevor
Can you make one like this including all the affecting factors but also including how your credit might affect this type of loan? Thanks :)
Trevor! Thank you so much for breaking this down. I was wondering, how do you do the drawing on the board? I make videos in a different genre but I'd love to help more with visuals like this.
Hi Ashley. Thank you for your comment. I custom built this setup in my studio over the span of a couple years specifically for teaching Finance and drawing diagrams. Glad you like it!
Thanks for sharing
My pleasure, Miguel! Thanks for your comment! - Trevor
nice information... I'd love to know how you made this video
Very helpful
Glad to hear that! Thank you! - Trevor
Nice job on the video
Thank you, Ken. Glad you liked it! - Trevor
Great video
Thank you!
How did you get the purchase value on the second example?
Coolest screen ever! The future is here! Finally, yet why arent more vids using it?
Hi! Thank you for the nice comment. I custom built the screen so it would be more visually appealing, easier for my students to see me, and better for me to explain concepts. Glad you like it! - Trevor
How does this guy write backwards like this. Mind blown
How about writing on a wide transparent glass? Some lighting work might help to eliminate the mirror effect.
@@isnantodahrojatun2352 you forgot 1 thing , if you record it that way it would be backwards . You have to reverse the video afterwards so it would be readable for us.
Hey Trevor, thanks. Very informative. How can I find the tool you're using to write on this clear screen? I'm a flight instructor and would love to make videos like this
Hi! Thanks for the comment. I built that setup myself, but now there are pre-made lightboards that you can buy. Learning Glass is one but that’s all I know. Good luck! - Trevor
I think I'm calculating DSCR correctly, but does NOI equal revenue subtracted by the annual debt payment? I'm calculating NOI as revenue - operating expenses (excluding debt), and dividing that sum by annual debt payments.
Yes, you’re calculating DSCR correctly ( DSCR = NOI / Annual Debt Service )
But it sounds like you’re not calculating NOI correctly. Check out my NOI video here: th-cam.com/video/R3cGmYqHKeE/w-d-xo.html
Hope this helps! - Trevor
Great video! Quick question: how did you calculate the loan amount?
Hi Feven. Once you have determined the maximum allowable payment, you can back into the loan amount using the interest rate and amortization. Let me know if you have more questions. I can post a step-by-step video. - Trevor
Thank you very much, Trevor. This was really helpful, cracked the PL numbers using the allowable payment, interest rate, and amortization :)
First video I've viewed of yours. Solid explanation and very simple to understand, even for an economist!
Thank you, sir!
Thank you Ryan! I appreciate the that! - Trevor
Honeslty the most impressive thing about this is writing everything backwards like that
Your explanation was fabulous, great video. However, I had one question at the end. If with a NOI of 100,000, a DS or loan amount of 80,000 is obtained annually, why does it result in a loan amount of 1,112,000 over 35 years?
Thank you! The ‘Annual Debt Service’ is 80k. They derive the loan amount by dividing that by 12, determining the maximum monthly payment, then backing into the number of how large of a loan that payment will support. Does that help? - Trevor
@@RealEstateFinanceAcademy Of course, now I understand. By determining the monthly payment, they can calculate how much to borrow for 35 or 30 years. Thank you very much for the response.
I just realized he is writing mirror writing
Would you use the Net operating income, EBITDA, or Net income?
Always use Net Operating Income. EBITDA is effectively the same thing, but that and Net Income are accounting terms, not a real estate terms. Check out my lesson on Net Operating Income for more details. 👍🏻
@@RealEstateFinanceAcademy Im using this ratio to evaluate business acquisitions. Would you still recommend using net operating income or net income? Wouldn't net income be a more true value of how much debt you can service? Since you would still have to pay taxes, and interest regardless?
Hello, I would like to calculate the maximum amount of debt that my fictitious company can borrow. But how do I determine the respective CFADS if I don't know my interest charge yet? As a tax shield, this has an influence on my tax load and thus on the CFADS. I would be very happy if someone could answer me.
Hi Jan. Happy new year. DSCR is calculated on the PRE-tax cash flow, not your after-tax, and it's specifically for real estate loans. For business loans, you would look at your EBITDA which is Earnings Before Interest, Taxes, Depreciation, and Amortization. In other words, your loan would be based on your PRE-tax cash flow, not after-tax cash flow. The interest expense from the loan will likely lower your tax liability, as well... Hope this helps. If not, feel free to shoot me a note with more questions. - Trevor
all of the lenders i speak to dont know how to do anything but conf/some do fha too, but nothing beyond this, can you help me?
do you know anyone who is qualified to do this type of loan? the ones i find cant do any really and most are scams as i have someone harassing me for years and trying to kill me , i need to move as i need urgent medical care
It sounds like you have been talking to residential home lenders. DSCR loans only apply to income-producing properties, typically commercial properties, with stable cash flow. They are also usually larger loans for properties minimum value $2+ million, but not always. Happy to point you in the right direction if you send more info. - Trevor
so if your DSCR was 2 and your net operating income is 100k would your annual debt service 200K is that correct ?
No, divide your NOI by the DSCR, so $100k / 2.0 = $50k maximum annual Debt Service... Side note: A DSCR of 2 is much higher than conventional lenders require. Most only require about 1.2 - 1.4. What type of loan are you looking at?
- Trevor
ok... im still impressed how in the world you write backward
Thank you! Me too! 😂 - Trevor
man how the heck do you do the writing thing on this video. is that a software?
It’s old school. I built that setup trying to figure out how to make Finance just a little bit less boring. 😂👍🏻 - Trevor
@@RealEstateFinanceAcademy It's fantastic
Thank you! Glad you like it. Dropping much more content soon! 😄👍🏻
How did you get the 1,112,000 for PL
Hi!Once you have determined the maximum allowable payment, you can back into the loan amount using the interest rate and amortization. You'll need to know how to use a financial calculator or a spreadsheet to do this.
Check out my online courses if you need help with that at evergreen.courses/
Where did the 1,112,000 come from?
Using a financial calculator, you can use the maximum payment amount along with the interest rate and amortization period to calculate the loan amount. 👍🏻
If you want help learning how to do that, I have full lessons on that (some are free) at Evergreen.courses
still trying too figure out how he is writing backwards.
Lots and lots of practice! 😉 - Trevor
where did 80k come from
Hi Alex! If the NOI is $100k and can be a max of 1.25x the annual debt service, then ( 100,000/1.25 = $80,000 ) so the max debt service can be is $80k. Hope that helps.