The 2nd important ratio to use when acquiring a property is the DSC or Debt Service Coverage Ratio. What is it and why is it important? It’s important because this is the ratio lenders look at when considering to finance a property. Today, lenders are extremely cautious because of the uncertainty caused by the pandemic and have tightened up lending criteria.
To determine the DSC of a potential property, take the annual NOI (Net Operating Income) and divide it by the annual mortgage debt, i.e., NOI/Mortgage Debt to determine the DSC. In other words, if your NOI is $120,000 and the Mortgage is $100,000, your DSC is 1.20. Lenders are typically looking at a 1.20 as an absolute minimum, but would more likely prefer a 1.25 or even higher, in case the income is reduced and/or the expenses go up, which will impact the NOI.