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How It Works
The debt coverage ratio divides a property's annual net operating income by its annual debt service (mortgage payments). A DCR above 1.0 means the property earns more than enough to pay its mortgage; below 1.0 means it falls short.
Lenders typically require a minimum DCR of 1.20–1.25, providing a safety margin if income dips or expenses rise unexpectedly.
Example Problem
A property has $90,000 in annual NOI and $72,000 in annual mortgage payments.
- DCR = $90,000 / $72,000 = 1.25
This means the property generates 25% more income than needed to cover its debt, meeting most lender requirements.
Frequently Asked Questions
What DCR do lenders require for commercial loans?
Most commercial lenders require a DCR of 1.20 to 1.25. SBA loans often require 1.15 or higher. The exact threshold depends on the property type, market, and lender risk appetite.
What happens if DCR falls below 1.0?
A DCR below 1.0 means the property cannot cover its debt from operating income alone. The owner must cover the shortfall from other funds. Lenders view this as a high default risk.
How can I improve the DCR on a property?
Increase NOI by raising rents or reducing operating expenses. You can also improve DCR by refinancing to a lower interest rate or extending the loan term, which reduces annual debt service.
Related Calculators
- Break Even Ratio Calculator — measure income needed to cover all obligations.
- Net Operating Income Calculator — compute NOI for DCR analysis.
- Loan Calculator — determine monthly payments and total debt service.
- Capitalization Rate Calculator — evaluate property value from NOI.
Reference: Brueggeman, William B. & Fisher, Jeffrey D. Real Estate Finance and Investments. McGraw-Hill Education.