1. What is Debt Coverage Ratio (DCR)?

The Debt Coverage Ratio (DCR) is a financial metric that measures a property's ability to cover its debt obligations with its net operating income. It's commonly used by lenders to assess the risk of a real estate investment.

2. How Does the Calculator Work?

The calculator uses the DCR formula:

Where:

• \( NOI \) — Net Operating Income (annual income after operating expenses)
• \( Debt\ Service \) — Annual debt payments (principal + interest)

Explanation: The ratio shows how many times the NOI can cover the debt payments. A DCR of 100% means the property generates exactly enough income to cover its debt.

3. Importance of DCR Calculation

Details: Lenders typically require a DCR of 1.2-1.4 (120-140%) for commercial real estate loans. Higher ratios indicate lower risk, while ratios below 100% indicate the property doesn't generate enough income to cover its debt.

4. Using the Calculator

Tips: Enter annual NOI and annual debt service in dollars. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is a good DCR value?
A: Most lenders look for DCR ≥1.2 (120%). Values below 1.0 indicate negative cash flow.

Q2: How is DCR different from debt-to-income ratio?
A: DCR measures property cash flow against debt, while debt-to-income compares personal income to all debt payments.

Q3: Can DCR be used for residential properties?
A: While primarily for commercial properties, it can be useful for rental property analysis.

Q4: What if my DCR is below 1.0?
A: This means the property doesn't generate enough income to cover its debt payments - a risky situation for lenders.

Q5: Does DCR include taxes and insurance?
A: These are typically included in operating expenses when calculating NOI, but not in the debt service amount.