Name: Eloisa Monique Yepez Time: 5:30-6:30

Subject: REM 318 – Real Estate Management week no.: 1

__________Debt service Coverage ratio ______

Topic Title

Introduction

DSCR is a ratio that measures the relationship of the available cash after operating
expenses have been paid and the cash required making the required debt payments. A developer
who plans in obtaining a mortgage loan from a local bank, the latter should know how to
calculate the DSCR to determine the ability of the developer to borrow and pay off his loan as
the rental properties he builds generates income. The minimum DSCR a lender will demand
depends on macroeconomic conditions. If the economy is growing, lenders may be more
forgiving of lower ratios. The ratio is especially important to lenders as they want to ensure that
the property being considered for investment purposes will generate enough cash to cover any
and all debt obligations. Hence, DSCR is a measurement of the cash flow available to pay
current debt obligations.

Examples

Therefore, he should first indicate its net operating income by subtracting his gross from
all of the expenses, and the lender should know how much is the debt service, that is adding the
principal and interest of the loan. If the developer’s net operating income per year will be ₱
2,000,000 and the lender notes that debt service will be 300,000 per year. The DSCR can thus be
calculated as Which should mean that the borrower can cover his debt service more than 6 times
over given his operating income.For example, DSCR of .95 means that there is only enough net
operating income to cover 95% of annual debt payments, this would mean that the borrower
would have to delve into his or her personal funds every month to keep the project afloat. In
general, lenders frown on negative cash flow, but some allow it if the borrower has strong
resources outside income.

Insights 5 sentences each

Learning how significant DSCR plays the financing role in real estate mortgage is
especially important because the result gives some indication to the lender of whether you’ll be
able to pay back the loan with interest. We would know that if the ratio is over 1, it is good, and
the higher the better. If the debt-service coverage ratio is too close to 1, say 1.1, the entity is
vulnerable, and a minor decline in cash flow could make it unable to service its debt.
Therefore, lenders should cautiously require that the borrower will maintain a certain
minimum DSCR while the loan is outstanding. The lender should also monitor the ongoing
operations of its borrower to ensure that they can still maintain the given net operating income;
otherwise, the borrower would need to file bankruptcy.