DCR What is it? Real Cap Daily #17
If you are investing or purchasing commercial real estate such as retail, multifamily, industrial, and more, you need to know what DCR is.
Hello, my name is Dennis Maynard, I am a real estate broker in Los Angeles. Please don’t forget to like, subscribe, and follow.
Experienced investors use DSCR or DCR all the time. It stands for debt service coverage ratio or debt coverage ratio. Both terms are correct. DCR determines the amount of income available to make loan payments and provide a return to investors after expenses. Thats a complex statement, let me simplify.
An income property generates income. With this income, the operating expenses need to be paid. If we take the total income produced, and subtract the expenses, it is called Net Operating income or NOI for short. In business accounting it is called something else, EBITDAR. The main principle is the same, Earnings minus expenses.
The remaining income or NOI are the funds available to pay loans and returns. The standard DCR is 1.2. It will change depending on the current economic environment and the risk of the asset being loaned on. You can also increase the DCR if you want to provide a greater return to investors. This will lower the loan amount and provide more cashflow.
Grab a calculator and play around with it. If you are an experienced investor, how else do you use DCR? If you would like help purchasing or selling investment property, please call, text, or email. My team is ready to help.