Florida Real Estate Sales Associate Examination Content OutlineReal Estate Investment and Business BrokerageMedium
A real estate investor is analyzing a potential office building acquisition using the debt service coverage ratio (DSCR). The property is projected to have a Net Operating Income (NOI) of $200,000 annually, and its total annual debt service (principal and interest payments) is $160,000. What is the property's DSCR?
- A0.80
- B2.00
- C1.25
- D1.60
Show answer & explanationAnswer & explanation
Correct answer: C. 1.25
The Debt Service Coverage Ratio (DSCR) is calculated by dividing the Net Operating Income (NOI) by the annual debt service. DSCR = NOI / Annual Debt Service. In this case, $200,000 / $160,000 = 1.25.
Why the other options are wrong
- A. This is incorrect. It results from dividing debt service by NOI, which is the inverse of DSCR.
- B. This is incorrect. This would imply NOI is double the debt service.
- D. This is incorrect. It might result from a calculation error or misunderstanding the components.
Debt Service Coverage Ratio (DSCR)
A financial metric used to assess a property's ability to cover its debt payments from its net operating income. It's calculated as Net Operating Income (NOI) divided by Annual Debt Service.
- Lenders typically require a DSCR of 1.20 or higher for commercial loans.
- A higher DSCR indicates less risk for the lender.
- Below 1.00 means the property's income isn't enough to cover debt payments.
Memory trick: Ratios reveal property health and risk.