DSCR is (debt service coverage ratio) is the ratio of a property’s annual net operating income (NOI) to its annual mortgage debt service (principal and interest payments only). I describe is as for every dollar in debt we have a $1.25 to services that debt. For example, if a property has $1,250,000 in NOI and $1,000,000 in annual mortgage debt service, the DSCR is 1.25.
What is NOI?
NOI is the Net operating income (NOI). This is a calculation that we use to analyze the profitability of income-generating real estate assets. NOI equals all revenue from the asset, minus all reasonably necessary operating expenses.
Example:
$120,000 Rents Received
60,000 Expenses
$60,000 Net Operating Income.
What is a cap rate?
A capitalization rate or cap rate for short is a method for valuing and comparing different income producing real estate assets. The cap rate is calculated as a ratio between the net operating income (NOI) and by the assets original cost. It can also be use inversely to calculate the assets current market value.
Example:
$60,000 Net Operating Income
/ divided
$600,000 Original Purchase Cost
Equals a 10% Cap Rate
Or
$60,000 Net Operating Income
/ divided
10% Current Cap Rates of these assets
$600,000 Market Value