Our next podcast discussing commercial real estate loans is here!
Today Isaac and I are explaining debt coverage ratio, which is a measure of how much net operating income your property is making for you.
Featuring:
René Nelson, Eugene commercial real estate broker
Isaac Grant, Eugene commercial loan officer
Investing with Commercial Real Estate Loans – Part 6
René Nelson: Joining me today is Isaac Grant from Oregon Community Credit Union. Hey Isaac.
Isaac Grant: Hi René.
René Nelson: Okay. For those of you that are joining, grab a piece of paper. I know you’re driving, so that means now you’re going to steer with your knees. I’ve done that before. Just stay off the sidewalk. Okay. Isaac’s going to talk about debt coverage ratio. This is where the rubber meets the road. This is going to be where Isaac tells you how much money you get. All right. Walk me through it, Isaac. How do you calculate a debt coverage ratio, and keep it simple because our listeners are driving and writing on a cocktail napkin or a piece of paper.
Isaac Grant: Absolutely. Yeah. I think one of the most important things first, when we start talking about debt service coverage is net operating income and true net operating income. I know you’re a fantastic broker, René. And so when you put together marketing packages, that net operating income that says that it’s actual is actual. What people need to watch out for is maybe sometimes we’ve got pro formers, we’ve got projected net operating income. We need to see what’s the in-place net operating income on the property that you’re looking to finance, that you’re looking to purchase. That’s going to help us determine the amount of debt, the size of the loan that you’re going to be able to qualify for based on that net operating income.
Again, it’s going to case by case basis. A lot of these things that we’ve discussed in the past week, a case by case basis. But if we’re looking kind of plain vanilla terms, if maybe you’re going to buy a small apartment complex or some residential units, kind of a baseline for most lenders might be a few basis points lower or a few basis points higher. But typically, they’re going to want to see about a 1.2 or a 1.25 debt service coverage.
Now, what does that mean? It means you need to have 1.25 times the amount of net operating income than you do the amount of debt against a property. We want to make sure that you’re probably doesn’t just cover the debt. It’s able to have a little bit of a cushion in covering that debt. It’s making you cashflow.
René Nelson: I’m going to put that in layman’s terms. For every dollar you want to borrow from Isaac or Oregon Community Credit Union, the property has to generate $1.22 or $1.25 cents. You can’t just borrow dollar for dollar. If you’re going to borrow a buck from him, you have to have additional generated from the property. How’d I do, Isaac?
Isaac Grant: Absolutely fantastic, René.
If you’d like help understanding the true income value of your property, schedule a 15-minute discovery call with expert René Nelson today.
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