Banks and Commercial debt ratios

[MattReno]

so I was chatting with my banker and she mentioned that commercial loans aren’t based on my income, they are based on the serviceable debt ratio of the property and she mention a good ratio is 1-3. That made enough sense when she said it however now unfortunately I realize I don’t fully understand how that works because I am trying to do my own figuring ahead of time and I don’t know how to do the math. If you could please explain how I can add this up that would be very much appreciated. Thank you in advance!

 

[Thomas Beyer]

She might have said 1.3 which is a common DCR for commercial assets. DCR is NOI/mortgage payment.

DCR is debt coverage ratio ie ratio of net operating income over debt payment. If debt payment is day $30,000 a year then NOI has to be $39,000 or higher. Multi-family might be 1.25 but commercial is usually 1.3 or 1.5 in smaller more risky towns.

NOI is net operating income which is gross income minus all operating expense like vacancies, insurance, property taxes, property management fees, utilities and repairs.