In terms of commercial mortgage calculations, debt coverage ratio is one of the most leading underwriting tools to figuring out if a possible commercial mortgage is fundable or not. This ratio essentially tells you what the level of cash flow will be for the owner. It's basically answers what the level of cash flow will be after all expenses have been paid along with the mortgage for the owner.
How do you reason this commercial mortgage ratio? You divide the net operating income by the proposed mortgage payment. So, first form out the proposed mortgage payment. Say you where quoted 6.5% on a 25 year amortization schedule, with a ,000,000 loan amount. Your monthly payment would be ,752 the yearly payments would be ,024.
Calculating the Net Operating Income
Calculating the net operating income is the same view on both venture properties or owner occupants but it's regularly a lot easier to form out on investments. Basically there just aren't as many tax shelters on venture deals and the lenders regularly focus more on the asset itself. Whereas on owner busy loans lender regularly look at personal, enterprise and real estate entity tax returns to form out what the net operating income is.
Going back to the venture example, say you're considering buying a 5 unit office building at ,333,000 with a loan whole of ,000,000 (75% loan to value). All 5 leases are gross, meaning the owner is responsible for paying all of the expenses on the property. Common expenses consist of real estate tax, insurance, management fee, expert fees (Cpa, Lawyer), utilities, maintenance/repairs, etc. So subtract all of these expenses from the gross income and you'll have your net operating income.
For example, say the gross income is 0,000 and that the total operating expenses are ,700. Your Noi is therefore 1,300. Now divide the 1,300 by the yearly mortgage payment we discussed above at ,024 and you should have a debt coverage ratio of 1.37. This, by the way is right along the accepted that most banks/lenders operate under. Practically all of these institutions want to see a minimum 1.2. If you want more info on calculating the Noi on owner occ deals check out our ebook available on our website.
industrial Mortgage Calculator - Debt Coverage