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EXPLAINED: Debt Service Coverage Ratio

build-to-rent podcast investment financing market research Oct 18, 2021

What is the debt service coverage ratio? What should you know about the debt service coverage ratio when you're looking to invest in new construction rental properties?

Watch the full episode here:

There's a term called "debt service coverage ratio". Let's talk about what this term means and how it applies to real estate investors.

Sherida Zenger

I know we want it to be at 1.3 or 1.4%, right?

Steve Olson

Usually one and a quarter.

Sherida Zenger

I know that just from doing a few of the deals, but I'm not as knowledgeable about it. So we'll punt that back to you.

Steve Olson

Debt service coverage ratio is just a way of saying, how much income do we have to cover the debt that's being incurred. And if that ratio falls below, one and a quarter, lenders are gonna just want more money down.

It's the equivalent of an appraisal not coming in high enough. On a property, if the debt service coverage ratio is too low, they say, we're giving you too much debt for this business. That's what they consider it to be as a business. And your business doesn't make enough for us to feel comfortable that you're going to cover the debt. So bring more money in. Instead of 30%. down, bring 35, or bring 40% down.

I'm working on a deal right now with a foreign national that I'm partnering with, to do 72 doors. And the bank kept saying, Well, I don't know what the debt service coverage ratio is, well, this guy's from overseas and is feeling lucky to borrow the money. And he'll bring as much as possible.

So I said, you tell me, what does it need to be we'll bring the amount of equity than when they say, oh, wow, you're the dream client. You're just going to put more down? If that's what it takes. But then I looked at, but I'm gonna get you on the next one. When we prove that we know what we're doing here... So that's the debt service coverage ratio.

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