In terms of commercial mortgage calculations, debt coverage ratio is one of the most important underwriting tools to figuring out if a potential 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 hypothesize this commercial mortgage ratio? You divide the net operating revenue by the proposed mortgage payment. So, first frame 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 cost would be ,752 the each year payments would be ,024.
Calculating the Net Operating Income
Calculating the net operating revenue is the same view on both venture properties or owner occupants but it's normally a lot easier to frame out on investments. Basically there just aren't as many tax shelters on venture deals and the lenders normally focus more on the property itself. Whereas on owner occupied loans lender normally look at personal, business and real estate entity tax returns to frame out what the net operating revenue is.
Going back to the venture example, say you're considering buying a 5 unit office construction at ,333,000 with a loan estimate 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. Tasteless expenses consist of real estate tax, insurance, administration fee, professional fees (Cpa, Lawyer), utilities, maintenance/repairs, etc. So subtract all of these expenses from the gross revenue and you'll have your net operating income.
For example, say the gross revenue is 0,000 and that the total operating expenses are ,700. Your Noi is therefore 1,300. Now divide the 1,300 by the each year mortgage cost 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 control under. Roughly 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.
commercial Mortgage Calculator - Debt Coverage