Ratio between your property's net operating income
This section explains what the Debt Coverage Ratio tells you about your investment property.
Debt Coverage Ratio is basically the ratio between your property’s net operating income for the year as to Annual Debt Service. Your Annual Debt Service is what we calculated in the Interest Calculations section.
In simple terms, Debt Coverage Ratio tells us how much of the debt would be covered by the operating income that is coming in.
For example, if the debt coverage ratio is more than 1.0 then the Levered Cash Flow would be positive from the first year. If this was a commercial property and if you had more rental income from this property, you will see that your Debt Coverage Ratio will improve.
When you borrow money for a bank, the bank not only considers the debt coverage ratio that is calculated just from the income of this property. It will also consider your overall service-ability to come up with a debt coverage ratio. This is because they need to figure out the money that is coming in from this so the Debt Coverage Ratio alone is not a good measure.