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 including the mortgage for the owner.
How do you calculate this commercial mortgage ratio? You divide the net operating income by the proposed mortgage payment. So, first figure out the proposed mortgage payment. Say you where quoted 6.5% on a 25 year amortization schedule, with a $1,000,000 loan amount. Your monthly payment would be $6,752 the annual payments would be $81,024.
Calculating the Net Operating Income
Calculating the net operating income is the same concept on both investment properties or owner occupants but it?s normally a lot easier to figure out on investments. Basically there just aren?t as many tax shelters on investment 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 figure out what the net operating income is.
Going back to the investment example, say you?re considering buying a 5 unit office building at $1,333,000 with a loan amount of $1,000,000 (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 include real estate tax, insurance, management fee, professional 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 $180,000 and that the total operating expenses are $68,700. Your NOI is therefore $111,300. Now divide the $111,300 by the annual mortgage payment we discussed above at $81,024 and you should have a debt coverage ratio of 1.37. This, by the way is right along the standard that most banks/lenders operate under. Almost 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.
Jeff Rauth is President of Commercial Finance Advisors, Inc out of Birmingham, Michigan. He has a STORE for commercial loan brokers. Contracts, spreadsheets, books, etc. Products starting at $4.95! Check it out commercial real estate loans or commercial mortgage calculators or commercial loan rates
Source: http://refinance.maxmoneymarketing.com/debt/commercial-mortgage-calculator-debt-coverage/
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