# question regarding dscr and expences

I am looking to purchase my first apartment building.(4 unit)
I am running the numbers to see at what purchase price it would be profitable for me. and i would like to know if my numbers are too high. I am figuring operating expenses of 40% of gross rents and a 10% vacancy /collections loss. in using these figures it seems my offer would be way below asking price to break even. I am also figuring out what my dscr would be as i understand lenders are looking for a 1.25:1 at a minimum. any help would be greatly appreciatted.

Debt Coverage Ratio

``````Also known as Debt Service Coverage Ratio (DSCR).  The debt coverage
ratio is a widely used benchmark which measures an income producing
property's ability to cover the monthly mortgage payments.  The DCR
is calculated by dividing the net operating income (NOI) by a property's
annual debt service.  Annual debt service equals the annual total of all
interest and principal paid for all loans on a property.  A debt coverage
ratio of less than 1 indicates that the income generated by a property
is insufficient to cover the mortgage payments and operating expenses.
For example,  a DCR of .9 indicates a negative income.  There is only
enough income available after paying operating expenses to pay 90% of
the annual mortgage payments or debt service.  A property with a DCR
of 1.25 generates 1.25 times as much annual  income as the annual debt
service on the property.  In this example, the property creates 25% more
income (NOI) than is required to cover the annual debt service.

Example:  We are considering buying an investment property with a net
operating income of \$24,000 and annual debt service of \$20,000.  The
DCR for this property would be equal to 1.2.   This means that it generates
20% more annual net operating income than is required to cover the annual
mortgage payment amount.

Net Operating Income               \$24,000
Debt Coverage Ratio  =  ------------------------------  =  -----------  =    1.2
Annual Debt Service                 \$20,000

Many lending institutions require a minimum debt coverage ratio value to
procure a loan for income producing properties.   DCR requirements for
lending institutions may vary from as low as 1.1 to as high as 1.35.   From
a lending institutions perspective, the higher the debt coverage ratio value,
the more income there is available to cover the debt service and thus the
less the risk.

Net Operating Income (NOI) is calculated as follows.

Income
Gross Rents Possible                       35,000
Other Income                                    2,000
Total Gross Income                              37,000
Less Vacancy Amount                        3,000
Gross Operating Income                      34,000
Less Operating Expenses                 10,000
Net Operating Income                         24,000

Operating Expenses include the following items; advertising, insurance,
maintenance, property taxes, property management,  repairs, supplies, etc.

Lenders use the debt coverage ratio to determine if an income producing
property has sufficient income to cover the operating expenses and debt
service.  To acquire a loan for an income producing property, the debt
coverage ratio must usually be greater than 1.1 and most lenders require a
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