Joe Capote – Certified Investment Agent Specialist Expert in Real Estate Investments and Properties

The Debt Service Ratio, also known as debt service coverage ratio, is a simple ratio that lets investors know if their mortgage payments will be too high for the property to be a good investment. It’s the net operating income (rent minus expenses) divided by the debt service, or mortgage payment.

Example:

1. A property generates $1000 in rent.
2. Expenses for the property are $400.
3. The net operating income is $600.

$1,000 – $400 = $600 (net operating income).

$600 (NOI) / $400 (Expenses) = 1.5

The Debt Service Ratio, in this case, is 1.5.

This means that for every $1 spent on a mortgage payment, $1.50 is being generated in post-expense cash flow.

This example is extremely simplistic. It assumes that the mortgage payment includes taxes and insurance, two monthly costs that every investor must incur. Let’s take a look at a much more realistic calculation for San Mateo County real estate.

This San Bruno Park home is on the market for $315,000. It is a 2br/2ba home that will command (as of today’s market rents) $2,200 per month in rent.

Assume a down payment of 50%. That leaves a loan amount of $157,500. At the current rates of 4.625% for non-owner occupied financing, the mortgage payment (principal and interest) is $809.55. Taxes are 1.255 of the purchase price, or a monthly cost of $398. Let’s assume $100 per month in insurance, and another $50 for maintenance.

1. Property generates $2200 in rent
2. Expenses for the property are 1357.55 (Principal, interest, taxes, insurance, other expenses).
3. Net operating income is $842.45.

$842.45 (NOI) / $1357.55 (PITI + expenses) = .62

The Debt Service Ratio, in this case, is .62.

So in this example, every dollar spend on PITI/expenses generates $.62 cents in post-expense cash flow.

San Mateo County real estate investments are what I do. If you would like to understand more about how real estate investing plays a part in your retirement portfolio, contact me.