Glossary / Property

Debt service coverage ratio

Debt service coverage ratio is net operating income divided by annual mortgage payments, and a ratio below one means the property does not earn enough to pay its own debt.

Lenders use it to size loans. Owners should use it to size risk: it says how much income can be lost before the shortfall has to come out of salary.

A ratio of 1.2 means a twenty percent fall in net income takes the property to break even.

Where people get it wrong

Calculating it on gross rent. Net operating income is after every running cost, and using gross rent can turn a ratio of 0.9 into an apparent 1.4.

Related terms

Cash on cash return Cash on cash return is the annual cash left after every running cost and every mortgage payment, divided by the cash the buyer actually put in, which makes it the only property return figure that answers what your own money earned. Loan to value Loan to value, or LTV, is the mortgage amount expressed as a percentage of the property's value, and it is the single number that determines how far a price fall has to go before the owner's equity is gone. Net rental yield Net rental yield is annual rent minus every running cost, divided by the purchase price plus every acquisition cost, which makes it the only yield figure that describes money actually reaching the owner.

Investments Playbook publishes educational research and general information. Nothing on this site is personal investment advice, a solicitation, or a recommendation to buy or sell any asset. Property and securities can fall in value. Past performance does not predict future returns. Figures shown are indicative and may be delayed. Always take regulated professional advice before acting.