Lenders often use the debt service coverage ratio (DSCR) and the loan-to-value (LTV) ratio to determine the maximum loan amount on a specific property. The maximum loan amount is based on the measure that results in the lowest debt.
DSCR = First year NOI/debt service
LTV = loan amount/appraisal value
Debt service (loan payment) includes interest and principal.
Equity investor benefits by financing the property with debt because of positive leverage. Remember, however, that leverage will also magnify negative returns.