Module 42.5 LOS 42.m: Financial ratios used to analyze private real estate investments

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.

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