Similar to purchasing a home or residential property, securing the financial means to acquire a commercial asset will involve working with a lender. However, in the world of commercial real estate, the mortgage process can be far more complex and in-depth. 

As an investor, it’s important to understand the various metrics that lenders will use to evaluate your creditworthiness while creating a financial plan for your purchase. 

One essential calculation that plays a crucial role in the commercial real estate mortgage application process is the Debt Service Coverage Ratio (DSCR).

So, what exactly is the DSCR, and why is it important? In this post, we’ll take a closer look. 

Looking for a crash course on the specialized nature of mortgages and financing in commercial real estate? Click here. 

Debt Service Coverage Ratio at a Glance

During the process of obtaining a commercial real estate mortgage, the debt service coverage ratio is an important and influential metric. If you’ll be approaching the market in the near future, it’s helpful to be familiar with how it works. 

At a glance, the DSCR is a financial formula that compares the proposed amount of a loan to a property’s existing income and total income potential. When purchasing a commercial real estate asset, it measures your ability to cover your debt obligations, including principal and interest payments, based on the income generated by the property.

How is it Calculated?

Given the volume of variables involved, calculating your debt service coverage ratio can be relatively intricate. If you accidentally overlook certain details, you could end up with a flawed result – which could in turn cause delays or headaches in your investment process. 

A brief, simplified overview of the calculation is this – your DSCR compares your net operating income (NOI) over the total amount paid towards principal and interest.

Looking for commercial real estate resources centred around financial planning? Explore these related readings. 

Uncovering All Inputs

While a relatively straightforward calculation, it’s one that requires precise attention to detail. 

For instance, if you fail to account for all of the applicable income streams when calculating your net operating income, you may end up with an inaccurate debt service coverage ratio. This miscalculation could negatively impact your chances of getting approved for a commercial real estate mortgage, or reduce the total lending amount that you qualify for. 

To ensure your DSCR calculation is as accurate (and optimal) as possible, seek the expertise of an established commercial real estate agent. Beginning with a careful NOI calculation, your agent can then help you factor in all the necessary expenses to arrive at an accurate DSCR.

Every Detail Counts

Note that your debt service coverage ratio will not simply determine if you will qualify for lending on a ‘yes or no’ basis. Instead, lenders will use this metric to provide you with personalized terms. In short, the healthier your DSCR, the more favourable your lending conditions will be. 

Looking to buy commercial real estate? Explore these blog posts for informative insights.

Optimizing Your Investment 

Amplifying your financial resources ahead of your investment requires specialized professional help. As leaders in Toronto’s dynamic commercial landscape, InTrust’s advisory services can give you an edge over other investors in the city.

We excel at identifying lucrative opportunities that other agents may overlook – leaving no stone unturned when determining the value of a possible investment. Leveraging our superior industry expertise, our team can optimize your NOI by finding opportunities to lower operating expenses or increase income potential.

Beyond our strategic underwriting services, we boast an advanced industry network that can help streamline your mortgage acquisition. As your link to trusted commercial mortgage brokers and lenders, our team can assist you in securing the financial power necessary for acquiring a profitable asset. 

If you’re looking to make a strategic investment in one of North America’s most competitive commercial markets, you’ll want our team in your corner. Send me an email or call me at 416.930.3890 to learn how powerhouse advisory services can help you succeed.

Questions About Commercial Real Estate?

See the services we offer to learn how we can help you achieve more with your asset.

Learn More