In most loans you deal with something known as the “Loan To Value”
which is referred to as LTV.

In commercial real estate investing you do too, but there’s also
something else that commercial lenders consider and that’s
“Debt Coverage Ratio” which is referred to as DCR.

A commercial lender will calculate the LTV and DCR on a
property and often loan the lesser of the two.

For example, let’s say you had a property worth $100K.
If a lender is willing to loan 80% of the property value, then
that’s 80% loan to value. You would need to come up with another
20%, or $20K. That’s how LTV works.

Now let’s talk about the “Debt Coverage Ratio”, or DCR. With
commercial real estate, a lender wants to see MORE income
being generated than is necessary to fully pay the monthly
mortgage payments on the underlying commercial financing.

Why?

Because if your property is generating say $80K a year in
monthly income, and your underlying mortgage payment
adds up to $80K a year, you don’t have any room for vacancies
or other things that might require cash.

So the commercial lender wants to see often 125% of the
payment owed being generated in income from the property.

That’s one of the reasons why it’s so important to be able to
maximize the amount of monthly income an apartment
can generate.

When investing in apartment foreclosures or commercial
short sales, you can zero in on properties where you know
you can increase the amount of income being generated by
doing improvements or lowering the vacancy rate.

That will also increase the value of the property and that’s
where the fun really begins!

I’ll share more with you soon…

Warm Regards,

Karen Hanover, CCIM Candidate
Apartment Education Institute, President