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Income Capitalization - Debt Service Coverage Ratio Method
The debt service coverage method derives an overall rate by blending the typical market debt coverage requirements of lending institutions with the yield return of the borrowed capital. For example, if local lenders require a minimal 1.2 debt coverage ratio, this factor can be applied to the mortgage position to derive an indicated overall rate. 
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RO = DSCR x M% x RM

1.2 x .75 x .1041 = .0937

Where:

RO is the Overall Rate

DSCR reflects the lenders required coverage ratio

M% reflects the loan-to-value ratio and,

RM reflects the mortgage loan constant (annual % factor necessary to amortize the loan including principal and interest)

Use of the DSCR shows the capacity of the investment to generate sufficient income to service debt. Use of this method generally reflects investment value to a lender and it may not not fully reflect typical market terms available.

 		   

 









 

      


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