Question

Finance & Real Estate Open Ended Question:

Why do banks look at NOI when determining the risk associated with loan payments and not Rental Income? Remember that the DSCR = NOI/DS, but why is it not Rental Income/DS?

Answer 1

DSCR stands for debt service coverage ratio and this ratio measures the ability of the borrower to pay back the debt. While calculating the DSCR the banks use the net operating income because this is more an effective measure of income rather than just rental income. A property can have other sources of revenue also besides rental income like revenue from parking lot or revenue from additional services within the property, entertainment etc. It can also happen that even though the rental income is high but operating expenses of the building are very high making the net amount available for the payback of loan very small so net operating income is more an effective measure.

Net operating income = Total rental revenue – total operating expenses.