Annual NOI available for debt service is $168,000 and total annual mortgage principal and interest debt service is $120,000. What is NOI ÷ debt service?
Correct Answer
C) 1.40
168000÷120000 = 1.40. Common errors: inverting the ratio (debt service ÷ NOI) gives 0.71; reporting the cushion above debt service instead of the ratio gives 0.40; adding the debt service to NOI before dividing by it gives 2.40.
Why This Is the Correct Answer
Option C is correct because $168,000 ÷ $120,000 = 1.40. The DSCR is calculated by dividing NOI by the annual debt service requirement. A result of 1.40 means NOI covers the debt payments 1.4 times.
Why the Other Options Are Wrong
Option A: 0.40
Option A, 0.40, reports only the cushion above debt service: ($168,000 − $120,000) ÷ $120,000. The ratio asked for is NOI ÷ debt service, which is $168,000 ÷ $120,000 = 1.40.
Option B: 0.71
Option B, 0.71, inverts the ratio by dividing debt service by NOI: $120,000 ÷ $168,000. The DSCR puts NOI on top, giving 1.40.
Option D: 2.40
Option D, 2.40, adds debt service to NOI before dividing: ($168,000 + $120,000) ÷ $120,000. There is no reason to add the two; NOI ÷ debt service is 1.40.
Income on top
Coverage asks how many times income covers debt, so income goes on top and debt service goes underneath.
How to use: Use this to set up the DSCR fraction in the right order.
Exam Tip
If a coverage ratio comes out below 1.0 when NOI is larger than debt service, you inverted the fraction.
Common Mistakes to Avoid
- -Dividing debt service by NOI
- -Reporting the excess over 1.0 instead of the full ratio
- -Using monthly debt service against annual NOI
Concept Deep Dive
Analysis
This question tests the debt service coverage ratio, NOI divided by annual debt service. The order of division matters, because inverting it produces a different measure. A ratio above 1.0 means NOI exceeds the debt payments.
Background Knowledge
The debt service coverage ratio compares a property's NOI to its annual mortgage payments. Lenders use it to judge how much income cushion protects the loan, and appraisers use it in mortgage-equity and debt coverage analyses.
Real-World Application
A lender asks an appraiser to report the subject's DSCR under a proposed loan. The appraiser divides stabilized NOI by the annual principal and interest payments and reports the ratio.
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Previous Question
An appraiser extracted an 8% overall rate from sales of similar properties whose NOI was reported after reserves for replacement. The subject, a four-unit apartment building, has NOI of $39,200 before reserves. Reserves for similar properties are $300 per unit per year. Last year the owner spent $5,200 to replace a boiler, an outlay not reflected in the $39,200. What is the indicated value by direct capitalization?
Next Question
The subject property is an owner-managed fourplex. Market rent at full occupancy is $72,000 per year, and there is no other income. The owner's actual vacancy and credit loss is 2%, while competing fourplexes show a stabilized loss of 6%. The owner's statement lists $21,000 of operating expenses, $18,000 of mortgage payments and no management cost. Competing fourplexes pay management fees of 5% of EGI, and the overall rate is 8%. What is the indicated market value?