No one gets wealthy without using debt, especially in real estate. Accurately determining the debt coverage ratio (DCR) will give you a good indication of whether your deal will be profitable and if you can get lending from the bank. 

Let’s go over why this number matters so much to the bank — and you — and how to calculate it the right way. 

Debt coverage ratio can make or break your financing

Lenders look at the DCR of an asset when deciding whether or not to give you financing. They believe it shows if the property will be profitable enough for you to pay them back… with interest. 

So, obviously, this figure is significant to the loan officers. In addition, it means that this number can tell you if your deal will cash flow as well before you even decide to talk to a bank. 

Nevertheless, this number can’t help you if you don’t know how to calculate it correctly.  

How to calculate debt coverage ratio

There are no real estate numbers that can help you create wealth if the math is done wrong. That being said, I’m going to give you the correct formula to calculate debt coverage ratio. 

DEBT COVERAGE RATIO (DCR) = net operating income (NOI) ÷ yearly debt obligations

Essentially, banks are looking for somewhere between 1.15-1.25 to lend money for. That means you’ll make 15 to 25% what you owe them per year to own this property. They call that a “spread.” And a spread like this covers paying the bank and yourself. 

In summary, I believe that real estate is the best way for Americans to build wealth today. However, you have to understand the terms and the math. One of those is DCR. 

For more must-know insights about the REI game, register for my Real Estate Training — for FREE.

Use this information well, get better deals, and be great,

Grant Cardone  

Disclosure: This content is intended to be used for educational and informational purposes only. Before investing, you should always do your own analysis based on your own financial and personal circumstances before making any investment. Grant Cardone is an industry expert who has been investing for over 30 years and his opinion is based solely on his own personal experience and circumstances. Individual results may vary. You should perform your own due diligence and seek the advice from a professional to verify any information on our website or materials that you are relying upon if you choose to make an investment. Investment involves great risk and there is no guarantee of performance or results.

We are not attorneys, investment advisers, accountants, tax professionals or financial advisers and any of the content presented should not be taken as professional advice. We recommend seeking the advice of financial professional before you invest, and we accept no liability whatsoever for any loss or damage you may incur.

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Star of Discovery Channel’s “Undercover Billionaire,” Grant Cardone owns and operates seven privately held companies and a private equity real estate firm, Cardone Capital, with a multifamily portfolio of assets under management valued at over $4 billion. He is the Top Crowdfunder in the world, raising over $900 million in equity via social media. Known internationally as the leading expert on sales, marketing, and scaling businesses, Cardone is a New York Times bestselling author of 11 business books, including “The 10X Rule,” which led to Cardone establishing the 10X Global Movement and the 10X Growth Conference, now the largest business and entrepreneur conference in the world. The online business and sales educational platform he created, Cardone University, serves over 411,000 individuals and Forbes 100 corporate clients throughout the world. Voted the top Marketing Influencer to watch by Forbes, Cardone uses his massive 15 million plus following to give back via his Grant Cardone Foundation, a non-profit organization dedicated to mentoring underserved, at-risk adolescents in financial literacy, especially those without father figures.

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