A lender will always go over the business' cash flow to help determine the borrower's ability to repay a loan. The Debt service coverage ratio (DSCR) is the cash coming in from the property to service the debt.

To calculate DSCR, you use the annual net income minus all expenses. Keep in mind that lenders should allow you to add back any non-cash expenses which include depreciation and amortization as well as interest expenses. This is known as EBIDA (Earnings before Interest, Depreciation and Amortization).

Then divide your EBIDA by the total annual debt service of the proposed loan (yearly sum of principle and interest payments). A DSCR of 1.75 indicates there is 75% more income over what required to repay all debt, or $1.70 available to pay for every $1.00 of debt. However, most multifamily lenders only want a DSCR of 1.20-1.35. The higher your DSCR, the better chance you'll get the best terms.

If you have the income and expenses of a potential property, use our Maximum Mortgage Calculator based on ohr factors with the Debt Service Coverage.