Debt Coverage Ratio [0532]

Annual net operating income on an office building is $120,000. Monthly mortgage payments are $9,000. What is the debt coverage ratio?

Debt Coverage Ratio = Net operating income (NOI) ÷ Annual Debt Service

$9,000 x 12 = $108,000 = Annual Debt Service

Debt Coverage Ratio = $120,000 ÷ $108,000 = 1.11

Annual debt service is generally calculated using the principal and annual mortgage constant.  In this problem, the principal is unknown so the monthly debt service times 12 is the best we can do.