How do I quickly evaluate any commercial real estate investment?
EASY! THINK LIKE A COMMERCIAL LENDER!
We at Trim Financial have created a FAST and EASY Commercial Real Estate CALCULATOR just for you!
Don’t waste your valuable time plugging in complicated commercial real estate financial metrics. This is a sure-fire way toward “analysis paralysis.”
MOVE FAST: You can quickly review 3 important and FAST steps to determine if a commercial property is right for you. The key is how to find the right financing. Quickly determine in only 3 easy steps how a business purpose property will give you positive cash flow.
WE MADE IT EASY: Find a viable Commercial Real Estate deal with only 3 points.
1. Determine what your debt coverage ratio is.
2. Know your exit cap rate.
3. Calculate your breakeven occupancy point.
Step #1: How do I determine quickly the Debt Service Coverage Ratio? (DSCR)
- You can quickly and easily calculate the DSCR of every commercial real estate deal.
- The debt service coverage ratio measures the ability to pay the commercial real estate property’s mortgage payments and expenses from the income generated from the commercial real estate property.
- DSCR is calculated by dividing the annual NOI: net operating income (your prospective commercial property’s income minus the commercial property’s expenses) by the annual commercial mortgage payments.
For example, if you have an NOI of $50,000 and annual mortgage payments of $40,000, the FAST and EASY formula will look like this: 50,000 / 40,000 = 1.25
- In less than a minute, you have determined that the DSCR of 1.25 means you are cash flow positive!
- Congratulations! The property will generate 1.25 times more (25% more) income than is required to pay the mortgage payments.
Which commercial properties should I avoid?
We got you covered! If you have the same NOI of $50,000 but the annual mortgage payment is $55,000, your formula will look like this: 50,000 / 55,000 = 0.90
NO GO with Negative cash flow! In this scenario your debt service coverage ratio is below 1, which means you have negative cash flow and there is not enough cash flow to pay the property’s operating expenses and still have enough remaining to pay mortgage payments. The commercial real estate property can only cover 90% of the annual commercial real estate financial debt payments.
As a new investor, what is the first thing I need to do on any deal?
ALWAYS BE POSITIVE! Calculate the DSCR to ensure the debt coverage ratio is greater than 1.
- If you have an NOI of $50,000 and $50,000 in annual mortgage payments, the DSCR is 1 and you are just breaking even.
- You want a DSCR greater than 1 which indicates a commercial real estate property as cash flow positive.
- Our recommendation for almost any commercial real estate deal is a minimum DSCR of 1.20.