The debt service coverage ratio divides a property's net operating income by its loan payments. For commercial property, lenders typically want at least about 1.25. Below 1, income doesn't cover the payments.
What the film says
In real estate, one building can make money, and still fail a test. The test is debt service coverage. Say a building earns five million a year. That's after running costs. Its loan costs four million. Interest and principal. Divide one by the other. One point two five. Commercial lenders typically want about that. That's a million dollar cushion. Then tenants move out. Income falls to three million. Now the ratio is zero point seven five. So why do investors care? Below one, the rent can't cover the loan. That's a one million dollar gap. Someone has to find it. The rent pays the bank first.
A simple example with round numbers, not advice. Terms vary by fund.
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