Humber/Ontario Real Estate Course 4 Exam Practice

Which of the following is included in the calculation of debt service coverage ratio (DSCR)?

1. Annual net operating income (NOI).

2. Total asset value of the property.

3. Insurance premiums for property.

4. Mortgage principal repayments.

The correct answer is: Annual net operating income (NOI).

The debt service coverage ratio (DSCR) is a financial metric used to evaluate a property's ability to generate enough income to cover its debt obligations. It is calculated by taking the annual net operating income (NOI) and dividing it by the total debt service, which includes all required payments on the property’s loans, such as interest and principal repayments. Since the DSCR specifically measures the relationship between the income generated by the property and the debt service required, annual net operating income (NOI) is the key component in this calculation. NOI represents the income a property generates after subtracting operating expenses, making it a critical indicator of a property's profitability and its capacity to cover its loan payments. In contrast, the total asset value of the property is not a part of the DSCR calculation, as it does not directly relate to the income or debt obligations. Insurance premiums for the property are considered operational expenses, which are deducted from gross income to arrive at NOI, but they do not play a direct role in the DSCR calculation itself. Similarly, while mortgage principal repayments are part of the debt service, the calculation includes total debt service rather than isolating principal repayment separately from interest obligations. Thus, the annual net operating income is the essential factor that directly