As discussed, you divide the NOI by the annual debt service to determine DCR:
Net Operating Income / Annual Debt Service = Debt Coverage Ratio
The net operating income is the property’s gross income minus vacancy loss and operating expenses.
The annual debt service is the total of mortgage payments for the year.
If you are looking at a range of financing options, you may want to ask about the DCR for each loan program to get an idea about the maximum loan a property can support:
All things being equal (NOI, Interest Rate, and Amortization), higher DCR requirements can result in lower loan amounts. As a reference, in cases where a higher DCR offers a lower interest rate to a borrower, the rate is often not low enough to offset the decrease in maximum loan dollars attainable.