Rock Bottom Hotel Blueprint:  Understanding Debt Service Ratio

So you ask.  Is it really important for me to know what debt service ratio is when I’m buying hotels?  The answer is an emphatic YES!  That is only a yes if you want to use the power of leverage to help you maximize your returns.  I don’t know about you, but I like to use other people’s money to help me make even more money.  So please, listen up very closely to this short lesson.  When we are finished, I will give you access to the Dutch Mendenhall and the Rock Bottom Hotel Blueprint as a bonus for you taking the time out to review this article.

Let’s get started.  Debt service ratio basically tells the guy that’s lending you the money, a private investor or bank, if the income on the property can cover the note.  That’s it.

To make it even simpler, just take the yearly income that the property earns and subtract all of the yearly expenses.  That will give you your net operating income or the first half of the equation.  Now add up the yearly principal and interest payments for the loan you are going to acquire to get the second piece of the equation.  That right there is called your Debt Service.

Now, let’s take the NOI and divide it by the Debt Service.  We now have our debt service ratio which is really just a number that compares the net income on the property and its ability to cover the debt service.  Anything greater, through Rock Bottom Blueprint, than one means it can cover the debt service, anything less than one means it doesn’t generate enough income to cover the debt service.

Rock Bottom Hotel Blueprint DSR Example

Let’s keep this simple!

Total Yearly Rents Gross:  $1,000,000

Total Yearly Expenses:  $500,000

Total Yearly NOI:  $500,000.00 ($1,000,000-$500,000)

Total Principal and Interest Loan Payments:  $250,000

DSR:  2 ($500,000/$250,000)

This is a very good DSR and any lender would look favorably at lending on this property because there is two times the income to cover the note.  Why is that so favorable to a lender?  Because it mitigates their risk in the event of default.  For one, they can go to bed good at night knowing that they have lent their money on a property that is generating enough profits to easily make the note.  Two, in the strange event that the borrower defaults, in an ideal world, they can get the property back, recover the monthly cash flow, and still have a very attractive property for other investors to want to purchase it.

Commercial lenders in today’s market are lending on properties with debt service ratios between 1.2 to 1.4.  Of course, this depends on the asset type, the location, the market and a number of other factors.  All you have to do is call a commercial lender that lends in your area and ask them what their DSR requirements are for purchasing Hotels!  Well folks, that’s it.  As I promised, you can go to Rock Bottom Blueprint and check out the Rock Bottom Hotel Blueprint.

Until next time,

Randy Rider

Rock Bottom Hotel Blueprint:  Understanding Debt Service Ratio