What does the formula DCR = Net Operating Income / Annual Debt Service help establish?

The formula DCR, or Debt Coverage Ratio, is fundamentally designed to assess the relationship between a property’s net operating income (NOI) and its annual debt service obligations.

When calculating the DCR using this formula, you are determining how much cash flow is available to cover debt payments. A DCR greater than 1 indicates that the property generates enough income to cover its debt obligations, while a DCR less than 1 suggests that the property does not generate sufficient income to meet its debt service, posing a risk to lenders and investors.

This ratio is critical for lenders as it provides insight into the property's financial health and its ability to service debt. A higher DCR generally indicates a more secure investment, as it implies that the property can comfortably meet its debt obligations, thus establishing a clear relationship between cash flow generated by the property and what is owed in terms of debt.

On the other hand, the other choices, while related to real estate investments, do not directly pertain to the specific application of the DCR formula. For instance, measuring the profit margin, assessing market value, or determining maximum loan amounts involves additional financial analyses that extend beyond simple cash flow and debt service considerations.