Certified Apartment Portfolio Supervisor (CAPS) Practice Exam - Module 1

Which term relates to the ratio of property NOI to annual debt servicing cost?

1. Debt Coverage Ratio

2. Loan to Value Ratio

3. Capitalization Rate

4. Gross Rent Multiplier

The correct answer is: Debt Coverage Ratio

The term that refers to the ratio of a property’s Net Operating Income (NOI) to its annual debt servicing cost is known as the Debt Coverage Ratio (DCR). This financial metric is crucial for assessing the ability of an income-producing property to cover its debt obligations. A higher Debt Coverage Ratio indicates that the property generates sufficient income to comfortably pay off its debt, which is an essential factor for lenders and investors when determining the risk associated with financing a property. Using the DCR, property managers and investors can analyze the financial health of a property. It's calculated by dividing NOI by the total debt service, and a DCR of less than 1.0 would indicate that the property is not generating enough income to cover its debt payments, raising red flags regarding its investment viability. In contrast, the other terms refer to different financial metrics. The Loan to Value Ratio (LTV) considers the ratio of a loan to the appraised value of the property and is primarily used to assess risk in lending scenarios. The Capitalization Rate is a measure of the return on an investment property, indicating how much income a property generates relative to its purchase price. The Gross Rent Multiplier (GRM) is used to evaluate the value of a rental property