Page 86 - Trump University Commercial Real Estate 101

TRUMP UNIVERSITY COMMERCIAL REAL ESTATE 101

you should take the deal to the next stage, and you must analyze
quickly: Good deals do not stay on the market long.

Another Key Measure: Debt Coverage Ratio

Many investors buy based on speculation. They get into a deal that
produces very little cash flow and hope to make all their dough from

appreciation.
Yes, such deals can work out. It ’ s even sometimes worth getting

into a deal with negative cash flow, where the property doesn ’ t throw
off cash, but requires cash. Nevertheless, don ’ t bother with these types
of deals when you ’ re starting out. There are simply too many proper-

ties that generate positive cash flow for you to get involved with a nail -
biter of a deal early on.
It ’ s important to gauge the health of your deal by calculating its
debt coverage ratio:

NOI

Debt Coverage Ratio ____________

Debt Service
This ratio tells you how many times your NOI covers your mort-

gage payment. As a rough guide, lenders like to see a debt coverage
ratio of at least 1.2 to 1. For every dollar of mortgage payment you
must make, you have $ 1.20 coming in.
The higher the debt coverage ratio, the safer the deal. If you are in
a deal with a debt coverage ratio of 1.1, the seller will either need to
come down on price or you ’ ll have to put up a higher down payment
to drop that loan amount.
Cash Flow Before Taxes

Notice that we ’ re getting deeper into the analysis, but we ’ re still
covering common sense measurements. Here ’ s another such number:

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