Real Estate-Specific Risk Metrics

DSCR measures a property's ability to cover its debt payments: DSCR = Net Operating Income / Annual Debt Service. A DSCR of 1.25× means the property generates 25% more income than needed to service the debt — providing a cushion against income declines. Most commercial real estate lenders require a minimum DSCR of 1.20–1.30× at origination. During the 2020 COVID-19 disruption, hospitality properties saw DSCRs drop below 1.0× as revenue collapsed, triggering loan covenant violations.

Example: A property generates $500,000 NOI with annual debt service of $400,000. DSCR = $500,000 / $400,000 = 1.25×. If NOI drops 20% (to $400,000), DSCR falls to exactly 1.0× — meaning every dollar of income goes to debt service with nothing left for the owner. A further decline means the owner must inject cash to avoid default. This is why experienced investors stress-test DSCR under adverse scenarios, not just base-case projections.

LTV measures leverage: LTV = Loan Amount / Property Value. Higher LTV means more leverage and more risk. A typical commercial real estate loan has a maximum LTV of 65–75%. At 75% LTV, a 25% decline in property value wipes out all equity and puts the loan underwater. This is exactly what happened during the Global Financial Crisis: the NCREIF Property Index declined approximately 27% from peak to trough (2008–2010), devastating investors with high-LTV financing.

Debt yield = NOI / Loan Amount — a measure that has gained prominence since the GFC because it is independent of interest rates and property values. A $500,000 NOI property with a $4,000,000 loan has a debt yield of 12.5%. Most lenders require minimum debt yields of 8–10%. Debt yield captures the property's income relative to the loan amount, providing a more conservative risk measure than DSCR (which depends on the interest rate) or LTV (which depends on the appraised value). If interest rates rise, DSCR deteriorates but debt yield remains unchanged.

Breakeven occupancy is the minimum occupancy required to cover all operating expenses and debt service: Breakeven Occupancy = (Operating Expenses + Debt Service) / Gross Potential Income. If gross potential income (at 100% occupancy) is $800,000, operating expenses are $320,000, and debt service is $280,000, then Breakeven Occupancy = ($320,000 + $280,000) / $800,000 = 75%. This means the property can sustain a 25% vacancy before the owner must inject capital.

The margin between actual occupancy and breakeven occupancy is the cushion — the wider the margin, the safer the investment. For a property operating at 93% occupancy with a 75% breakeven, the cushion is 18 percentage points. According to CBRE data, national average multifamily occupancy ranged from 91% to 97% between 2010 and 2023, while office occupancy ranged from 82% to 92%. This means the same breakeven occupancy of 75% provides a comfortable cushion for multifamily but a thin one for office — highlighting how property-type fundamentals affect risk assessment.