Cash Coverage Ratio: Application to Real Estate
What is a Cash Coverage Ratio?
The Cash Coverage Ratio (CCR) measures a property's ability to cover its fixed financial obligations using available cash flow, calculated as:
Application in Real Estate
In real estate, CCR is used by lenders and investors to assess whether a property generates enough cash flow to cover debt payments. A higher CCR (e.g., above 1.5x) indicates strong cash flow and lower financial risk, while a lower CCR (e.g., below 1.0x) suggests potential liquidity issues. For example, a multifamily property with $1.2M NOI and $800K in debt service has a CCR of 1.5x, meaning it generates 1.5 times the cash needed to meet debt obligations, making it a safer investment for lenders.
