Certified Apartment Portfolio Supervisor (CAPS) Practice Exam - Module 2

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Prepare for the CAPS Exam with a comprehensive study of Module 2. Utilize our practice resources filled with flashcards, multiple choice questions, and thorough explanations to ensure your success!

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What does a low debt coverage ratio (DCR) signify to lenders?

High investment returns
Low risk assessments
High-risk properties
Stable income projections

The correct answer is: High-risk properties

A low debt coverage ratio (DCR) signifies to lenders that there is a higher risk associated with the property. DCR is calculated by dividing the net operating income (NOI) of a property by its total debt service (the total amount of loan payments). When the DCR is low, it indicates that the property's income is insufficient to cover its debt obligations. This raises red flags for lenders, as it suggests that the property may struggle to generate sufficient revenue to meet its financial commitments, making it a potentially risky investment. In contrast, a higher DCR indicates that a property is generating sufficient income to cover its debt payments comfortably, leading lenders to view it as a lower-risk investment. Therefore, a low DCR not only reflects current financial health but can also foreshadow future difficulties, causing lenders to view the property and its investment potential with caution.