Rent Ratio (Exact Definition)
Definition:
Rent Ratio = Monthly Rent ÷ Monthly Gross Revenue
It measures how much of total revenue is consumed by occupancy cost.
Formula:
Rent Ratio=Monthly Rent Monthly Gross Revenue\text{Rent Ratio} = \frac{\text{Monthly Rent}}{\text{Monthly Gross Revenue}}
Example:
If:
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Monthly Rent = $5,000
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Monthly Revenue = $32,000
5,000÷32,000=0.156=15.6%5,000 ÷ 32,000 = 0.156 = 15.6\%
That’s healthy.
Industry Context (Laundromats)
Healthy: ≤ 15%
Acceptable: 16–18%
Risky: 19–22%
Danger zone: > 23%
Once rent approaches 25%, the model becomes fragile unless turns are extremely high.
Why It Matters
Rent is fixed.
If revenue drops 10%, rent does not.
High rent ratio compresses margin and reduces safety buffer.
It is one of the strongest predictors of store failure.
DSCR (Debt Service Coverage Ratio)
This is a lender metric.
Definition:
DSCR = Net Operating Income (NOI) ÷ Annual Debt Service
It measures whether the business generates enough income to cover loan payments.
Formula:
DSCR=Annual NOI Annual Loan Payments\text{DSCR} = \frac{\text{Annual NOI}}{\text{Annual Loan Payments}}
Components Defined Clearly
Net Operating Income (NOI)
NOI=Gross Revenue−Operating Expenses\text{NOI} = \text{Gross Revenue} – \text{Operating Expenses}
Operating expenses include:
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Rent
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Utilities
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Labor
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Insurance
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Repairs
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Admin
NOI does NOT include:
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Loan payments
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Taxes
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Depreciation
Annual Debt Service
Total principal + interest paid in one year.
If loan payment = $6,000/month:
6,000×12=72,000 annual debt service6,000 × 12 = 72,000 \text{ annual debt service}
Example
If:
Annual NOI = $120,000
Annual Debt Service = $80,000
120,000÷80,000=1.50120,000 ÷ 80,000 = 1.50
DSCR = 1.50
That means the business generates 50% more cash than required to service debt.
Interpretation Scale
| DSCR | Meaning |
|---|---|
| ≥ 1.50 | Strong cushion |
| 1.35–1.49 | Healthy |
| 1.25–1.34 | Acceptable |
| 1.15–1.24 | Tight |
| < 1.10 | Fragile |
| < 1.00 | Cannot cover debt |
Most banks want ≥ 1.25 minimum.
You wisely set a fail trigger below 1.10.
Important Strategic Note
Rent Ratio measures structural overhead pressure.
DSCR measures leverage risk.
A store can:
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Have good demographics
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Have strong revenue
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But still fail if rent ratio is too high or DSCR too thin.