Commercial Debt Service Coverage Ratio (DSCR) Calculator
Your DSCR is:
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What is the Debt Service Coverage Ratio (DSCR)?
The Debt Service Coverage Ratio (DSCR) is a critical metric used by commercial real estate lenders to measure a property's ability to cover its debt payments with its net income. For investors, it represents the safety margin between the cash flowing out of the property to pay the mortgage and the cash flowing in after all operating expenses are paid.
How to Calculate DSCR
The formula for DSCR is straightforward:
DSCR = Net Operating Income (NOI) / Total Debt Service
- Net Operating Income (NOI): This is your gross rental income minus all operating expenses (property taxes, insurance, maintenance, utilities, and management fees). It does not include your mortgage payment or income taxes.
- Total Debt Service: This is the total amount of principal and interest payments made on the loan over a one-year period.
Realistic Example:
Imagine a multi-family apartment building generating $150,000 in Gross Income. After $50,000 in operating expenses, the NOI is $100,000. If the annual mortgage payments (Principal + Interest) total $80,000, the DSCR would be:
$100,000 / $80,000 = 1.25
Imagine a multi-family apartment building generating $150,000 in Gross Income. After $50,000 in operating expenses, the NOI is $100,000. If the annual mortgage payments (Principal + Interest) total $80,000, the DSCR would be:
$100,000 / $80,000 = 1.25
What DSCR do lenders look for?
In most commercial lending scenarios, a DSCR of 1.20 to 1.25 is the minimum standard. Here is how lenders typically view the results:
- Below 1.00: Negative cash flow. The property does not generate enough income to cover the debt. Lenders will rarely approve these loans.
- 1.00 to 1.15: Very tight. High risk of default if a single tenant leaves or expenses rise.
- 1.20 to 1.50: Healthy. This is the "sweet spot" for most commercial banks and CMBS lenders.
- Over 1.50: Excellent. The property has significant cash flow cushions, making it a low-risk investment for the lender.
How to Improve Your DSCR
If your ratio is too low to qualify for a loan, you have two primary levers: Increase the NOI or Decrease the Debt Service. You can increase NOI by raising rents or cutting operating costs. You can decrease Debt Service by putting more money down (lowering the loan amount) or negotiating a lower interest rate.