Calculate your property's ability to cover its mortgage payments.
Enter values to see your DSCR
Understanding the Debt Service Coverage Ratio (DSCR)
The Debt Service Coverage Ratio (DSCR) is a crucial financial metric used by lenders and investors to assess a property's (or business's) ability to generate enough income to cover its debt obligations. It's a key indicator of financial health and the risk associated with lending money for a specific asset.
How is DSCR Calculated?
The formula for DSCR is straightforward:
DSCR = Net Operating Income / Annual Debt Service
Let's break down the components:
Net Operating Income (NOI): This represents the property's annual income after deducting all operating expenses, but *before* accounting for debt service (mortgage payments) and income taxes. For rental properties, NOI is typically calculated as: Gross Rental Income – Vacancy and Credit Losses – Operating Expenses (property taxes, insurance, property management fees, repairs, maintenance, etc.).
Annual Debt Service: This is the total amount of principal and interest payments due on all loans secured by the property over a one-year period.
Interpreting the DSCR Result:
DSCR > 1.0: The property generates more income than its debt obligations. This is generally a positive sign, indicating the property can cover its debt payments with some buffer. Lenders prefer a DSCR of 1.20 or higher, as it provides a cushion against potential income fluctuations.
DSCR = 1.0: The property's income exactly covers its debt payments. This leaves no room for error or unexpected expenses, making it a higher-risk scenario for lenders.
DSCR < 1.0: The property's income is not sufficient to cover its debt payments. This indicates a potential cash flow problem and is a significant red flag for lenders, suggesting the property may default on its loan.
Why is DSCR Important?
For Lenders: It helps them gauge the risk of default. A higher DSCR suggests a lower risk, making the borrower more attractive for a loan.
For Investors: It provides insight into the cash flow potential of an investment property and its ability to sustain operations and debt.
For Property Owners: It's a tool to monitor financial performance and identify areas where income can be increased or expenses reduced to improve cash flow and loan eligibility.
Example Calculation:
Imagine a commercial property has:
Annual Net Operating Income (NOI): $120,000
Annual Debt Service (Total Mortgage Payments): $80,000
Using our calculator:
DSCR = $120,000 / $80,000 = 1.50
A DSCR of 1.50 indicates that the property generates 1.5 times the income needed to cover its annual debt obligations. This is generally considered a healthy ratio by lenders.
function calculateDSCR() {
var noi = parseFloat(document.getElementById("annualNetOperatingIncome").value);
var debtService = parseFloat(document.getElementById("annualDebtService").value);
var resultDiv = document.getElementById("result");
resultDiv.classList.remove("error");
if (isNaN(noi) || isNaN(debtService)) {
resultDiv.innerHTML = "Please enter valid numbers for all fields.";
resultDiv.classList.add("error");
return;
}
if (debtService === 0) {
resultDiv.innerHTML = "Annual Debt Service cannot be zero.";
resultDiv.classList.add("error");
return;
}
var dscr = noi / debtService;
if (dscr >= 1.0) {
resultDiv.innerHTML = "DSCR: " + dscr.toFixed(2);
resultDiv.style.backgroundColor = "var(–success-green)";
} else {
resultDiv.innerHTML = "DSCR: " + dscr.toFixed(2) + " (Below 1.0)";
resultDiv.style.backgroundColor = "#dc3545"; // Red for critically low DSCR
}
}