Debt Service Coverage Ratio Calculator

by

Debt Service Coverage Ratio (DSCR) Calculator

$
Revenue minus operating expenses (excluding debt).
$
$
Your Debt Service Coverage Ratio is:
function calculateDSCR() { var noi = parseFloat(document.getElementById('noi_amount').value); var principal = parseFloat(document.getElementById('principal_amount').value); var interest = parseFloat(document.getElementById('interest_amount').value); var resultSection = document.getElementById('dscr_result_section'); var resultValue = document.getElementById('dscr_value'); var resultStatus = document.getElementById('dscr_status'); if (isNaN(noi) || isNaN(principal) || isNaN(interest) || (principal + interest) = 1.25) { resultSection.style.backgroundColor = '#f0fff4'; resultValue.style.color = '#2f855a'; resultStatus.innerText = 'Strong Coverage'; resultStatus.style.color = '#2f855a'; resultStatus.style.backgroundColor = '#c6f6d5'; } else if (dscr >= 1.0) { resultSection.style.backgroundColor = '#fffaf0'; resultValue.style.color = '#c05621'; resultStatus.innerText = 'Adequate / Tight'; resultStatus.style.color = '#c05621'; resultStatus.style.backgroundColor = '#feebc8'; } else { resultSection.style.backgroundColor = '#fff5f5'; resultValue.style.color = '#c53030'; resultStatus.innerText = 'Negative Cash Flow'; resultStatus.style.color = '#c53030'; resultStatus.style.backgroundColor = '#fed7d7'; } }

Understanding the Debt Service Coverage Ratio (DSCR)

The Debt Service Coverage Ratio (DSCR) is a critical financial metric used by commercial lenders and real estate investors to measure an entity's ability to produce enough cash to cover its debt obligations. Unlike a personal loan that looks at credit score and income, a DSCR-based analysis focuses primarily on the income generated by the asset itself.

The DSCR Formula

DSCR = Net Operating Income (NOI) / Total Debt Service

Where:

  • Net Operating Income (NOI): This is the total annual revenue (rents, fees, etc.) minus all operating expenses (property taxes, insurance, maintenance, utilities, management fees). Note: NOI does not include income tax or the debt payments themselves.
  • Total Debt Service: This is the sum of all annual principal and interest payments required by the lender.

What Do the Numbers Mean?

Lenders use the DSCR to determine the "margin of safety." If the ratio is exactly 1.0, the property is breaking even—every dollar earned goes toward operations or debt, leaving no room for unexpected repairs or vacancies.

  • Less than 1.0: Negative cash flow. The property does not generate enough income to cover its debt.
  • 1.0 to 1.2: Tight coverage. Small fluctuations in occupancy or expenses could make debt repayment difficult.
  • 1.25 and above: The standard benchmark for many commercial loans. It indicates a 25% cushion in cash flow.

Practical Example

Imagine you are looking at a multi-family apartment building:

  • Annual Rental Income: $150,000
  • Annual Operating Expenses: $50,000
  • Net Operating Income (NOI): $100,000
  • Annual Loan Principal: $40,000
  • Annual Loan Interest: $35,000
  • Total Debt Service: $75,000

To find the DSCR, we divide the NOI ($100,000) by the Total Debt Service ($75,000). This results in a DSCR of 1.33. Since this is above 1.25, most commercial lenders would view this as a healthy, financeable property.

Why DSCR Matters for Real Estate Investors

Investors use DSCR to evaluate the risk of a property. A high DSCR not only makes it easier to obtain financing but also provides a buffer against market downturns. If your DSCR is high, you can survive a period of high vacancy or rising interest rates without facing foreclosure. Additionally, specialized "DSCR Loans" allow investors to qualify for mortgages based solely on the property's projected income rather than personal tax returns or employment history.

Leave a Comment