Debt Service Coverage Ratio (DSCR) Calculator
Determine the ability of an income-producing property to cover its debt obligations.
What is 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 a property's or business's ability to produce enough income to cover its debt payments. In simple terms, it tells you if the cash flow generated is sufficient to pay the mortgage.
How to Calculate Debt Service Coverage Ratio
The formula for DSCR is straightforward:
DSCR = Net Operating Income (NOI) / Total Debt Service
- Net Operating Income (NOI): This is the total income generated by the property minus all necessary operating expenses (like taxes, insurance, and maintenance), but BEFORE debt payments and income taxes.
- Total Debt Service: This is the total amount of principal and interest payments due on loans over a specific period (usually one year).
Interpreting the Results
| DSCR Value | Meaning |
|---|---|
| Less than 1.00 | Negative Cash Flow: The income is not enough to cover the debt. The entity is losing money. |
| Exactly 1.00 | Breakeven: The income covers the debt exactly, leaving no cushion for unexpected expenses. |
| Greater than 1.25 | Strong Coverage: Most commercial lenders require a DSCR of 1.20 to 1.25 as a minimum safety margin. |
Example Calculation
Imagine you own a small apartment complex that generates $150,000 in Net Operating Income annually. Your total annual mortgage payments (principal and interest) are $120,000.
To find your DSCR:
$150,000 / $120,000 = 1.25
A DSCR of 1.25 means you have 25% more income than what is required to pay your debt, which is generally considered a healthy ratio for securing financing.
Why DSCR Matters to Lenders
Lenders use DSCR as a primary risk assessment tool. A higher ratio indicates a lower risk of default. If the DSCR is too low, a lender may require a larger down payment to reduce the loan amount (and thus the debt service) until the ratio meets their underwriting criteria.