DSCR Calculator (Debt Service Coverage Ratio)
Total annual revenue minus operating expenses (excluding debt payments).
Total annual principal and interest payments on all loans.
Your DSCR Ratio:
1.25
What is Debt Service Coverage Ratio (DSCR)?
The Debt Service Coverage Ratio (DSCR) is a critical financial metric used by lenders, real estate investors, and banks to evaluate a borrower's ability to repay a loan. It compares a property's or company's Net Operating Income (NOI) to its debt obligations.
Essentially, DSCR tells a lender whether the property generates enough cash flow to cover the mortgage payments. A higher ratio indicates greater financial health and a lower risk for the lender.
The DSCR Formula
The formula to calculate DSCR is straightforward:
DSCR = Net Operating Income (NOI) / Total Debt Service
- Net Operating Income (NOI): Revenue generated from the property (rents, fees) minus all operating expenses (maintenance, taxes, insurance, management fees). Do not subtract the mortgage payment here.
- Total Debt Service: The total amount of principal and interest payments required for the loan over a specific period (usually one year).
What is a Good DSCR Ratio?
While requirements vary by lender and loan type, the following benchmarks are standard in commercial real estate financing:
- DSCR < 1.0: Negative cash flow. The property does not generate enough income to pay the debt. The borrower must subsidize the payments from personal funds.
- DSCR = 1.0: Breakeven. The income exactly covers the debt payments, leaving no profit cushion.
- DSCR 1.20 – 1.25: Typically the minimum requirement for most commercial lenders. It provides a buffer for unexpected vacancies or expenses.
- DSCR > 1.50: Strong cash flow. The entity is highly profitable and easily covers debt obligations.
Real-World Example
Let's assume you are buying a small apartment building. Here is how the numbers might look:
Gross Annual Income: $150,000
Operating Expenses: $30,000
Net Operating Income (NOI): $120,000
Annual Mortgage Payment: $96,000
Calculation: $120,000 / $96,000 = 1.25
In this example, the DSCR is 1.25. This means for every $1.00 of debt, the property generates $1.25 in income. This would likely meet the underwriting standards of most banks.