How to calculate DSCR
The debt service coverage ratio shows whether a property’s income covers its loan payments.
The formula
DSCR = net operating income ÷ annual debt service
Worked example
NOI of $30,000 and loan payments of $24,000 a year give a DSCR of 1.25.
How to use this calculator
Enter the monthly rent and monthly expenses, then the loan amount, interest rate and loan term. The DSCR calculator works out the net income per month and the loan payment, divides one by the other, and compares the result against a 1.25 lender minimum. It also shows the largest payment the income supports at 1.25. Net operating income is rent and other income minus operating expenses, before loan payments.
What the result means
- Above 1. Income covers the loan with money left over. A DSCR of 1.25 means income is 25% more than the payments.
- Exactly 1. Income just covers the payments, with no cushion for a vacancy or a repair.
- Below 1. You would have to add your own money each year to pay the loan.
Many lenders prefer 1.20 to 1.25 or higher. Some accept 1.0. Each lender sets its own minimum and its own way of counting income and payments, so ask your lender which figures it uses.
More examples
The same $30,000 of NOI gives a different ratio as the yearly loan payments change.
| NOI | Annual debt service | DSCR |
|---|---|---|
| $30,000 | $20,000 | 1.50 |
| $30,000 | $24,000 | 1.25 |
| $30,000 | $27,000 | 1.11 |
| $30,000 | $30,000 | 1.00 |
| $30,000 | $33,000 | 0.91 |
How the interest rate moves DSCR
Take an example loan of $300,000 over 30 years on a property with $30,000 of NOI. The rates below are examples only.
| Rate | Monthly payment | Annual debt service | DSCR |
|---|---|---|---|
| 6% | $1,798.65 | $21,584 | 1.39 |
| 7% | $1,995.91 | $23,951 | 1.25 |
| 8% | $2,201.29 | $26,416 | 1.14 |
The property and its income are the same in every row. Only the rate changed, and at 8% the loan no longer reaches 1.20.
Working backward to a payment
Divide NOI by the lender’s minimum to find the largest yearly payment the property supports. With $30,000 of NOI, a 1.25 minimum allows $24,000 a year in payments. A 1.20 minimum allows $25,000.
What changes the result
- Rent. Higher rent raises NOI and DSCR.
- Operating expenses. Higher taxes, insurance or repairs lower NOI and DSCR.
- Loan size. A larger down payment means smaller payments and a higher DSCR.
- Rate and term. A higher rate or a shorter term raises the payment and lowers DSCR.
Common mistakes
- Using gross rent instead of net operating income.
- Leaving vacancy out of the income figure.
- Counting the mortgage payment as an operating expense, which subtracts it twice.
- Mixing a monthly figure with a yearly one.
- Using projected rent that the property has not yet earned.
Related calculators
Work out income first with the NOI calculator. Then check the return on the price with the cap rate calculator and the return on your own cash with the cash-on-cash return calculator.
Frequently asked questions
What DSCR do lenders want?
Commonly 1.20 to 1.25 or higher.
What does a DSCR below 1 mean?
The property does not earn enough to cover its debt.
What is a DSCR loan?
A loan for investors that qualifies on the property’s income instead of personal income.
How can I raise a property’s DSCR?
Raise income, cut operating expenses, or lower the loan payment with a larger down payment, a lower rate or a longer term.
Are property tax and insurance part of the calculation?
In the formula on this page they are operating expenses, so they are already taken out of NOI. Some lenders count them on the payment side instead. Ask your lender which method it uses.
How much debt can a property support?
Divide NOI by the lender’s minimum DSCR. With $30,000 of NOI and a 1.25 minimum, the property supports $24,000 a year in loan payments.
Is a higher DSCR always better?
A higher ratio is safer because there is more income left after the loan. A very high ratio can also mean the property carries little debt, so check your return on cash as well.