The formula

DSCR = NOI / annual debt service

NOI is net operating income, which is collected rent minus operating costs. Debt service is the year's loan payments, principal and interest. A DSCR of 1.00 means income exactly covers the payments. Above 1.00 leaves a cushion. Below 1.00 means the property does not cover its loan.

Lenders like the ratio because it looks at the property, not only at the borrower's paycheck. It is a quick answer to a simple question: can this building pay for its own loan?

Worked example

Starting numbers from the calculator: rent $2,800 a month, 5% vacancy, taxes $4,200, insurance $1,800, other costs $3,000 a year. Loan: $280,000 at 7.25% for 30 years. I checked each line against the calculator's math and they match.

  • Collected rent: $2,800 x 12 x 95% = $31,920
  • NOI: $31,920 - $4,200 - $1,800 - $3,000 = $22,920
  • Monthly payment: $1,910.09, so debt service is $22,921
  • DSCR: $22,920 / $22,921 = just under 1.00 (income falls about $1 short)

The income almost covers the loan, and misses by about a dollar. If a lender asks for 1.20, this loan falls short. The most this property supports at 1.20 is about $233,300 of loan, at the same rate and term.

What if the loan falls short?

Say a lender wants 1.20 and you are just under 1.00. You have a few options. Here is one, with the numbers.

  • Borrow less. A $240,000 loan at the same rate has a payment of $1,637.22 a month, or $19,647 a year. The DSCR is $22,920 / $19,647 = 1.17. That is closer, though still under 1.20.
  • Borrow about $233,300 or less to reach 1.20 exactly.
  • Raise NOI by lifting rent or trimming costs that are not real.
  • Look for a lower rate or a longer term, which lowers the payment.

Borrowing less means a bigger down payment. That ties the DSCR to how much cash you need, which you can see in cash-on-cash return.

DSCR loans use a different method

Some loans called DSCR loans compare monthly rent with the full monthly payment, including taxes, insurance and any HOA dues (PITIA). In the example, rent of $2,800 divided by PITIA of $2,410 gives 1.16. The calculator shows both so you can see the gap. Lenders set their own rules, so ask which method and what minimum they use.

The two methods can disagree. The first uses NOI, so it counts vacancy, repairs and management. The second uses the rent as is and only counts the payment and its extras. Neither is wrong. They are different tests, so do not mix them up when you compare lenders.

Using it when you shop for a loan

Work the ratio before you talk to lenders, not after. Start with honest rent, a vacancy allowance and every real cost. Then try a few loan sizes and rates in the calculator and note which ones clear a ratio of 1.20, 1.25 or whatever minimum a lender names.

Ask each lender three things. Which method do you use, NOI over debt service or rent over PITIA? What minimum do you need? Do you use my rent, or an appraiser's estimate of market rent? Their answers can change the result more than a small rate difference does.

Keep a margin. A ratio that only just clears the minimum has no room for a vacancy, a tax bill that rises or a repair. If a deal works only at the very edge, treat that as a warning, not a pass.

When it misleads

  • It is a snapshot of year one. Rent, taxes and insurance move.
  • It depends on how you count expenses. Leaving out repairs or management makes it look better.
  • A passing ratio is not the same as good cash flow. Check the actual dollars too, as in how to calculate rental cash flow.
  • Rates and lender minimums change, so check current terms.

DSCR next to cap rate

Cap rate and DSCR use the same NOI. Cap rate divides it by the price, so it ignores the loan. DSCR divides it by the loan payments, so it needs the loan. If you want the price view first, read what is a good cap rate.

Try the DSCR calculator to find your ratio and your maximum loan.

FAQ

What DSCR do lenders want?

It varies by lender and loan. Ask each lender for its minimum. The calculator lets you set the target.

Is DSCR the same as cash flow?

No. DSCR is a ratio. Cash flow is the dollars left after the loan payment.

How can I raise my DSCR?

Raise income, cut costs, borrow less, put more down, or find a lower rate.

Can DSCR be below 1?

Yes. Below 1.00 means the property's income does not cover its loan payments, so you cover the gap from other money.