What is Debt Service Coverage Ratio ("DSCR") in real estate?

What does DSCR mean?

DSCR means Debt Service Coverage Ratio. DSCR is a ratio calculated by taking a rental property's operating income and dividing it by the cost of a loan. DSCR is a metric private lenders and commercial lenders use to determine the amount of a loan they are willing to provide for a single family or multi-family rental property.

How do you calculate debt service coverage ratio?

Use our handy DSCR Calculator to quickly and accurately determine DSCR and maximum loan amount!

Method 1: Net Operating Income ÷ Debt Service

Key:

Net Operating Income ("NOI") = Rent Revenue - Taxes - Insurance - HOA Dues - Maintenance - Property Management

Debt Service = Mortgage Principal + Mortgage Interest

A DSCR of 1.0 means the property generates exactly net operating income to cover the cost of mortgage payments.

Method 2: Adjusted NOI ÷ PITIA

Adjusted NOI: Rent - Maintenance - Utilities - Property Management

PITIA: Mortgage Principal + Mortgage Interest + Taxes + Insurance + HOA Dues

This second method tends to result in slightly lower DSCR, so it's important to understand how your private lender calculates DSCR.

DSCR Example

Let's say you own a rental property that generates $30,000 in NOI and the monthly mortgage payments (principal and interest) are $2,000 or $24,000 annually. That means the property has a DSCR of 1.25.

What debt service coverage ratio do private lenders require?

Private lenders typically require a DSCR of 1.2 or higher to make sure the income generated by the property can conservatively repay the loan.

How does DSCR relate to LTV?

DSCR varies based on the target LTV (loan-to-value) because the amount of the loan impacts the debt service component of the ratio.

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