15
Feb
The Debt Service Coverage Ratio (DSCR) measures a property’s ability to cover its debt obligations using its rental income. Lenders use this metric to assess risk when financing investment properties.
DSCR Formula:
DSCR = Net Operating Income (NOI)/Total Debt Service (TDS)
Where:
- Net Operating Income (NOI) = Rental Income – Operating Expenses
- Total Debt Service (TDS) = Principal + Interest + Taxes + Insurance (PITI)
Example Calculation:
Scenario:
- Gross Monthly Rental Income: $5,000
- Operating Expenses: $1,000 (maintenance, management, utilities, etc.)
- Net Operating Income (NOI): $5,000 – $1,000 = $4,000
- Monthly Mortgage Payment (PITI): $3,000
DSCR Calculation:
DSCR Calculation:
DSCR=$4,000/$3,000=1.33
Interpretation:
- DSCR > 1.0: Positive cash flow (e.g., 1.33 means the property generates 33% more than its debt payment).
- DSCR = 1.0: Break-even (rental income just covers debt payments).
- DSCR < 1.0: Negative cash flow (not enough income to cover debt).
What DSCR Do Lenders Require?
✔ 1.20 – 1.40+ DSCR → Ideal for strong loan approval.
✔ 1.10 – 1.19 DSCR → May still qualify but with stricter terms.
✔ Below 1.0 DSCR → Risky; requires higher reserves or alternative financing.