What DSCR measures
The debt service coverage ratio compares the income a property produces with the payments on the loan that financed it. Lenders use it to size commercial mortgages and “DSCR loans” for rental investors, which are approved on the property’s income rather than the borrower’s tax returns. A ratio of 1.0 means the rent exactly covers the mortgage; anything above leaves a cushion for vacancies and repairs.
The formulas
- DSCR = net operating income ÷ annual debt service
- Annual debt service = monthly principal and interest payment × 12
- Cash flow = NOI − debt service
- Maximum loan at a target DSCR = the loan whose payment equals NOI ÷ target
- NOI needed = debt service × target
Net operating income (NOI) is gross rent minus vacancy and every operating expense: property tax, insurance, maintenance, management, utilities the owner pays and HOA dues. It excludes the mortgage, depreciation and income tax.
Worked example
A small apartment building brings in $40,000 of NOI a year. The buyer wants a $400,000 loan at 6.5% over 30 years, and the lender requires a DSCR of 1.25.
- Monthly payment: $2,528.27, or $30,339 a year.
- DSCR = 40,000 ÷ 30,339 = 1.32: above the lender’s minimum.
- Cash flow after the loan: $9,661 a year.
- At exactly 1.25, the property could support a loan of $421,896, and the current loan needs at least $37,924 of NOI.
How the rate moves the ratio
For the same building and loan:
| Interest rate | DSCR | Cash flow |
|---|---|---|
| 5.0% | 1.55 | $14,233 |
| 6.0% | 1.39 | $11,222 |
| 6.5% | 1.32 | $9,661 |
| 7.0% | 1.25 | $8,065 |
| 8.0% | 1.14 | $4,779 |
What lenders look for
| DSCR | Typical reading |
|---|---|
| Below 1.0 | Negative cash flow; most lenders decline or require a large down payment |
| 1.0–1.19 | Accepted by some DSCR loan programs, often at a higher rate |
| 1.20–1.25 | Usual minimum for commercial and investor loans |
| Above 1.35 | Comfortable; may qualify for better terms |
Ways to improve DSCR
- Raise income: adjust rents to market, add parking or laundry fees, reduce vacancy.
- Cut expenses: appeal the property tax assessment, rebid insurance and management.
- Change the loan: borrow less, buy down the rate or choose a longer amortization.
Lenders often use their own vacancy and expense assumptions, so their NOI may be lower than yours. Check the property’s yield with the rental yield calculator.