DSCR (Debt Service Coverage Ratio)

What DSCR measures

Debt service coverage ratio answers one question a credit officer asks on every deal: after the property pays its operating costs, is there enough left to make the loan payment, and how much room is there before that stops being true?

A DSCR of 1.00x means the property generates exactly enough cash to cover debt service and nothing more. A DSCR of 1.25x means it generates 25 percent more than the payment. Below 1.00x, the property does not cover its own loan and something else has to.

How it is calculated

DSCR = Net Operating Income / Annual Debt Service

Net operating income is effective gross income minus operating expenses, before debt service and before capital items. Annual debt service is twelve months of principal and interest at the proposed loan terms.

A worked example

A 40-unit apartment property produces $612,000 of effective gross income and carries $248,000 of operating expenses, so NOI is $364,000. The proposed loan is $3,400,000 at 6.75 percent on a 25-year amortization, which is roughly $282,000 of annual debt service.

$364,000 divided by $282,000 is 1.29x.

What lenders require

Minimums vary by institution, property type, and cycle, and they live in the lender's own written credit policy rather than in any industry rulebook. Stabilized multifamily and net-leased retail typically clear at lower coverage than hotels or self-storage, because the income is more predictable. Construction and bridge loans are often underwritten to a stabilized DSCR at exit rather than a current one, since the property is not yet producing.

The number that matters on any given deal is the one in that lender's policy, and whether the deal clears it or needs a documented policy exception.

Where DSCR goes wrong

Most DSCR disputes are not arguments about division. They are arguments about the numerator.

• Expense understatement. A borrower pro forma that omits replacement reserves, management fees, or a realistic vacancy factor produces an NOI that is too high and a DSCR that looks better than the property earns.
• Below-market or expiring leases. Trailing income can reflect rents that will not renew at the same level. Reading the rent roll lease by lease against the summary usually finds this.
• Debt service on the wrong terms. Interest-only periods flatter coverage. Many policies require the ratio be tested on a fully amortizing constant rather than the actual payment.
• One-time income. Termination fees and non-recurring recoveries inflate a single year.

Related terms

Net operating income, debt yield, loan-to-value, stress testing.

You can run the calculation on your own deal with the free DSCR calculator.