Debt Service Coverage Ratio (DSCR)

Debt Service Coverage Ratio (DSCR)

What is DSCR?

The Debt Service Coverage Ratio (DSCR) is a financial ratio that measures the ability of a rental property to cover its debt and expenses. This ratio compares an investment property's annual debt service (or mortgage payment) to its net operating income. It’s vital to calculate DSCR for rental properties because it takes into account the cost of debt and expenses.

If a property’s DSCR is less than 1, the property will not be able to cover its debt and expenses. On the other hand, if a property’s DSCR is greater than 1, then it will have enough net operating income to cover its annual debt service payment. Depending on your situation, a lender may require a reserve amount if the DSCR is too low.

How do I calculate DSCR?

\[ { Net \, operating \, income \over Annual \, debt \, service } = DSCR \]

Examples of DSCR

If a property’s NOI is $10,000 and the annual debt service payment is $6,000, the DSCR will be $10,000/$6,000 = 1.67.

Most lenders will only lend on a property if the DSCR is more than 1.25. A good way to think about what this means is that the property generates 25% more income than breakeven and can cover its debts.

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