CREFCOA Knowledge Center

How to calculate the DSCR


How to Calculate the Debt Service Coverage Ratio

What is the debt service coverage ratio (DSCR)?

The debt service coverage ratio (DSCR) is the relationship between a property’s annual net operating income and its annual mortgage debt.

How do I calculate the debt service coverage ratio (DSCR)?

To calculate the debt service coverage ratio (DSCR) you divide the annual net operating income by the annual mortgage debt.

What is the debt service coverage ratio (DSCR) used for?

The debt service coverage ratio is used to determine if there is enough income available to pay the mortgage debt. Or, simply put, the DSCR on an income producing property is an indication of how strong a property’s cash flow is. The higher the DSCR the stronger and more profitable a property is.

Why does the debt service coverage (DSCR) matter?

The debt service coverage ratio is the most important ratio used by lenders as it provides an indication of a property’s ability, after paying all other expenses, to service the mortgage debt. For example, a property with a DSCR of 1.50 means that after paying all operating expenses a property can cover the mortgage payment by 1.5 times or 150%. Whereas a property with a 1.00 DSCR means that after paying all operating expenses and the mortgage debt there is no money left over. A lender requires there to be money left over after paying all expenses and mortgage debt to provide a buffer to ensure there is enough cash flow available to pay the mortgage payment in case expenses rise or income falls.

Gross Potential Rents$1,000,000
Other Income
Total Annual Gross Income$1,000,000
Less 5% Vacancy & Collection Loss$50,000
Effective Gross Income:$950,000
Real Estate Taxes$15,000
Property Insurance$5,000
Repairs & Maintenance$5,000
Pest Control$5,000
5% Off Site Management Reserve$50,000
Replacement Reserves Estimated at $200 Per Unit @ 75 Units$15,000
Total Operating Expenses:$105,000
Net Operating Income (NOI)$845,000

Now that we have calculated the NOI, we must calculate the annual debt service for the property. The annual debt service is the simply the total amount of principal and interest payments made over a 12 month period. Taxes and insurance are not included in this calculation as they are accounted for in the expenses of the property.

To calculate the debt service coverage ratio, simply divide the net operating income (NOI) by the annual debt.

Commercial Loan Size: $10,000,000
Interest Rate: 6.5%
Term: 30 Years
Annual Payments (Debt Service) = $758,475

Net Operating Income (NOI) = $845,000

Now we can calculate the DSCR:

DSCR = Net Operating Income / Annual Debt Service

(NOI) = $845,000
Total Debt Service = $758,475
DSCR = 1.10 ($845,000 / $758,475)

What this example tells us is that the cash flow generated by the property will cover the new commercial loan payment by 1.10x. This is generally lower than most commercial mortgage lenders require. Most lenders will require a minimum DSCR of 1.20x.

If a DSCR is 1.0x, this is called breakeven, and a DSCR below 1.0x would signal a net operating loss based on the proposed debt structure.

Why Choose CREFCOA

More Choices
Better Decisions

Unbeatable Rates
Unbeatable Terms

Ease and Convenience
Simplified Loan Process



You can count on us
to be there for you.

Learn more

Got 5 minutes? Request a custom quote today!

Provide some basic information about the property and the financing you’re seeking and through our proprietary lending platform CRELP we’ll provide you with the most competitive quotes available.

It’s really that simple.

Private. Confidential. Secure. We never sell or provide your personal information or email address to unrelated third parties.

This article is protected under the copyright laws of the United States (title 17 U.S. Code). Any unauthorized use is strictly prohibited. If you would like to reprint this article for use on a commercial website, please contact Crefcoa for more information. Visit Crefcoa's home page to learn more about all of our commercial loan and apartment loan programs.