DSCR Calculator
Calculate your Debt Service Coverage Ratio and understand how lenders evaluate your deal.
Use this free calculator from CapitalAx Commercial Lending to analyze your commercial financing scenario. For personalized guidance on your specific deal, request a quote or call our team.
What is DSCR?
DSCR (Debt Service Coverage Ratio) measures how much cash flow a property generates relative to its debt obligations. Lenders use this ratio as a primary underwriting metric for commercial real estate loans. A higher DSCR means lower risk for the lender and generally results in better loan terms.
The DSCR Formula
DSCR equals net operating income divided by annual debt service. Annual debt service is the total of all principal and interest payments due in a twelve-month period.
DSCR = Net Operating Income / Annual Debt Service
How to Calculate NOI
Net operating income is the income left after paying all property operating expenses but before debt service. It does not include mortgage payments, depreciation, or income taxes.
NOI = Gross Rental Income - Vacancy Loss - Operating Expenses
Operating expenses include property taxes, insurance, maintenance, property management fees, and utilities paid by the owner. They do not include debt service.
Worked Example
A 10-unit apartment building collects $18,000 per month in gross rent, or $216,000 per year. Vacancy runs about 5 percent, so effective gross income is $205,200. Annual operating expenses (taxes, insurance, maintenance, and management) total $72,000, leaving an NOI of $133,200.
The owner takes a $1,400,000 loan at 7.0 percent with a 25-year amortization. That loan produces annual debt service of roughly $118,740.
NOI = $205,200 - $72,000 = $133,200
DSCR = $133,200 / $118,740 = 1.12x
A 1.12x DSCR clears the minimum threshold most lenders set at 1.0x but falls short of the 1.25x that earns the best terms. Reducing expenses or increasing rents would improve the ratio.
What DSCR Do Lenders Require?
Most commercial lenders require a minimum DSCR of 1.20x to 1.25x. DSCR loan programs for investment properties generally set a floor of 1.0x to 1.25x depending on property type and loan-to-value ratio. A ratio above 1.35x typically qualifies a borrower for the most competitive rates and terms.
Frequently Asked Questions
What is DSCR?
DSCR, or Debt Service Coverage Ratio, measures how much cash flow a property generates relative to its debt obligations. Lenders use it as a primary underwriting metric for commercial real estate loans. A higher DSCR means lower risk for the lender and generally results in better loan terms.
How do you calculate DSCR?
Divide annual net operating income by annual debt service, which is the total principal and interest due over twelve months. A property with $133,200 in NOI and $118,740 in annual debt service has a DSCR of 1.12x. The calculator above does this for you.
What is a good DSCR ratio?
Most commercial lenders view 1.25x or higher as strong. A ratio between 1.0x and 1.25x meets some minimum thresholds but leaves little margin for vacancy or expense swings, and a ratio above 1.35x typically qualifies for the most competitive rates and terms.
What does a DSCR below 1.0 mean?
A DSCR below 1.0 means the property's income does not cover its debt payments, so the owner would need to fund the shortfall from other sources. Most lenders will not approve financing at this level without additional collateral or guarantor support.
What DSCR do lenders require?
Most commercial lenders require a minimum DSCR of 1.20x to 1.25x. DSCR loan programs for investment properties generally set a floor of 1.0x to 1.25x depending on property type and loan-to-value ratio.
How can I improve my DSCR?
Raise net operating income by increasing rents, reducing vacancy, or cutting operating expenses, or lower annual debt service by borrowing less, extending amortization, or securing a lower rate. Small changes in NOI or debt service can move the ratio meaningfully.