How to Calculate DSCR on a Rental Property

DSCR, or debt service coverage ratio, answers one question. Does this property's income cover its debt payments, with room to spare? Lenders use it to decide whether to fund a deal. Investors use it to decide whether a deal can survive a bad month.

The formula

DSCR = Net Operating Income divided by Annual Debt Service. Net operating income (NOI) is rental income minus operating expenses, before the mortgage payment. Annual debt service is the total principal and interest paid on the loan over a year.

A worked example

A property brings in $30,000 a year in rent. Operating expenses (taxes, insurance, maintenance, management, a vacancy reserve) run $10,000 a year, leaving $20,000 in NOI. The mortgage payment is $1,400 a month, or $16,800 a year in debt service.

$20,000 divided by $16,800 comes out to a 1.19 DSCR. This property generates 19% more income than it needs to cover its debt payments.

What counts as a good DSCR

• Below 1.0: the property does not generate enough income to cover its own debt payments. Most lenders will not fund this without real compensating factors.
• 1.0 to 1.25: covers debt, but with a thin margin. This is the common minimum for conventional investment-property lending.
• 1.25 to 1.5 and up: a real cushion against a vacancy or an unexpected repair. Preferred by many lenders on larger commercial loans, and by conservative investors on any deal.

There is no single right target. It depends on the lender, the property type, and how much cushion you personally want against a bad month. Commercial and multi-family lenders often set a hard minimum in the loan terms. Residential investors evaluating their own deals have more flexibility, but a DSCR near 1.0 leaves no room for error.

Run it on your own numbers

DSCR only means something with your property's real income and expenses, not rough estimates. RentLedger's calculator runs DSCR, cap rate, and cash-on-cash return together on the same deal, so you can see how they relate before you commit to a purchase or refinance.