Debt Service Coverage Ratio

The debt service coverage ratio is used to measure if an investment will produce enough cash flow to make its debt payments. It's commonly used by lenders to determine whether or not an income-producing property will qualify for a loan. The DSCR is used in the commercial real estate industry more often than in the residential market. Lenders use the debt service ratio to see if the commercial property in question will generate sufficient revenue to pay off the loan. If it will, lenders are happy to loan money, but if it won't it can be very hard to obtain financing.

A debt service coverage ratio greater than 1 means the property will generate enough revenue to pay off its debt while a ratio less than 1 means the property will not generate enough revenue to pay the monthly debt service. In this case, additional money would be needed every month to pay the amount due. Each lender will have their own minimum cutoffs but typically a DSCR of 1.25 - 1.5 is the minimum acceptable value that will still qualify you for a loan. A number greater than 1.5 is usually treated as preferential and in some cases can help you obtain more favorable financing or a lower interest rate.

DSCR is not only a useful metric for mortgage lenders, real estate investors also use the debt service coverage ratio to decide whether a property will produce an adequate return on investment. Investors can use the debt service coverage ratio formula to compare properties and quickly ascertain whether an available property is likely to make its payments and qualify for financing.

While the debt service coverage ratio is a valuable tool, real estate investors should not rely solely on this metric to evaluate an investment opportunity. There are many other useful metrics that give valuable insights and when these metrics are used together an investor gets a much clearer picture of the overall situation and can make a more informed decision.

The debt service coverage ratio (DSCR) can be calculated using the following formula:


Debt service is the mortgage payment for the property.
NOI is the net operating income for the property

For example, if you wanted to get a loan with a $2,000/month mortgage payment the property you are financing would need to have a monthly NOI of at least $2,500 to qualify. $2,500 / $2,000 = 1.25

With a little reverse math, you can also use the debt service coverage ratio formula to determine how large of a loan you can qualify for.


For example, if you were trying to obtain financing for a commercial property with a net operating income of $2,500/month and you know your lender requires a DSCR of at least 1.25, you could calculate how large of a payment you could qualify for. $2,500 / 1.25 = $2,000/month.