DSCR (Debt Service Coverage Ratio) measures a property's ability to cover its loan payments from operating income. It's the primary metric commercial lenders use to approve or decline a loan. Understanding DSCR is essential for financing any income-producing property.
Where NOI is Net Operating Income and Annual Debt Service is the total principal + interest payments over 12 months.
A DSCR of 1.0 means the property exactly covers its debt. Above 1.0 means income exceeds payments. Below 1.0 means the property is losing money after debt.
| DSCR | What It Means | Lender Response |
|---|---|---|
| Below 1.0 | Property can't cover debt | Loan denied |
| 1.00 – 1.15 | Barely breaking even | Very difficult to finance |
| 1.15 – 1.24 | Marginal coverage | May require more equity down |
| 1.25 – 1.40 | Adequate coverage | Standard approval range |
| Above 1.40 | Strong coverage | Best rates and terms |
Purchase Price: $2,500,000
Loan Amount (75% LTV): $1,875,000 at 6.5% interest, 25-year amortization
Monthly Payment: ~$12,730 → Annual Debt Service: $152,760
Property NOI: $195,000/year
DSCR = $195,000 / $152,760 = 1.28
This clears the 1.25 threshold — the deal is financeable at standard terms.
DSCR directly determines how much you can borrow. If a property's DSCR is below the lender's minimum at a given loan amount, you have three options:
Cap rate ignores financing entirely — it measures unlevered yield. DSCR is the opposite: it's all about whether the debt is serviceable. You need both. A property can have a great cap rate but fail DSCR if you're over-leveraged, or pass DSCR at one interest rate and fail when rates rise.
When modeling a deal, always stress-test DSCR against a rate 1–2% higher than current market to understand your margin of safety.
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