What is DSCR (Debt Service Coverage Ratio)?
The debt service coverage ratio (DSCR) measures whether a property generates enough income to cover its debt payments. It is calculated by dividing the property's net operating income (NOI) by its annual debt service (total annual loan payments including principal and interest). A DSCR above 1.0 means the property's income exceeds its debt obligations. Below 1.0 means the property is not generating enough income to cover its loan payments.
How to calculate DSCR
DSCR = Net Operating Income / Annual Debt Service
Example: NOI of $120,000 / Annual debt payments of $96,000 = 1.25x DSCR
NOI is gross rental income minus operating expenses (property taxes, insurance, maintenance, management, vacancy allowance). It does not include debt payments, capital expenditures, or depreciation. Annual debt service is the total of all loan payments (principal + interest) for the year.
Typical DSCR requirements
| Lender Type | Minimum DSCR | Typical Range |
|---|---|---|
| Conventional bank | 1.20x | 1.20-1.30x |
| CMBS/conduit | 1.25x | 1.25-1.35x |
| Life insurance company | 1.30x | 1.30-1.50x |
| SBA loan | 1.15x | 1.15-1.25x |
| DSCR investor loan | 1.00x | 1.00-1.25x |
DSCR loans for residential investors
DSCR loans have become popular for residential real estate investors. Unlike conventional mortgages that require income documentation (W-2s, tax returns), DSCR loans qualify borrowers based solely on the property's income. If the rent covers the debt service at the required ratio, the loan is approved regardless of the borrower's personal income. This makes DSCR loans ideal for investors with complex tax returns, self-employment income, or multiple properties.
For BRRRR investors, DSCR loans are often used for the refinance step. After renovating and placing a tenant, the investor refinances into a 30-year DSCR loan based on the rental income, pulling their capital out to redeploy.
Improving DSCR
If a property's DSCR is too low for lender requirements, you can increase rents (if market conditions allow), reduce operating expenses, increase the down payment (reducing the loan amount and therefore debt service), negotiate a lower interest rate, or extend the amortization period (reducing annual payments).
DSCR vs debt yield
DSCR depends on the loan terms (interest rate, amortization). A low interest rate makes DSCR look better. Debt yield is independent of loan terms and provides a more absolute measure of risk. Lenders often evaluate both metrics together.