What Is DSCR (Debt-Service Coverage Ratio) in Real Estate?

DSCR (Debt-Service Coverage Ratio) measures a property's ability to generate enough net operating income (NOI) to cover its mortgage payments. Lenders and investors use DSCR to evaluate risk and determine whether a property produces sufficient cash flow.

How DSCR Works in Real Estate

DSCR compares a property's net operating income (NOI) to its total annual debt obligations, including mortgage principal and interest.

Formula:

DSCR = Net Operating Income ÷ Annual Debt Service

  • DSCR above 1.0 means the property generates enough income to cover its debt
  • DSCR below 1.0 means the property does not fully cover its mortgage payments
  • Most lenders prefer a DSCR of 1.20–1.40+
  • Lower DSCR means higher investment risk

Example of DSCR

A rental property produces $36,000 per year in net operating income. The mortgage requires $30,000 per year in principal and interest.

DSCR = $36,000 ÷ $30,000 = 1.20

This means the property brings in 20% more income than needed to cover its debt payments — generally acceptable to many lenders.

DSCR vs. NOI vs. Cap Rate

  • DSCR – Measures ability to pay debt
  • NOI – Measures property income before financing
  • Cap Rate – Measures return based on NOI and property value

DSCR is a financing metric, while NOI and cap rate focus on investment performance. Lenders rely heavily on DSCR when approving rental property loans.

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