Debt Service Coverage Ratio (DSCR), sometimes called the debt service ratio, is the ratio of net operating income (NOI) to yearly debt service. It is a measure of the amount of net income from a property that is available to make payments on its debt.
A DSCR of 1.25 means that for each $1 in mortgage expense, the property has $1.25 of net operating income (NOI).
The formula for Debt Service Coverage Ratio (DSCR) is:
To calculate a DSCR, you will need a property's net operating income (NOI) and its mortgage payment. You divide the NOI by its annual debt service (12 months of mortgage payments) to get the DSCR, usually represented as a number and two decimal spaces (i.e. 1.37). For more on net operating income, see Calculating Multifamily NOI.
Debt service coverage ratio is important because it is a primary metric used by lenders to determine maximum loan amount, loan terms and loan rates. For multifamily loans, the minimum DSCR will generally range from 1.20-1.40 depending on the location of the property.