How to Calculate DSCR for Investment Properties (With Real Examples)
Debt Service Coverage Ratio (DSCR) is one of the most important metrics in real estate investing—especially when financing rental properties using DSCR loans. Unlike conventional mortgages that focus on borrower income, DSCR loans evaluate the property’s ability to pay for itself.
This guide breaks down how to calculate DSCR step by step, explains what lenders look for, and walks through real-world examples investors actually encounter.
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What Is DSCR in Real Estate?
DSCR stands for Debt Service Coverage Ratio. It measures how much income a property generates compared to its debt obligations.
Lenders use DSCR to assess risk on income-producing properties because it shows whether the asset itself can support the loan—without relying on the borrower’s personal income.
DSCR Formula Explained
The formula for calculating DSCR is simple:
DSCR = Net Operating Income (NOI) ÷ Annual Debt Service
A DSCR of 1.00 means the property breaks even. Anything above 1.00 indicates positive cash flow, while anything below 1.00 signals a shortfall.
What Counts as Net Operating Income (NOI)?
Net Operating Income is the income a property generates after operating expenses but before debt payments.
Included in NOI:
- Gross rental income
- Laundry or parking income
- Pet fees or storage income
Excluded from NOI:
- Mortgage payments
- Loan interest
- Depreciation
Operating expenses typically include taxes, insurance, management, maintenance, and reserves.
What Is Annual Debt Service?
Annual debt service is the total principal and interest paid on a loan over a 12-month period.
For DSCR loans, lenders often calculate debt service using either interest-only payments or fully amortized payments depending on the loan structure.
Real DSCR Calculation Examples
Example #1: Strong DSCR Property
Gross rent: $120,000
Operating expenses: $45,000
NOI: $75,000
Annual debt service: $60,000
DSCR = $75,000 ÷ $60,000 = 1.25
This is considered a strong DSCR and often qualifies for favorable loan terms.
Example #2: Break-Even DSCR
NOI: $60,000
Debt service: $60,000
DSCR = 1.00
Many lenders allow this, especially for experienced investors.
Example #3: Low DSCR Scenario
NOI: $50,000
Debt service: $60,000
DSCR = 0.83
This may still be financeable using higher down payments or asset-based lending.
What DSCR Do Lenders Require?
Most DSCR lenders look for ratios between 1.00 and 1.25.
- 1.25+ = Best pricing
- 1.00–1.24 = Standard approval range
- Below 1.00 = Alternative structures required
DSCR Loans vs Conventional Loans
Conventional loans focus on borrower income and debt-to-income ratios. DSCR loans focus on property performance.
This makes DSCR loans ideal for investors scaling portfolios, refinancing after fix-and-flip projects, or exiting short-term hard money loans.
Final Thoughts
Knowing how to calculate DSCR gives investors leverage. When you understand your numbers before applying, you control the deal—not the lender.
If you’re evaluating long-term rental financing, understanding DSCR is the first step toward structuring smarter, more scalable investments.
Frequently Asked Questions About DSCR
What is a good DSCR for rental properties?
A good DSCR for rental properties is typically 1.25 or higher. This indicates the property generates at least 25% more income than required to cover its debt payments. Many DSCR lenders will approve loans with a DSCR as low as 1.00, depending on loan terms and equity.
Can you qualify for a DSCR loan with a DSCR below 1.0?
Yes, it is possible to qualify for a DSCR loan with a ratio below 1.0. Some lenders allow lower DSCRs when the borrower provides a larger down payment, accepts interest-only payments, or uses asset-based lending as a temporary solution.
Do DSCR lenders calculate DSCR differently?
Yes, DSCR calculations can vary by lender. Differences may include how rental income is estimated, whether expenses are standardized, and how debt service is calculated. This is why investors should understand lender-specific guidelines when comparing DSCR loan programs.
Does DSCR include taxes, insurance, and HOA fees?
Yes, most DSCR lenders include property taxes, insurance, and HOA fees when calculating expenses. These costs reduce net operating income, which directly impacts DSCR. Accurately accounting for all operating expenses is critical when evaluating DSCR-based rental financing.