DSCR for Rental Property: How to Calculate It (Example)

Debt service coverage ratio (DSCR) asks a simple question about a financed rental: does the property's net operating income cover its loan payments, and by how much? It is one number that puts income and financing side by side, which makes it a useful check next to cap rate and cash-on-cash return.

The formula

A DSCR above 1.0 means NOI is larger than the loan payments; exactly 1.0 means they are equal; below 1.0 means NOI does not cover the payments and the difference has to come from somewhere else. With no loan there is no debt service, so DSCR does not apply.

How the Rental Deal Analyzer computes it

In the Rental Deal Analyzer, DSCR sits in the Results section of the Analyzer tab as DSCR (NOI / debt service), one column per property, using these definitions:

Things to know about these definitions, which can differ from what a lender uses:

• Debt service is principal and interest only. Property tax, insurance and HOA are counted in operating expenses, not in the payment.
• Vacancy, maintenance and a CapEx reserve are inside NOI. Some calculations leave reserves out, which makes NOI and DSCR look higher.
• Income is what you enter. A lender may use its own rent figure (for example from an appraisal or a lease) and its own expense assumptions.

Worked example

Example only: made-up round numbers, not a real property, loan or market. Purchase price $250,000; 25% down; 7% interest, 30-year loan; monthly rent $2,000 (no other income); 5% vacancy; property tax $3,000/yr; insurance $1,500/yr; no HOA or owner-paid utilities; maintenance 8% and CapEx reserve 5% of rent; self-managed (0%).

1. Gross scheduled income: $2,000 × 12 = $24,000
2. Effective gross income: $24,000 × (1 − 0.05) = $22,800
3. Operating expenses: $3,000 + $1,500 + $24,000 × (0.08 + 0.05) = $4,500 + $3,120 = $7,620
4. NOI: $22,800 − $7,620 = $15,180
5. Loan: $250,000 × (1 − 0.25) = $187,500. Monthly P&I at 7% for 30 years ≈ $1,247.44, so annual debt service ≈ $14,969.31
6. DSCR: $15,180 ÷ $14,969.31 ≈ 1.01
7. Cash flow before income taxes: $15,180 − $14,969.31 ≈ $210.69 per year

Here NOI only just covers the loan payments, so a small rise in expenses or vacancy would push DSCR below 1.0. Working backward is also useful: if your own target were a DSCR of 1.25, the highest annual debt service this NOI supports is $15,180 ÷ 1.25 = $12,144, or $1,012 per month in P&I. You could then look at what loan amount, rate or down payment gets the payment there.

To see the same NOI and loan payment as a monthly figure, see how to calculate rental property cash flow.

What lenders look at

Lenders that use DSCR set their own minimums and their own ways of calculating income, expenses and payments, and these vary by lender, loan type and property. Ask each lender how they compute DSCR and what they require before you rely on a number. Treat any target you set in a spreadsheet as your own screen, not a lender rule.

What DSCR leaves out

• It does not tell you how much cash you put in. Cash-on-cash return covers that.
• It ignores appreciation, principal paydown and income taxes.
• It is only as good as your rent, vacancy and expense estimates. Real expense records help: see rental property expense categories.
• For a quick first screen before any of this, see the 1% rule.

Not investment advice. These are estimates that depend entirely on the numbers you enter. Check figures with your lender and a qualified professional before you buy. Not legal or tax advice; rules vary by state and city.

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