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What is DSCR?

Debt-Service Coverage Ratio (DSCR) is a measure of the available cash flow to service debt generated by a subject property. The available cash flow to service debt (net operating income or NOI) is calculated by the lender during or prior to underwriting. Below is an example of how DSCR is calculated.

Income
Gross Potential Rents$2,000,000
5% Vacancy and Collection loss-$100,000
Effective Gross Income$1,900,000
Expenses
Management 5%$100,000
Real Estate Taxes$50,000
Repairs & Maintenance$40,000
Utilities$30,000
Property Insurance$45,000
Replacement Reserves$15,000
Total Operating Expenses$280,000
Net Operating Income (NOI)$1,620,000

Now that Net Operating Income (NOI) is determined, we find the DSCR by dividing the NOI by the annual payments for the proposed loan.

Proposed Loan Terms:

  • Loan amount of $10,000,000
  • Interest rate of 4%
  • Amortization of 30 years

The total annual payments for the proposed loan are approximately $570,000. If we divide the NOI by $570,000, we arrive at the DSCR of the proposed loan. In our example, this is

($1,620,000) / ($570,000) = 2.83

This means there is 2.83 times as much available cash flow as is needed to make the loan payments. A DSCR below 1.00 means the loan can’t be supported by the subject property.