So, what is DSCR in real estate? Here’s the definition:
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.
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.
