Debt Service Coverage Calculator Formula
Understand the math behind the debt service coverage calculator. Each variable explained with a worked example.
Formulas Used
Debt Service Coverage Ratio
dscr = net_operating_income / annual_debt_serviceAnnual Surplus After Debt
surplus = net_operating_income - annual_debt_serviceMonthly Surplus After Debt
monthly_surplus = (net_operating_income - annual_debt_service) / 12Variables
| Variable | Description | Default |
|---|---|---|
net_operating_income | Net Operating Income (NOI)(USD) | 48000 |
annual_debt_service | Annual Debt Service(USD) | 36000 |
How It Works
Debt Service Coverage Ratio
DSCR measures the ability of a property to generate enough income to pay its debt obligations.
Formula
DSCR = Net Operating Income / Annual Debt Service
Interpretation
Worked Example
A property generates $48,000 NOI with $36,000 in annual debt payments.
- 01DSCR = $48,000 / $36,000 = 1.33
- 02Annual surplus: $48,000 - $36,000 = $12,000
- 03Monthly surplus: $12,000 / 12 = $1,000
- 04A DSCR of 1.33 means the property earns 33% more than needed to cover debt
Frequently Asked Questions
What DSCR do lenders require?
Most commercial lenders require a minimum DSCR of 1.20 to 1.35. Some DSCR loan programs for residential investment properties go as low as 1.0 or even 0.75 but at higher interest rates.
What is included in annual debt service?
Annual debt service includes all principal and interest payments on the property mortgage(s) for the year. It typically does not include operating expenses, which are already deducted to calculate NOI.
How can I improve my DSCR?
Increase NOI by raising rents, reducing vacancies, or cutting operating expenses. Alternatively, reduce debt service by making a larger down payment, extending the loan term, or securing a lower interest rate.
Ready to run the numbers?
Open Debt Service Coverage Calculator