If you’re a real estate investor, you’ve likely heard about the importance of your Debt-Service Coverage Ratio (DSCR). It’s a key metric lenders use to evaluate whether your property’s income can cover its debt obligations—and it plays a huge role in determining your loan approval.
The good news? Calculating your DSCR isn’t as complicated as it sounds. Let’s break it down step by step, explore real-world examples, and show you how understanding your DSCR can help you make smarter investment decisions.
Quick Tip: Don’t want to do the math yourself? Use our DSCR Calculator to get your ratio in seconds.
What Is DSCR, and Why Does It Matter?
DSCR, or Debt-Service Coverage Ratio, measures a property’s ability to generate enough income to cover its loan payments. For real estate investors, it’s a critical indicator of a property’s financial health and viability.
Here’s the formula lenders use:
– DSCR Formula: Monthly Net Operating Income (NOI) ÷ Monthly Debt Service
Example: If your property generates $2,000 in monthly rental income, has $600 in monthly operating expenses, and $1,200 in monthly loan payments, your DSCR is 1.17. This means your property earns 17% more than it needs to cover its debt—a reasonable ratio for many lenders.
Why It Matters: A DSCR of 1 or higher indicates the property’s income covers its debt, while a ratio below 1 may signal risk to lenders.
Step-by-Step Guide to Calculating DSCR
1. Calculate Monthly Net Operating Income (NOI):
NOI is your property’s total monthly rental income minus monthly operating expenses (not including loan payments). For example:
- Monthly Rental Income: $2,000
- Monthly Operating Expenses: $600
- Monthly NOI: $2,000 – $600 = $1,400
2. Determine Your Monthly Debt Service:
This is the monthly payment you make toward your loan, which includes both principal and interest. For example:
- Monthly Loan Payment: $1,200
3. Divide Monthly NOI by Monthly Debt Service:
- DSCR Formula: $1,400 ÷ $1,200 = 1.17
That’s it! In this example, your DSCR is 1.17, meaning your property generates 17% more income than it needs to cover its loan payments.
Want a quicker way? Use our DSCR Calculator to simplify your calculations and see how your property performs.
How Lenders Use DSCR to Evaluate Loan Approval
Lenders rely heavily on DSCR to assess the risk of lending to you. Here’s what they’re looking for:
- 1.2 or Higher: Most lenders prefer a DSCR of at least 1.2, meaning the property earns 20% more than its debt obligations.
- Lower Than 1: This indicates the property’s income doesn’t fully cover its debt, making loan approval more difficult.
- Tailored Ratios: Some lenders may accept a lower DSCR if you have strong overall financials or if the property is in a high-demand area.
Pro Tip: Understanding your DSCR can help you negotiate better loan terms or decide if a property is worth pursuing.
How DSCR Fits Into the BRRRR Strategy
If you’re using the BRRRR strategy (Buy, Rehab, Rent, Refinance, Repeat), understanding and calculating your DSCR is essential—especially during the Refinance stage. Here’s why:
- After rehabbing and renting your property, lenders will evaluate your DSCR to determine how much equity you can cash out.
- A strong DSCR not only increases your chances of loan approval but also helps you access more funds for your next investment.
Want to see how this works in action? Read our guide on How to Master the BRRRR Strategy with Fix and Flip and DSCR Loans.
Real-World Example: Calculating DSCR
Meet Sophia, a real estate investor exploring a rental property in a bustling urban area. Here’s how she calculates the property’s DSCR:
- Monthly Rental Income: $2,100
- Monthly Operating Expenses: $488
- Monthly Loan Payment: $1,400
Step 1: Sophia calculates the Monthly NOI:
$2,100 (Rental Income) – $488 (Operating Expenses) = $1,612
Step 2: Sophia determines the Monthly Debt Service:
$1,400
Step 3: Sophia calculates the DSCR:
$1,612 ÷ $1,400 = **1.15**
In this scenario, Sophia’s property meets the minimum DSCR requirement of 1.1, making it eligible for financing. While higher ratios are always better, this is sufficient to move forward with her investment plan.
FAQs About Calculating DSCR
Can DSCR vary by property type?
Yes! Multi-family properties often have higher operating costs, which can impact DSCR calculations.
What’s the minimum DSCR I need for approval?
While 1.1 is the standard, some lenders accept lower ratios for properties in high-demand areas or with strong growth potential.
Your Next Steps
Understanding your DSCR is the first step to securing financing and making smart investment decisions. Whether you’re evaluating a potential deal or preparing for refinancing, knowing your DSCR gives you a clear advantage.
What to Do Next:
– Use our DSCR Calculator to calculate your ratio quickly.
– Learn how DSCR loans fit into the BRRRR strategy.
– Ready to move forward? Start Your Approval or Contact Us today.
