Debt Service Coverage Ratio (DSCR) measures a property's ability to cover its debt payments with its rental income. It is the primary qualification metric for investment property loans.
DSCR = Net Operating Income / Annual Debt Service. A DSCR of 1.0 means the property generates exactly enough income to cover the mortgage payment. Lenders typically require 1.0 to 1.25.
Higher DSCR means better cash flow and easier qualification. DSCR is used for DSCR loans which qualify based on property income rather than personal income.
Formula
DSCR = Net Operating Income (NOI) / Total Debt Service. NOI = rental income minus operating expenses (property taxes insurance management HOA vacancy reserves). Debt Service = annual mortgage payment (P&I).
Calculation
Example: Monthly rent ,000. Expenses 00/month. NOI = ,500/month x 12 = 8,000/year. Monthly mortgage payment ,200. Annual debt service 4,400. DSCR = 8,000/4,400 = 1.25.
What It Means
1.0 DSCR means income equals expenses exactly. 1.25 means income is 25% above expenses providing a cushion. Below 1.0 means the property loses money each month. Lenders want a cushion above 1.0.
Lender Requirements
Minimum DSCR requirements: Conventional investment loans typically 1.0-1.15. DSCR loans typically 1.0-1.25. Portfolio lenders may accept 0.75-1.0 with strong borrower qualifications.
How to Improve
To improve DSCR: increase rent, reduce expenses, lower the interest rate with a larger down payment, or add a co-borrower. Even small improvements in NOI can significantly improve DSCR.
By Property Type
Single-family rentals: typically need 1.0-1.15 DSCR. Multi-family: 1.15-1.25. Commercial: 1.2-1.4. Short-term rentals (Airbnb): 1.0-1.25. New construction rentals: may need higher DSCR due to lease-up risk.