How Is DSCR Calculated?
DSCR = Net Operating Income (NOI) / Total Debt Service. NOI is rental income minus operating expenses (property management, maintenance, insurance, taxes) but before mortgage payments. If a property generates $60,000 NOI and has $48,000 in annual mortgage payments, the DSCR is 1.25. This means the property earns 25% more than needed to cover the debt.
Why Does DSCR Matter to Investors?
DSCR tells you whether a property can sustain itself financially. A DSCR below 1.0 means the property loses money after debt service — you would need to cover the shortfall out of pocket. Higher DSCRs provide safety margins for unexpected vacancies, repairs, or rent decreases. Seasoned investors target DSCRs of 1.25 or higher for comfortable cash flow.
What Is a DSCR Loan?
A DSCR loan is a type of investment property mortgage that qualifies borrowers based on the property's income rather than the borrower's personal income. This makes them popular with self-employed investors and those with complex tax returns. Lenders typically require a minimum DSCR of 1.0 to 1.25, a larger down payment (often 20-25%), and charge slightly higher rates than conventional loans.
Frequently asked questions
What is a good DSCR for rental property?
A DSCR of 1.25 or higher is generally considered good, meaning the property earns 25% more than its debt payments. Conservative investors aim for 1.5+. A DSCR below 1.0 indicates negative cash flow and is a red flag.
Does DSCR include all property expenses?
DSCR uses net operating income, which subtracts operating expenses like taxes, insurance, maintenance, and management fees from gross income. It does not subtract capital expenditures or mortgage payments — the mortgage is the denominator of the ratio.