“DSCR” Debt Service Coverage Ratio Explained

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Debt service coverage ratio determines the maximum LOAN PAYMENT and LOAN AMOUNT that can be placed on a property, based on the property's income... In this video, I show you how it works.

DSCR FORMULAS:
1. Debt Service Coverage Ratio = NOI / Debt Service
2. Maximum Annual Debt Service = NOI / DSCR

Debt Service Coverage Ratio - DSCR is an underwriting term used by lenders that effectively sets a minimum for the amount of net operating income available to cover the debt service. The ratio is often set right around 1.25, sometimes it's 1.2, sometimes it is 1.3, depends on the industry, the market, the market timing, and the product type.

Debt Service Coverage Ratio tells us how much extra cushion we need to have in our net operating income over the debt service or the annual loan payments. In this case, a 1.25 debt service coverage ratio means that the NOI needs to be 125%, or 1.25 times the amount of the annual loan payments. Debt service coverage ratio sets a limit on how much risk the lender's going to take in terms of what they loan compared to the cash flow on the property. They don't want to put borrowers in a position where they have barely enough net income to cover the debt service or, even worse, not enough net income, so the debt service coverage ratio builds in the amount of cushion that they want. Lenders can adjust this for competitive reasons, or market reasons, but it typically is about .25 over the debt service amount.

Example: $100,000 NOI / 1.25 DSCR = $80,000 Max Debt Service

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