Debt Service Coverage Ratio (DSCR)

DSCR measures a property's ability to cover its annual debt payments using its net operating income. It is calculated by dividing NOI by annual debt service (principal and interest). Most lenders require a minimum DSCR of 1.20x to 1.25x for commercial and multifamily loans, meaning income must exceed debt payments by 20–25% as a cushion against vacancy or expense spikes.

Formula: DSCR = Net Operating Income ÷ Annual Debt Service

DSCR is the single most important underwriting metric in commercial and investor real estate lending because it directly answers the lender's core question: does the property's own cash flow cover the loan payment? Unlike residential mortgages, which underwrite primarily to the borrower's personal income, most commercial and DSCR-loan products underwrite to the asset itself.

Lenders calculate NOI by taking gross rental income, subtracting vacancy loss, and subtracting operating expenses (taxes, insurance, repairs, management fees) — but NOT subtracting debt service, depreciation, or capital expenditures. That NOI figure is then divided by the annual debt service, which includes both principal and interest on the proposed loan.

A DSCR below 1.0x means the property loses money every month before any owner distribution is possible; a DSCR of 1.0x means the property exactly breaks even on debt payments with zero cushion. Because of this, banks, agency lenders (Fannie Mae/Freddie Mac), and DSCR-loan programs for one-to-four unit and small multifamily rentals typically set minimums between 1.15x and 1.35x depending on property type, loan size, and market. Bridge and value-add lenders sometimes accept lower in-place DSCR if a clear stabilization plan exists, but permanent takeout financing almost always requires the loan to clear the standard threshold on trailing or pro forma numbers.

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