What DSCR measures
The debt service coverage ratio compares a property's net operating income to its annual loan payments. It answers the lender's first cash flow question: does the property earn enough to pay the loan, with room to absorb a vacancy or an expense increase?
DSCR = net operating income / annual debt service. A ratio of 1.00x means the property earns exactly enough to make the payments. Anything below 1.00x means the owner has to fund the shortfall.
Worked example
A property with $650,000 of net operating income and a $7,000,000 loan at 7.00% on a 30-year amortization has annual debt service of $558,854 and a DSCR of 1.16x. At a 1.25x target, the largest loan the same income supports is $6,513,328.
What counts as net operating income
Net operating income is gross rent and other property income, less vacancy and credit loss, less operating expenses such as taxes, insurance, utilities, repairs, and management. It excludes the loan payment, depreciation, and income taxes. Lenders underwrite their own version of it, often with a management fee and replacement reserves deducted even if the owner does not pay them today, so an underwritten figure can be lower than the owner's.
How lenders use DSCR
Lenders set a minimum coverage level that varies by property type, lender, and loan program. Stabilized assets with durable income usually qualify at lower minimums than transitional, specialized, or single-tenant assets. When coverage limits proceeds, the options include a longer amortization, an interest-only period, a lower loan amount, or a bridge loan sized to the business plan rather than today's income.
Common questions
What is a good DSCR for a commercial loan?
Any ratio above 1.00x means income covers the payment. Lenders require a margin above that, and the minimum depends on the property type, lender, loan program, and leverage. Stabilized, lower-risk assets usually qualify at lower minimums than transitional or specialized property.
How do I calculate DSCR?
Divide annual net operating income by annual debt service. A property with $650,000 of net operating income and $520,000 of annual debt service has a DSCR of 1.25x.
What is the difference between DSCR and debt yield?
DSCR depends on the interest rate and amortization because it uses the loan payment. Debt yield divides net operating income by the loan amount, so it ignores rate and amortization. Many lenders apply both tests.
Can I get a commercial loan with a low DSCR?
Sometimes. A longer amortization or interest-only period raises coverage, and a smaller loan does too. Bridge lenders may lend against a business plan that increases income, and subordinate capital can fill a gap when senior proceeds are limited by coverage.