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DSCR stands for Debt Service Coverage Ratio. This is a key financial metric used by lenders and investors to assess the financial health and cash flow of a real estate project. The ratio provides a measure of the cash flow available to pay the current debt obligations of a property.

DSCR is calculated as follows: DSCR = Net Operating Income (NOI) / Debt Service

  • Net Operating Income (NOI) refers to the total income generated by a property (e.g., rent payments) minus the operational expenses (not including mortgage payments).
  • Debt Service refers to the total amount of current debt obligations, including both principal and interest payments on the loan(s) for the property.

A DSCR of greater than 1.0 indicates that there is enough NOI to cover the annual debt payments. A DSCR less than 1.0 implies that there is insufficient income to cover the debt, which signals a higher risk for lenders and investors. For example, a DSCR of 1.2 means that the property’s net income is 1.2 times greater than its annual debt service, suggesting a decent cushion for payments. Typically, lenders prefer a DSCR of 1.2 or higher when considering a loan for a real estate investment.