What Is a Debt Service Coverage Ratio?

In multifamily and commercial real estate, debt service coverage ratio, or DSCR, is a measurement of a property’s cash flow relative to its debt obligations.

If an income-producing property has a DSCR of less than 1x, that means its income is less than its monthly debt obligations. Alternatively, if it has a DSCR greater than 1x, its income exceeds its monthly debt obligations.

DSCR Calculator

Calculate your property's debt service coverage ratio by using the calculator below. Enter the figures, but do be sure you are using the correct numbers — read below for more details.

DSCR for Multifamily, Commercial Real Estate

When a lender evaluates a potential commercial real estate transaction, DSCR is one of the most highly scrutinized metrics. DSCR is valued because it’s one of the best predictors of a borrower’s ability to pay back a loan on time.

Optimal Debt Service Coverage Ratio

In most commercial real estate financing cases, lenders prefer properties with DSCRs of 1.25x or more, but a lender’s DSCR requirements depend on a combination of the borrower’s financial strength, the type of property, and other factors.

For example, while lenders may require a minimum DSCR of 1.25x for multifamily properties, property types normally deemed riskier than multifamily properties — such as hotels or retail assets — could see that requirement expand as high as 1.40x or 1.50x.

DSCR can be seen as adjacent to loan-to-value and loan-to-cost ratios as a crucial part of any loan decision-making process. If a DSCR is below the preferred criteria for the loan product, lenders may take that as a sign that the borrower will have difficulty paying back the loan on time.

DSCR Formula

The formula for calculating debt service coverage ratio is fairly straightforward, given below:
⁠DSCR = Net Operating Income ÷ Debt Obligations

While it may be a simple calculation, an investor will need to make sure they are using the correct figures for a property to get an accurate result.

Net operating income or NOI, for example, is typically calculated using earnings before interest, taxes, depreciation, and amortization (EBITDA) for DSCR calculations. This means that taxes, interest, and other costs from the NOI calculation should not be deducted before entering it into the DSCR formula. 

The following example shows how the DSCR formula is used in practice:

A multifamily property has an NOI of $3.4 million and annual debt obligations of $2.3 million. In that case, it would have a DSCR of 1.48x, as seen below.

$3.4 million ÷ $2.3 million = 1.48x DSCR

Most lenders would consider this a good DSCR for most multifamily and many commercial real estate finance transactions.

Global DSCR

Sometimes a lender may require more than the standard DSCR metric. In these cases, the more detailed global DSCR is what typically gets used. Global DSCR is a variation of the formula that incorporates the personal finances (income and debts) of the borrower into the calculation. In most cases, global DSCR is typically only requested of small business owners, which may sometimes include small multifamily and commercial real estate investors. Understandably, lenders will want a more in-depth analysis of the DSCR for these transactions to determine if the borrower may be taking on more than they can financially handle.

Borrowers with a high income compared to their debt generally benefit from a global DSCR calculation, while borrowers with lower income and higher personal debts may find obtaining a commercial or multifamily real estate loan to be a more difficult process.