In other words, the NOI of this property is just enough to cover the loan payment obligations, but not a dollar more. In this case, the debt service coverage ratio of this property is 1.0x. Suppose a potential investment property has a yearly net operating income (NOI) of $100,000 and an annual debt service of the same amount – also $100,000. In other words, it is the net income a property owner will receive before accounting for loan payments, depreciation and capital reserves.Ī property’s debt service is simply the sum of all loan payments (principal and interest only) that the owner will pay for that property. The debt service coverage ratio can be calculated by dividing a property’s yearly net operating income (NOI) by its yearly deb service:Ī property’s net operating income can be calculated by subtracting all operating expenses from the operating income. The Debt Service Coverage Ratio (DSCR) Formula This ratio can be used to assess the level of risk when underwriting an investment property, as well as the level of a safety net the property’s NOI provides, should market conditions deteriorate. The DSCR is an indicator of whether a property’s net operating income (NOI) is sufficient to cover its loan payments in any given year. The debt service coverage ratio (DSCR), also called the debt coverage ratio (DCR), is often used by real estate lenders when underwriting loans for rental properties, especially when working with commercial real estate.
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