How to Calculate DSCR (Debt Service Coverage Ratio)
DSCR tells you whether a property's income covers its loan payments. Here is the formula, a worked example, and the thresholds lenders actually use to approve deals.
If you have ever applied for an investment-property loan, you have run into DSCR — even if no one explained it. It is the single number a lender looks at to decide whether a property can pay for its own loan. Get it wrong and your financing falls through; understand it and you can size deals the way a lender does, before you ever apply.
What DSCR actually measures
DSCR, or debt service coverage ratio, compares a property's income to its debt payments. It answers one question: does this property earn enough to cover its loan?
The formula is simple:
DSCR = Net Operating Income ÷ Annual Debt Service
- Net Operating Income (NOI) is your rental income minus operating expenses — taxes, insurance, management, maintenance, vacancy. It does not subtract the mortgage.
- Annual Debt Service is the total of all principal and interest payments on the property's loans for the year.
A DSCR of 1.0 means income exactly equals the loan payment. Above 1.0, the property throws off more than it owes. Below 1.0, it loses money before you have paid yourself a dollar.
A worked example
Say you are looking at a small rental:
- Gross annual rent: $48,000
- Operating expenses (taxes, insurance, management, maintenance, vacancy): $18,000
- Net operating income: $48,000 − $18,000 = $30,000
- Annual mortgage payments (principal + interest): $24,000
Run the numbers:
DSCR = $30,000 ÷ $24,000 = 1.25
A DSCR of 1.25 means the property earns $1.25 for every $1.00 of debt service — a 25% cushion above the loan payment. That is right in the range most lenders want to see.
What counts as a "good" DSCR
Thresholds vary by lender and loan type, but the rough map looks like this:
- Below 1.0 — income does not cover the loan. Most lenders decline.
- 1.0 to 1.20 — tight. Possible, but expect scrutiny or a larger down payment (a lower LTV).
- 1.25 — the common minimum for investment-property and DSCR loans.
- 1.40 and above — strong. More borrowing room and better terms.
The reason lenders want a buffer above 1.0 is simple: a single bad month — a vacancy, a roof repair, a tax hike — should not push the property into the red. The cushion is their margin of safety, and it should be yours too.
Why DSCR is not the whole picture
DSCR is a lender's metric. It tells you whether a property can service its debt, not whether it is a good investment for you. A property can clear a 1.4 DSCR and still deliver a mediocre return on the cash you put in — that is what cash-on-cash return measures. And the income figure feeding DSCR depends entirely on getting net operating income right, which is where most beginner underwriting goes wrong.
Read the two together. DSCR keeps you financeable; cash-on-cash keeps you profitable.
Tracking DSCR across a portfolio
For one property, DSCR is a back-of-the-envelope calculation. Across ten properties with different loans, refinance dates, and rent rolls, it becomes a moving target — and a falling DSCR on one asset is an early warning you want to catch before the lender does.
That is exactly what Portfoliq's debt optimizer watches: per-loan and portfolio-wide DSCR, updated as your income and debt change, with refinancing opportunities surfaced before coverage gets tight. You see the number a lender would see, continuously, instead of rebuilding a spreadsheet every quarter.
The takeaway
DSCR is the income-to-debt ratio that decides whether a property can carry its loan. Calculate it as NOI divided by annual debt service, aim for 1.25 or higher, and never confuse a healthy DSCR with a healthy return — they answer different questions. Master it and you will underwrite deals with a lender's eye, long before you fill out an application.