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The debt service coverage ratio, or DSCR, is a useful metric for assessing a borrower’s ability to cover debt obligations. In real estate, it can measure how easily the net income a property generates can cover its mortgage.
The DSCR is one tool real estate investors often use when evaluating potential investment properties. It’s also an important factor lenders consider when investors apply for or refinance loans on multifamily buildings or other commercial properties.
DSCR = net operating income (NOI) / total debt service
You can calculate the DSCR at the property or portfolio level. To calculate a property’s DSCR, divide its annual NOI by its annual debt service payments, which include principal and interest. For instance, a property generating $450,000 of NOI with $250,000 in debt service would have a DSCR of 1.8. That means there’s $1.80 of income for every $1 of debt service.
A global DSCR, on the other hand, includes a real estate investor’s total NOI and debt service across their entire portfolio.
NOI = total income – total operating expenses
Certain costs a property owner pays aren’t included in operating expenses when calculating NOI. For instance, investors often exclude one-time projects, such as replacing a roof, and instead factor in a set annual amount that will cover capital expenditures as they arise. Expenses unrelated to the property’s operations—like loan payments—are also excluded.
Accurately assessing NOI is important, as an inflated NOI will overestimate a property’s ability to generate income to cover mortgage payments, while an NOI that’s too low underestimates how much income will be available to service debt.
Both real estate investors and lenders use the DSCR to assess whether a rental property’s operating cash flow can sustainably support its debt—or the debt required to acquire or refinance a property.
What’s a good DSCR? Each investor or lender may have different standards, which may vary across property types and markets. A property’s DSCR can also change over time if its NOI rises or falls.
Lenders consider the DSCR—at both the property and portfolio level—when assessing a real estate investor’s loan application. At the property level, the DSCR is one factor in determining the size of the loan offered. Understanding their lender’s expected DSCR can help a real estate investor evaluate potential investment properties and strategies for financing those properties.
Looking at global DSCR, meanwhile, can offer insights into how an investor is managing income and debt across their full portfolio of rental properties, and how acquiring or refinancing a property could influence that balance. Global DSCR can also be useful for understanding how changes in interest rates could affect an investor’s portfolio, particularly if the investor has properties with adjustable-rate mortgages.
Digital banking platforms can help commercial real estate businesses gain more visibility into cash flow and improve efficiency and security.
JPMorgan Chase Bank, N.A. Member FDIC. Visit jpmorgan.com/cb-disclaimer for disclosures and disclaimers related to this content.
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