How to calculate debt service coverage ratio (DSCR) on a rental property
DSCR is net operating income divided by the year's loan payments (principal and interest). A property with $78,000 of NOI and $60,000 of annual debt service has a DSCR of 1.30, meaning it earns 1.30 times what the loan costs. Lenders set their own minimum, so ask for it in writing.
The formula and the two numbers in it
DSCR = net operating income divided by annual debt service. Both numbers are for the same twelve months.
- Net operating income (NOI) is rent and other income, less the costs of operating the property. It does not subtract mortgage payments, depreciation or income tax.
- Annual debt service is every principal and interest payment on the loan for the year. Add the twelve monthly payments. Do not include the escrow part of a payment (tax and insurance), since those are already operating costs inside NOI.
Example a made-up building has NOI of $78,000. The loan payment is $5,000 a month for principal and interest, so annual debt service is $60,000. DSCR is $78,000 divided by $60,000, which is 1.30.
A DSCR of 1.00 means the property earns exactly enough to make the payments and nothing else. Above 1.00 there is a cushion. Below 1.00 the owner pays part of the loan from other money.
Why principal counts here but not in your expenses
Landlords are sometimes confused that the loan is split two ways. For tax and for the profit and loss statement, only the interest is an expense. IRS Publication 527 lists mortgage interest as a deductible rental expense, while the part of a payment that repays the loan is not an expense at all.
Lenders do not care about that line. They want to know whether the property can make the whole payment, principal included. So DSCR uses principal plus interest, while your profit and loss shows only interest.
If your loan is interest only for a period, debt service is interest only during that period. Lenders often test the ratio again using the amortizing payment, so ask which one they use.
What lenders do with the number
Commercial and apartment lenders size a loan by DSCR: they take the NOI, divide by the minimum ratio they require, and that sets the maximum annual payment. The minimum differs between lenders and loan programs, and it changes with the market, so get it from the term sheet, not from a blog post.
Example a lender in this made-up case requires a DSCR of at least 1.25. NOI is $78,000, so the largest yearly payment is $78,000 divided by 1.25, which is $62,400, or $5,200 a month. A loan with a $5,000 payment passes. A loan with a $5,500 payment, which is $66,000 a year and a ratio of 1.18, does not.
Lenders also adjust your NOI. They often use their own vacancy rate, add a management fee even if you manage it yourself, and set aside a reserve per unit. Their NOI can be lower than yours, so your own DSCR is a first look, not the final one.
What moves the ratio
- Raise NOI: collect all the rent, reduce days vacant, charge for things you provide, and cut costs that do not help the building.
- Lower the payment: a longer amortization, a lower rate or a smaller loan all reduce debt service.
- Fix the inputs: a DSCR built from an old rent roll or missing a bill is wrong. Clean books matter as much as the math.
A small change in expenses has a big effect because it hits NOI dollar for dollar. Every $1,000 of yearly savings on a property with $60,000 of debt service lifts DSCR by about 0.017.
How DoorKeeping handles it
DoorKeeping keeps each property's books separately, so net operating income by property is a question you ask Claude or ChatGPT for any date range. You supply the loan payment from your lender's statement, and the assistant can work out the ratio. Bank lines that look like loan principal are never filed as an expense for you: that choice is always yours. DoorKeeping gives no lending or tax advice.
Sources
Questions
- What is a good DSCR for a rental property?
- It depends on the lender. Above 1.00 means the property covers its payments. Ask your lender for its required minimum in writing.
- Does DSCR use principal and interest?
- Yes. Debt service is the full loan payment of principal and interest, not just interest.
- Is escrow part of debt service?
- No. Property tax and insurance paid through escrow are operating costs and are already inside NOI.
- Can I use DSCR for one property in an LLC?
- Yes. Use that property's NOI and that property's loan payments. Do not mix in other properties.