What Is Debt Service Coverage Ratio (DSCR)?

Debt Service Coverage Ratio (DSCR) measures whether a property generates enough NOI to cover its loan payments with room to spare. Formula: DSCR = NOI ÷ Annual Debt Service Annual debt service = total principal + interest payments over one year.

Debt Service Coverage Ratio (DSCR) measures whether a property generates enough NOI to cover its loan payments with room to spare.

Formula: DSCR = NOI ÷ Annual Debt Service

Annual debt service = total principal + interest payments over one year.

A property with $250,000 NOI and $200,000 in annual debt service has a DSCR of 1.25. The lender’s minimum threshold is usually 1.20–1.25 for conventional loans (1.25 is most common). This means the property must earn 25% more than it needs to pay the mortgage. That buffer protects the lender if income dips temporarily.

A DSCR below 1.0 means the property cannot cover its own debt — the owner must feed money into the deal each month. This is called “negative carry” or “alligator property” (it eats your cash). A DSCR of exactly 1.0 means the property breaks even on debt service — every dollar of NOI goes to the lender with nothing left for the investor.

Lenders underwrite DSCR based on their own stabilized NOI estimate, not the seller’s. They’ll typically use a standardized vacancy rate (often 5% for apartments regardless of current occupancy) and their own expense estimates. If the seller’s proforma shows a 1.35 DSCR and the lender’s underwriting produces 1.15, the deal may not qualify at the requested loan amount.

Learn this properly

DSCR is one of the core numbers in commercial real estate. The Language of CRE course teaches it alongside every other metric you need to read a deal, with worked examples and practice questions.

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Common questions

What is Debt Service Coverage Ratio (DSCR)?

Debt Service Coverage Ratio (DSCR) measures whether a property generates enough NOI to cover its loan payments with room to spare. Formula: DSCR = NOI ÷ Annual Debt Service Annual debt service = total principal + interest payments over one year.

Why does DSCR matter in a commercial real estate deal?

A property with $250,000 NOI and $200,000 in annual debt service has a DSCR of 1.25. The lender’s minimum threshold is usually 1.20–1.25 for conventional loans (1.25 is most common).

Related terms

[Effective Gross Income (EGI)](/effective-gross-income/) · [Gross Lease vs. Net Lease](/gross-lease-vs-net-lease/)

Educational definition only. Not investment, financial, or brokerage advice.