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How to calculate DSCR for a rental loan, with a worked example
DSCR, the debt service coverage ratio, is the number many rental lenders look at first: does the property earn enough, after operating expenses, to cover the loan? It is a close cousin of cash flow, but it is a ratio rather than a dollar amount, which makes it easier to compare loans and to see how thin the cushion is. This guide shows the formula, a fully worked example, and how much rent the same property would need to reach a 1.25 DSCR.
General information, not lending, investment or tax advice. Lender overlays, how they define NOI, and minimum DSCRs vary by program and change over time. The example is made up and is not a forecast for any market or loan offer.
The DSCR formula
DSCR = net operating income ÷ debt service
- Net operating income (NOI) is effective rent (after a vacancy allowance, plus other rental income you actually collect) minus operating expenses. Operating expenses include property tax, insurance, repairs, a capex reserve, management, owner-paid utilities, HOA dues and the like. The loan payment is not an operating expense. Depreciation is not either, because it is not cash.
- Debt service is the principal and interest payment on the loan, for the same period as the NOI. Annual NOI divided by annual debt service gives the same ratio as monthly NOI divided by the monthly payment.
A DSCR of 1.00 means NOI exactly covers the payment. 1.25 means NOI is 25% higher than the payment. Below 1.00 means the property does not earn enough to cover the loan, and you will have to make up the shortfall from other income.
A worked example
A made-up single-family rental:
| Assumption | Value |
|---|---|
| Purchase price | $250,000 |
| Down payment (25%) | $62,500 |
| Loan amount | $187,500 |
| Interest rate and term | 7.00%, 30 years |
| Monthly rent | $2,200 |
| Vacancy allowance | 5% of rent |
| Property tax | $3,000 a year |
| Insurance | $1,320 a year |
| Repairs and capex reserves | 5% of rent each |
| Management | 8% of effective rent |
The monthly loan payment on $187,500 at 7.00% for 30 years is $1,247.44, so annual debt service is $14,969.31.
| Line | Monthly amount |
|---|---|
| Rent | $2,200 |
| Vacancy (5%) | $110.00 |
| Effective rent | $2,090.00 |
| Property tax | $250.00 |
| Insurance | $110.00 |
| Repairs | $110.00 |
| Capex reserve | $110.00 |
| Management | $167.20 |
| Operating expenses | $747.20 |
| NOI | $1,342.80 |
| Loan payment | $1,247.44 |
| DSCR | 1.08 |
| Cash flow | $95.36 |
Annual NOI is $16,113.60. Divided by annual debt service of $14,969.31, DSCR is the same 1.08. The loan is covered, but not by much: cash flow is $95.36 a month, or $1,144.29 a year. A single mid-size repair would wipe out that cushion if you had not already reserved for it.
What a lender would do with 1.08
A DSCR of 1.08 can look fine on your own spreadsheet and still fail a lender's test. Many investment-property programs quote minimums in the area of 1.20 or 1.25, and some "DSCR loans" are priced in tiers around those levels, but the cutoff is the lender's, not a law of nature. Always ask what ratio they require and how they compute NOI.
Lenders often use their own vacancy factor, sometimes ignore or recast your capex reserve, and may haircut market rent if you are using an asking figure rather than a lease. The DSCR they underwrite can be lower than the one in this table even when you both start from the same rent.
On this example, the monthly NOI needed for a 1.25 DSCR is 1.25 × $1,247.44 = $1,559.30. Because vacancy, repairs, capex and management all move with rent, you cannot get there by adding $216.50 to the current rent. Solving with the same expense rules, the rent that produces a 1.25 DSCR is $2,479.72. For a 1.20 DSCR it is $2,399.14. For a 1.00 DSCR — just covering the loan — it is $2,076.80.
That is a useful planning number: if comparable properties do not actually lease near $2,480, a lender who requires 1.25 is unlikely to underwrite this loan on the property's income alone, even though your own DSCR is above 1.0.
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Price, loan, rent and expenses in; monthly cash flow, cash-on-cash return, cap rate and DSCR out. Works in Excel and Google Sheets. The price is $0; enter your email on the next page to get the download.
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Stress-test the ratio
Drop the rent to $2,000 and keep the other rules the same. Monthly NOI falls to $1,188.00, DSCR falls to 0.95, and cash flow turns negative: −$59.44 a month. The property no longer covers its loan.
The same thing happens if the interest rate is higher, the loan is larger, or taxes and insurance come in above the estimate. Re-run DSCR whenever any of those inputs change, including when you refinance: a cash-out refinance can lift the payment enough to push a comfortable DSCR below the lender's minimum.
DSCR, cash flow and cap rate
These three numbers answer different questions:
- Cash flow is the dollars left after the payment. It tells you whether you can run the property without feeding it.
- DSCR is NOI relative to the payment. It tells you how thick the cushion is, and it is what many lenders test.
- Cap rate is annual NOI relative to the price (or value). It ignores the loan entirely, so it does not change when you borrow more or less.
A property can have a solid cap rate and a weak DSCR if you put little money down or pay a high interest rate. It can also have a modest cap rate and a comfortable DSCR if you put more money down. Run all three.
Common mistakes
- Leaving vacancy, capex or management out of NOI, which inflates DSCR.
- Counting the full mortgage payment as an operating expense, which deflates NOI and then divides by the payment again.
- Mixing monthly NOI with annual debt service, or the reverse. The ratio will be off by a factor of 12.
- Treating a 1.0 DSCR as a comfortable result. It means there is no room for a vacancy or a rate reset.
- Assuming your NOI is the lender's NOI. Ask for their worksheet.
Doing it in a spreadsheet
Once rent, vacancy, expenses and the loan payment are in one place, DSCR is one division. The free Spruce Sheets Rental Property Cash Flow Calculator works out payment, NOI, cash flow, cash-on-cash return, cap rate and DSCR together in Excel or Google Sheets. The Rental Property Analysis Calculator does the same for up to five deals, including BRRRR and refinance cases where the new payment changes the ratio.
Rental Property Analysis Calculator
Know what a rental will earn before you make an offer. Enter up to 5 deals. You'll see the cash you need, monthly cash flow and the return ratios lenders and investors use, all side by side.
Excel & Google Sheets · sample + blank file · PDF guide
The example is made up. This guide is not lending, investment or tax advice. Confirm any ratio a lender will use with that lender.
Get the free cash flow calculator
Price, loan, rent and expenses in; monthly cash flow, cash-on-cash return, cap rate and DSCR out. Works in Excel and Google Sheets. The price is $0; enter your email on the next page to get the download.
The file is sent to your email. You may get an occasional message about our templates and can unsubscribe at any time.
Frequently asked questions
What is the formula for DSCR on a rental property?
DSCR, or debt service coverage ratio, is net operating income divided by debt service. Use the same period for both, monthly or annual. A DSCR of 1.0 means the property's NOI exactly covers the loan payments; above 1.0 means there is a cushion, and below 1.0 means the income does not cover the loan.
What DSCR do lenders require for a rental property?
It depends on the lender and the loan program. Some investment-property loans look for a DSCR comfortably above 1.0, and 1.20 or 1.25 are common minimums you will see quoted, but they are not universal. The NOI the lender uses may also differ from the NOI you calculate for yourself. Ask your lender for the exact test.
Does DSCR include the tax and insurance escrow?
Standard DSCR uses debt service as principal and interest. If your lender collects taxes and insurance in escrow, those amounts already sit in operating expenses, so they should not also be added to debt service or you will count them twice. Some underwriting worksheets use PITIA; if they do, follow that definition consistently.