THE SHORT ANSWER

Debt-service coverage ratio, or DSCR, compares income available for debt payments with the payments due over the same period. In a basic commercial property calculation, DSCR equals annual NOI divided by annual debt service. It measures modeled coverage, not whether every future payment will be affordable.

TRY THE MATH

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An educational calculation, not a property valuation or financing decision. Definitions and lender adjustments can differ. Check the guide’s assumptions and limitations.

How DSCR is calculated

DSCR = annual NOI ÷ annual debt service. Debt service generally includes scheduled principal and interest. A lender may use underwritten net cash flow after reserves or other adjustments rather than the NOI in a seller's presentation.

A ratio of 1.00 means the numerator equals the modeled debt payments. Above 1.00 means it exceeds them; below 1.00 means it falls short. None of those readings, by itself, measures all capital needs or borrowing conditions.

A hypothetical debt-coverage example

Suppose a building has $120,000 NOI and annual debt service of $96,000. Its basic DSCR is 1.25. In this model, income exceeds debt service by $24,000 before other below-NOI cash needs.

If NOI falls to $102,000 while debt service stays $96,000, the ratio becomes about 1.06. If NOI falls to $90,000, DSCR becomes about 0.94 and operations fall $6,000 short of scheduled debt payments.

These figures are mathematical examples. They are not lender requirements or recommended underwriting targets. A lender's threshold depends on the loan program and property's risk.

Loan terms can change coverage

An interest-only period can make initial payments lower than later amortizing payments. A variable-rate loan can change debt service as rates reset. Model the relevant future payments instead of applying the first month's payment indefinitely.

Maturity is another issue. A loan can show coverage of regular payments while still requiring a large balloon payoff. DSCR does not establish that a future refinance or sale will be available.

Questions to ask when someone quotes a DSCR

Ask for the income period, expense adjustments, treatment of reserves, debt-service calculation, and assumed interest rate. Confirm whether the calculation covers only a first mortgage or the relevant combined obligations.

  • Use the same time period in both inputs.
  • Compare current operations with the underwritten version.
  • Check the payment after interest-only periods or rate resets.
  • Examine liquidity, loan maturity, LTV, and debt yield alongside DSCR.

Common questions

What DSCR do lenders require?

Requirements vary by lender, program, property, and loan structure. Obtain the actual underwriting definition and threshold for the proposed financing.

Does a 1.25 DSCR mean a 25% investment return?

No. It describes income relative to debt payments. It does not compare profit with invested capital.

Sources & further reading

Educational content from Real Estate 101. Updated 2026-09-05. Refer to the original sources and your professional advisers for transaction-specific requirements.