Debt Service Coverage Ratio Calculator (DSCR)
This debt service coverage ratio calculator, or DSCR calculator for short, measures whether your incoming cash flows are sufficient to pay back a debt. Commercial lenders most commonly use it to determine if, thanks to this loan, the borrower will be able to generate an adequate return on investment.
You can start using this debt service coverage ratio calculator straightaway or read on for a more thorough explanation of how to calculate DSCR and how to interpret the result.
Besides, you may use the DSCR calculator with our Cap Rate Calculator to support your investment decisions in the real estate market.
What does DSCR stand for?
DSCR stands for debt service coverage ratio. It is a metric commonly used in commercial lending (instead of personal credit scoring) to establish whether the borrower's investment makes sense from an economic point of view.
In contrast to private purchases, commercial mortgages are taken with one main objective: generating income. For example, as a real estate agent, you might consider buying a building to rent out the apartments. The rent paid by the tenants will have to cover the loan you've taken (with interest) and provide you with some profit. Your lender won't be interested in your credit history: he will be interested in predicted cash flows to ensure that you won't run out of money to pay him off.
How to calculate DSCR
Our debt service coverage ratio calculator uses the following formula:
where:
- — Debt service coverage ratio;
- — Monthly net operating income; and
- — Monthly payment towards paying off your debts.
You can input the value of NOI directly in this DSCR calculator or head to our net effective rent calculator for a more detailed calculation scheme.
Alternatively, you can open the NOI calculation section of the calculator to calculate the NOI according to the equation:
In this formula:
- — Gross income — the monthly rent paid by your tenants;
- — Monthly expenses for maintenance, repairs, or cleaning, expressed as a percentage of the gross income; and
- — Vacancy rate (how often you don't have a tenant for the apartment), expressed as a percentage of the gross income.
Our debt service coverage ratio lets you easily determine your debt service, too!
Minimum acceptable DSCR
Your lender will probably use the DSCR to decide whether you should get the loan or not. The common minimum acceptable DSCR is 1.25; if you're below this value, you will probably be rejected as a potential borrower. On the other hand, if your DSCR is substantially higher, you might get your loan faster than you'd expect!
Finally, there are other debt-analysis-related tools, such as the debt to capital ratio calculator and interest coverage ratio calculator, on which you can rely for further understanding of the funding structure of your company.
How do I calculate a DSCR loan?
Follow these steps to calculate for your DSCR loan:
-
Get your net operating income (NOI) from the property. Let's say its $5000.
-
Calculate your total debt service (expenses). For example:
-
Mortgage = $2,500 -
Maintainance = $200 -
Insurance = $50
Total debt service = $2,750
-
-
Apply the DSCR formula:
DSCR ratio = NOI/total debt service
-
Substitute the values and calculate:
DSCR = 5000/2750
DSCR = 1.82
To qualify for a DSCR loan, most lending institutions require a DSCR of 1.25 or greater.
What is a 1.50 DSCR?
A 1.50 DSCR means that the income from your property will be able to cover the total debt service related to your property and have enough left over for an income for you.
1 exactly represents the amount needed to cover the loan, while 0.50 represents the amount that is left over.
How much do I need to put down on a DSCR loan?
The amount needed as a down payment for a DSCR loan varies. DSCR loans typically require a higher downpayment than a typical mortgage. The down payment is usually 20% and above. The lower the downpayment is on a DSCR loan, the higher the monthly payments will be.
What is a good DSCR coverage ratio?
A good DSCR coverage ratio is 1.25.
This number is ideal because lending institutions typically want to see that you are in a good position to repay your loan and still meet any additional obligations that may come up.