Debt Service Coverage Ratio (DSCR) Calculator

Monthly Net Operating Income (NOI): dollars

Optional: Calculate NOI

Gross Income (Monthly Rent): dollars

Expenses (as % of Gross Income): %

Vacancy Rate (as % of Gross Income): %

Monthly Debt Service: dollars

1. What is the Debt Service Coverage Ratio (DSCR) Calculator?

Definition: This calculator computes the debt service coverage ratio ($ DSCR $), which measures a property’s ability to cover debt payments using its net operating income, along with the input values for NOI and debt service.

Purpose: Helps lenders and investors assess the financial health of a property or business, determining if income sufficiently covers debt obligations.

2. How Does the Calculator Work?

The calculator uses the following formulas to compute the results:

Formulas:

If NOI is calculated:

$ NOI = (1 - E) \times (1 - V) \times GI $

For DSCR:

$ DSCR = \frac{NOI}{DS} $

Where:

$ DSCR $: Debt Service Coverage Ratio
$ NOI $: Monthly Net Operating Income (dollars)
$ DS $: Monthly Debt Service (dollars)
$ GI $: Gross Income (monthly rent, dollars)
$ E $: Expenses (as a decimal, e.g., 20% = 0.20)
$ V $: Vacancy Rate (as a decimal, e.g., 5% = 0.05)

Steps:

Step 1: Determine NOI. Input NOI directly or calculate it using $ NOI = (1 - E) \times (1 - V) \times GI $.
Step 2: Determine debt service. Input the monthly debt payment ($ DS $).
Step 3: Calculate DSCR. Compute $ DSCR = \frac{NOI}{DS} $.

3. Importance of DSCR Calculation

Calculating the DSCR is crucial for:

Loan Approval: Lenders use DSCR to assess repayment ability; a DSCR > 1 indicates sufficient income to cover debts.
Investment Analysis: Investors evaluate property profitability and risk.
Financial Planning: Helps property owners manage debt obligations.

4. Using the Calculator

Example 1 (Direct NOI): $ NOI = \$2,000 $, $ DS = \$1,500 $:

Step 1: $ NOI = \$2,000 $.
Step 2: $ DS = \$1,500 $.
Step 3: $ DSCR = \frac{2,000}{1,500} = 1.33 $.
Results: $ NOI = \$2,000 $, $ DS = \$1,500 $, $ DSCR = 1.33 $.

A DSCR of 1.33 indicates the property generates 33% more income than needed to cover debt.

Example 2 (Calculated NOI): $ GI = \$3,000 $, $ E = 20\% $, $ V = 5\% $, $ DS = \$1,200 $:

Step 1: $ NOI = (1 - 0.20) \times (1 - 0.05) \times 3,000 = 0.80 \times 0.95 \times 3,000 = \$2,280 $.
Step 2: $ DS = \$1,200 $.
Step 3: $ DSCR = \frac{2,280}{1,200} = 1.90 $.
Results: $ NOI = \$2,280 $, $ DS = \$1,200 $, $ DSCR = 1.90 $.

A DSCR of 1.90 suggests strong debt coverage.

Example 3 (Calculated NOI): $ GI = \$5,000 $, $ E = 30\% $, $ V = 10\% $, $ DS = \$3,000 $:

Step 1: $ NOI = (1 - 0.30) \times (1 - 0.10) \times 5,000 = 0.70 \times 0.90 \times 5,000 = \$3,150 $.
Step 2: $ DS = \$3,000 $.
Step 3: $ DSCR = \frac{3,150}{3,000} = 1.05 $.
Results: $ NOI = \$3,150 $, $ DS = \$3,000 $, $ DSCR = 1.05 $.

A DSCR of 1.05 indicates marginal debt coverage, posing higher risk.

5. Frequently Asked Questions (FAQ)

Q: What is a good DSCR?
A: A DSCR > 1 is typically required, with 1.2–1.5 often preferred by lenders, indicating sufficient income to cover debt, per Investopedia.

Q: Why calculate NOI?
A: NOI reflects the property’s income after operating expenses and vacancies, critical for assessing debt repayment capacity.

Q: Can DSCR be negative?
A: Yes, if NOI is negative (e.g., high expenses or vacancies), but this indicates severe financial distress.