Income divided by loan payments
DSCR shows whether a property's earnings can cover its loan. Net operating income (rent minus operating costs, before any loan payment) goes on top; the year's total loan payments — principal plus interest — go on the bottom. A result above 1 means income more than covers the debt.
What the number is telling a lender
| DSCR | Meaning | Lender view |
|---|---|---|
| 1.50+ | Income is 50% above the payment | Low risk, best terms |
| 1.25–1.50 | Comfortable cushion | Standard commercial minimum |
| 1.10–1.25 | Thin margin | Marginal; SBA floor is 1.10 |
| Below 1.00 | Income falls short of the payment | Usually declined |
1.25 is the figure most commercial lenders treat as the pass mark. Riskier property types (hotels, retail) can be held to a higher bar.
A worked example, and the two levers
- Example. NOI $400,000, annual debt service $300,000 → DSCR = 1.33. Income covers the loan 1.33 times, an acceptable profile.
- Raise NOI. Higher rent, lower vacancy or added income (parking, services) lifts the top of the ratio.
- Lower debt service. Refinancing to a lower rate or a longer term shrinks the annual payment and raises DSCR.
Common questions
What does a DSCR of 1.25 mean?
The property or business earns 1.25 times its annual loan payments in net operating income. For every dollar of debt payment there is $1.25 of income, leaving a 25% cushion. This is the level most commercial lenders want to see.
What happens if DSCR is below 1.0?
A ratio under 1.0 means operating income does not cover the debt payments. The owner has to make up the shortfall from reserves or other sources, and most lenders will decline the loan at that level.
Does NOI include the loan principal?
No. Net operating income is measured before any debt service. The debt service figure, which includes both interest and principal, sits on the other side of the ratio. Mixing them is the most common DSCR mistake.
