Debt Service Coverage Ratio (DSCR) Explained
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Debt Service Coverage Ratio (DSCR) measures the net operating income available to cover debt service (principal and interest) in a given operating period.
Debt Service Coverage Ratio (DSCR) is useful for analyzing financial statements and estimating cash flow for a business or investment property. Commercial lenders commonly use the debt service coverage ratio to establish creditworthiness and determine the size of the loan.
DSCR expresses the net operating income divided by the total debt service for a particular property.
For example, if the net operating income (NOI) is $100,000 and the total debt service is $80,000, the DSCR would be 1.25, often notated as 1.25x. This means that the property’s NOI covers debt 1.25 times.
Aside from getting insight into financing options, the debt service coverage ratio is a useful metric for real estate investors to use when comparing properties to add to their portfolios. DSCR provides a good cash flow estimate for prospective properties and can help an investor determine an offer amount.
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