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# Debt Service Coverage Ratio Calculator ## What is Debt Service Coverage Ratio?

Debt Service Coverage Ratio (DSCR) is a financial metric used to measure whether incoming cash flows are sufficient to pay back a debt, primarily in commercial lending. It helps determine if a borrower would be able to generate an adequate return on investment with a loan. Unlike personal credit scoring, DSCR assesses the borrower's investment from an economic standpoint, focusing on predicted cash flows to evaluate repayment capability.

## How to use Debt Service Coverage Ratio Calculator?

To use a DSCR calculator, follow the steps below:

1. Determine your Net Operating Income (NOI). This value can be entered directly or calculated using the following formula:

`NOI = (1 - expenses) * (1 - vacancy) * Gross Income`

In this formula:

• Gross Income is the total rent paid by tenants.

• Expenses refer to monthly expenses for maintenance, repairs, or cleaning, expressed as a percentage of gross income.

• Vacancy is the vacancy rate (how frequently the property is unoccupied), expressed as a percentage of gross income.

1. Calculate your debt service. This is the monthly payment made towards paying off debts.

2. Apply the DSCR formula:

`DSCR = NOI / debt service`

## An actual example to demonstrate the calculator

Let's assume you want to calculate the DSCR for a property investment. The following information is available:

• Gross Income: \$10,000 per month

• Expenses: 30% of gross income

• Vacancy rate: 10% of gross income

• Monthly debt service: \$6,000

Calculate the NOI:

`NOI = (1 - 0.3) * (1 - 0.1) * \$10,000 = 0.7 * 0.9 * \$10,000 = \$6,300`

Now, calculate the DSCR:

`DSCR = NOI / debt service`
`DSCR = \$6,300 / \$6,000 = 1.05`

The calculated DSCR is 1.05. Lenders typically look for a DSCR of 1.25 or higher. In this case, the DSCR of 1.05 may not be considered sufficient to obtain a loan. To improve their chances of securing a loan, the borrower may need to increase the net operating income, reduce the vacancy rate, or lower the expenses, which would result in a higher DSCR.

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