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Debt Service Coverage Ratio Calculator

Debt investment calculators

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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