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:
Determine your Net Operating Income (NOI). This value can be entered directly or calculated using the following formula:
NOI = (1 - expenses) * (1 - vacancy) * Gross IncomeIn 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.
Calculate your debt service. This is the monthly payment made towards paying off debts.
Apply the DSCR formula:
DSCR = NOI / debt serviceAn 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 = $6,300Now, calculate the DSCR:
DSCR = NOI / debt serviceDSCR = $6,300 / $6,000 = 1.05The 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.