DSCR Formula for Rental Property Investors

Last updated: October 14, 2025

Quickly and accurately calculating Debt Service Coverage Ratio (DSCR) is critical when growing and optimizing your rental property portfolio.

By calculating DSCR, you can determine the loan amount a rental property will be eligible for, and the associated free cash flow it is projected to generate. A high DSCR signals financial strength, while a low DSCR raises concerns about the viability of a mortgaged rental property. It's a straightforward yet powerful tool that helps guide critical real estate investing decisions.

In this guide, we will share the two most commonly used DSCR formulas and provide you with analysis, examples and tools to help you invest successfully.

Method 1: Gross Rent ÷ PITIA or ITIA

The industry standard and most commonly used DSCR formula for 1-4 unit residential properties is Gross Rent ÷ PITIA for a fully amortizing DSCR loan and Gross Rent ÷ ITIA for an interest only DSCR loan.

Real estate investors should be cautioned about this method because it does not factor in real operating costs which include property management, maintenance and vacancy. For this reason, we advise all OfferMarket clients to focus on deals with DSCR safely above 1.0.

How to think about property management

Property management is a real cost. Either you're going to be doing it (and it will consume a growing amount of your time as your portfolio grows), or you will outsource this to a 3rd party property management firm that will charge you off the top. If your DSCR is 1.0, not factoring in property management, then you will be bleeding money every month until you can raise your rents.

How to think about maintenance

Maintenance is a real, often very expensive cost. It's not uncommon to see rental property investors generating $250 free cash flow and then the refrigerator needs to be replaced. That right there will wipe out 3+ months of positive cash flow. What happens when the roof needs to be replaced? This is why higher DSCR, conservative reserves, and proactive maintenance is critical to long term rental property investing success.

How to think about vacancy

Most new rental property investors run their numbers estimating rent at the top of the range and to make matters worse, they estimate that the property will be 100% occupied. In reality, the property may sit vacant, especially if you're outside of peak leasing season which tends to be June - August. When outside of peak leasing season, not only do you have low renter demand, you also have other landlords lowering their asking rents to fill their vacancies. Vacancies are a real cost of doing business and you should set your base case to expect it -- 5% vacancy is generally acceptable but a high DSCR at 10% vacancy signals a solid, safe investment.

Method 2: NOI ÷ Debt Service

Multifamily lenders and banks tend to use this more conservative DSCR formula which, unlike the SFR version (Method 1), factors in vacancy, property management and maintenance. These are all very real expenses. What's more, when this stricter DSCR formula is used, it is often for loan programs where the minimum DSCR is 1.25.

Let's take a look at an example for a 5 unit multifamily property in Chicago, IL:

• Annual gross rent: $120,000
• Vacancy: 5%
• Annual property management: $12,000
• Annual taxes: $24,000
• Annual insurance: $5,000
• Annual maintenance: $10,000
• Term: 30 years
• Structure: full amortization
• Interest rate: 5% (fixed)
• Loan amount: $750,000

NOI = ($120,000 x 0.95) - $12,000 - $24,000 - $5,000 - $10,000 = $63,000

Debt Service = Principal + Interest = $48,313.95

DSCR = $63,000 ÷ $48,313.95 = 1.30

Comparing the DSCR Formulas

By comparing the 2 DSCR formulas, we will get more familiar with how to calculate DSCR and we will see that the NOI ÷ Debt Service formula produces a lower DSCR because it factors in property management, vacancy and maintenance expenses.

Let's use a uniform example:

• Gross rent: $50,000
• Vacancy: 5%
• Annual property management: $5,000
• Annual taxes: $10,000
• Annual insurance: $2,500
• Annual HOA: $0
• Annual maintenance: $5,000
• Term: 30 years
• Structure: Full amortization
• Interest rate: 6.5% (fixed)
• Transaction type: Purchase
• Purchase price: $600,000
• Loan amount: $450,000 (75% LTV)

Gross Rent ÷ PITIA

DSCR = $50,000 ÷ $46,632 = 1.07

NOI ÷ Debt Service

NOI = (($50,000 x 0.95) - $5,000 - $10,000 - $2,500 - $5,000) = $25,000

Debt Service = Principal + Interest = $8,636.08 + $15,612.34 = $24,248.42

DSCR = $25,000 ÷ $24,248.42 = 1.03

Why should you care about DSCR?

DSCR is a fancy acronym for cash flow. Cash flow is king. By focusing on rental properties that generate healthy cash flow under adverse and conservative conditions, you will build a rental portfolio that accumulates cash quickly, allowing you to reinvest in more properties.

Conversely, by cutting corners and focusing on rental properties with low DSCR to the point they become monthly drains on your cash balance, you will expose yourself to avoidable and very stressful risks.

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