How to calculate annual debt service

Last updated: April 21, 2025

For rental property investors, particularly those targeting 1-4 unit residential properties, understanding how to calculate annual debt service is critical to assessing the financial viability of an investment. Annual debt service represents the total amount required to cover principal and interest payments on a loan over a year. This metric is essential for evaluating cash flow, determining loan affordability, and calculating key ratios like the Debt Service Coverage Ratio (DSCR), which lenders and investors use to gauge a property’s ability to generate sufficient income to cover debt obligations. In this comprehensive guide, we’ll walk through the process of calculating annual debt service, explain its importance, and provide practical examples tailored to small-scale residential rental property investors. We’ll also incorporate the DSCR formula, defined here as DSCR = Rent ÷ PITIA, to illustrate its role in investment analysis.

What is Annual Debt Service?

Annual debt service is the sum of all principal and interest payments required to service a loan over a 12-month period. For rental property investors, this typically refers to the mortgage payments on a 1-4 unit residential property, such as a single-family home, duplex, triplex, or quadplex. These properties are popular among investors because they qualify for residential financing, which often comes with lower interest rates and more favorable terms compared to commercial loans.

The components of annual debt service include: