DSCR means Debt Service Coverage Ratio. DSCR is a ratio calculated by taking a rental property's operating income and dividing it by the cost of a loan. DSCR is a metric private lenders and commercial lenders use to determine the amount of a loan they are willing to provide for a single family or multi-family rental property.
Use our handy DSCR Calculator to quickly and accurately determine DSCR and maximum loan amount!
Net Operating Income ("NOI") = Rent Revenue - Taxes - Insurance - HOA Dues - Maintenance - Property Management
Debt Service = Mortgage Principal + Mortgage Interest
A DSCR of 1.0 means the property generates exactly net operating income to cover the cost of mortgage payments.
Adjusted NOI: Rent - Maintenance - Utilities - Property Management
PITIA: Mortgage Principal + Mortgage Interest + Taxes + Insurance + HOA Dues
This second method tends to result in slightly lower DSCR, so it's important to understand how your private lender calculates DSCR.
Let's say you own a rental property that generates $30,000 in NOI and the monthly mortgage payments (principal and interest) are $2,000 or $24,000 annually. That means the property has a DSCR of 1.25.
Private lenders typically require a DSCR of 1.2 or higher to make sure the income generated by the property can conservatively repay the loan.
DSCR varies based on the target LTV (loan-to-value) because the amount of the loan impacts the debt service component of the ratio.
Read The Ultimate Guide To Real Estate Private Lenders to learn everything there is to know about working with private lenders to grow your real estate investing business.
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