DSCR education
How to Calculate DSCR: A Step-by-Step Guide
Calculating your Debt Service Coverage Ratio is essential for evaluating investment property deals and understanding what lenders see when they review your scenario.
The DSCR Formula
DSCR = Net Operating Income ÷ Total Debt Service
The formula is straightforward: divide your property's Net Operating Income (NOI) by its Total Debt Service. The result tells you how many times the property's income covers its mortgage payments. For example, a DSCR of 1.25 means the property generates 25% more income than needed to pay the debt.
Step 1: Calculate Gross Rental Income
Start with the property's total annual rental income. If the property is already rented, use the actual lease amounts. If you are evaluating a potential purchase, use the market rent estimate from a comparable rental analysis or appraisal rent schedule. For short-term rentals, average your monthly bookings across the year and account for seasonality.
Example: A single-family rental with a monthly rent of $2,500 has an annual gross rental income of $30,000.
Step 2: Subtract Operating Expenses
Operating expenses include all costs required to keep the property running, except mortgage payments. Common expenses include:
- Property taxes
- Property insurance
- Property management fees (typically 8-10% of rent)
- Maintenance and repairs
- HOA dues
- Vacancy allowance (typically 5-10% of gross rent)
- Utilities (if paid by owner)
- Landscaping and pest control
Example: Annual expenses of $8,000 ($3,500 taxes + $1,800 insurance + $3,000 management + $1,200 maintenance + $1,500 vacancy allowance = $11,000; adjust as needed for your scenario).
Step 3: Determine Net Operating Income (NOI)
Subtract operating expenses from gross rental income. NOI represents the property's profitability before debt service.
NOI = $30,000 - $11,000 = $19,000
Step 4: Calculate Total Debt Service
Total debt service is your annual mortgage payment including principal and interest. If you have an interest-only loan, use the annual interest payment. Do not include taxes and insurance here — those are operating expenses.
Example: A monthly mortgage payment of $1,400 equals an annual debt service of $16,800.
Step 5: Divide NOI by Debt Service
Now divide NOI by total debt service to get your DSCR.
DSCR = $19,000 ÷ $16,800 = 1.13
A DSCR of 1.13 means the property generates 13% more income than needed to cover the mortgage. This may fit some DSCR programs, though higher ratios generally open more options.
Use Our Calculator for Instant Results
Our free DSCR calculator does the math instantly. Enter your rent, expenses, and loan details to see your ratio in real time.