What does DSCR stand for?
DSCR stands for debt service coverage ratio. It is a metric commonly used in commercial lending (instead of personal credit scoring) to establish whether the borrower’s investment makes sense from an economic point of view.
In contrast to private purchases, commercial mortgages are taken with one main objective in mind: to generate income. For example, you, as a real estate agent, might consider buying a building in order to rent out the apartments. The rent paid by the tenants will have to cover the loan you’ve taken (with interest) and provide you with some profit. Your lender won’t be interested in your credit history: he will be interested in predicted cash flows to ensure that you won’t run out of money to pay him off.
How to calculate DSCR?
Our debt service coverage ratio calculator uses the following formula:
DSCR = NOI / debt service
- DSCR is the debt service coverage ratio;
- NOI is the monthly net operating income;
- debt service is the monthly payment towards paying off your debts.
You can input the value of NOI directly in this DSCR calculator or head to our net effective rent calculator for some more detailed calculation scheme. Alternatively, you can open the advanced mode to determine NOI according to the equation
NOI = (1 - expenses) * (1 - vacancy) * GI
- GI is the gross income – the monthly rent paid by your tenants;
- expenses are the monthly expenses for maintenance, repairs or cleaning, expressed as a percentage of the gross income;
- vacancy is the vacancy rate (how often you don’t have a tenant for the apartment), expressed as a percentage of the gross income.
Our debt service coverage ratio lets you easily determine your debt service, too! All you have to do is use the following formula:
debt service = r * debt / [1 - (1 + r)^(-T)]
- debt is the total amount of your loan;
- r is the interest rate on that loan,
- T is the number of years in which you have to pay the loan back.
Minimum acceptable DSCR
Your lender will probably use the DSCR to decide whether you should get the loan or not. The common minimum acceptable DSCR is 1.20; if you’re below this value, you will probably be rejected as a potential borrower. On the other hand, if your DSCR is substantially higher, you might get your loan faster than you’d expect!