How to use the debt service coverage ratio calculator
- Enter the yearly net operating income, or choose to work it out from the monthly rent, a vacancy allowance and yearly operating costs.
- Enter your yearly debt payments, or choose to work them out from a loan amount, interest rate and term.
- Optionally enter the ratio you want to meet, such as the one a lender asks for.
- Read the ratio, the income left after debt payments, and the most debt payments or the largest loan that would still meet your ratio.
Formula
DSCR = net operating income / yearly debt payments
Net operating income = rent x 12 x (1 - vacancy %) - operating costs
Most yearly debt payments at a ratio = net operating income / ratio
Largest loan = monthly payment x (1 - (1 + r)^-n) / r, with r = rate / 12
A ratio of 1.00 means income exactly covers the debt payments. Above 1.00 leaves room, and below 1.00 means income falls short.
$30,000 of income and $24,000 of debt payments
The debt service coverage ratio is $30,000 / $24,000 = 1.25. At a target of 1.25, yearly debt payments can be at most $30,000 / 1.25 = $24,000, so this property sits exactly on the line.
Starting from a loan instead, a $300,000 loan at 7% for 30 years has a monthly payment of $1,995.91, or $23,950.92 a year, giving a ratio of 1.25. At a ratio of 1.25 the largest loan the same income supports at that rate and term is $300,615.14.
How lenders use the ratio
Lenders of income property use the ratio to judge whether the income can carry the loan with a cushion. The minimum they ask for, and the way they count income and expenses, are set by each lender, which is why the target here is a field you set rather than a built in number.
The same property can show different ratios under different lenders because of how vacancy, management and reserves are counted. Ask for the lender calculation method when you compare offers.
Using it to size a loan
Working backward is often more useful than the ratio itself. Enter the ratio you must meet and the tool shows the most debt payment per year and the largest loan at your rate and term. The loan calculator can then show the payment for any loan you are considering.
See also the cap rate calculator for value from income and the cash on cash return calculator for return on the cash you invest. The debt to income ratio calculator covers the personal borrower side.
Assumptions and limits
- Net operating income and debt payments are the yearly figures you enter or derive.
- The target ratio is your own example. Lenders set their own minimums.
- Operating costs should not include loan payments.
- This is arithmetic and not a loan approval or financial advice.
Frequently asked questions
How do you calculate DSCR?
Divide the yearly net operating income by the yearly debt payments. Income of $30,000 against payments of $24,000 gives 1.25.
What is a good DSCR?
It depends on the lender, who sets its own minimum. Enter the ratio you must meet in the tool and it shows whether you meet it and how much room there is.
What counts as debt service?
Debt service is the principal and interest payments on the loans against the property for the year. Enter them as a total or build them from the loan terms.
What if the ratio is below 1?
Income is not enough to cover the payments. You would need more income, lower costs or a smaller loan, and the tool shows the largest loan that would meet the ratio you set.