DSCR Calculation Formula Calculator
Use this calculator to determine the Debt Service Coverage Ratio (DSCR) for a property or business, a key metric for assessing its ability to cover debt obligations.
Calculation Result:
Understanding the Debt Service Coverage Ratio (DSCR)
The Debt Service Coverage Ratio (DSCR) is a vital financial metric used to assess an entity's (whether a business or a property) ability to generate enough cash flow to cover its debt obligations. It's particularly crucial in real estate investment and commercial lending, as lenders often use it to determine the risk associated with a loan.
What is DSCR?
In simple terms, DSCR measures the amount of cash flow available to pay current debt obligations. A DSCR of 1.0 means that the entity's net operating income is exactly enough to cover its debt service. Lenders typically look for a DSCR greater than 1.0, often in the range of 1.20 to 1.50, to ensure there's a buffer against unexpected expenses or income fluctuations.
The DSCR Formula
The basic formula for DSCR is:
DSCR = Net Operating Income (NOI) / Total Debt Service (TDS)
Components of the Formula:
- Net Operating Income (NOI): This is the income generated by a property or business after deducting all operating expenses, but before accounting for taxes, interest payments, and depreciation.
- Potential Gross Income (PGI): The maximum possible income from a property, assuming 100% occupancy and collection of all rents and other income (e.g., laundry, parking fees).
- Vacancy & Credit Loss: An allowance for lost income due to vacant units or uncollected rent.
- Gross Operating Income (GOI): PGI minus Vacancy & Credit Loss.
- Total Annual Operating Expenses: All costs associated with operating the property or business, such as property taxes, insurance, utilities, maintenance, and management fees. Importantly, this does NOT include mortgage principal or interest payments, depreciation, or income taxes.
- Calculation: NOI = (Annual Rental Income + Other Annual Income) * (1 – Vacancy & Credit Loss Rate / 100) – Total Annual Operating Expenses
- Total Debt Service (TDS): This represents the total amount of principal and interest payments due on all debts over a specific period, typically one year.
- Calculation: TDS = Total Annual Principal Payments + Total Annual Interest Payments
Interpreting DSCR Values
- DSCR < 1.0: This indicates that the property or business is not generating enough income to cover its debt obligations. This is a high-risk scenario for both the owner and potential lenders.
- DSCR = 1.0: The income is just enough to cover debt payments. There's no buffer for unexpected costs or income drops, making it a risky position.
- DSCR > 1.0 (e.g., 1.20 – 1.50): This is generally considered healthy. It means there's sufficient income to cover debt payments with a comfortable margin. Lenders typically require a minimum DSCR in this range.
How to Use the Calculator
To use the DSCR calculator, simply input the following annual figures:
- Annual Rental Income: The total expected rent collected from all units.
- Other Annual Income: Any additional income streams from the property (e.g., parking, laundry, vending machines).
- Vacancy & Credit Loss Rate (%): The estimated percentage of potential income lost due to vacancies or uncollected rent.
- Total Annual Operating Expenses: Sum of all yearly expenses required to run the property (excluding debt service).
- Total Annual Principal Payments: The total amount of principal paid on all loans for the property in a year.
- Total Annual Interest Payments: The total amount of interest paid on all loans for the property in a year.
Click "Calculate DSCR" to see the resulting ratio.
Example Calculation
Let's consider a commercial property with the following annual figures:
- Annual Rental Income: $120,000
- Other Annual Income: $5,000
- Vacancy & Credit Loss Rate: 5%
- Total Annual Operating Expenses: $30,000
- Total Annual Principal Payments: $40,000
- Total Annual Interest Payments: $25,000
Using the formula:
- Potential Gross Income (PGI) = $120,000 + $5,000 = $125,000
- Gross Operating Income (GOI) = $125,000 * (1 – 0.05) = $118,750
- Net Operating Income (NOI) = $118,750 – $30,000 = $88,750
- Total Debt Service (TDS) = $40,000 + $25,000 = $65,000
- DSCR = $88,750 / $65,000 = 1.365
In this example, a DSCR of 1.365 indicates a healthy financial position, as the property generates 1.365 times the income needed to cover its debt obligations.