Debt service coverage ratio (DSCR)

Debt service coverage ratio (DSCR) is a business’s or property’s cash flow available for debt payments divided by principal and interest due over the same period. Cash flow is often measured as EBITDA for a business or net operating income for a property. A DSCR of 1.25 means 1.25 in cash flow for every 1 in debt payments.

Example

For illustration, a business has $150,000 in cash flow available for debt payments and $120,000 in principal and interest due for the same period. Its DSCR is $150,000 ÷ $120,000 = 1.25.

Calculating DSCR for a business or rental property

For a business, the cash-flow figure is often EBITDA. For a rental property, it is often net operating income. Use figures from the same period as the principal and interest due.

For illustration, a business has $240,000 in EBITDA for the year and $200,000 in principal and interest due that year. Its DSCR is $240,000 ÷ $200,000 = 1.20.

For illustration, a rental property has $72,000 in net operating income for the year and $60,000 in principal and interest due. Its DSCR is $72,000 ÷ $60,000 = 1.20.

Using a minimum DSCR to size and stress a loan

Lenders often set a minimum DSCR between 1.2 and 1.5, depending on the loan type. The minimum is set by the lender.

To find the largest debt payment that meets a minimum, divide cash flow by that minimum. For illustration, $180,000 in annual cash flow ÷ a 1.25 minimum = $144,000 in annual debt payments.

An income stress test recalculates DSCR with lower cash flow. For illustration, with $100,000 in annual debt payments and a 1.25 minimum, cash flow of $150,000 could fall by $25,000 to $125,000 before DSCR reaches the minimum.

Questions we get asked

Decisimo’s DSCR calculator shows the ratio with a new loan and the largest loan allowed by a minimum, then shows how far income can fall.