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Debt Service Coverage Ratio (DSCR)
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The Debt Service Coverage Ratio is a common used reference which will measures a commercial or income producing propertys ability to cover the monthly mortgage payments and expenses. The DSCR is calculated by dividing the net operating income (NOI) by a propertys annual debt service.For Example: A debt coverage ratio of 1.25 indicates that the income generated by a property is sufficient to cover the mortgage payments and operating expenses. For every $1.00 that is spent on mortgages and expenses, $1.25 is received in income.
The debt service coverage ratio (DSCR) is the most important ratio to understand for any borrower considering purchasing an income property. The DSCR is calculated by taking the Net Operating Income (NOI) divided by the Total Debt Service (TDS). To understand the ratio, it is first necessary to understand the numerator and the denominator.