Chartered Financial Analyst (CFA) and Financial Risk Manager (FRM) specializing in business valuation and credit analysis.
The **Debt Service Coverage Ratio (DSCR) Calculator** is used by lenders to determine a property’s or business’s ability to cover its debt payments (principal and interest) with its Net Operating Income (NOI). Enter values for any three of the four core parameters (Net Operating Income, Total Debt Service, DSCR, or Cash Flow Cushion) to solve for the missing one.
Debt Service Coverage Ratio Calculator
Instructions: Enter values for any three of the four core parameters to solve for the missing one.
Debt Service Parameters (Annual)
DSCR Formula
The Debt Service Coverage Ratio ($DSCR$) is calculated by dividing Net Operating Income ($NOI$) by Total Debt Service ($TDS$).
DSCR:
$$DSCR = \frac{NOI}{TDS}$$Cash Flow Cushion ($CFC$):
$$CFC = NOI – TDS$$ Formula Source: InvestopediaVariables Explained (P, F, V, Q – Parameters)
- $NOI$ (Net Operating Income, $P$): Annual income generated by the property or business after covering operating expenses, but before debt and taxes.
- $TDS$ (Total Debt Service, $F$): Annual total of principal and interest payments due on the loan(s).
- $DSCR$ (Debt Service Coverage Ratio, $V$): The number of times NOI can cover the annual debt payments.
- $CFC$ (Cash Flow Cushion, $Q$): The amount of cash flow left over after the annual debt service is paid.
Related Loan Analysis Calculators
Further analyze business profitability and debt metrics:
- Operating Margin Calculator
- Debt-to-Income Ratio Calculator
- Net Present Value Calculator
- Debt-to-Asset Ratio Calculator
What is Debt Service Coverage Ratio?
The **Debt Service Coverage Ratio (DSCR)** is a critical financial ratio used primarily in commercial real estate and business lending. It measures an entity’s ability to cover its debt obligations from its net operating income. Lenders use this ratio to determine the maximum loan amount they are willing to offer and to assess the risk of a loan.
A DSCR of 1.0 means that Net Operating Income exactly equals the total debt payments due, leaving no cushion. Lenders typically require a minimum DSCR of 1.25 or higher, ensuring the borrower has a margin of safety against unexpected vacancies or expense increases. A higher DSCR indicates a stronger ability to meet debt obligations, making the borrower a lower credit risk.
How to Calculate DSCR (Example)
A rental property generates Net Operating Income ($NOI$) of \$75,000 per year, and the annual total debt service ($TDS$) is \$60,000. We solve for the DSCR:
- Step 1: Identify NOI and TDS
$NOI = \$75,000$ and $TDS = \$60,000$.
- Step 2: Apply the DSCR Formula
$DSCR = NOI / TDS = \$75,000 / \$60,000 = \mathbf{1.25}$.
- Step 3: Calculate Cash Flow Cushion ($CFC$)
$CFC = NOI – TDS = \$75,000 – \$60,000 = \mathbf{\$15,000}$.
The DSCR is $\mathbf{1.25}$, meaning the property’s income is 1.25 times the required debt payment. The cash flow cushion is $\mathbf{\$15,000}$ per year.
Frequently Asked Questions (FAQ)
For commercial and investment property loans, most traditional lenders require a minimum DSCR of 1.20 to 1.35. A ratio below 1.0 is generally unacceptable as it signals the income cannot cover the debt.
$NOI$ is calculated as Gross Rental Income minus all Operating Expenses (such as property taxes, insurance, maintenance, and management fees), but importantly, before deducting interest, income taxes, depreciation, and amortization.
A high DSCR is a positive sign, but loan approval also depends on other factors like the borrower’s credit history, liquidity, appraisal value of the collateral, and the overall loan-to-value (LTV) ratio.
A DSCR of 1.0 means the project is breaking even on its debt payments; the income just covers the debt. This offers zero cushion, making the loan highly risky for both the borrower and the lender in case of any income fluctuation.