The Formula
DSCR = Net Operating Income ÷ Annual Debt Service
Net operating income is what the property earns from rent after operating expenses and before the loan. Annual debt service is a full year of principal and interest on the loan, not a single month and not interest alone.
The Duplex, Worked
I run the same $425,000 duplex across this site so the numbers agree wherever a reader lands. It rents for $3,800 a month, and after 5% vacancy and $17,100 of operating expenses, NOI is $26,220.
A $340,000 loan (80% of price) at 7% over 30 years costs $2,262.03 a month, or $27,144 a year.
DSCR = $26,220 ÷ $27,144 = 0.97
0.97 means the property's income falls just short of covering the loan payment on its own. The gap is $924 a year, and on this deal the owner funds it.
What Debt Service Is, and What It Isn't
Debt service in this formula is principal and interest only. That surprises people who assume it should also carry property taxes, insurance, and any HOA dues, because a mortgage statement often bundles all four into one payment.
The reason it doesn't: NOI already subtracted property taxes and insurance as operating expenses before DSCR ever divides by anything. Adding them into debt service too counts the same dollar twice and understates the ratio. On the duplex above, if $4,200 of the $17,100 in operating expenses is taxes and insurance, folding that same $4,200 into debt service would drop the ratio from 0.97 to roughly 0.83 for a cost that was already subtracted once. That double count is the single most common mistake in a DSCR calculation, and it always pushes the ratio down, never up.
Reading the Ratio
A DSCR of 1.0 means the property earns exactly its loan payment and nothing more. Below 1.0, the rent doesn't cover the debt and the shortfall comes from the borrower's pocket every month. Above 1.0, the property produces a surplus over the loan payment before anyone touches other expenses.
The specific minimum a lender requires is a term-sheet detail set by that lender and that loan program, not a market-wide constant, so it's worth reading off the term sheet rather than assuming a round number.
Three Levers That Move DSCR
The property's income doesn't have to change for the ratio to change. All three of the following levers touch only the denominator.
Down payment. The duplex above at 20% down produces a 0.97 DSCR. At 40% down, the loan drops to $255,000 and the same 7%, 30-year terms bring annual debt service to $20,358. $26,220 ÷ $20,358 = 1.29. NOI didn't move. Less debt did the work.
Amortization. Stretching the same $340,000 loan from 30 years to 40 years lowers the monthly payment to $2,112.87, or $25,354 a year. $26,220 ÷ $25,354 = 1.03. The loan balance is identical. The payment is just spread thinner.
Rate. On the same $340,000, 30-year loan, DSCR runs 1.07 at a 6% rate, 0.97 at 7%, and 0.88 at 8%. A two-point move in the rate the borrower qualifies for swings the ratio by roughly 0.2, more than the swing from doubling the down payment on some deals.
None of these levers touches what the property actually earns. They change who is exposed to the gap between income and debt, which is exactly why DSCR is a financing ratio and not a measure of the property itself.
Stacking the Levers
The three levers compound because they all divide the same NOI. Combine 40% down with a 40-year amortization on the duplex and annual debt service falls to $19,016, well below either single change on its own. $26,220 ÷ $19,016 = 1.38, up from 0.97 at 20% down on a 30-year loan. Nothing about the property changed between those two versions of the same deal. Every point of that gain came from restructuring how the purchase was financed.
That also means DSCR can be engineered on paper by an investor with enough cash to shrink the loan, which is worth remembering when comparing two properties that show the same ratio. A 1.29 DSCR reached with 40% down and a 1.29 DSCR reached with 20% down and unusually strong rent describe very different deals, even though the number on the page is identical.
The Trap: DSCR Is Built on NOI, So It Inherits NOI's Blind Spot
DSCR is a ratio built entirely on NOI, and NOI excludes capital expenditures by definition. A property sitting right at 1.0 covers its mortgage precisely and has nothing left over for a roof, a furnace, or any other capital item. The ratio can read as fully covered while the deal is still one repair away from running out of cash, because the calculation was never designed to see that cost coming.
FAQ
What is the DSCR formula?
DSCR = Net Operating Income ÷ Annual Debt Service. On the $425,000 duplex, $26,220 of NOI against $27,144 of annual principal and interest gives a DSCR of 0.97.
Does DSCR use monthly or annual numbers?
Annual, on both sides. Using a monthly debt service figure against annual NOI, or the reverse, produces a ratio off by a factor of twelve. Convert everything to the same period before dividing.
Do property taxes and insurance belong in debt service?
No. They're operating expenses, already subtracted inside NOI. Debt service is principal and interest only. Adding taxes and insurance to debt service double counts them and understates the ratio, which is the most common calculation error.
What DSCR do lenders require?
Above 1.0 is the baseline most DSCR lenders start from, but the exact floor is set by the individual lender and loan program rather than by any market-wide rule, so the number in the term sheet is the one that governs.
How can I raise DSCR on a specific deal without changing the rent?
Three ways, all on the debt side: a larger down payment, a longer amortization, or a lower rate. On the duplex, moving from 20% to 40% down lifts DSCR from 0.97 to 1.29, and stretching a 30-year loan to 40 years lifts it from 0.97 to 1.03. NOI never moves in either case.
Related Reading
- Net Operating Income Explained: how the numerator in this formula gets built, and the assumptions that move it
- DSCR Loans: Complete Guide for Real Estate Investors: what lenders do with this ratio once it's calculated
- Cap Rate Explained: The Complete Guide to Capitalization Rates in Real Estate: the companion metric that screens a deal before DSCR tests whether the financing works
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