Calculating Debt Service Coverage Ratio

Debt service coverage ratio—usually abbreviated to DSCR—is the formula used by lenders to confirm that a borrower will be able to comfortably make the monthly loan repayments. A DSCR ratio is the usual calculation that determines how much you can borrow for an investment property and is based solely on the property itself—it doesn’t take employment status, proof of income, creditworthiness, or any other financial information into account.

In the simplest of terms, the amount you can borrow with a DSCR loan is dependent on how much you can expect to earn from the property after all relevant expenses are subtracted 

Demystifying the DSCR Ratio

• Understanding the jargon
• How to go about calculating a debt service coverage ratio

Understanding the jargon

DSCR, NOI, EBITDA… it’s acronym city in the world of finance. But don’t worry, they’re actually quite simple once you break them down.

• DSCR: As already determined, this stands for “debt service coverage ratio”.
• NOI: You won’t have to dig deep into the world of DSCR loans before you come up against this one. It stands for “net operating income”, which is the total potential gross income you can expect to gain from your property (once rehabbed), minus all the expenses.
• EBITDA: This mouthful stands for “earnings before interest, taxes, depreciate, and amortization”. However, this is more geared towards a business loan, rather than an individual who’s looking to BRRRR (buy, rehab, rent, refinance, & repeat) to create or grow their property empire. We mention it because, while doing your research, you may well come across it.

For non-business loans, you’ll simply need to determine what’s known as the “total debt payment”. While this is similar, you’re only required to take things like maintenance costs, tax returns, operating statements, and rent rolls into consideration.

So, now we understand what the abbreviations stand for, we can go ahead and look at the formula that’s used to calculate a DSCR ratio.

How to go about calculating a debt service coverage ratio

For individuals looking to borrow, the formula for a DSCR ratio is quite simple.

DSCR = NOI / Total Debt Payments.

The resulting number is written in a ratio format. So, for instance, if the NOI is $430,500 and your total debt payment is $320,000.

430,500 / 320,000 = 1.345. 

Therefore, the DSCR is 1:1.35.

The ratio must be above 1:1 to be considered viable—and, realistically, should be greater than this. A DSCR of 1:2 or above is preferable, as it shows a lender that you have a decent buffer in case any unexpected expenses occur.

Having an accurate estimate of the DSCR ratio before you approach a lender can help you secure your loan in the quickest time. Financial institutions want to lend you money—it’s the whole reason they exist. However, they need to be sure that they don’t take on too much risk. Therefore, the better the numbers, the more likely you are to be approved.

In addition, the higher the DSCR ratio, the more favorable your interest rates are likely to be.

Calculating Debt Service Coverage Ratio is Easy with BRRRR Loans 

BRRRR is a market-leading lender for real estate investors. We provide funding for BRRRR properties across the country with some of the most tempting rates in the industry. 

We have one of the fastest close rates in the business, require no income or employment verification, and—very importantly—we’ll do all the DSCR calculations for you. 

We can underwrite DSCR financing for both commercial and residential units, helping you build your property portfolio as fast (or slowly) as you choose.

Head over to our in-depth information on DSCR loans and get in touch today for a no-obligation discussion.