How this calculator works
Net operating income is gross rent reduced for vacancy and credit loss, then less operating expenses. It excludes interest, principal, tax and depreciation, because those depend on how the property is financed rather than on how it operates. Annual debt service is the cash needed for interest and principal over a year. The ratio divides the first by the second. A ratio below 1 means the property does not cover its debt from operations. Lenders commonly want at least 1.20 to 1.25, and a commercial loan is often sized so the ratio meets that minimum at origination.
Formula
NOI = gross rental income x (1 - vacancy rate) - operating expenses. Annual debt service = 12 x monthly payment, where the monthly payment uses i = rate / 12 and n = years x 12. DSCR = NOI / annual debt service. When the debt service is entered directly, that figure is used unchanged.
Worked example
Gross rent of $60,000 with 5% vacancy leaves $57,000. Operating expenses of $12,000 give NOI of $45,000. A $400,000 loan at 6.5% over 30 years has a monthly payment of about $2,528.27 and annual debt service of about $30,339. The DSCR is 45,000 / 30,339 = 1.48.
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Frequently asked questions
Should taxes and insurance be in operating expenses?
Property tax and property insurance are operating costs and belong in the expense figure. Income tax and financing costs do not, because they follow the owner's situation rather than the property.
What ratio will a lender accept?
Many commercial lenders require between 1.20 and 1.25, with lower thresholds for some asset classes or government-backed loans. The required figure also depends on the loan-to-value ratio and the lender's policy.
Why does a lower DSCR matter to a borrower?
A thin cushion means a small drop in rent or a large repair can push the property below its debt payments. That can trigger a covenant breach, a cash reserve requirement or a refusal to refinance.
How is this different from the interest coverage ratio?
The interest coverage ratio compares EBIT with interest alone. DSCR is a cash measure for property finance and includes principal repayment, so it is stricter.