DSCR on a rental property: whether the rent covers the loan

DSCR, the debt service coverage ratio, is a property's net operating income divided by its loan payments for the year. At 1.00 the property earns exactly what the loan takes. Above it there is a cushion; below it the owner is topping up the payment from somewhere else.

It is the number a lender looks at to decide whether the property can carry the loan on its own, and it is worth knowing before you ask.

Nothing here is sent anywhere and nothing is stored. The figures loaded are Maple Street Duplex in the Rental Property Analyzer, where the net operating income of $20,548.40 already has vacancy, taxes, insurance and every operating line taken out. The minimum is whatever your lender tells you; 1.20 is only where the field starts.

The ratio above is the classic one: net operating income over principal and interest. Some lenders who make loans to rental investors measure coverage differently, dividing the gross rent by the full monthly payment with taxes and insurance in it, plus any HOA dues, often called PITIA. For the duplex that version reads 1.77, because it starts from gross rent instead of the income left after costs.

The two numbers answer different questions and are not interchangeable. Ask which one your lender uses before comparing your figure to their minimum.

It says the payment is covered, not that the deal is good. A property can clear any minimum and still return little on the cash you put in, which is what cash-on-cash return measures.

It is also only as honest as the income on top. Leave out vacancy or the CapEx reserve and the DSCR rises without anything about the property changing. How that income is built, line by line.

The Rental Property Analyzer works out DSCR for one property with up to eight units, from every expense line, and shows it for a downside case where rent falls and costs rise, next to your base case. It works in Excel and Google Sheets, and every formula is open to read.