Debt service coverage ratio
Net operating income divided by yearly debt payments. A DSCR of 1.25 means the property makes 25% more than it needs to cover the loan. Lenders use it to size loans on rental and commercial properties.
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See how it worksWhere this comes up: on the market
Part 1 of 4
Why a seller cares
An investor's lender sizes the loan on your rental by DSCR: the net income has to cover the loan payments with a margin. If the rent is too low for the price, the loan shrinks and so does the offer.
Part 2 of 4
A simple example
Your fourplex nets $30,000 a year. The lender wants a 1.25 DSCR, so the most it will lend is a loan whose payments are $24,000 a year.
| The arithmetic | The number |
|---|---|
| Net operating income | $30,000 |
| Divided by 1.25 | $24,000 of annual debt service |
| At 7% over 30 years | A loan of about $300,000, whatever the price |
DSCR caps the loan at what the rent can carry. The buyer covers the rest in cash or not at all.
Part 3 of 4
What people get wrong
That the buyer's income sets their loan. On a DSCR loan, your rent roll sets it.
Part 4 of 4 · where to read next
Where it appears in the sale
What a definition is, and what it isn't
Keighbor is a software company, not a law firm, brokerage, or tax adviser. This is general information, not legal, tax, financial, or real estate advice about your sale. Your situation may differ. Before acting on a contract, disclosure, title, tax, or pricing question, ask an appropriately licensed professional in your state.
Written and researched by Keighbor Research · drawn from the reference glossary · how we research and check what we publish
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