DSCR calculator

How it works

DSCR = annual NOI ÷ annual debt service

Debt service is a year of loan payments. On an interest-only loan, that's the loan times the rate. On an amortizing loan, each payment also repays some principal, so the payment is bigger and the DSCR lower for the same loan. Switch between the two above to see the difference.

A DSCR of 1.00 means the income exactly covers the payment and nothing is left over. Lenders want a cushion, usually 1.20 or more, so that a few vacancies or a repair bill don't stop the loan being paid.

The bank in CRE Tycoon

In CRE Tycoon, a free commercial real estate simulation, the bank lends up to 65% of the price at about 6% in a steady market, paid down over 30 years, and wants a DSCR of at least 1.20. It underwrites the building's stabilized income less 10%, the way real lenders haircut a seller's projections. Hard money lends up to 80% at 12%, interest-only, and ignores coverage: dear, but it lets you buy a half-empty building, lease it up, and refinance into the bank.

Interest rates move with the market cycle, so a deal that passes in a calm market can fail when rates rise, and the reverse. Try it on a real career.

Related

• Cap rate calculator: what the building is worth.
• Cash-out refinancing explained: where DSCR and LTV decide how much cash comes out.
• What is NOI?: the top half of the ratio.

Questions

How do you calculate DSCR?

Divide a year of net operating income by a year of loan payments (principal and interest, or interest only on an interest-only loan). $120,000 of NOI against $100,000 of payments is a DSCR of 1.20.

What DSCR do lenders want?

Most commercial lenders want 1.20 to 1.35, depending on the property type and the market. Below 1.0, the building does not earn enough to pay its loan.

How do I raise my DSCR?

Borrow less (a bigger down payment), borrow cheaper (a lower rate or longer amortization), or raise the net operating income by leasing up or cutting costs.