What the number means, how to calculate it, and what a good one looks like, using two real deals side by side.
DSCR (debt service coverage ratio) asks one question: does the property earn enough to pay its own loan? It is the property's yearly net operating income divided by its yearly loan payments.
Step 1: Net operating income (NOI). Take monthly rent, subtract vacancy, then subtract property taxes, insurance, management, maintenance and any HOA. Do not subtract the loan payment.
Step 2: Debt service. Add up 12 months of principal and interest on the loan.
Step 3: Divide. NOI divided by debt service is your DSCR.
Both deals use a 30-year loan at 7%. Deal A has a bigger loan and more expenses, Deal B has a smaller loan and higher rent relative to price.
| Deal A | Deal B | |
|---|---|---|
| Price | $250,000 | $180,000 |
| Down payment | 20% | 25% |
| Monthly rent | $2,500 | $2,000 |
| Net operating income / mo | $1,555 | $1,255 |
| Loan payment (P&I) / mo | $1,331 | $898 |
| Cash flow / mo | $224 | $357 |
| DSCR | 1.17 | 1.40 |
| Deal Ledger verdict | Proceed with caution | Clear to proceed |
Deal A: $1,555 × 12 = $18,660 of NOI against $15,972 of loan payments, so 1.17. Deal B: $1,255 × 12 = $15,060 against $10,776, so 1.40.
Notice that Deal A still makes money every month. But a 1.17 means a modest drop in rent or a vacancy stretch eats the cushion fast. Deal B can absorb much more before the loan is at risk.
There is no single rule. Many lenders look for 1.20 to 1.25 or higher. Some DSCR loan programs accept 1.0 or lower with a larger down payment or a higher rate. Lenders also differ on how they calculate it, so ask your lender for their minimum and their method. Deal Ledger flags anything near or below 1.1 as a caution, and treats 1.2 and above as a healthy sign.
The property's yearly net operating income divided by its yearly loan payments. It shows how many times the income covers the debt.
No. Cash flow is the dollars left each month. DSCR is a ratio of income to loan payment. Two deals can have similar cash flow and very different DSCR.
In the standard formula they are operating expenses taken out of income, and debt service is principal and interest only. Some lenders use a different version, so ask.
The rent does not cover the loan. Options include a larger down payment, a lower price, a better rate, or higher rent. Try changing one input at a time to see which helps most.
Not by itself. A high DSCR means the loan is safe, not that the return is strong. Check cash-on-cash return and cap rate too.
Free to try. Enter price, rent and loan terms and get DSCR, cash flow, cap rate and a verdict in seconds.