Lenders care about DSCR because it answers one question: Can this property pay its own debt from its own income, or will the owner need to cover shortfalls from other sources?
How it works
DSCR divides net operating income by annual debt service (principal + interest on all loans). A ratio of 1.25 means the property earns $1.25 for every $1.00 it owes in debt payments annually.
Why lenders require a minimum DSCR
Lenders typically require DSCR of 1.20 to 1.25 because it leaves a cushion if income drops or expenses rise. A DSCR below 1.0 means negative cash flow: the property does not cover its own debt, and you pay out of pocket. A DSCR of exactly 1.0 means the property covers debt but leaves no margin for error or owner income.
What this does not include
DSCR looks only at debt service. It does not account for capital expenditures (a new roof costs $15,000, not monthly), owner distributions, or taxes. A property can have an adequate DSCR and still not generate acceptable cash flow after capex or ownership reserves.
How to use this calculator
- Calculate net operating income: rental revenue minus all operating expenses, before debt service.
- Enter your total annual debt payments: principal + interest on your mortgage and any other loans.
- The ratio shows whether the property covers its debt and by how much of a margin.
Frequently asked questions
What DSCR will a lender require?
Most conventional lenders require 1.20 to 1.25. FHA and some portfolio lenders accept 1.0 to 1.15. DSCR below 1.0 is typically not financed at all, because the property would need ongoing owner funding to cover the gap.
Can DSCR be negative?
Yes, if NOI is negative. A property that loses money before debt service has a negative DSCR—it needs owner funding for both operations and debt payments.
How much owner capital can I avoid putting in?
That depends on the lender. At DSCR 1.0, zero—the property covers debt but leaves no cash to the owner. At 1.25, the property generates 25% more income than its debt costs, so you could take that as owner cash or reserve it. Check your specific lender’s requirements.
