Debt service coverage ratio: formula and a three-case example
Calculate net operating income, annual debt service and the DSCR in a spreadsheet, then stress the result with a vacancy case and a refinance case.
The debt service coverage ratio (DSCR) divides net operating income by the principal and interest due in the same year. A value of 1.0 means income exactly covers the payments. Lenders usually set their own minimum, so read the definition in your loan agreement before relying on any figure here.
How do you calculate DSCR?
Net operating income is gross revenue less operating expenses. Debt service is annual principal plus annual interest. For a fictional property with $280,000 revenue and $130,000 expenses, paying $45,000 principal and $55,000 interest:
| Item | Formula | Result |
|---|---|---|
| Net operating income | =B11-C11 |
$150,000 |
| Total debt service | =D11+E11 |
$100,000 |
| DSCR | =IF(G11<=0,"",F11/G11) |
1.50 |
| Cash after debt | =F11-G11 |
$50,000 |
How does a vacancy stress change it?
Drop revenue to $240,000 and keep everything else. Income falls to $110,000 and DSCR to 110000/100000 = 1.10. Cash after debt shrinks from $50,000 to $10,000. A 14 percent revenue drop removed 80 percent of the cash cushion, which is why a ratio alone understates fragility.
What does a refinance do?
Lower payments of $40,000 principal and $48,000 interest give debt service of $88,000. With the original $150,000 income, DSCR is 150000/88000, about 1.70. To get payment figures for different rates and terms, compare offers in the fixed-rate loan comparison, or see the interest split in the loan amortization schedule.
Which mistakes distort DSCR?
- Putting capital expenditure or income tax into operating expenses changes the numerator. Use the lender's definition.
- Mixing a monthly payment with annual income produces a ratio twelve times off.
- Using only interest in debt service during an interest-only period hides the amortizing payment that follows.
The debt service coverage calculator lays out the three cases side by side. For how principal and interest divide each payment, read what an amortization schedule is.