What DSCR means
DSCR = net operating income ÷ annual debt service
A DSCR of 1.25x means the property earns 25% more than its mortgage payments. Below 1.00x, the property doesn’t cover its debt from operations.
Calculating NOI correctly
Lenders build NOI their own way, and it is usually lower than the owner’s number:
- Start with gross potential rent at current leases or market rent, whichever is lower.
- Subtract vacancy and credit loss, usually at least 5% even if the building is full.
- Subtract operating expenses: property taxes, insurance, utilities, repairs, management (lenders often impute 3–5% even if you self-manage), and replacement reserves.
- Do not subtract mortgage payments, depreciation or income taxes.
Worked example
Gross income of $420,000, 7% vacancy and $150,000 of operating expenses gives NOI of $240,600. A $2,400,000 loan at 7.25% over 25 years costs $208,168 a year, so the DSCR is 1.16x. That falls short of a 1.25x minimum, so a lender would cut the loan or ask for a longer amortization.
DSCR minimums by lender
- Banks and credit unions: 1.20x–1.35x
- CMBS: about 1.25x, plus a debt-yield test
- Agency multifamily (Fannie Mae / Freddie Mac): around 1.25x
- SBA (owner-occupied): about 1.15x–1.25x, measured on business cash flow
- Investor DSCR loans for 1–4 unit rentals: about 1.00x–1.25x, sometimes lower
- Bridge and private: flexible, often based on a business plan