This Debt Service Coverage Ratio (DSCR) Calculator helps determine whether a property or business is generating sufficient income to cover loan repayments. A higher DSCR indicates a lower level of risk for lenders.
The formula for the debt-service coverage ratio requires net operating income and the total debt servicing for a company.
- Gross Operating Income: The total income generated by the property before any expenses.
- Vacancy Loss: A percentage reduction in income due to vacant units or rental downtime.
- Operating Expenses: A percentage of gross operating income deducted to account for property maintenance, management, and other costs.
- Net Operating Income (NOI):The income remaining after deducting vacancy loss and operating expenses, calculated as:
NOI = Gross Operating Income × (1 - Vacancy Loss%) × (1 - Operating Expenses%)
- Loan Amount (P): The total loan taken for the property.
- Loan Term (n): The number of years over which the loan is repaid.
- Annual Interest Rate (r): The yearly interest rate applied to the loan.
- Debt Service: The total annual debt obligation, including both principal and interest payments, calculated using the loan amortization formula:
Debt Service = (P × r) / (1 - (1 + r/12)-12 × n)
- Debt Service Coverage Ratio (DSCR):The ratio of net operating income to debt service, calculated as:
A DSCR above 1.0 indicates that the property generates enough income to cover its debt payments. A DSCR of 1.25 or higher is typically preferred by lenders, as it suggests a safer investment.