1. What is Debt Service Coverage Ratio?

Debt Service Coverage Ratio measures if the income generated by a commercial property is sufficient to fulfill its annual debt burden. It's a key financial metric used by lenders to assess a borrower's ability to repay debt obligations.

2. How Does the Calculator Work?

The calculator uses the DSCR formula:

Where:

• \( DSCR \) — Debt Service Coverage Ratio
• \( NOI \) — Net Operating Income ($)
• \( AD \) — Annual Debt ($)

Explanation: The ratio compares the property's net operating income to its annual debt service requirements. A higher ratio indicates better ability to cover debt payments.

3. Importance of DSCR Calculation

Details: DSCR is crucial for lenders to evaluate loan risk and for investors to assess property profitability. Most lenders require a minimum DSCR of 1.20-1.25 for commercial real estate loans.

4. Using the Calculator

Tips: Enter Net Operating Income and Annual Debt in dollars. Both values must be positive numbers for accurate calculation.

5. Frequently Asked Questions (FAQ)

Q1: What is considered a good DSCR?
A: Generally, a DSCR of 1.25 or higher is considered good, indicating sufficient income to cover debt payments with a safety margin.

Q2: What happens if DSCR is below 1?
A: A DSCR below 1 indicates that the property's income is insufficient to cover its debt obligations, which may lead to loan denial.

Q3: How is NOI calculated?
A: Net Operating Income = Gross Operating Income - Operating Expenses (excluding debt service and income taxes).

Q4: Does DSCR include principal and interest?
A: Yes, Annual Debt includes both principal and interest payments on all debt obligations.

Q5: Can DSCR be used for personal loans?
A: While primarily used for commercial real estate, DSCR principles can be applied to assess any income-generating property's ability to service debt.