If you’re applying for a DSCR loan or evaluating a rental property’s profitability, understanding how to calculate Debt Service Coverage Ratio (DSCR) is absolutely critical. This single number determines whether lenders will approve your loan – and whether your investment will actually cash flow.
In this comprehensive guide, you’ll learn:
✔ What is DSCR and why it matters for rental properties
✔ The exact DSCR formula (with examples)
✔ How lenders evaluate your DSCR
✔ Common mistakes investors make
✔ Pro tips to improve your DSCR
✔ Best DSCR lenders for rental properties
By the end, you’ll be able to calculate DSCR like a pro and position yourself for loan approval. Let’s dive in!
What Is DSCR for Rental Properties?
Debt Service Coverage Ratio (DSCR) measures a property’s ability to cover its mortgage payments with rental income. It’s the #1 metric lenders use to approve DSCR loans.
Why DSCR Matters
- Determines if you qualify for financing
- Shows whether a property will be profitable
- Helps compare different investment opportunities
- Required by most commercial and investment property lenders
The DSCR Formula Explained
The basic DSCR formula is:
DSCR = Net Operating Income (NOI) / Annual Debt Service
Let’s break down each component:
1. Net Operating Income (NOI)
This is the property’s annual rental income minus operating expenses (but before mortgage payments).
NOI = Gross Rental Income – Operating Expenses
What’s included in NOI?
✅ Gross rental income
✅ Other income (laundry, parking, etc.)
✅ Property taxes
✅ Insurance
✅ Maintenance costs
✅ Property management fees
✅ Utilities (if paid by owner)
✅ Vacancy allowance (typically 5-10%)
What’s NOT included?
❌ Mortgage payments
❌ Income taxes
❌ Capital expenditures (major repairs)
2. Annual Debt Service
This is the total annual mortgage payment (principal + interest).
Step-by-Step DSCR Calculation (With Example)
Let’s calculate DSCR for a sample property:
Property Details:
- Purchase Price: $300,000
- Down Payment: 25% ($75,000)
- Loan Amount: $225,000
- Interest Rate: 7.5%
- Loan Term: 30 years
- Monthly Rent: $2,500
- Vacancy Rate: 8%
- Annual Expenses: $6,000
Step 1: Calculate Gross Rental Income
$2,500/month × 12 = $30,000/year
Step 2: Subtract Vacancy
$30,000 × 8% = $2,400 vacancy loss
$30,000 – $2,400 = $27,600
Step 3: Subtract Operating Expenses
$27,600 – $6,000 = $21,600 NOI
Step 4: Calculate Annual Debt Service
Monthly payment on $225k @ 7.5% for 30 years = $1,573
$1,573 × 12 = $18,876 annual debt service
Step 5: Calculate DSCR
$21,600 (NOI) / $18,876 (Debt Service) = 1.15 DSCR
How Lenders Evaluate Your DSCR
Most lenders require:
- Minimum DSCR of 1.0 (break-even)
- Preferred DSCR of 1.25+ for better rates
- Some hard money lenders accept 0.75-1.0 with higher down payments
What If Your DSCR Is Too Low?
- Increase down payment
- Raise rents (if justified by market)
- Reduce operating expenses
- Consider a different property
DSCR Calculation Mistakes to Avoid
- Overestimating rental income (use actual leases or conservative market rates)
- Underestimating expenses (always include vacancies, maintenance, etc.)
- Forgetting to annualize the numbers
- Using the wrong interest rate (get current quotes from lenders)
- Ignoring property-specific factors (older homes have higher maintenance)
5 Pro Tips to Improve Your DSCR
- Increase Your Down Payment – Lowers the loan amount and monthly payment
- Add Value-Add Features – Like coin laundry or storage to boost income
- Renegotiate Expenses – Shop for cheaper insurance or property management
- Choose a Longer Loan Term – 30-year vs. 25-year lowers payments
- Find a DSCR-Friendly Lender – Some accept lower ratios than others
Best DSCR Lenders for Rental Properties
🥇 #1 Recommendation: Truss Financial Group
✅ Accepts DSCR as low as 1.0
✅ Credit scores 580+ accepted
✅ No tax returns or W-2s required
✅ Fast approvals (10-14 days)
Other Top Lenders
| Lender | Min. DSCR | Min. Credit | Down Payment |
|---|---|---|---|
| Kiavi | 1.0 | 620 | 20% |
| LendingOne | 1.0 | 600 | 25% |
| Visio Lending | 1.0 | 580 | 25% |
| Hard Money | 0.75 | 500 | 30% |
FAQ: DSCR Calculations
❓ Can I include future rent increases in my DSCR?
Most lenders use current rents unless you have signed leases at higher rates.
❓ How do I estimate expenses for a new purchase?
Use 1% of property value for maintenance and 8-10% for property management.
❓ What’s a good DSCR for Airbnb properties?
Lenders typically want 1.25+ due to higher vacancy risk.
❓ Does DSCR include principal payments?
Yes! Debt service includes principal + interest.
Free DSCR Calculator Tool
Want to skip the math? Use our [free DSCR calculator spreadsheet] (insert link) to automatically calculate your ratio.
🚀 Ready to Finance Your Rental Property?
Now that you can calculate DSCR like a pro, it’s time to take action! Truss Financial Group offers some of the most investor-friendly DSCR loans available: