If you borrow against a rental property, there is one ratio the lender cares about before almost anything else: does the property's income cover its debt? That ratio is DSCR — debt service coverage ratio. For conventional loans, the lender leans on your personal income and the property's DSCR is supporting evidence. For DSCR loans — a common product for investors — the property's ratio is the underwriting: no tax returns, no pay stubs, just the question of whether the rent carries the loan. Either way, you should know your number before the lender tells you theirs.
On this page
The formula
NOI (net operating income) is effective rent — rent minus vacancy — minus operating expenses: taxes, insurance, maintenance, management, HOA, and a CapEx reserve. NOI deliberately excludes the mortgage; it measures the property itself. The full calculation is in our NOI guide.
Annual debt service is the total of your mortgage payments for the year: principal and interest. (Some lenders define the denominator as PITIA — principal, interest, taxes, insurance and HOA — folding expenses back in. The definitions differ, which is why the same property can score differently at two lenders. Ask which one yours uses.)
A DSCR of 1.0 means the property earns exactly enough to pay its debt — nothing left over. Below 1.0, the property loses money every month and the shortfall comes out of your pocket. Above 1.0, there is a cushion.
What lenders typically look for
Thresholds vary by lender, loan program, property type and your credit profile — treat the following as typical ranges, not guarantees:
| DSCR | What it usually means |
|---|---|
| 1.20–1.25 and up | The range many lenders prefer. The property covers its debt with a 20–25% cushion, which absorbs a vacancy or a repair without missing a payment. |
| 1.0–1.19 | Lendable at some programs, often with compensating factors — a lower loan-to-value, higher reserves, or a higher rate. |
| Below 1.0 | Most DSCR programs decline or require a much larger down payment. The property does not pay its own mortgage, and the lender prices that risk accordingly — or walks away. |
Worked example: DSCR of 0.78
This is the sample deal pre-loaded in our analyzer — a $250,000 purchase renting for $1,800 a month, financed with 20% down at 7% over 30 years.
| Item | Value |
|---|---|
| NOI | $12,432 / year |
| Annual debt service | $15,967 / year (≈ $1,331 / month) |
| DSCR | 12,432 ÷ 15,967 = 0.78 |
| Cash flow | −$294.60 / month |
| Cash-on-cash return | −6.4% |
| Break-even rent | ≈ $2,180 / month |
Green = calculated
A DSCR of 0.78 means the property's income covers only 78 cents of every dollar of debt. The remaining 22 cents — $294.60 a month, $3,535 a year — is a standing obligation the owner funds from other income.
What a 0.78 means for financing
- A DSCR loan is almost certainly off the table at standard terms. The property fails the product's core test.
- A conventional loan shifts the burden to you. The lender will underwrite your personal income and debts; the property's shortfall counts against you, not for you.
- The fixes are structural, not cosmetic. To reach a DSCR of 1.0 at the same NOI, annual debt service would have to fall to $12,432 — about $1,036 a month. At 7%, that means a loan near $155,700 instead of $200,000: roughly $94,000 down on this price, or a purchase price near $195,000 at 20% down. In other words, this deal becomes financeable at a materially lower price — which is a negotiating fact, not a modeling opinion.
- Rate matters as much as price. Debt service is driven by the loan amount and the rate. The same property can pass at one rate environment and fail at another, which is why DSCR should be recalculated, not remembered, whenever rates move.
One more distinction: DSCR is not the same as the "1% rule" or any rent-to-price heuristic. Those are quick screens. DSCR uses your actual expenses and your actual loan, and it is the number a lender will compute — with their definition, their expense assumptions and their threshold. Run yours first, conservatively, so their answer is not a surprise.
Common mistakes
- Computing NOI with the seller's expenses. Understated taxes and insurance inflate NOI, and with it DSCR. Use your own post-purchase figures — taxes typically reset at sale.
- Leaving out vacancy and CapEx. A DSCR built on gross rent is fiction. Lenders apply their own haircuts; if yours has none, theirs will be worse.
- Mixing definitions. NOI ÷ debt service and rent ÷ PITIA give different numbers for the same deal. Know which one your lender uses before you quote a ratio.
- Checking DSCR only at purchase. The ratio moves with taxes, insurance and rent. Recompute it annually, and before any refinance.
- Assuming a passing DSCR means a good deal. A property can cover its debt and still return poorly on the cash invested. DSCR measures safety, not profit — check cash-on-cash alongside it.
Check your deal's DSCR before a lender does
The free Lite version of the Real Estate Deal Analyzer calculates DSCR from your own expense figures, next to cap rate, cash flow and break-even rent. The Full version adds a sensitivity grid — so you can see exactly how the ratio moves when rent, price or rate changes — plus a 5-year projection and a BRRRR calculator. Both are on the Real Estate Deal Analyzer page.
Lite first, free — DSCR, cap rate and cash flow on one sheet.
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This guide is an educational calculation aid, not financial, tax or legal advice. Lender thresholds vary; confirm current requirements with your lender. Verify all figures against local data before making an offer.