Calculations
How to Calculate DSCR for Commercial Real Estate
DSCR is calculated differently for residential properties and commercial real estate. The DSCR formula for commercial properties, like office buildings, shopping malls, strip malls, medical centers and other commercial real estate is:
DSCR Formula: Net Operating Income (NOI) ÷ Total Debt Service.
NOI = Property’s income after operating expenses.
Total debt service = Sum of all loan payments, including principal and interest.
How to Calculate DSCR for Residential Real Estate
The DSCR calculation for residential properties, such as single-family homes, townhomes, condos, duplexes, triplex and quadplexes is:
DSCR Formula: Monthly rental income ÷ Monthly PITIA
PITIA = Principal + interest + taxes + property insurance + association dues (if any).
What Is Considered a Good DSCR?
DSCR ratios higher than 1.25 are considered strong.
1.25+ DSCR
A DSCR of 1.25 means the property is generating 25% more income than the total monthly debt obligations, including principal and interest payments, property taxes, insurance, and any HOA fees.
1.0 DSCR = Breakeven
A DSCR of 1.0 means the property is breaking even.
Less than 1.0 DSCR
DSCR ratios below 1.0 suggest that the property is overpriced, too expensive to maintain, the monthly rent is too low or loan payments are too high.
How to Improve a Low DSCR
- Increase your down payment or pay down principal to lower monthly mortgage payments.
- Find lower quotes for your landlord insurance policy.
- Purchase a new 1007 appraisal if monthly rental rates came back lower.
- Switch to an interest only loan rather than principal and interest loan type.
What DSCR Do I Need to Qualify for a Loan?
To qualify for a DSCR loan for a rental property, you’ll need a DSCR of 1.0 or more to get approved. Higher ratios give you a cushion in case your appraisal comes back lower (Form 1004).
| DSCR | Meaning |
|---|---|
| 0-1 | The investment property cannot sufficiently meet its annual debt obligations, such as principal, interest payments, property taxes, landlord property insurance, and any HOA fees. |
| 1 | Investment property covers its expenses without any cushion or margin of safety. |
| 1+ | The property generates additional cash flow after paying all of its annual debt obligations. This surplus can be used to buy another rental property, pay down principal, distribute to property owners, or save for future uncertainties. |
How to Apply for a DSCR Loan
Capital Ton specializes in DSCR loans for non-owner occupied investment properties in over 20+ states. We help real estate investors build portfolios by using monthly rental income to qualify for financing.
- See how much you qualify for
- No application fee
- Secure up to 80% financing
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