Does the property cover its own loan?

What DSCR tells a lender — and you

The debt service coverage ratio asks whether the property pays for its own loan: net operating income for a year, divided by the mortgage payments for the same year. At 1.50×, the building earns half again what the bank collects — a cushion that survives a vacancy or a tax hike. At 1.0× it earns exactly the payment and nothing else. Below 1.0×, the owner feeds the loan from other income every month. It is the first ratio underwritten on any income property, and on commercial deals and DSCR loan programs it is often the deciding one, because those programs qualify the property's income rather than yours.

How the number is computed

DSCR = net operating income ÷ annual debt service. The NOI is built the standard way — gross income less vacancy, less operating expenses — and the debt service is the loan payment, principal and interest, annualized. Keep the boundary clean: escrowed taxes and insurance are operating expenses, not debt, even though they ride in the same monthly payment; count them once, on the operating side. The fourth figure above runs the same arithmetic backwards — the largest monthly payment this income supports at a 1.25× requirement — which is the practical version of the question, since it translates directly into how much loan a lender will size for you at today's rates.

What lenders look for

Most income-property lenders underwrite to a minimum of 1.20–1.25×; stronger tiers price better as coverage rises, and riskier asset classes — hospitality, single-tenant retail — push requirements toward 1.40× and beyond. Coverage also decides refinance timing: a rate jump that drags a 1.35× property toward 1.15× forces cash into the deal at renewal, which is why owners track the ratio between loans and not just at origination. If you record your actual loan terms — rate changes, recasts, refinances — the ratio stays honest as the debt evolves; that is what a proper loan history is for.

Common mistakes

The most common error is computing coverage on cash flow instead of NOI — subtracting the mortgage before the ratio, which double-counts the debt and makes any performing loan look catastrophic. The next is quoting scheduled rent with no vacancy: a lender will apply one whether you did or not, so better to see the underwritten version first. Mixing tax-and-insurance escrow into debt service deflates the ratio; leaving management out of expenses inflates it. And treat a strong DSCR built on the current NOI as a snapshot, not a promise — the textbook ratio ignores capital expenditures, so an aging roof can hide behind a comfortable 1.5× right up until the invoice arrives.

Coverage is one property; the next question on any loan application is the whole portfolio. The free Schedule of Real Estate Owned generator assembles it — every property with its income, debt and equity — in the format the underwriter will ask for anyway.