Leverage

Leverage is the use of borrowed money to buy an asset larger than the owner's cash alone could buy. A 75% loan on a rental is 4 to 1 leverage on the down payment. DSCR measures how much of that leverage the property's rent can carry.

More leverage means a bigger loan, a bigger payment and a lower DSCR. On the $500,000 example the ratio is about 1.20 at 75% loan-to-value and about 1.14 at 80%. A lender's minimum DSCR therefore works as a ceiling on leverage that moves with rent and interest rates.

Leverage raises returns when the property earns more than the loan costs and cuts them when it earns less. At high rates a heavily financed rental can have a thin ratio and little cash flow, so the extra return on equity comes with a smaller cushion against vacancy or repairs.

Further reading: Leverage on Wikipedia.