Operating Expense

An operating expense is a recurring cost of running a rental property: taxes, insurance, repairs, management, utilities the owner pays, association dues and reserves. It is subtracted from income to get net operating income. Which operating expenses count depends on the type of DSCR loan.

A residential DSCR lender counts only property taxes, insurance and association dues, and puts them in the payment alongside principal and interest. Repairs, management and vacancy never enter the ratio. That is why the site's $500,000 example shows a DSCR of about 1.20.

A commercial lender subtracts every operating expense first and divides the resulting net operating income by principal and interest. The same property scores lower that way, closer to 0.90. Knowing which method a lender uses tells you which number to bring to the conversation.

Further reading: Operating Expense on Wikipedia.