How to Calculate DSCR for a Rental Property (With Worked Examples)

DSCR is monthly rent divided by the full monthly mortgage payment. For a rental property loan, the formula is:

DSCR = gross monthly rent / PITIA

PITIA is principal, interest, taxes, insurance and association dues, all expressed monthly. A ratio of 1.0 means rent exactly covers the payment. Above 1.0 the property carries itself. Below 1.0 you make up the difference.

The formula step by step

1. Find the monthly rent. For a leased property, use the lease. For a vacant one, use the appraiser’s market rent from Form 1007 (single family) or Form 1025 (two to four units). If both exist, lenders usually take the lower.
2. Compute principal and interest on the loan amount at the note rate and term.
3. Divide annual property taxes by 12.
4. Divide the annual insurance premium by 12.
5. Add monthly HOA or condo dues, if any.
6. Add steps 2 through 5. That is PITIA.
7. Divide rent by PITIA.

The DSCR loan calculator runs these seven steps and also solves backwards for the loan amount a given rent supports.

Example 1: a standard purchase

A $500,000 single-family rental. 25% down, so the loan is $375,000 at 7.5% over 30 years. Taxes are $6,000 a year and insurance $2,500. Rent is $4,000.

• Principal and interest: $2,622
• Taxes: $6,000 / 12 = $500
• Insurance: $2,500 / 12 = $208
• HOA: $0
• PITIA: $3,330
• DSCR: $4,000 / $3,330 = 1.20

The property covers its payment with $670 a month to spare, but it sits below the 1.25 that unlocks the best pricing at many lenders. To reach 1.25, rent would need to be $4,163, or the loan would need to drop to about $356,000.

Example 2: the same property, interest only

Same loan, but the lender offers a 10-year interest-only period and qualifies on the IO payment.

• Interest only: $375,000 × 7.5% / 12 = $2,344
• Taxes and insurance: $708
• PITIA: $3,052
• DSCR: $4,000 / $3,052 = 1.31

Nothing about the property changed. The ratio went from 1.20 to 1.31 because the payment fell by $278. This is why interest-only options are popular on DSCR loans that sit near the line, and why you should ask whether the lender qualifies on the IO payment or the amortizing one.

Example 3: a condo with HOA dues

A $500,000 condo, 25% down, $375,000 loan at 7.75%, taxes $6,000, insurance $1,500 (the master policy covers the building), HOA $575 a month. Rent $3,950.

• Principal and interest: $2,687
• Taxes: $500
• Insurance: $125
• HOA: $575
• PITIA: $3,887
• DSCR: $3,950 / $3,887 = 1.02

The HOA line alone knocked about 0.18 off the ratio. Condos with high dues are the most common place DSCR deals fail, and the dues are the one line you cannot negotiate down.

Commercial DSCR is a different formula

Commercial lenders and most finance textbooks define DSCR as net operating income divided by annual debt service (the NOI Calculator builds that NOI line by line):

DSCR = NOI / annual debt service

NOI is rent minus vacancy, management, repairs, taxes, insurance and other operating expenses, but before the mortgage. Debt service is principal and interest only, since taxes and insurance already came out of NOI. The Wikipedia entry on debt service coverage ratio describes this version.

Run example 1 the commercial way with 5% vacancy, 8% management and 10% for repairs and reserves. NOI is roughly $4,000 × 12 × 0.77 minus $8,500 in taxes and insurance, about $28,500 a year. Debt service is $2,622 × 12, about $31,500. The commercial DSCR is 0.90.

Same property. Residential DSCR 1.20, commercial DSCR 0.90. The residential version flatters the property because it ignores every operating cost except taxes and insurance. NOI is also the numerator of cap rate, and the cap rate calculator builds it line by line. That is fine for qualifying. It is a poor guide to whether you will actually make money, which is why the calculator labels its cash flow figure “before vacancy, repairs and management.”

Common mistakes

Leaving taxes and insurance out of the denominator is the most frequent one. Lenders never do this, so a ratio computed on principal and interest alone will be higher than what the underwriter sees.

Using a rent the appraiser will not support is the second. If comparable rentals in the area lease for $3,600, a $4,000 lease from a related party or a tenant paying above market may be cut to $3,600 in underwriting.

Using the current tax bill on a purchase is the third. Many counties reassess at sale. If the seller’s bill reflects a purchase from 2012, yours may be substantially higher, and a careful lender will estimate taxes off the new price.

Where to go next

If your ratio is under 1.25, the guide to what counts as a good DSCR explains how lenders price each band. If it is under 1.0, the DSCR below 1.0 guide covers your options. For each ratio from 0.75 to 2.00 there is a page of worked numbers, starting with 1.25 DSCR.