DSCR Calculator: Debt Service Coverage Ratio Explained
1. Short answer
DSCR (debt service coverage ratio) is net rental income divided by annual loan obligations, interest plus principal. It tells you whether the property can carry its own financing.
DSCR = net rental income ÷ (annual interest + principal)
A DSCR of 1.25 means € 1.25 of rent comes in for every euro going to the lender. Below 1.00 the property runs at a loss: you have to top up the payments from your own pocket each month.
2. What DSCR is, and what it is not
DSCR is the figure lenders steer on. Where yield figures say whether a property is attractive, DSCR says whether it is financeable. Many lenders apply a floor of 1.20 to 1.30 for rental property.
It is the mirror image of LTV. LTV measures what a lender recovers if things go wrong; DSCR measures how likely it is that they will. Both usually sit as covenants in the same facility, and when rates move it is almost always DSCR that binds first: your LTV does not change, your debt service does.
The numerator is net rental income (NOI): rent minus operating costs, but before interest and principal. The denominator is the full annual obligation on the loan.
What DSCR does not do:
- take account of your other income or assets
- include tax
- say anything about capital growth
- say anything about what happens after a rate change, for that you recalculate
3. The formula, component by component
Numerator: net rental income. Exactly NOI: annual rent minus maintenance, service charges, insurance, local taxes, management and a vacancy allowance. Do not use gross rent; that is the most common way to overstate DSCR.
Denominator: debt service. The full annual payment to the lender. Here is the trap: on an amortising loan that is far more than interest alone.
On an interest-only loan, debt service equals the interest. On an annuity loan, principal is included, and that can almost double the denominator. The same loan at the same rate then produces a completely different DSCR.
4. Worked example
The same apartment as on the net yield page: net rental income € 11,074 a year. Financed with a € 199,500 loan (70% of the € 285,000 purchase price) at 5.0%.
| Item | Interest-only | Annuity, 30 years |
|---|---|---|
| Net rental income | € 11,074 | € 11,074 |
| Annual interest | € 9,975 | € 9,908 (year 1) |
| Annual principal | € 0 | € 2,943 (year 1) |
| Debt service | € 9,975 | € 12,852 |
Interest-only: DSCR = 11,074 ÷ 9,975 = 1.11 Annuity: DSCR = 11,074 ÷ 12,852 = 0.86
| Outcome | Value | What it means |
|---|---|---|
| Interest-only | 1.11 | Covers the payments, but below most lenders' floor |
| Annuity | 0.86 | The property cannot carry its own payments; you top up € 148 a month |
| Difference | 0.25 points | Repayment type alone, same property, rate and loan |
That is the point of this page. Repayment type does not change the property's return, but it does change whether it is financeable. A DSCR quoted without stating the repayment type is a number without meaning.
5. What counts as a good DSCR?
| Range | What it usually signals |
|---|---|
| below 1.00 | The property runs at a loss; monthly top-up required |
| 1.00 – 1.20 | Covered, but with no margin; most lenders will decline |
| 1.20 – 1.40 | Common requirement for rental property |
| above 1.40 | Comfortable margin; often lower LTV or interest-only |
A lender's floor is not arbitrary: it is the buffer against vacancy and rate rises. At a DSCR of 1.25, rent can fall 20% before payments are no longer covered.
Many lenders also underwrite at a notional rate above the one you are being offered. Run your own case one to two points higher as a matter of routine and see whether DSCR still clears the floor. Finding out where it breaks is worth far more before an application than after one.
The same figure read the other way round: break-even occupancy. Instead of asking how much headroom you have, ask at what occupancy you exactly break even. Add your fixed operating costs to your annual debt service and divide by the rent you actually collect.
Break-even occupancy = (operating costs + debt service) ÷ contracted rent × 100%
On this property the interest-only variant lands at 93.60% and the annuity at 110.35%, and that second figure is not an arithmetic error. Above 100% you fail to cover your obligations even with the unit let for all twelve months, which means something has to change in the loan, the costs or the rent. Note too that the answer moves with how you enter management: a fixed fee gives 110.04% on this very same property. The break-even occupancy page works both branches out.
6. Three mistakes that distort the number
Gross rent in the numerator. That measures whether rent can pay the lender before maintenance, service charges and vacancy. In the example above it would give 1.78 instead of 1.11, a difference that reverses the verdict.
Interest only in the denominator on an amortising loan. See the table: 0.25 points, exactly the difference between financeable and not.
Using year 1 on an annuity. In year 1 the interest share is highest and the principal share lowest, but total debt service stays flat on an annuity. On a linear loan it falls every year: there, year 1 is the heaviest and therefore the right test.
7. Run your own numbers
Enter your own figures above. For multiple loan parts, different repayment types per phase and a multi-year view including rent indexation, the BRIX Calc rental calculator models it in full.
8. Frequently asked questions
What is the difference between DSCR and ICR?
ICR (interest coverage ratio) divides net rental income by interest alone; DSCR divides it by interest plus principal. On an interest-only loan they are identical. On an amortising loan ICR is always higher, and DSCR is the stricter, and fairer, measure.
What DSCR do lenders require?
For rental property the requirement is typically between 1.20 and 1.30, depending on the lender, property type and LTV. Some also test against a notional higher rate (a stress test), so the loan remains serviceable if rates rise.
Does vacancy count in DSCR?
Yes, through the numerator: net rental income should include a vacancy allowance. Assuming 100% occupancy overstates DSCR and removes exactly the buffer the figure exists to provide.
Does my equity belong in DSCR?
No. DSCR compares operations with debt service and nothing else; how much of your own money sits underneath is read from LTV and from cash-on-cash return. There is an indirect link: put more in, borrow less, and debt service falls, which lifts DSCR. It is a lever on the result, not an ingredient of the formula.
What does a DSCR of zero, or a negative one, mean?
Zero normally means there is no debt service at all: with no loan there is nothing to cover, so the ratio does not apply. Read it as "not applicable" rather than as a poor score. It can also go negative, when net rental income itself is negative because operating costs exceed collected rent. That should stay visible rather than being floored at zero, because that is precisely the case worth seeing.
Can DSCR improve without more equity?
Yes, three ways: a lower rate, a longer term (less principal per year), or switching to interest-only. All three reduce the denominator. None reduces your risk, with interest-only you build no equity and the principal remains outstanding.
Is DSCR calculated per loan part or overall?
Overall, unless the lenders are independent of each other. With several loan parts at different rates and repayment types, add all annual obligations into the denominator. A DSCR per loan part hides the fact that the property has to carry them together.