What DSCR actually measures
DSCR answers one question lenders care about above all others: if the property runs the way you say it will, can it cover the mortgage? A DSCR of 1.0 means break-even. A DSCR of 1.25 means the property generates 25% more in NOI than the mortgage needs — a comfortable cushion that covers a bad month, a brief vacancy, or a surprise expense.
The formula
What lenders look for
- Conventional investment loan: ≥1.25, typically
- DSCR loan (no income docs): 1.0 to 1.25 minimum, with rate / LTV penalties below 1.25
- Commercial multifamily (5+ unit): ≥1.20 to ≥1.40 depending on lender
- Hard money / bridge: DSCR not always required, but lenders glance at it
Most conventional lenders also have a debt-to-income (DTI) calculation that mixes the property's DSCR with your personal income. DSCR-only loan products skip the personal side — your tax returns, W-2, and DTI don't matter as long as the property covers itself.
Common mistakes
1. Forgetting to subtract operating expenses from NOI
NOI = gross rent afterproperty tax, insurance, vacancy reserve, maintenance, management, CapEx reserve, HOA, utilities — everything except mortgage P&I. New investors often calculate “NOI” as just gross rent, which inflates DSCR by 40-60%.
2. Using nominal rent instead of effective rent
Subtract vacancy and credit loss before calling it rent. Asking $2,950 doesn't mean you collect $35,400/year — you collect $35,400 × (1 − vacancy rate). For a 5% vacancy that's $33,630 effective rent before any operating expenses.
3. Ignoring the seasonality of expenses
Annual NOI smooths out seasonal swings. A heating-zone rental might be cash-flow-negative in January (heat, vacancy from December move-outs) and cash-flow-positive in August. Lenders look at the annual number. So should you.
DSCR and the rest of your underwriting
DSCR is a debt-coverage measure. It tells you whether the bank gets paid. It doesn't tell you whether the deal is good for you. For that you also need cap rate (the unleveraged return), cash-on-cash (the leveraged return on your money), cash flow (the dollars per month), and projection (the 10-year picture). TrueCap's full analyzer runs all of those at once on the same deal — free to start.