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What Is a DSCR?
Debt service coverage ratio, or DSCR, is a measurement of a property’s cash flow versus its debt obligations. In multifamily real estate, that entity is typically an income-producing property. Most apartment loan programs have DSCR minimums in place that help to determine eligibility.
How to Calculate DSCR
The DSCR formula is:
DSCR = Net Operating Income ÷ Debt Obligations
In order to calculate the debt service coverage ratio for a multifamily property, you simply divide the asset’s net operating income by its debt obligations. It’s essential to make sure you have ALL of the correct numbers before utilizing the formula.
So, for example, if a property has an NOI of $1 million and an annual debt obligation of $850,000, it would have a DSCR as calculated below.
$1,000,000 ÷ $850,000 = 1.18x DSCR
Net operating income (NOI) for the DSCR formula is calculated using EBITDA (earnings before interest, tax, depreciation, and amortization), so it’s essential to understand this when calculating the DSCR for an apartment property. Debt obligation encompasses all debts (recurring and outstanding) to be paid by the entity, usually calculated annually.