How to Calculate DSCR: Step-by-Step Tutorial

The DSCR Formula Explained

Calculating your Debt Service Coverage Ratio is essential for understanding whether your investment property will qualify for a DSCR loan. Let's break down the formula step by step.

Basic DSCR Formula

DSCR = Gross Rental Income / Total Debt Service

Or more precisely:

DSCR = (Monthly Rent × Occupancy Rate) / (Principal + Interest + Taxes + Insurance + HOA)

Step 1: Determine Gross Rental Income

Start by identifying the property's expected monthly rental income. You can find this by:

Reviewing comparable rentals in the area
Consulting with property managers
Using online rental estimate tools
Getting a formal rent appraisal

Example: Your property can rent for $2,500/month based on market comparables.

Step 2: Factor in Vacancy

Most lenders apply a vacancy factor (typically 5-10%) to account for potential periods without tenants.

Effective Rent = $2,500 × 0.95 (5% vacancy) = $2,375/month

Step 3: Calculate Total Debt Service

Add up all your monthly housing expenses:

ExpenseMonthly Amount

|---------|----------------|

Principal & Interest$1,450

Property Taxes$350

Insurance$125

HOA Fees$75

Total$2,000

Step 4: Calculate Your DSCR

Now divide your effective rent by your total debt service:

DSCR = $2,375 / $2,000 = 1.19

Interpreting Your DSCR

DSCR > 1.25: Excellent - strong cash flow
DSCR 1.0 - 1.25: Good - qualifies with most lenders
DSCR < 1.0: Challenging - limited lender options

Real-World Examples

Example 1: Single-Family Rental

Purchase Price: $350,000
Down Payment: 25% ($87,500)
Loan Amount: $262,500
Interest Rate: 7.5%
Monthly Rent: $2,800
DSCR: 1.24

Example 2: Duplex

Purchase Price: $500,000
Down Payment: 25% ($125,000)
Loan Amount: $375,000
Interest Rate: 7.5%
Monthly Rent: $4,200 (both units)
DSCR: 1.18

Tips for Improving Your DSCR

Increase rent if below market rates

Make a larger down payment to reduce loan amount

Shop for better insurance rates

Choose properties with lower HOA fees

Consider interest-only loans for initial years

Use Our Calculator

Don't want to do the math manually? Our DSCR Calculator makes it easy to determine your property's ratio in seconds. Simply enter your property details and get instant results.