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What does DSCR stand for?
DSCR stands for debt service coverage ratio. It is a metric commonly used in commercial lending (instead of personal credit scoring) to establish whether the borrower’s investment makes sense from an economic point of view.
In contrast to private purchases, commercial mortgages are taken with one main objective: generating income. For example, as a real estate agent, you might consider buying a building to rent out the apartments. The rent paid by the tenants will have to cover the loan you’ve taken (with interest) and provide you with some profit. Your lender won’t be interested in your credit history: he will be interested in predicted cash flows to ensure that you won’t run out of money to pay him off.
How to calculate DSCR?
Our debt service coverage ratio calculator uses the following formula:
- – Debt service coverage ratio;
- – Monthly net operating income; and
- – Monthly payment towards paying off your debts.
You can input the value of NOI directly in this DSCR calculator or head to our net effective rent calculator for a more detailed calculation scheme.
Alternatively, you can open the advanced mode to determine NOI according to the equation:
In this formula:
- – Gross income – the monthly rent paid by your tenants;
- – Monthly expenses for maintenance, repairs, or cleaning, expressed as a percentage of the gross income; and
- – Vacancy rate (how often you don’t have a tenant for the apartment), expressed as a percentage of the gross income.
Our debt service coverage ratio lets you easily determine your debt service.
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