According to Investopedia, DSCR is a ratio used by bank loan officers in determining income property loans. Ideally, this ratio should be more than 1. That would mean that the property is generating enough income to cover its debt obligations. Loan officers typically like to see a DSCR of at least 1.1 - 1.3 on income property.
It is calculated as Net Operating Income (NOI) divided by Total Debt Service or:
NOI/Total Debt
For example, using our pro forma budget numbers on our mixed use commercial project for the Rainier Beach Light Rail Station:
NOI (fully stabilized) = $399,960
Debt Service = ($4,332,900 * 4.75%/Permanent Financing) + ($298,000 * 4% /Land/Seller Financing, amortized over 30 years)=
205813 + 17,072= $222885
DSCR = 399960/222885 = 1.8
1.8 is a very healthy DSCR!
However, if our loan rate is 6.25% (minimum floor on a Washington Community Reinvestment Act loan), then our DSCR drops to 1.4, still a very healthy DSCR.
If we went up to 80% LTV (loan to appraised value), rather than 65%, our DSCR would drop to 1.14. This is still probably sufficient for a commercial bank loan.
Happy Investing!
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