DSCR = Net Operating Income ÷ Annual Debt Service. It measures how much the property's income covers its mortgage payment. A DSCR of 1.0 means the property exactly covers the loan. A DSCR of 1.25 means the property produces 25% more income than the loan payment needs — a comfortable cushion. Most investor lenders require a minimum DSCR of 1.20–1.25 to approve the loan.
If your deal's DSCR is below the lender minimum, you have four levers to raise it: put more down, raise the rent projection, cut the operating expenses, or find a cheaper loan.
The formula
DSCR = Net Operating Income (NOI) ÷ Annual Debt Service
- NOI = Gross rent − operating expenses (taxes, insurance, vacancy, maintenance, CapEx, property management). NOI is BEFORE debt service — it's what the property produces regardless of how you finance it.
- Annual Debt Service = Principal + Interest payments across the year. Taxes and insurance are already inside NOI (netted from gross rent), so they don't count here.
Worked example
A Chicago 2-flat:
- Gross rent: $3,000/month × 12 = $36,000/year
- Operating expenses: $12,000/year (35% ratio)
- NOI: $36,000 − $12,000 = $24,000
- Loan: $220,000 at 7% interest, 30-year fixed → $1,463/month → $17,556/year debt service
- DSCR: $24,000 ÷ $17,556 = 1.37
1.37 DSCR is comfortably above the 1.25 lender minimum. This deal gets approved on the debt-service side.
What lenders actually require
- DSCR loans (non-QM investor loans): 1.20–1.25 minimum. Some lenders will fund down to 1.0 with a "no ratio" or "low ratio" product but at higher rates and lower LTVs.
- Conventional investor loans (Fannie/Freddie): Not explicitly DSCR-underwritten, but debt-to-income + rental income requirements amount to a similar bar. Rental income is typically counted at 75% of gross to imply a ~1.33 DSCR minimum.
- Small-balance commercial (5+ units): Often 1.25 minimum with some lenders going to 1.20 on strong sponsors.
- Bridge / hard money: Usually not DSCR-underwritten (short-term product), but the exit loan they refinance into will be.
Why lenders care about DSCR
Lenders write a mortgage assuming the property (not the borrower's day job) will pay it back. If the property produces exactly enough income to cover the mortgage (DSCR = 1.0), there's zero cushion for a vacancy, a big repair, or a rent decline. The lender's default risk goes up sharply.
At DSCR 1.25, the property covers 125% of the mortgage — one month of vacancy or one $2k repair doesn't threaten the loan. The 25% cushion is the lender's safety margin against normal operating volatility.
Higher DSCR requirements protect the lender. Lower DSCR requirements (1.0, 1.10) exist but come with higher rates because the lender is taking more risk.
How to raise a DSCR that's below the minimum
Put more down
A smaller loan means smaller debt service means higher DSCR. If you're at 1.15 on a 75% LTV loan, dropping to 70% LTV usually pushes you above 1.25. Downsides: more of your cash locked into the deal, lower cash-on-cash return.
Raise the rent projection (honestly)
If you underwrote rent conservatively, check whether market rent is actually higher. Sometimes the seller's rent roll is stale and the market has moved. Don't invent rent — but use current comps if they support a higher number than what the seller quoted.
Cut the operating expenses
Are you assuming 8% property management on a property you'll manage yourself? That's an extra $2,400/year of NOI. Are you carrying vacancy at 10% when the market is 5%? Same story. Underwriting expenses tighter (honestly, not optimistically) can raise NOI enough to clear the DSCR bar.
Find a cheaper loan
The debt service comes from the loan payment, which comes from the rate + term. Extending amortization from 25 to 30 years lowers the monthly payment and raises DSCR. Shopping a rate that's 0.5% lower has the same effect. Interest-only periods on some DSCR loans temporarily raise DSCR at the cost of no principal paydown.
Combine two units on paper
For 2-4 unit properties, lenders average the units to compute total gross rent. If one unit is under-market and the other is at-market, updating the under-market rent projection (based on comps for a unit like yours) raises the average — and DSCR.
The trap: DSCR that looks good but hides risk
A DSCR of 1.35 on paper can still be a risky deal if:
- Rent projection is aggressive. Lender-approved 1.35 doesn't matter if actual leased rent comes in 15% lower and DSCR drops to 1.14.
- Operating expenses are understated. If you're assuming 30% expense ratio and actuals come in at 45% (common in older buildings), NOI drops and DSCR drops with it.
- The loan is a teaser rate. DSCR at the initial fixed period looks great; at reset (year 5, 7, or 10) the higher rate can push a healthy DSCR below 1.0.
- You're on interest-only. DSCR looks strong while you're only paying interest; the day the principal payments start, DSCR craters.
Always run DSCR against a realistic (not best-case) NOI and against the true fully-amortizing payment, not the teaser or interest-only payment.
How Prop-Folio surfaces DSCR
Every Buy & Hold and BRRRR analysis in Prop-Folio computes DSCR live as you adjust assumptions. Change the loan rate, LTV, or rent estimate — DSCR recomputes instantly. The Deal Score weights DSCR heavily on both strategies (it's a lender-side gating metric, not just a nice-to-have), so a deal with a marginal DSCR flags in the score even if other metrics look strong.
For BRRRR specifically, Prop-Folio computes both the initial-loan DSCR and the post-refi DSCR — that second number is what the refi lender will actually approve on. Many BRRRR deals pencil on the acquisition loan but fail on the refi loan; showing both up front prevents surprises.
Related: Cap rate vs cash-on-cash vs DSCR · FCCR vs DSCR · Hard money + DSCR in Chicago