Debt Service Coverage Ratio (DSCR)

Debt service coverage ratio is net operating income divided by annual debt service, the lender's measure of how many times a property's income covers its loan payments. It uses the same two inputs as cash on cash return from the other side: the investor asks what is left after debt service, the lender asks how safely it is covered.

On the default deal, $20,105 of NOI over $15,349 of debt service is a DSCR of 1.31. Cash flow of $4,756 is the same fact stated in dollars. A DSCR of 1.0 means zero cash flow; below 1.0 means negative.

Commercial lenders require 1.20 to 1.25. Residential DSCR lenders on one to four unit rentals use gross rent over the full monthly payment instead, which produces a higher figure for the same property, and accept 1.0 or higher. A property that clears the lender's DSCR with room will have positive cash flow; whether the cash on cash return is good depends on how much cash it took to get there.

Further reading: Debt Service Coverage Ratio (DSCR) on Wikipedia.