How do you calculate the debt service coverage ratio (DSCR) for a rental property?

• A. DSCR = Cap rate / NOI.
• B. DSCR = NOI / Annual Debt Service; higher DSCR indicates greater ability to cover debt.
• C. DSCR = Gross rent / Mortgage payment.
• D. DSCR = Annual Debt Service / NOI; higher DSCR indicates lower ability.

Answer: (B)

DSCR measures whether a rental property’s income after operating expenses can cover its annual debt payments. Net Operating Income (NOI) is the rental income left after operating expenses (like maintenance, property management, taxes, and insurance) but before debt service. Annual Debt Service is the total yearly mortgage payments (principal plus interest). So the DSCR is NOI divided by annual debt service. If the DSCR is greater than 1, the property generates enough cash flow to cover debt; the higher the ratio, the safer the debt coverage. If it’s less than 1, debt payments exceed the income the property produces.

This is why the other formulations don’t fit: using cap rate ties NOI to property value, not to debt obligations; using gross rent omits operating expenses; and flipping the ratio would invert the relationship between income and debt service.