What does DSCR measure for a rental property?

• A. A rental property's ability to cover annual debt service with NOI.
• B. A property's equity.
• C. Gross rent multiplier.
• D. Cash-on-cash return.

Answer: (C)

DSCR gauges whether a rental property generates enough income to cover its debt payments. It compares the property's net operating income (NOI) to its annual debt service (the total principal and interest paid in a year). NOI is the income left after operating expenses like property management, maintenance, taxes, and insurance are subtracted from gross rents, but it does not include financing costs or depreciation. When the ratio is above 1, the property produces more income than needed to make debt payments, which provides a cushion for lenders and investors. If the ratio is below 1, debt payments exceed the income the property can generate, signaling a risk of not meeting obligations. This measure is distinct from other metrics: equity reflects ownership stake, gross rent multiplier relates price to gross rent, and cash-on-cash return looks at cash flow relative to cash invested.