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. Commercial lenders require 1.20 to 1.25. It shares NOI with cap rate, and the spread between cap rate and mortgage constant decides whether it clears.

DSCR equals cap rate divided by mortgage constant, times the inverse of the loan-to-value. At 75% LTV, a 6% cap rate against an 8.2% constant gives a DSCR near 0.98: the property barely covers its debt. At 60% LTV the same property scores about 1.22.

That relationship is how lenders size loans. They lend the lesser of the LTV cap and the loan amount at which DSCR hits their minimum. In a low cap rate market the DSCR constraint binds first and buyers must put more down. Residential DSCR lenders on one to four unit rentals use a simpler version, gross rent divided by the full monthly payment, which produces a higher ratio for the same property.

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