Glossary term
Debt Coverage Ratio (DCR)
Debt coverage ratio compares a property's net operating income to its yearly loan payments. Lenders use it to see whether the property can carry its debt.
DCR, also called DSCR, is calculated as NOI / annual debt service. Debt service is the total of principal and interest payments for the year. A DCR of 1.25 means the property earns 25 percent more than it needs to pay the loan.
A ratio of 1.0 means income exactly covers the payment, with no cushion. Most lenders want to see a cushion, often 1.20 to 1.35 or more, depending on the loan type and market. A higher ratio gives more room if vacancy rises or expenses jump.
Owners also use DCR when they plan a refinance. Raising NOI or paying down the loan can lift the ratio and open better loan terms.
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