Debt Service Coverage Ratio (DSCR) is a measurement of an entity’s cash flow versus its debt obligations. In commercial real estate, that entity is typically an income-producing property. DSCR is calculated by dividing the net operating income (NOI) of the property by the total debt service (TDS) of the loan. If the DSCR is less than 1, then that means that the income is less than the monthly debt obligations. If the DSCR is 1, then that equates to the income being equal to the monthly debt obligations. Finally, when the DSCR is more than 1, it means the income is greater than the monthly debts. Most apartment loan programs have DSCR minimums that help to determine eligibility.

Source: www.multifamily.loans/dscr-calculator and apartment.loans/posts/what-is-dscr

Debt Service Coverage Ratio (DSCR) is used to evaluate a commercial real estate loan by measuring a property's cash flows relative to its debt service obligations. A lender can determine if a property generates enough net income to cover its debt obligations by using a DSCR calculation. DSCR requirements vary by asset type, but the higher the better. Don't expect to find many institutions willing to offer you a competitive loan at a DSCR of less than 1.25x. (Source, Source)

The formula for calculating debt service coverage ratio is fairly straightforward, given below:

DSCR = Net Operating Income ÷ Debt Obligations

In order to calculate the debt service coverage ratio for a multifamily property, you simply divide the asset’s net operating income by its debt obligations.

In most cases, lenders prefer properties with DSCRs of 1.25x or more, though the required DSCR will typically depend on the financial strength of the borrower, the type of property in question, and other factors. For instance, while multifamily apartment properties may need a minimum DSCR of 1.25x to qualify for funding, riskier property types, such as hotels or self-storage facilities, may need a DSCR of 1.40x- 1.50x in order to qualify. Source and Source.

Having a low DSCR for a commercial real estate loan can be risky because it indicates that the property's cash flows are not sufficient to cover its debt service obligations. This means that the borrower may not be able to make their loan payments, which could lead to default. Additionally, lenders may be less likely to offer competitive loan terms if the DSCR is too low. Generally, lenders look for a minimum DSCR of 1.25x. Source

You can use a DSCR calculator to determine if a property generates enough net income to cover its debt obligations. Source

The main benefit of having a high debt service coverage ratio (DSCR) for a commercial real estate loan is that it can lead to better loan terms. A higher DSCR indicates that the property is generating a higher net operating income, which is a sign of lower risk to the lender. As a result, borrowers with a higher DSCR may receive more competitive interest rates and longer loan terms. For example, some lenders may offer loans of up to 35 years for properties with a high DSCR. Additionally, DSCR loans may allow for unlimited cash out, which can be useful in the event of an unexpected or large property expense.

Sources:

• How DSCR Loans Are Used in Multifamily Investing
• What Is a DSCR Loan?