What is the definition of the debt service coverage ratio (DSCR) and why is it important?

• A. DSCR = NOI / debt service; it should be greater than 1 to be financially viable.
• B. DSCR = debt service / NOI; it should be greater than 1 to be financially viable.
• C. DSCR is a measure of cash-on-cash return.
• D. DSCR is a measure of cap rate.

Answer: (B)

DSCR shows whether a property's income can cover its debt payments. It is calculated as net operating income divided by annual debt service. Because you’re comparing income to debt obligations, the ratio should be greater than 1 to indicate a cushion; lenders typically want a DSCR around 1.2x or higher to account for vacancies and expense swings. Remember that NOI is gross operating income minus operating expenses (excluding debt service, taxes, and depreciation), while debt service is the annual principal and interest payments on the loan. This metric focuses on the ability to service debt, not on overall profitability metrics like cash-on-cash return or cap rate.