Debt Service Coverage Ratio is a financial ratio used to indicate a company (or properties) ability to repay a proposed debt.

For a rental property, it is typically calculated by dividing the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) by the total annual required debt service of the company. Most lenders look for a minimum of anywhere from 1.20x to 1.50x.

DSCR is similar to the other debt ratios. This is a measure of the amount of cash flow available with the company to meet its annual interest and principal payments on its debt obligations. A DSCR of less than 1 means a negative cash flow. i.e., the company is not generating enough cash flow to meet its debt obligations. Company's try to keep their DSCR to be a value much higher than 1.

Formula:

DSCR = Net Operating Income / Total Debt Service