What is DSCR and How Does It Impact Apartment Loans?
By Mark Kenney | Think Multifamily
If you’re stepping into the world of apartment investing, you’ve probably heard the term DSCR tossed around like confetti at a real estate conference. It sounds technical—and it is—but don’t let it intimidate you.
Understanding DSCR could be the difference between locking in financing… or watching your deal collapse before it even starts.
Let’s break it down in plain English.
What Does DSCR Mean?
DSCR = Debt Service Coverage Ratio
Let's get real - real fast: this boils down to one question:
👉 Does this property bring in enough income to pay its mortgage—and then some?
The Formula:
DSCR = Net Operating Income (NOI) ÷ Annual Debt Service
Where:
NOI = Income after expenses (but before loan payments)
Debt Service = Annual mortgage payments (principal + interest)
Real-Life Example:
Property NOI = $120,000
Annual mortgage = $100,000
DSCR = $120,000 ÷ $100,000 = 1.20
That means the property earns 20% more than needed to cover debt. Healthy. Exactly what lenders want to see.
Why Lenders Care So Much About DSCR
Banks don’t care if your property has granite countertops or sits in a “hot” zip code. They care about one thing: Will the loan get repaid?
That’s why lenders set DSCR minimums.
⚠️ If DSCR dips below 1.0, the property isn’t generating enough to pay the loan. That’s a flashing red light.
Easy Analogy: DSCR = Your Paycheck vs. Your Bills
Let's think about your household budget:
If you earn $5,000/month
Your bills = $4,000/month
DSCR = 1.25 — solid.
Now let’s say inflation pushes your bills to $5,500/month. Suddenly DSCR falls below 1.0. You’re underwater.
The same would be true for apartments: when expenses rise faster than income, DSCR weakens.
DSCR and Refinancing: Where Deals Really Go Sideways
This is where syndicators often get burned.
Here is an Example:
Bought a property in 2021 with a DSCR = 1.30
Fast forward: rates double, taxes climb, rents soften
DSCR slips to 1.05
Now - here is when refinancing gets tricky. The lender may shrink your loan size—or deny it altogether. Either way, your deal is in danger.
How DSCR Impacts Your Loan
Loan Approval: Miss the DSCR minimum? No loan.
Loan Size: Lower DSCR = smaller loan = bigger equity raise.
Refinance Options: Weak DSCR limits your leverage.
Cash Flow Cushion: Tight DSCR means one bad month and you’re in the red.
Smart Operators Stress Test DSCR
Before closing, run this simple test:
Drop projected NOI by 10%.
Recalculate DSCR.
Still above 1.20? Safer.
Under 1.0? Time to rethink.
🔷 Too many deals “work” in spreadsheets—until real life shows up.
How to Improve DSCR
✔️ Boost NOI
Raise rents (strategically)
Add new income streams (pet rent, parking, storage)
Reduce operating expenses (better vendor contracts, energy savings)
✔️ Reduce Loan Burden
Borrow less (raise more equity)
Extend amortization
Lock in lower interest rates
The DSCR Trap: What New Investors Often Miss
Even a strong DSCR can unravel fast.
Be sure you always ask:
What if rates jump 1%?
What if taxes spike 20%?
What if 10 units sit vacant for a quarter?
Good operators build in cushions. Bad ones bank on wishful thinking.
📘 Quick Glossary
DSCR: Debt Service Coverage Ratio
NOI: Net Operating Income
Debt Service: Principal + interest payments
Cap Rate: Market’s expected return
🤔 FAQs
❓ What’s a good DSCR for multifamily?
1.25 is the norm. Conservative operators prefer 1.30+.
❓ Is DSCR the only thing lenders check?
No. They also look at your financials, track record, the market, and your plan. But DSCR carries heavy weight.
❓ Can DSCR be manipulated?
Some try. But lenders will dig into the numbers. Your credibility is on the line.
Final Word: DSCR Isn’t Just for Banks—It’s for You
Even if the lender signs off, ask yourself:
👉 Can this property take a hit and still perform?
Because the goal isn’t just to close. It’s to survive—and scale.
Next Steps
👉 Want expert help analyzing deals, stress testing DSCR, and avoiding painful mistakes?
Apply for Coaching and learn from someone who’s managed 120+ multifamily deals.
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