Which formula represents the Debt Service Coverage Ratio (DSCR)?

The Debt Service Coverage Ratio (DSCR) is a key financial metric used to assess a borrower's ability to service debt obligations. The correct representation of DSCR is calculated as Net Operating Income (NOI) divided by Debt Service.

This ratio indicates how many times a property’s net operating income can cover its debt payments. A DSCR greater than 1 means that the property generates sufficient income to cover its debt obligations, with some margin for error, while a DSCR less than 1 indicates that the income is insufficient to meet debt obligations, which can be a red flag for lenders.

In this context, using NOI (the income generated from the property after operating expenses but before financing costs) ensures that the ratio focuses on the property’s performance rather than the borrower's equity position or total debt amounts. This makes it a vital measure for investors and lenders in real estate finance, as it directly reflects the operational efficiency of the asset in generating income relative to its debt liabilities.