Debt-service coverage ratio measures whether multifamily NOI can pay annual principal and interest.
The DSCR formula
DSCR equals net operating income divided by annual debt service. A property with $150,000 of NOI and $120,000 of annual debt service has a 1.25x DSCR. That means each dollar of debt service is supported by $1.25 of property income.
Use lender-quality NOI
Begin with collected revenue, subtract vacancy and credit loss, and include normalized operating expenses. Do not count loan payments, depreciation, or income taxes in NOI. Treat recurring reserves consistently with the lender’s method.
Why cap rate is not enough
Cap rate describes an unlevered property yield. DSCR depends on interest rate, amortization, loan amount, and NOI. A positive spread can still be too narrow once principal amortization is included.
Stress the coverage
Recalculate DSCR with lower occupancy, no rent growth, higher insurance, reassessed taxes, and repair reserves. Also test refinance proceeds under a higher exit rate. A thin base case is not protected by an attractive narrative.
See A 6% Cap Rate Is Not a Debt Strategy for a worked comparison.
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