Before we calculate the DSCR, we need to understand a few parameters that are required to know the DSCR for the property.
The first thing that we would require is net operating income (NOI) which is the property’s or the company’s income after deducting operating expenses excluding taxes, interest payments, depreciation, and amortization each year.
The next thing we need to calculate the DSCR is the total debt service. This would include the interest and principal amounts that are paid by the investment or commercial property for all the short-term and long-term debt obligations.
Getting the DSCR could be challenging when including income tax as the interest rate amount is tax-deductible and the principal amount is not. The best way to calculate the total debt service is:
Total Debt Service = ( Interest x (1 – Tax Rate)) + Principal
The formula to Calculate Debt Service Coverage Ratio (DSCR) is:
DSCR = Net Operating Income (NOI) / Total Debt Service (TDS).
Let’s take an example here:
An investor is looking to purchase an investment property where the property has an NOI of $550,000 per year and the total debt service is $200,000 per year.
DSCR = 550000/300000 = 1.83
In this example, the DSCR for the property in question would be 1.83.