What does the Debt Service Coverage Ratio (DSCR) evaluate?

The Debt Service Coverage Ratio (DSCR) evaluates cash flow relative to debt obligations, making it a crucial metric in assessing a property or investment's ability to generate sufficient cash to meet its debt payments. Specifically, the DSCR is calculated by dividing the net operating income (NOI) of a property by its total debt service obligations (the total principal and interest payments due in a given period).

A DSCR of less than 1 indicates that the property is not generating enough income to cover its debt obligations, which may signal financial distress, while a ratio greater than 1 suggests that there is enough cash flow to meet debt payments, indicating a more favorable financial position. This ratio is particularly significant for lenders in determining risk levels associated with financing a property.

In contrast, aspects like the market value of a property, projected rental income, or the owner's investment return are related but do not directly assess the sufficiency of cash flow in relation to debt payments. Thus, the focus of DSCR as a financial metric is distinctly on evaluating the ability to service debt through available cash flow.