DSCR: can the property's income support its debt?

Debt service coverage ratio (DSCR) compares income available for debt payments with the debt payments themselves. It helps you ask: does this property generate enough income to support its borrowing, and how much room is left if conditions change?

A coverage ratio above 1 means the chosen income measure exceeds the chosen debt service. It does not guarantee that you can withdraw cash after capital spending, reserves, and tax.

The simple version

Imagine the property's operating income as a jug and its annual debt payments as a glass. A DSCR of 1 fills the glass exactly. A DSCR of 1.33 leaves some water in the jug. That water may still need to pay for a roof.

Before comparing ratios, make sure both people are using the same jug.

How to calculate DSCR

For this owner's tracking example, DSCR = annual NOI ÷ annual debt service.

Net operating income (NOI) is effective gross income minus operating expenses. Our convention excludes financing, actual capital spending, and reserve transfers.

Debt service includes required interest and principal payments for the debt being measured. Use the same period for both inputs. If you have several loans secured on the property, identify which payments your owner calculation includes; a lender's contractual calculation may specify its own scope.

$$\mathrm{DSCR}=\frac{N}{D}$$

Here, $N$ is annual NOI and $D$ is annual debt service, both in the same currency. The result is a multiple, not a percentage.

Using only interest in the denominator overstates coverage for an amortizing mortgage. A debt-free property has a zero denominator: this calculation is undefined, rather than an infinitely reassuring score. Review its operating income and cash directly.

One property, three coverage views

Consider our hypothetical annual CAD rental example, before income tax.

$$\mathrm{DSCR}=\frac{24{,}000}{18{,}000}\approx1.33$$

There is about CAD 1.33 of NOI per CAD 1 of debt service. The difference is CAD 6,000 a year before capital spending and reserves.

That is the starting point. Now ask what could change:

These are sensitivity cases, not forecasts or lender stress-test rules. At 0.91, annual NOI falls CAD 2,000 short of debt service. You need to understand how that gap would be funded before considering other cash needs.

Your lender may calculate a different number

Do not send an owner dashboard ratio to a lender and assume it answers their underwriting question.

For example, Fannie Mae's multifamily DSCR job aid uses underwritten net cash flow that deducts replacement reserves and a defined annualized debt payment. That is a specific underwriting convention; the dated document is not a promise of today's loan eligibility.

To see why definitions matter, suppose an income measure deducts an illustrative CAD 1,500 annual replacement allowance from our CAD 24,000 NOI. The numerator becomes CAD 22,500 and coverage is 1.25 with the same CAD 18,000 debt service. Neither version changed the building. The definitions changed.

Ask a lender for its income adjustments, debt-payment assumptions, treatment of additional borrowing, required coverage, and any ongoing covenant.

What is a healthy DSCR?

1 is an arithmetic boundary, not a comfortable operating target. A contractual minimum is a different thing again.

A specific Canadian example: CMHC's MLI Select page, checked October 1, 2026, lists a minimum debt coverage ratio of 1.10 for standard rental housing. That programme requires at least five units, with separate exceptions and criteria. It is not a universal approval rule for an individual rental house.

Your own planning cushion should reflect vacancy, repairs, payment changes, and accessible cash. If you choose a target such as 1.25, label it as your planning assumption unless a particular lender requires it. A number copied from another investor's spreadsheet has no contractual authority.

How often should you check?

Review trailing-twelve-month coverage quarterly, alongside monthly collections and owner cash flow. Recalculate when borrowing, renewing, changing payments, losing a tenant, or facing a major cost increase. Use the lender's required frequency for any covenant.

Coverage does not measure the return on your invested cash or how much you can distribute. In our base example, CAD 3,000 of capital spending and a CAD 1,500 reserve transfer leave only CAD 1,500 available before tax despite DSCR of 1.33.

Track the ratio to spot pressure, then use the underlying dollars to decide what deserves attention.

Continue reading

• NOI: the income numerator in this example.
• Cash flow: what remains after financing and capital work.
• Related guide: If you track only a few rental metrics, start here.
• Related guide: Fixed and variable rental mortgages.

Sources

• Fannie Mae, DSCR guidance job aid, definitions on PDF page 2; document dated October 2022. Used to illustrate underwriting conventions, not current product eligibility. Accessed October 1, 2026.
• CMHC, MLI Select, coverage footnote and eligibility section. Programme terms checked October 1, 2026.