CRE 101 · deweyluong.realtor

DSCR Explained: Debt Service Coverage Ratio for Commercial Real Estate in Atlanta and Gwinnett

DSCR: the number your lender runs before you get a yes. By Túy “Dewey” Luong, CCIM — Founding Broker, SERHANT. Atlanta · 318 closed sales / $281.2M career volume · 678-707-2498

Cap rate tells you what a building earns. DSCR tells you whether that income can carry the loan. Buyers who only run the first number get surprised at the bank. Run both.

DSCR is a coverage ratio. Take the building's net operating income — rent actually collected, minus the costs to run it — and divide it by the annual debt service: the principal and interest you pay the lender in a year. The result is written as a multiple, like 1.25x.

Here is the whole formula:

Worked example. The numbers below are made up to teach the math. This is not a real property.

• A small retail building produces $90,000 a year in NOI.
• The loan payment is $6,000 a month — $72,000 a year in debt service.
• $90,000 divided by $72,000 is 1.25. The DSCR is 1.25x.
• That means the building earns $1.25 for every $1.00 of loan payment. The extra 25 cents is the cushion.

Why the cushion matters

Run the same building with a bad year. Rent falls 10% and NOI drops to $81,000. $81,000 divided by $72,000 is 1.13x. The loan still gets paid, but the cushion is thin — and a lender pricing the loan today will run exactly that stress case.

Run it backwards and it sets your borrowing limit. If a lender wants 1.25x coverage on that $90,000 of NOI, the most debt service the deal can carry is $90,000 divided by 1.25 — $72,000 a year. Every dollar of payment above that has to come from a smaller loan, a lower price, or stronger verified income.

Where buyers get fooled. DSCR built on paper rent is fiction. If the NOI uses rent that is not collected, leaves out management or reserves, or counts a tenant who is leaving, the ratio looks strong and the building is not. Verify the income first — the ratio is only as honest as the NOI inside it.

DSCR says nothing about value by itself. A deal can cover its loan and still be overpriced. Pair it with cap rate: cap rate prices the building, DSCR tests the loan. When both work, the deal has a real chance.

Want me to run this on a building you are looking at? Reply with the address. I will tell you what I see.

Túy “Dewey” Luong, CCIM | Founding Broker, SERHANT. Atlanta | SERHANT. Georgia | 678-707-2498 | dewey.luong@serhant.com | deweyluong.realtor

Frequently asked questions

What is DSCR in commercial real estate?

DSCR is debt service coverage ratio: net operating income (NOI) divided by annual debt service (principal and interest payments for the year). A DSCR of 1.25x means the building earns $1.25 for every $1.00 of loan payment.

What DSCR do commercial lenders usually want?

It depends on the lender, the property type, and the lease. Many commercial lenders look for coverage around 1.20x to 1.25x or higher, but the required number is set loan by loan. Treat any single number as a starting point for a conversation with your lender, not a guarantee.

How is DSCR different from cap rate?

Cap rate measures the building unfinanced: NOI divided by price. DSCR measures the building with your loan: NOI divided by debt service. The same building can have a strong cap rate and a weak DSCR if the loan is too large or the rate is too high.

How do I raise a weak DSCR before I apply?

The levers are the price, the loan amount, the rate and term, and the income. Pay less, borrow less, extend the term, or buy a building with stronger verified income. Run the ratio on the rent actually collected, not the rent on paper.