Every commercial lender I work with asks the same first question. Does this property make enough money to pay us back? DSCR is how they answer it. If you understand how they calculate it, you'll know what loan you can get before you ever apply.
It all starts with NOI
Net operating income is the property's income minus the cost of running it. It comes before your loan payment, depreciation and income taxes.
Income is collected rent and other real income, like parking or laundry. Expenses are property taxes, insurance, repairs and maintenance, utilities you pay, management and payroll.
Here's the part owners miss. The lender doesn't use your NOI. They use their own version of it, and it's almost always lower.
How lenders adjust your numbers
On an investment property, expect the lender to:
- Apply a vacancy factor, often 5% or more, even if you're 100% full
- Charge a management fee, often 3% to 5% of income, even if you manage it yourself
- Set aside replacement reserves for roofs, HVAC and unit turns
- Use your actual trailing 12 months, not a projection, and question any income that looks one-time
So if your own statement shows $330,000 of NOI, don't be surprised when the underwritten number comes back closer to $300,000.
Where add-backs come in
Add-backs matter most when the business that occupies the building is paying the loan, such as an SBA or owner-user deal. The lender looks at business cash flow and adds back items that don't really drain cash or won't happen again.
Common add-backs are depreciation and amortization, interest on debt you're paying off with the new loan, and documented one-time expenses like a lawsuit settlement or a storm repair. If you're buying the building you already rent, the rent you'll stop paying gets added back too. Some lenders will also adjust owner pay that's clearly above market.
The key word is documented. An add-back you can't support with a statement or invoice is one the underwriter will throw out.
The 1.25x floor
Once the lender has their NOI, they divide it by the annual loan payment. That's the DSCR.
Most lenders want at least 1.25x. Think of it as a 25% cushion between what the property earns and what it owes. Some multifamily programs go a little lower. Hotels, special-use buildings and weaker credits often need 1.35x to 1.50x or higher.
Sizing the loan, step by step
Say the lender underwrites $300,000 of NOI and requires 1.25x.
$300,000 divided by 1.25 is $240,000. That's the most annual debt service they'll allow, or $20,000 a month. If the rate is 7% on a 25-year amortization, that payment supports a loan of about $2.83 million.
Now the second test. Most lenders also cap the loan as a share of value. If the property appraises at $4 million and the lender's limit is 70%, the cap is $2.8 million.
The lender takes the smaller of the two, so your loan is $2.8 million. Some lenders add a third test, debt yield, which is NOI divided by the loan amount. The lowest result always sets the number.
How to get a bigger number
Clean up your operating statement before you apply, so one-time expenses are clearly marked. Document every add-back. Push for a longer amortization, since a 30-year schedule lowers the payment and raises the loan. If you're close to the line, sometimes a small paydown or a few signed leases moves you over it.
And run your numbers before the lender does. Our commercial calculator shows DSCR, LTV and maximum loan on the same screen. For rental property specifically, see our DSCR program details.
If you want a second set of eyes on how a lender will see your property, schedule a free consultation. Send the T12 and rent roll and I'll show you the number I think lenders will land on.