The definition, precisely
DSCR is net operating income divided by annual debt service. A property earning $1,100,000 of NOI against $880,000 of annual loan payments covers at 1.25× — a 25% cushion before income fails to service the debt. At 1.00× every dollar of income goes to the lender; below 1.00× the deal feeds the loan from reserves or fresh equity.
The convention: 1.20–1.25×, with asterisks
For stabilized multifamily, the market converges on a minimum of roughly 1.20× to 1.25×: agency lenders (Fannie Mae and Freddie Mac programs) typically underwrite to 1.25× for standard deals, banks and credit unions often accept 1.20–1.25×, and debt funds or bridge lenders will go lower (1.00–1.15× going-in) on a value-add story — priced accordingly, with reserves and a clear path to stabilized coverage. Affordable programs, small markets, and anything with operational hair push the floor up, not down.
The binding constraint rule: your loan is sized by whichever bites first — DSCR or LTV. In a high-rate environment, DSCR almost always bites first: the proceeds that satisfy 1.25× coverage are often well below 75% of value. Solving for maximum proceeds at a required DSCR is the calculation that actually sets your equity check.
NOI-basis vs NCF-basis: the quiet haircut
Agency credit committees do not divide NOI by debt service — they divide net cash flow (NCF), which is NOI minus replacement reserves, typically $250–$300 per unit per year. On a 104-unit property that’s roughly $26,000 of NOI that vanishes from the numerator before coverage is computed. A deal that covers 1.27× on NOI can be a 1.24× NCF deal — under the 1.25× wire. When a term sheet says “1.25× DSCR,” always ask: on NOI or on NCF?
Same deal, two coverage answers — 104 units
The interest-only flattery
An IO period shrinks the payment, which inflates coverage: the same loan that covers 1.45× interest-only may cover 1.22× once amortization kicks in. Lenders see through this — agency sizing uses the amortizing payment even during IO years. Quote both numbers and know which one the term sheet means; a deal marketed on its IO coverage is a deal that gets repriced in committee.
Stress it like a credit committee
Three stresses reveal whether coverage is real or decorative:
- Income off 5–10%. One bad lease-up season or a soft submarket. If 1.25× becomes 1.05× on a 7% revenue haircut, the cushion was thinner than the headline implied.
- Exit-refi coverage. The year-five buyer (or your own refinance) must service debt at then-current rates on then-current NOI. A deal that only pencils if rates fall is a rate bet wearing a real-estate costume.
- Taxes and insurance at your basis. Reassessed property taxes and a current insurance quote — not the seller’s T-12 lines — belong in the NOI before coverage is computed. (This is the same trap covered in how to read a T-12.)
Debt yield: the lender’s second lens
Increasingly, lenders pair DSCR with debt yield — NOI divided by loan amount — because it cannot be flattered by low rates or long amortization. A 10% debt yield floor (common for bridge and CMBS) means a $1,100,000 NOI supports at most $11,000,000 of proceeds, full stop. When rates are low, debt yield bites; when rates are high, DSCR bites. Underwrite both and you will never be surprised by a proceeds cut.
The bottom line
Target 1.25× on the agency’s NCF basis with the amortizing payment, confirm coverage survives a 5–10% income stress and a realistic exit rate, and check the debt yield floor. In Nivora, both DSCR bases (NOI and NCF), debt-yield, breakeven occupancy, and DSCR-constrained loan sizing are computed on every change — and the live sample deal will show you the coverage math on real engine output right now.
See it computed, not explained.
Every concept on this page is a number Nivora computes live — the real engine is running on a fictional 104-unit sample deal right now, no login required.