Cap rate vs DSCR
DSCR is NOI divided by annual debt service. It answers one question: does the property cover its own loan payment? Lenders commonly want at least 1.25. Cap rate prices the building; DSCR decides whether anyone will lend against it.
Side by side
| Cap rate | DSCR | |
|---|---|---|
| Formula | NOI ÷ property value | NOI ÷ annual debt service |
| Includes | No financing at all. | The loan. Same NOI, measured against the payment. |
| Use it for | What the property is worth. | Whether the loan gets approved. |
Why the difference matters
They share a numerator and answer to different people. A low cap rate in an expensive market can still be financed by a large down payment; a high cap rate on a property with collapsing NOI cannot be financed at all.
The mistake to avoid
Underwriting to a DSCR built on optimistic NOI. The lender will rebuild it with their own vacancy and management assumptions, and a DSCR of 1.3 on your spreadsheet becomes 1.1 on theirs — which is a declined loan, discovered late.
Worth knowing
- 1.25 is a common DSCR-loan minimum; the usual range is 1.20 to 1.25.
- At 1.0 the property exactly covers its debt and has nothing left for CapEx or a vacancy.
- Below 1.0 the property does not cover its loan from operations, and the shortfall comes from you.
- A bigger down payment raises DSCR without changing the cap rate at all.