Which of the following statements best describes what DSCR represents in underwriting?

• A. DSCR measures cash flow available to cover annual debt service; a higher DSCR indicates greater ability to service debt
• B. DSCR measures the return on equity invested in the property
• C. DSCR equals NOI divided by gross potential income
• D. DSCR is the same as cap rate in reflecting market value

Answer: (A)

DSCR measures whether the property's cash flow is enough to cover its debt payments. In underwriting, DSCR = Net Operating Income (NOI) divided by annual debt service (the total yearly principal and interest payments). A higher DSCR means a bigger cushion to meet debt obligations, which signals lower default risk to lenders. Lenders often look for a DSCR above 1.0, with typical targets around 1.2–1.25 or higher depending on risk.

This isn’t a measure of return on equity, which would focus on profit to the equity investor, not the ability to cover debt payments. It also isn’t NOI divided by gross potential income; DSCR uses debt service in the denominator, not potential rental income. And it isn’t the same as the cap rate, which relates NOI to property value rather than debt service coverage.