NOI, or net operating income, is what an apartment building earns after operating expenses and before loan payments. DSCR, or debt service coverage ratio, is that NOI divided by the year's loan payments. A ratio above 1.0 means the property earns more than its payments; lenders usually want a cushion above that.
These two numbers drive most apartment financing decisions, so it is worth knowing how to calculate them yourself before a lender does.
How to calculate NOI
Start with the income the property can collect, subtract expenses to run it, and stop before debt payments.
- Add up the gross potential rent if every unit were occupied at current rents, plus other income such as laundry or parking.
- Subtract vacancy and collection loss, the rent you will not actually receive.
- Subtract operating expenses: property taxes, insurance, utilities you pay, repairs and maintenance, management, and similar costs.
What is left is NOI. Note what does not belong in the calculation: loan payments, income taxes and your own capital improvements.
A hypothetical example
For illustration only, suppose an apartment building has gross potential rent of $600,000 per year and, to keep it simple, no other income. Vacancy and collection loss is $30,000, leaving $570,000. Operating expenses total $240,000. The NOI is:
$600,000 - $30,000 - $240,000 = $330,000
These numbers are invented to show the arithmetic and are not a forecast for any property.
How to calculate DSCR
DSCR equals NOI divided by annual debt service, meaning the principal and interest payments over a year. Suppose the loan in our example requires $264,000 in annual payments:
$330,000 / $264,000 = 1.25
The building earns 1.25 times what it needs to pay the lender. If NOI fell to $264,000, DSCR would be 1.00, with nothing to spare. Below 1.00, the property does not cover its own payments.
Key takeaways
- NOI is income minus operating expenses, before debt payments. DSCR is NOI divided by annual debt service.
- Lenders look at both in-place and projected NOI; accuracy of the expense side matters as much as the rents.
- Renovation raises NOI only if rents rise and vacancy does not offset them.
- Required DSCR levels differ by lender and loan type, so ask each one directly.
Why lenders care
NOI is the building's earning power, and in most income-property valuations it is central to what the building is worth. DSCR shows how much room there is for things to go wrong: a few vacant units, a repair bill, a tax increase. A thin ratio means a small problem can become a missed payment.
For short-term financing, we also look at whether the property can carry payments during a business plan, and how it gets to a DSCR that a long-term lender will accept. Our multifamily bridge loan guide explains how in-place and projected income are treated.
How renovations change both numbers
Continuing the hypothetical, suppose renovations let the owner raise gross potential rent to $720,000, with vacancy and collection loss of $36,000 and expenses of $250,000, slightly higher because of the larger operation. NOI becomes:
$720,000 - $36,000 - $250,000 = $434,000
Against the same $264,000 of annual payments, DSCR rises to about 1.64. That improvement is what can make a building eligible for long-term financing after being too weak for it before.
The caution runs the other way too. During renovation, units sit empty, so NOI often falls below the in-place number temporarily. Rent increases also have to be achievable: check comparable units, and in California consider how rent regulation might limit increases at your specific property. Renovation costs themselves are not part of NOI, but they affect how much you borrow and therefore the payments in the denominator.
Mistakes buyers make
- Using the seller's expense figures without verifying them against actual bills and tax records.
- Leaving out management costs because you plan to self-manage.
- Projecting rents the market has not shown it will pay.
- Ignoring how higher payments from a larger loan reduce DSCR.
Our article on financing a value-add repositioning shows how these checks fit into a larger plan, and our apartment program page describes what we finance.
Want a second set of eyes on your numbers? Call (800) 943-1314 or apply online. Every application is reviewed individually, and approval is not guaranteed. General information only, not legal, tax or investment advice.
Published by the US Lending & Company underwriting desk. General information only — not legal, tax or investment advice.