What's a good DSCR for a rental — and what cash-on-cash really tells you
By Arpit Patel
Two numbers decide whether a rental gets financed and whether it's worth owning: DSCR is the lender's test, cash-on-cash is your return. They're easy to confuse and they answer completely different questions.
DSCR: the lender's coverage test
Debt-Service Coverage Ratio measures whether the property's income covers its loan payment. The formula is simple:
DSCR = Net Operating Income ÷ Annual Debt Service
Net Operating Income (NOI) is rent minus operating expenses — taxes, insurance, management, maintenance, and a vacancy allowance — but before the mortgage. Annual debt service is your yearly principal and interest.
A DSCR of 1.0 means the property exactly breaks even on its debt. Below 1.0, the rent doesn't cover the mortgage and you feed it from your pocket. Most lenders offering “DSCR loans” (which qualify the property's income rather than your personal income) want a minimum of 1.20–1.25, and they price the best terms for 1.25 and above. So a “good” DSCR for financing is 1.25+; 1.0–1.25 is workable but tight; under 1.0 is a problem.
DSCR example
A property rents for $2,700/month ($32,400/year). After a vacancy allowance and operating costs, NOI is about $20,300. The mortgage runs $1,573/month, or $18,876/year. DSCR = 20,300 ÷ 18,876 = 1.08 — financeable with some lenders, but below the 1.25 most prefer.
Cash-on-cash: your actual return
DSCR tells the bank the loan is safe. It tells you very little about whether the deal is good. That's what cash-on-cash return measures:
Cash-on-cash = Annual pre-tax cash flow ÷ Total cash invested
Cash flow is what's left after the mortgage and all expenses. Total cash invested is everything you put in: down payment, closing costs, and any upfront repairs. It's the return on the money that actually left your bank account.
Cash-on-cash example
Using the property above, monthly cash flow after the mortgage is about $116, or roughly $1,400/year. If you put down 25% on $300,000 plus ~$9,000 in closing costs, your cash in is about $84,000. Cash-on-cash = 1,400 ÷ 84,000 ≈ 1.7%. Coverage is fine; the return is thin — which is common at today's rates and prices.
DSCR vs cash-on-cash vs cap rate
| Metric | Question it answers | “Good” range |
|---|---|---|
| DSCR | Does the rent cover the loan? (lender's view) | 1.25+ |
| Cash-on-cash | What return do I get on cash invested? | Often 8%+ targeted; 4–6% common today |
| Cap rate | What's the property's unlevered yield? | Market-dependent; compare to local comps |
A property can pass DSCR comfortably but deliver weak cash-on-cash (large down payment lifts coverage but lowers return on cash), or show strong cash-on-cash on a small down payment while barely clearing DSCR. Looking at one in isolation hides the trade-off.
The levers that move all three
Four inputs do most of the work: the interest rate (the single biggest swing today), the down payment (more cash improves DSCR and cash flow but dilutes cash-on-cash), the rent, and your operating expenses — especially whether you self-manage. Small changes compound, so it's worth testing them rather than trusting a single snapshot.
Enter price, rent, rate, and expenses to see DSCR, cash-on-cash return, cap rate, and monthly cash flow for any rental in seconds.
Open the Rental Property Calculator →Frequently asked questions
What DSCR do I need for a DSCR loan?
Most DSCR lenders look for at least 1.20–1.25, with the best rates reserved for 1.25 and above. Some will lend below 1.0 with a larger down payment or higher rate, but terms get worse the lower the ratio.
Is a DSCR of 1.25 good?
Yes — 1.25 means the property generates 25% more income than its debt payment, which most lenders consider comfortable. Higher is safer; 1.5+ is strong.
What's a good cash-on-cash return?
Many investors target 8% or more, but in high-price, high-rate markets 4–6% is common, and the right benchmark is what you'd earn on that cash elsewhere at similar risk. Cash flow plus appreciation and loan paydown make up the total return.
Does DSCR include vacancy and maintenance?
It should. A realistic NOI deducts a vacancy allowance and ongoing maintenance before you divide by debt service. Skipping them inflates DSCR and flatters the deal.