DSCR is the acronym for Debt Service Cover Ratio. In the context of personal finance, the debt-service coverage ratio mirrors the ability to service the debt of a rental property given its operating income.
DSCR = Operating Income / Debt Obligations.
Operating income is not exactly the total rental income collected from your tenant. The operating income also considers expenses, condo fees, vacancy rates, management fees, maintenance, repairs and insurance fees.
A DSCR of less than 1 means negative cash flow, which means that the operating income can not sufficiently cover the debt obligations without outside help.
For example, a DSCR of 0.95 means the net operating income can cover 95% of the debt payments, which means that the owner will have to use personal funds to cover the other 5% of debt obligations.
Generally, lenders are looking for a higher DSCR (prefer above 1) because a DSCR greater than 1 means sufficient income to pay its debt obligations and more.
However, when the DSCR is too close to 1, for instance, 1.1, the project is vulnerable. Why is it Vulnerable? Because if there was even a slight decline in cash flow, for example, your tenant moves out, and your property is vacant for too long, you may be required to use personal funds or, worse borrow more.