A DSCR of 1.25 means NOI covers debt service 1.25 times — for every dollar owed on the loan, the property generates $1.25 of operating cash. Lenders set minimum DSCR thresholds per asset class (multifamily often 1.20-1.25, retail 1.30-1.40, hotel higher) and will size the loan down or require additional reserves if the deal can't clear the floor.
DSCR is sensitive to both numerator and denominator: a small change in interest rate or amortization assumption can move DSCR meaningfully even when NOI is stable. In a rising-rate environment, deals that penciled at 1.30 DSCR at 5% can fall below 1.20 at 7%, which is one of the reasons cap rates moved during the 2022-2024 cycle.
