May 14, 2025 • General
When you’re diving into commercial real estate—whether it’s a retail building, office space, or industrial property—two terms you’ll hear a lot are DSCR and LTV. These aren’t just lender jargon; they’re key pieces of the puzzle when it comes to financing a deal and understanding risk. Let’s break them down in plain terms and look at how they impact your ability to buy and finance investment property.
What Is DSCR (Debt Service Coverage Ratio)?
DSCR stands for Debt Service Coverage Ratio. It’s a measure of how easily a property’s income can cover its debt payments. In other words, it answers the question: Can this property pay its mortgage—and then some?
How It’s Calculated:
DSCR = Net Operating Income (NOI) ÷ Annual Debt Payments
- A DSCR of 1.0 means the property brings in just enough income to cover the loan payments—no cushion.
- A DSCR of 1.25 means the property generates 25% more income than it needs to cover the loan.
- Anything below 1.0 is usually a red flag for lenders—it means the property isn’t producing enough income to pay its own debt.
Why It Matters:
Lenders use DSCR to figure out how risky the loan is. If the property barely pays its bills, a bank is going to hesitate—or ask for a higher interest rate, more money down, or stricter terms. Most commercial lenders want to see a DSCR of at least 1.20–1.25 to approve financing.
What Is LTV (Loan-to-Value Ratio)?
LTV stands for Loan-to-Value. It shows how much of the property’s purchase price (or appraised value) is being financed versus how much is being paid in cash.
How It’s Calculated:
LTV = Loan Amount ÷ Property Value
So if you’re buying a building for $1 million and you’re borrowing $700,000, your LTV is 70%.
Why It Matters:
Lenders use LTV to measure risk. The higher the LTV, the more the lender is putting on the line—and the less you have invested up front. In most commercial deals, lenders prefer to keep LTV at 75% or lower, meaning you’ll need at least 25% down.
Higher LTVs can make financing tougher to secure, especially if the DSCR is also low. On the flip side, putting more cash down (lowering the LTV) can get you better terms.
How They Work Together
When evaluating a commercial loan, lenders look at both DSCR and LTV to assess how safe the deal is:
- A high DSCR with a low LTV = low risk, and you’re more likely to get approved with good terms.
- A low DSCR and a high LTV = much riskier, and lenders may reject the deal or require more equity.
- Sometimes, if your DSCR is borderline, putting more money down (reducing your LTV) can help balance the risk and still get the loan approved.
Real-World Example
Let’s say you’re eyeing a retail strip center in Amarillo that costs $1.2 million. It brings in $96,000 a year in NOI. You want to borrow $900,000 over 20 years at 6.5%.
- Annual loan payment: ~$82,000
- DSCR = $96,000 ÷ $82,000 = 1.17 → A little tight
- LTV = $900,000 ÷ $1,200,000 = 75% → Right at the edge
With a DSCR below 1.20 and an LTV at 75%, the lender might still approve the loan—but maybe with a slightly higher rate or additional reserves. If you bumped your down payment and borrowed only $840,000, the DSCR would improve and the LTV would drop to 70%, making the deal more attractive to the lender.
Final Thoughts
Both DSCR and LTV help paint the full financial picture for any commercial real estate deal. They tell lenders how risky the loan is—and give you, the investor, a framework for evaluating whether a deal makes financial sense. If you’re analyzing a property or applying for financing, understanding these two ratios is critical.
Need help evaluating a deal in Amarillo or figuring out what kind of loan you might qualify for? The team at Wellborn Real Estate is here to walk you through the numbers and help you make a smart, confident investment.