Debt Service
The total cash required to cover loan payments — both principal and interest — over a given period.
Definition
Debt service is the total amount of money required to pay off a loan during a specific period — typically quoted annually or monthly. For real estate investors, it's the mortgage payment (or payments if multiple loans) that must be paid regardless of vacancy or other issues.
Debt service coverage ratio (DSCR) measures a property's ability to cover its debt obligations from its income: DSCR = NOI ÷ Annual Debt Service. Lenders typically require a minimum DSCR of 1.20–1.25 for investment property loans, meaning the property's income must exceed the loan payment by at least 20–25%.
Understanding debt service helps investors evaluate how much debt they can safely take on. Over-leveraging creates a situation where even small vacancies or expense increases can create negative cash flow and threaten the investor's ability to make loan payments.
Related Terms
DSCR (Debt Service Coverage Ratio)
A property's net operating income divided by its annual debt service — measures ability to cover loan payments.
Cash Flow
The money left over each month after all property-related income and expenses are accounted for.
Net Operating Income (NOI)
A property's total income minus all operating expenses, before mortgage payments and taxes.
Amortization
The process of paying off a loan through regular scheduled payments of principal and interest.
PITI
Principal, Interest, Taxes, and Insurance — the four components of a monthly mortgage payment.
Leverage
Using borrowed capital (debt) to increase the potential return on an investment.
Also in "D"
Days on Market (DOM)
The number of days a property has been listed for sale before going under contract.
Deed
A legal document that transfers ownership of real property from one party to another.
Double Close
Two simultaneous closings on the same property — an investor buys from the seller then immediately sells to the end buyer.