Debt Service
The total loan payments — principal and interest — due over a period, usually annual. Debt service is what NOI must cover; it's the denominator behind coverage ratios like DSCR.
Debt service is the total amount of loan payments due over a period — principal plus interest — typically expressed annually. It's the cost of carrying the financing on a property, and it's the figure a property's income must cover for the deal to be sustainable.
Annual Debt Service = Monthly Loan Payment × 12
On a $200,000 loan at 7.25% over 30 years, the payment is ~$1,364/month, so annual debt service is about $16,368.
Where debt service sits in the math
Debt service comes after NOI, not inside it — NOI is deliberately calculated before financing so properties can be compared regardless of how they're funded. You then subtract debt service from NOI to get pre-tax cash flow:
Pre-Tax Cash Flow = NOI − Annual Debt Service
That cash flow, divided by your invested capital, gives cash-on-cash return.
Debt service and coverage ratios
Debt service is the denominator behind the lender's key safety metrics:
- Debt-service-coverage ratio (DSCR): in commercial form, NOI ÷ annual debt service. (Single-family DSCR lenders simplify this to gross monthly rent ÷ PITIA.) A ratio above 1.0 means income exceeds the payments.
- A higher debt service (from a bigger loan, higher rate, or shorter amortization) lowers coverage and cash flow; a lower debt service raises both.
Interest-only vs. amortizing debt service
How debt service is structured changes the number:
| Structure | Annual debt service on $200k @ 7.25% |
|---|---|
| 30-yr amortizing | ~$16,368 (P&I) |
| Interest-only | ~$14,500 (interest only) |
Interest-only debt service is lower because it excludes principal — which is why investors sometimes choose IO to boost coverage and cash flow, at the cost of building no equity through paydown.
Why it matters
Debt service is the lever where your financing terms meet the property's income. Two investors buying the identical property can have very different cash flow and DSCR purely because of their loan's rate, term, and structure — all of which flow through debt service. When you shop loan terms, you're really shaping your debt service, and therefore your coverage and your return. Model it carefully against realistic NOI before committing to a deal or a rate.
Frequently asked questions
What is annual debt service?
The total of your loan payments over a year — principal plus interest — usually calculated as the monthly payment times twelve. It represents the yearly cost of carrying the financing, and it's the amount a property's net operating income must cover for the deal to be sustainable.
Is debt service part of NOI?
No. NOI is calculated before debt service so properties can be compared independent of financing. You subtract debt service from NOI to get pre-tax cash flow. Keeping debt service out of NOI is what makes NOI and cap rate useful as financing-neutral measures.
How does interest-only affect debt service?
It lowers it, because an interest-only payment excludes principal. Lower debt service raises both your coverage ratio and cash flow — which is why investors sometimes choose interest-only — but it means you build no equity through principal paydown during the interest-only period.