To calculate DSCR ratio, use this simple formula:
DSCR = Rent / Principal, Interest, Taxes, Insurance, Association Dues (PITIA)
A DSCR ratio of 1 indicates that the monthly expenses of a subject property are equal to the monthly expenses. For instance, if your monthly expenses are $1,820 per month and your rental income is $1,820 per month, you are breaking even. A good DSCR ratio is a 1.2 or higher and indicates to a lender your ability to repay. If your DSCR is too low, there are some simple ways to optimize it:
1. Increase your down payment. Raising your down payment is the simplest way to improve debt-service coverage ratio. This will lower your rate, and therefore your monthly expenses and DSCR.
2. Buy down your interest rates. Some lenders will provide you with the opportunity to buy down your rate. This will increase your closing costs, yet decrease your monthly payments and debt-service coverage ratio.
3. Raise rents. Increasing the rent, will improve your property's cash flow, and therefore, DSCR.
4. Provide upsells to increase rental rates. If you are able to improve the property's cash flow by providing upsells, such as renting to pets or providing a furnished rental, this will help you optimize your debt-service coverage ratio.
According to Roofstock, many rents in the state of North Carolina grew by double digits over the past year. Additionally, some of big cities including Raleigh, Winston-Salem and Fayetteville have large percentages of renters. The combination of growing rents and high renter demand makes North Carolina a great state for real estate investors.
The top investment property market in North Carolina for Visio borrowers is Asheville. Norada Investments found that the median home price in Asheville in 2022 was $375,000, which is an increase of over 17% year-over-year. Asheville's appreciation rates are some of the top in the country, and the rental market is thriving as well. The average rent of a 3-bedroom apartment in Asheville is $1,698, a 3% increase since last year.
Here are some other top real estate investment markets identified by Roofstock:
Charlotte, NC: This city has a 43% renter-occupied household rate. Not to mention, a median monthly rent of $1,800, and a median sale price of $382,000.
Raleigh, NC: The second most populous city in North Carolina is 49% renter occupied. Raleigh also boasts a high median household income, high median monthly rent, and affordable entry point.
Greensboro, NC: At just a $245,000 median sales price, Greensboro offers a tangible entry point. Plus, the median monthly rent is $1,620 and the renter-occupied household percentage is 41%.
Durham, NC: Home to Duke University, Durham has a median sale price of $400,000, and an average monthly rental income of $1,800
Wilmington, NC: This college town is 43% renter occupied. Other benefits include a median sales price of $366,000 and a median rent of $1,795.
Check out some of our recently closed DSCR loans in North Carolina.