(Mar 26, 2023)
Compared to other counties in Florida, Dixie County is perfect for small investors and those looking to build their real estate portfolio without competing for properties with bigger investors. The market also offers unique opportunities for buy and hold and commercial real estate property investors.
There are no bidding wars which keeps the prices affordable, and the quality of property in Dixie County is top-notch. With DSCR options available, real estate investors can build their portfolios without providing lenders with extensive documentation and employment verification.
Why Get a DSCR Loan in Dixie County, Florida?
Dixie County has a relatively quiet real estate market, but the growing population is slowly and steadily putting pressure on housing and real estate prices. The County is also a tourism hub and is one of the 35 counties in Florida with a coastline. It has popular destinations like the Horseshoe Beaches and tons of activities.
Visitors present an opportunity for real estate investors specializing in short-term stays and commercial properties in strategic locations. More patient investors can consider buy and hold options as the prices continue to rise.
DSCR loans are non-QM loans that compare a property's cash flow to the monthly loan payments as opposed to individual income and employment records. This makes the loan application process faster and easier, with higher chances of approval.
DSCR loans also give investors unique benefits that make it easier to build their investment portfolio even with limited investment capital. These benefits include:
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Personal income is not taken into account - DSCR loans do not take into account your personal financial information. That makes them more accessible to borrowers who don't have a considerable quantity of liquid assets.
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Quicker application and closure times - Because you won't need to submit any personal financial information, and you don't have to explain job gaps and other details in your job history, DSCR loans have a more streamlined and faster application procedure.
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You're not limited - Most mortgages require you to commit to one property at a time. But with a DSCR, you can obtain loans for different properties simultaneously.
- Ideal for seasoned and novice real estate investors - DSCR loans make fiscal sense for novice and experienced investors. You can use the loan to get started on the right foot or help you get the funds you need to take your business to the next level.
How Does a DSCR Loan Work?
DSCR loans are a valuable product for real estate investors. They allow you to separate your business from your personal affairs.
With a DSCR loan, it's not about your pay stubs or tax returns. In most cases, your DSCR loan application will be approved as long as the property in question can make enough to cover the loan repayment – that's the bottom line.
Unlike traditional loans that go deep into your records, DSCR loans focus on the property's cash flow. They have quicker closing times than conventional loan products and require a lower down payment than other real estate loan options.
DSCR loans don't limit you on the number of properties you can own. They allow you to build your property portfolio at your own pace. You can use the loan for residential and commercial properties, allowing you to take advantage of any opportunities you might come across.
How is DSCR Calculated?
Determining your DSCR loan requires the calculation of your DSCR, which is expressed as a decimal, such as 1.20 or 1.20x.
A DSCR that is above one means the property is bringing in enough money to cover the loan repayment, while a ratio that is below 1.0 has a negative cash flow.
The calculation compares the property's income and the full expenses, including the principal, interest, taxes, insurance, and HOA fees, otherwise known as PITIA, among other expenses.
In a nutshell, the formula for calculating your DSCR is:
DSCR = Annual Net Operating Income /Annual Debt Service
Finding the Net Operating Income
The net operating income is the gross income from the property less the operating expenses, also known as EBIT. However, some lenders also use EBITDA to calculate the ratio depending on the nature of the analysis.
The formula for calculating the Net Operating Income (NOI) is as follows:
NOI = Gross income – Operating expenses
Find the Total Debt Service
The total debt service is the sum of the principal loan service and the interest on the loan. Therefore, the formula for calculating the total debt service for the property in question would be:
Total debt service = Principal loan payments + interest on the loan
Example of a DSCR Calculation
Let's assume the property you're interested in has an appraised value of $100,000, an estimated market rent of $1,500 per month, and annual taxes of $600, and you apply for a DSCR loan with an annual interest of 5%.
The property in question would generate $18,000 annually in rent revenue from the assumption. Therefore your annual revenue would be:
$18,000 + $600 = $18,600 (annual rental revenue).
The net operating income would be - $18,600 - $5,400 (the debt service principal + interest) = $13,200 (net operating income)
Therefore, the DSCR is - $13,200 / $5400 = 2.0 (the DSCR ratio)
The DSCR calculation will also consider other factors like a sinking fund and lease payment due in the coming year. During the calculation of the DSCR, you may also see terms like Capital Expenditures (CAPEX) instead of net operating income, Depreciation, and Amortization.
The DSCR calculation determines whether you qualify for the loan or not. If:
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If the DSCR is less than 1 - you don't have enough cash flow to cover the debt payments. If the ratio is maybe 0.85, you only have enough cash flow to cover 85% of the debt payment. That doesn't automatically mean the lender will deny your application, but you might pay a higher interest rate for the loan. You can improve your DSCR by using some money from the loan to improve amenities, increase rent, or increase your down payment. With a higher DSCR, your chances of approval are higher, and you might get lower interest rates.
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The DSCR is very close to 1 – If the DCSR is close to 1, like 1.1, you have just enough cash flow to cover the debt payment. If you experience a slight decline in cash flow, you might be unable to pay the debt. Lenders often require borrowers to meet and maintain a specific DSCR for the duration of the loan to avoid cash flow problems that could complicate debt payments.
- The DSCR is much greater than 1 – A DSCR of 1.6 or higher means the borrower has enough cash flow to cover their debt payments.
Remember that DSCR calculations are not universal. Each application has its unique situation that lenders often consider when deciding whether to approve the applications.
Some applications may require a lower DSCR, while others might require a higher DSCR. Lenders evaluate each application and its unique circumstances during consideration.
What is the Minimum DSCR to Qualify in Dixie County, Florida?
There is no minimum DSCR to qualify for a DSCR loan in Dixie County. However, most lenders consider a ratio of between 1.2x and 1.25x as the minimum to apply for a DSCR loan, but this also varies among lenders.
Lenders may settle on a lower or higher ratio depending on the nature of the transaction. Some lenders can allow a DSCR as low as 1.0x or even lower, and others don't have a minimum. Also, the minimum DSCR will vary depending on your unique scenario.
You will only know the minimum DSCR once you connect with a lender, and they provide you with an inside on the property, its potential income, and the payments.
DSCR Loan Guidelines in Dixie County, Florida
Generally, DSCR loans have a more straightforward application process and higher chances of approval. The application process doesn't involve as many documents as conventional loans.
Although the qualifications and guidelines of the applications vary slightly depending on the lender, some of the other qualifications that lenders will consider include:
Coverage ratio
The coverage ratio is an essential qualification criterion for a DSCR mortgage. The ratio is calculated using rental income determined through a signed lease agreement or estimated rental income determined by a property appraisal if there's no lease.
Single-family houses use Form 1007 rent schedule, while two to four-unit residences use Form 1025 for the small residential income property appraisal reports. The coverage ratio has a substantial impact on various factors of the mortgage, including the interest rates.
Loan to Value (LTV) Ratio
DSCR loans have a maximum LTV ratio of 80%, meaning you need to pay 20% of the property value in down payments.
The LTV ratio for a DSCR mortgage is moderately lower than the maximum LTV ratio for a standard single-unit investment property purchase loan but higher than the ratio for a standard rental property refinance.
A lower LTV ratio means a higher down payment or more equity you're required to have in the property for a refinance.
Credit score
DSCR credit scores tend to run a little higher than conventional loans require. For a DSCR loan, you may need a FICO credit score of at least 640 with most lenders. With some lenders, a higher LTV may require higher credit scores of 660 to 720.
Loan Program
The type of loan program you can access depends on the lender. But, most lenders allow all types of programs, including fixed rate, Adjustable Rate (ARM), and interest-only mortgages.
Maximum loan amount
The maximum DSCR loan amount depends on the lender but can go as high as $5 million in some cases. It is significantly higher than the maximum loan amount for a standard investment property program.
Eligible properties
You can use a DSCR loan to purchase multiple types of properties that you can't typically buy with a standard investment property loan. You can use a DSCR loan to purchase properties with more than four units and non-warrantable condos.
The properties can also be owned by an LLC which is usually not acceptable under standard mortgage guidelines. Also, most lenders don't limit the total number of properties you can have financed, which enables you to grow your portfolio faster.
Although DSCR loans are flexible in the types of properties you can purchase using this program, they don't allow the purchase of a primary residence property.
Prepayment penalty
DSCR loans may include a prepayment penalty. You should carefully review the loan terms to understand the fees and penalties you may be required to pay because these will vary depending on the lender.
Refinancing
Most lender offer DSCR programs that provide purchase loans and rate and term and cash-out refinance options. In some cases, you might even be able to take more cash out of an investment with a DSCR mortgage than with a standard, non-owner loan.
The seller paid closing costs
Most lenders will allow seller-paid closing costs but cap these at 2% of the loan amount. You should check with your lender before negotiating with the seller to pay some or all of the closing costs.
DSCR Mortgage Rates in Dixie County, Florida
Because DSCR mortgages are an alternative lending solution, the rates are often higher than traditional loans.
In Dixie County and the more significant Florida, the rates are around 1% higher than the traditional loan, but that depends on your DSCR and the other qualifying requirements. For some investors, the rates could be higher, and for others, they could be lower.
Best Cities to Invest in Dixie County, Florida
Dixie County might not have the hottest property market in the country. That's not necessarily bad, especially for budding real estate investors who don't have the financial muscle that experienced firms and investors have.
The property market in Dixie County is vibrant and still affordable, ensuring you get a return on investment. Depending on your portfolio goals, you need to know which cities to invest in.
Cross City
Cross City is the county seat of Dixie County. It is located on U.S Highway 19/98. The city is located a convenient 19 miles from the Florida Gulf City, which serves as a good multi-day staging area from which you can explored the nearby coastline, the Lower Suwanee National Wildlife Refuge, Horseshoe Beach, The Suwanee River, Fanning Springs State Park and Manatee Springs State park. It's an excellent place for travelers to stop and spend the night, which speaks volumes about the rental potential of the city.
Cross City might not have the highest population or the highest number of listed properties, but it is strategically located and ripe for short and long-term rentals. It's evident from the city's multiple lodging options, including Southern Comfort, European-style Carriage Inn, and Putnam Lodge. Commercial properties are also feasible to provide travelers and tourists with the necessary amenities.
Horseshoe Beach
Horseshoe City is located at the tip of a Peninsula along the Big Bend area of Florida. It is a quick 20 miles southwest of Cross City. The town is one of the remote towns on the Nature Coast, but surprisingly, you'll find many houses when you get there.
The city has an eclectic mix with many expensive homes that overlook double-wide trailers. The city is exclusively devoted to fishing and boating. Most of the houses in the city are vacation or getaway houses which speaks to the real estate potential of the location. There are also houses for short-term rentals.
Other areas within Dixie County, like Old Town and Suwanee, are also rife with real estate investment opportunities.
Dixie County, Florida Presents a Unique Opportunity for Real Estate Investors
Although tucked in the Northern part of Florida, the remote nature of the county and its diverse eco-tourism topography presents real estate investors with an opportunity to cash in on the rental real estate.
Property prices here are still affordable, perfect for ambitious real estate investors looking for affordable but quality houses. Cities like Horseshoe Beach allow you to go crazy with your designs and finishes. You'll find some impressive architecture sitting there already.
A DSCR mortgage can help you ramp up your real estate investments in Dixie County, starting with submitting your DSCR loan scenario. Working with a DSCR lender in Dixie County will help you understand your commitments and start building your real estate portfolio.
(Mar 26, 2023)
