(Jun 7, 2023)
If you are a real estate investor planning to set up in Duval County, read this piece till the end. It will introduce you to excellent reasons to use a debt-service coverage ratio (DSCR) loan to finance your endeavors, DCSR computation, and the best cities to invest in this region. Strap in and enjoy.
Why Get a DSCR Loan in Duval County, Florida?
You can use various platforms and solutions to finance your endeavors as a real estate investor. You can source cash from your savings, request a conventional loan from your bank, or seek help from an individual private lender; the options are virtually unlimited.
The question is, why would you favor DSCR loans over all the other alternatives? The following should prove why that is a good idea:
High loan amounts
Investment in real estate depends on your risk appetite and future goals. You can start with as little as $500 and use the money to fix and flip a single-family home. However, if you want to go big and reap incredible returns, you must up your investment.
Unfortunately, your savings may not be enough for expensive investments like luxury real estate. And to make matters worse, you may be hard-pressed to find an institution that can loan you a sizable amount.
But not all is lost. If you plan to become a giant in the real estate sector, a DSCR loan can make your dreams come true. That is so because, when it comes to DSCR loans, some lenders set the limit as high as $5,000,000.
No employment verification
Most lenders ask for employment verification before issuing loans. They use this information to reach out to borrowers' employers and confirm submitted income documentation. For instance, a mortgage company can call your place of work and review your job status, position, and salary.
The lending institutions that consider employment verification the Holy Grail do so because it helps them reduce fraud risks and determine clients' creditworthiness and ability to cover their debts.
Sadly, employment verification can frustrate your endeavors as a borrower. That is more so if you don't have a conventional job. Not to forget, sometimes the employment verification process takes ages, delaying your access to much-needed financing.
You can avoid the hassles associated with financial solutions that ask for employment verification by going with DSCR loans. These solutions don't require job history or income verification, a reprieve for unemployed folk.
Uncapped cashout
Suppose you have a conventional commercial property loan. In that case, your lender may allow you to refinance once you've covered 60-70% of the investment. Refinancing in this scenario means taking a new loan and using it to pay off current debt.
Refinancing is a popular solution that many real estate investors use to replace debt obligations with more favorable terms. For instance, you can refinance your loan and enjoy a new, much lower interest rate.
The problem with refinancing is many institutions have cashout limits. That means you can only get a specified amount of money when you refinance, which is rarely enormous. But DSCR loans don't have this problem.
If you take out a DSCR loan today, you can replace it in the future and enjoy unlimited cashouts. So, if you don't want your spending threshold to be affected by insufficient funds, go for a DSCR loan.
Lenient credit score requirements
Seasoned real estate investors know that most institutions consider a 720 credit score the sweet spot. Anything above that is ideal. But points lower than 720 are just that: low. But very few people in the US have credit scores that fall in the stipulated range. The average in the entire nation is around 714.
However, if your credit score is below the 720-mark, there's no cause for worry. With a credit score of around 640, you can get a DSCR loan from most lenders.
But if you have poor credit and still want to use a DSCR loan to invest in real estate, work on your score first. You can do that by paying down existing revolving credit balances, building your credit file, covering bills at the right time, etc.
No property limits
Investing in real estate is a splendid idea. And you can reap countless benefits when multiple investments are in play.
Also, remember although properties often appreciate over time, it's not a guarantee. You may fail to get the expected returns, or your investment may start fetching fitting prices after a long time. All these pose a significant hurdle for an investor with one property. But if you have multiple investments, you can let some fetch better rates at their own pace.
But there's one issue here. Some lenders require lenders to commit to one property at a time, which bars you from reaping the returns associated with multiple real estate investments. If you want to avoid this issue, opt for DSCR loans.
With DSCR, you can take out several loans and use them to finance multiple properties simultaneously. And that comes in handy when you want to up your investment or grow your real estate business exponentially.
Quicker closing times
As mentioned earlier, many institutions consider employment verification a vital part of their loan underwriting process. The problem is this element consumes significant amounts of time, ranging from a couple of days to several weeks.
The amount of time required for employment verification by a financial institution depends on factors like the type of confirmation required. The process may go by quicker if a lender is okay with verbal verification. But if email or fax verification is necessary, the employer may delay, causing stagnation and delayed loan closure.
Luckily, as you know by now, you don't need employment verification to get a DSCR loan. And that is key to quicker closing times and faster financing.
How Does a DSCR Loan Work?
A debt-service coverage ratio (DSCR) loan allows you, a borrower, to qualify for a loan that matches the cash flow your investment is likely to generate. With that in mind, you can use a DSCR loan to finance the following:
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Residential properties like single-family homes, and condos
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Commercial properties like apartment buildings
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Mixed-used properties like buildings with apartments and retail stores
- Hotels and resorts
The critical point here is whatever you fund with a DSCR loan needs to be an investment property.
How is DSCR Calculated?
Lenders calculate your debt-service coverage ratio by dividing your net operating income and total debt service.
In DSCR, net operating income refers to your firm's revenue after subtracting specified operating expenses (interest payments and taxes not factored in). Your NOE is equivalent to EBIT (earnings before interest and tax).
On the other hand, as the name implies, total debt service is the sum of your current debt obligations. This element often covers total principal repayments, interest paid on short-term and long-term loans, lease payments, and sinking funds due the following year.
To summarize, here's the formula for calculating your debt-service coverage ratio:
DSCR = Net Operating Income ÷ total debt service
While determining your DSCR, be careful of the following detrimental pitfalls:
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Ignoring certain debt obligations - all current debts must be factored in your debt service coverage ratio computations.
- Capital lease expenses - Depending on the lender you plan to go with, you can either include or exclude capital lease expenses. Follow the institution's lead.
Most importantly, if you find calculating your DSCR challenging, seek help from a certified accountant or experienced investment partner.
How to determine DSCR income
Let's explore net operating income in depth to ensure you understand this concept well enough.
We've already said that your net operating income equals total revenue less operating expenses. But what are operating expenses?
Operating expenses are the expenses your organization has to incur to keep operating. They often cover:
- Rent
- Staff wages
- Equipment
- Office Supplies
- Market costs
- Research and development expenses
We can't overemphasize this. You should calculate net operating income from the earnings before interest and tax. Don't deduct interest and tax when computing your debt-service coverage ratio.
How to Determine DSCR Payment
As mentioned, professionals calculate your DSCR by dividing net operating income (minus operating expenses) by your total debt service, which includes all existing debt obligations.
With that in mind, suppose your company's net monthly operating income is $150,000, and your total debt service is $90,000. In that case, your debt-service coverage ratio should be around 1.67, which is not bad.
Remember, most lenders consider a DSCR above 1.25 strong, meaning you're highly likely to meet all your debt obligations. On the other hand, to most institutions, a DSCR below 1 is a potential indicator of your company's impending financial ruin.
Now back to calculations. Again, suppose your lender accepts a 1.2 DSCR. You can estimate the maximum payment expected from a DSCR loan by dividing your net monthly income by the acceptable DSCR.
That means - $150,000 ÷ 1.2 = 148,998.80
So, your maximum monthly mortgage payment is 148,998.80. You can now take this figure and use a mortgage calculator to determine how much a lender is likely to offer, depending on factors like interest rate and loan period.
What Is the Minimum DSCR to Qualify in Duval County, Florida
Unfortunately, there's no set minimum DSCR for Duval County. That said, most lenders in this region and the entire nation want to see something between 1.2 and 1.25. But a few institutions are willing to go as low as 1.0.
In most cases, lending institutions refuse to finance borrowers with DSCRs lower than 1.0. And those that take this risk demand additional collateral.
If your DSCR is above 1.25, you have nothing to worry about. The general rule of thumb for lenders is: the higher the DSCR, the more likely a borrower will repay their debt on time.
With the above in mind, if your DSCR is below the acceptable minimum, use the following tips to improve it fast:
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Boost your net operating income
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Cut operating expenses
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Cover as many existing debt obligations as possible
- Lower your borrowing amount
If the tips above don't seem feasible, try searching for a lender with lower DSCR requirements, provided you have access to collateral.
The Five Best Cities to Invest in Duval County, Florida
Here are five cities that are nirvana for real estate investors in Duval County:
Jacksonville
Jacksonville is Duval's county seat and the most populous city in Florida. If that doesn't impress you, consider this. Jacksonville is home to the most extensive US urban park system. It boasts at least 400 city parks and numerous other state parks, gardens, arboretums, and a national preserve.
Jacksonville was recently ranked among the best places to buy a rental property in 2022 by RealWealth, and rightly so. This city boasts high demands for rental housing, making it a goldmine for investors seeking considerable cash flow and equity growth in the long run.
Moreover, Jacksonville residents highly demand single-family homes, and the city has a broad, complex road system.
Atlantic Beach
Atlantic Beach is part of the infamous Jacksonville Beaches communities, including Neptune Beach, Ponte Vedra Beach, and Mayport.
Miles of pristine, laid-back beaches and easy access to essential facilities like golf courses and public parks have attracted many people to Atlantic Beach. By 2020, this city had approximately 13,685 residents.
Like other major cities in Duval County, Atlantic Beach is a good place for an investor dealing with rental properties. Depending on your capabilities, you can invest in traditional rentals or options like Airbnb.
Neptune Beach
Neptune Beach is a beachfront city located east of Jacksonville. It's one of the most coveted beaches in Duval County, known for its gorgeous sand stretch. By 2021, Neptune Beach's population was around 7,088.
The city of Neptune Beach has never been short of people looking to buy homes. Why? It offers a sparse suburban feel, which is ideal for many prospective homeowners. The area also has numerous reputable schools, coffee shops, and parks.
Most importantly, experts consider Neptune Beach as a seller's housing market. That means the regional housing demand is higher than the supply. That should be luring enough for you, a real estate investor.
Jacksonville Beach
Don't confuse Jacksonville Beach with the city of Jacksonville. The latter is Duval County's county seat, and the former is a coastal resort community with its municipal government. Jacksonville Beach was home to 23,515 residents by 2021.
Presently, numerous factors make Jacksonville a paradise for residents and future homeowners. These include vast stretches of pristine beaches, the famous Jacksonville Beach Pier, and picturesque golf courses. We can't forget the city's fascinating history, eateries, and watersport facilities.
According to research, homes listed in Jacksonville Beach stay on the market for an average of 48 days. That is an enticing number, especially considering the average for the State of Florida is around 78 days. So, a real estate investment in the area should pay off in good time.
Baldwin
Lastly, real estate investors should consider trying their hand in Baldwin, a sizable town in Duval County.
By 2010, Baldwin had around 1,425 residents. Today, it has approximately 1,556. As you can see, the population in the area is growing slowly. But that shouldn't be a problem for an investor. You can use it to your advantage.
Investing in real estate in a sparsely populated area like Baldwin has its fair share of pros. For starters, property prices are considerably low. Moreover, there's less competition, fewer homeowner associations, and higher cap rates.
Also, many Americans began craving rural life amid the pandemic. This trend is expected to continue, meaning many people will migrate to rural towns. So, investing in an area like Baldwin is a sound move guaranteed to bring mouth-watering returns in the long run.
Parting Shot
If you previously didn't know what DCSR loans are and what they entail, we hope you do now. And if you did, you likely picked up more knowledge and tips from this piece.
With the above in mind, go for it if you think it's time to get a DSCR loan and use it to invest in real estate in Duval County, Florida! But before you do, use the formula we discussed to check if you meet all stipulated minimum debt-service coverage ratio requirements.
If all signs point to you getting a DSCR loan, consider using the funds to invest in the cities outlined in this piece. Good luck.
(Jun 7, 2023)
