(Mar 26, 2023)
Finding low-cost properties that will gain value rapidly is critical for new investors, and Highlands County, Florida, offers unique opportunities for potential real estate investors.
Highlands County was named the second best place to own a home in Florida by SmartAsset, which will positively impact property demand and prices. But how do you grow your real estate portfolio in Highlands County, given how much capital is required when investing in real estate? There's a simple answer – DSCR loans.
Why Get a DSCR Loan in Highlands County, Florida?
Florida continues to out-pace the rest of the nation in growth. Highlands County is at the center of this growth. The county has all the highlights every real estate investor looks for. It has a growing population, low operating costs, a dedicated workforce, and a fantastic climate.
Highlands County's real estate market looks promising for all real investment opportunities. The county is well-connected, surrounded by three interstates, commercial airports and an intermodal logistics center. You need a DSCR loan to start building your real estate portfolio.
DSCR loans are much easier to secure for real estate investment than traditional loans. They compare the property's cash flow to its monthly payments, eliminating most of the red tape that comes with conventional loans like personal income verification, which makes getting funds for real estate investment easier.
How Does a DSCR Loan Work?
Investors don't fit the portfolio for applying for traditional loans because they don't have a regular income. You will often have trouble proving your income and ability to repay a traditional loan, and in most cases, you won't have the necessary documentation.
A DSCR loan provides investors with a financing alternative that is better suited to them—a DSCR loan factors in the unique needs of investors instead of your income. DSCR lenders focus on the property's income.
When applying for a DSCR loan, you won't have to submit your tax returns or pay stubs. There's a higher chance of getting approved for a DSCR loan as long you choose a property that makes enough money to cover the loan repayments and running costs of the property. It is as simple as that.
How is DSCR Calculated?
The formula for calculating DSCR is as follows;
DSCR = Net operating income (NOI) / Total debt service (TDS)
Components of DSCR
From the above formula, you can tell there are several components to the DSCR calculation formula. Understanding each component can help you come to a more accurate estimation of your DSCR.
You can calculate the net operating income by subtracting the operating expenses (ignore the interest and tax payments) from the revenue collected from the property.
Another variation of this formula commonly used when calculating DSCR for commercial properties is where EBITDA substitutes NOI. Using EBITDA excludes all the non-cash expenses like amortization and depreciation that don't affect cash flow which makes EBITDA a more accurate expression of the cash available to pay off debt.
The Total Debt Service represents how much a company pays for the period in principal, interest, and lease payments. If the investor has a sinking fund, the total debt service is also considered. When calculating DSCR, the TDS and NOI should refer to the same period, usually one year.
When calculating the total debt service, you should factor in the loan's interest cost, which is tax-deductible and will affect the TDS. However, some lenders use an unadjusted interest rate for the calculation. Using the interest directly will understate the borrower's ability to meet their debt obligation.
DSCR calculation example
Assuming you want to purchase a small commercial property for $14 million. You intend to pay a down payment of $4 million in equity and finance the $10 million through a 10-year $10million loan at an interest of 5.50%.
Your annual debt service requirement for the first year is 0.055 x $10 million, equal to $550,000 in interest and $1 million in principal repayment for a total of $1.5 million.
According to your calculation and research, the property can make you $2.3 million in NOI. That means your DSCR will be;
$2.300M / $1.550M = 1.48
Your DSCR will be 1.48, which is sometimes expressed as 1.48x.
If you choose to use the projected EBITDA of $2.5 million instead of the NOI of $2.3 million, you will end up with a healthier DSCR of 1.613x.
In this case, you would have a DSCR greater than 1, which is acceptable, but you can improve your DSCR by increasing rent or reducing the payment by putting down a higher down payment.
How to Determine DSCR income
Your DSCR income is the monthly rental income from the residential or commercial property. However, commercial properties are slightly different.
For commercial properties, use the net operating income, which you can calculate by subtracting taxes, management and maintenance expenses, and other expenses associated with the running of the property from the total income collected.
How to Determine DSCR Payment?
You won't know the exact DSCR payment amount until you work with your DSCR lender to help you determine your interest rate and payment.
The lender will consider your Principal, Interest, Taxes, Insurance, and HOA (PITIA) when calculating your DSCR payment. The final figure you pay will depend on various factors, including your DSCR.
A lower DSCR will attract higher interest rates from some lenders, while a higher one has the opposite effect. There are several ways you can improve your DSCR to get favorable DSCR loan payments:
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Increase your Amortization period - If your DSCR loan is low for a 10-year loan, you can consider a 15-year loan. It will lower your monthly principal payments and raise your DSCR. However, it will also increase the total cost of the loan.
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Take an interest-only loan - Taking an interest only relieves you of principal payments and boosts your DSCR. This works best with short-term loans like construction loans. However, the lender may still include principal payments as part of the underwriting calculations.
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Decrease leverage - Put down a more significant stake in the property to increase your DSCR. Putting down a larger down payment also shows your commitment to the project and earns the lender more confidence in you and the project.
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Increase revenue - You can increase your rental income by increasing the rates. Scout around to see if you're within the ideal rental market rates. If not you can increase the rental costs. You can also use some of the money from the loan to upgrade the property to allow you to charge higher rates while decreasing vacancies. This will increase your NOI and DSCR, which is a win-win.
- Cut expenses - You can increase your NOI and DSCR by cutting back on property expenses. Some avenues for reducing costs include finding lower-cost suppliers, charging extra for certain services, replacing high-salary employees with more affordable ones, and increasing the speed of evictions.
What is the Minimum DSCR to Qualify in Highlands County?
The minimum DSCR in Highlands County varies depending on the lender. Most lenders generally work with a DSCR of at least 1.25x.
Some lenders may go as low as 1.0x, but the DSCR loan will attract a higher interest. Some lenders don't even have a minimum and assess the application depending on your unique scenario. But as a rule of thumb, the higher your DSCR, the easier it will be to get approved.
It's best to connect with a DSCR lender to review your application, offer insight into the property's potential income and draft the payment terms for you.
DSCR loan guidelines in Highlands County, Florida
Besides the minimum DSCR, lenders look into other factors to determine whether you're a suitable applicant before approving the DSCR loan. Overall, you will have an easier time applying for a DSCR loan than a traditional loan.
Some of the other qualifications your lender will evaluate while going through your application include the following:
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Loan-to-value (LTV) ratio - Lenders will require an LTV ratio of at least 80% for a DSCR loan program. That means you must make a minimum of 20% down payment. It's possible to have a lower down payment option depending on your situation, but your interest could go up if you put up less money in the down payment.
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Credit score requirement - A DSCR mortgage requires a credit score of at least 640. It's comparable to the score you need for a regular investment property loan. However, different lenders have varying credit score requirements, which also depend on other circumstances.
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A debt-to-income ratio of the borrower - The lender will not check your debt-to-income ratio when evaluating your DSCR loan application. This also means the lender will not check your employment or income when evaluating the DSCR loan application, decreasing the paperwork needed and expediting the approval process.
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Loan purpose - A DSCR loan can be used to purchase or purchase, refinance or take cash out on a property.
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Property eligibility - DSCR loans cover properties prohibited by most regular investment properties, like properties with more than four units and non-warrantable condos. An LLC can also own the properties. However, you can't use a DSCR loan to finance a primary residence. The property in question can be a residential or commercial property, making this an excellent method of quickly expanding your real estate portfolio.
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Verification of the property's future rental income - The lender will need to verify the future income for the property, a single-family property. The appraiser will complete Form 1007 for the Single-Family Comparable Rent Schedule.
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Loan Type - DSCR loan types can include 30-year fixed rates and 5-year and Interest Only loans, among other options. Some lenders have more flexible loan types than others.
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Property use - You can use a DSCR loan to purchase short-term and long-term rentals. You can also use the loan to purchase investment and rent-only properties, but you can't use the funds to purchase a primary residence.
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Maximum loan amount - You can borrow up to $5 million from a DSCR program. But, the exact limit varies by lenders and also your situation.
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Maximum properties owners - There's no limit to the number of properties you can own using a DSCR which is why this is an excellent option for real estate investors.
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Cash reserves - Most lenders will require that you have six to 12 months of cash reserves for the full payment. The exact cash reserve amount depends on your DSCR.
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Prepayment penalties - The lender may penalize you for early payments, sell the home too soon, or refinance too quickly. Every lender's terms vary.
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Seller-paid closing costs - Most lenders allow sellers to pay your closing costs only to a specific limit.
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Closing in the name of an LLC - With a DSCR loan, you can close in the name of an LLC in most cases.
- DSCR Mortgage Rates - DSCR mortgage rates are typically higher than standard loans and other alternative lending options. On average, you will pay between 1-2% higher than a traditional loan. The exact percentage you will pay depends on your DSCR.
Three Best Cities to Invest in Highlands County, Florida
Florida has a vibrant real estate market. Accessibility, affordable homes and properties, and the fantastic weather are some of the factors that make Florida one of the best places for real estate investment.
Highlands County is at the heart of Florida and presents some excellent real estate investments. If you're considering investing in the real estate market in Highlands County, these cities are the best place for you to start.
Avon Park
Avon Park is the best city for real estate investment in Highlands County. The homeownership here is balanced, with 44% of the over 10,400 people that live here renting and 56% owning their own homes.
The median home value in Avon Park is $80,400, which is perfect for budding real estate investors working on expanding their real estate portfolio. The median rent here is lower than the national average but considering what you pay for the home; it is still a good return on investment.
The city has numerous amenities and is highly accessible. What makes Avon Park even more appealing is its potential. In the right hands, it's possible to increase demand for real estate in this city and grow its property values.
Lake Placid
Lake Placid has a population of 2,306, making it ideal for families looking for peace and serenity. Although most people own their homes, only 45% rely on renting. The median value of homes in Lake Placid is around $108,000 and the median rent is about $722.
Like Avon Park, Lake Placid holds a lot of potentials, mainly because of the high tourist population that comes to the city to look at the murals and caladiums. The city is perfect for investors looking to set term short-term rentals or Airbnb. And the proximity of the schools makes the city an ideal place to bring up a family.
Sebring
Sebring is one of the cities in Highlands County where more people are renting than those that own their properties. With over 10,000 people, it presents real estate investors with a unique opportunity to take advantage of the high appetite for rentals.
The median cost of homes in Sebring is about $104,200, which is only half the national average, while the median rent is $767 versus a national median of $1,096. Many activities bring people down to Sebring, including the Sebring International Racetrack, which opens the door for short-term rentals.
There are plenty of decent jobs and schools for families and cities. However, the city hasn't grown at the expected rate. It could very well be turning the corner and ready to take massive steps in development, which could also influence its property value.
Get a DSCR Loan Today!
Highlands County, Florida presents unique opportunities for real estate investors, particularly those looking for affordable properties that can start making returns on investment within a short time. The diverse nature of the real estate market in Highlands County and its promising future means investors can buy property here for short and long-term rentals, for commercial purposes, and even for buying and holding.
A DSCR loan can help you build your real estate portfolio rapidly in Highlands County without the lengthy processes and paperwork that other investments and standard loans require from the applicant. Submit your DSCR loan scenario and see the DSCR loan options you can take advantage of in Highlands County to get you started in your real estate investment journey.
(Mar 26, 2023)
