(Mar 26, 2023)
Savvy investors are increasingly using the flexible Debt Service Coverage Ratio (DSCR) loans to help them expand real estate holdings in Monroe Country, Florida.
Since they involve a little less paperwork, DSCR loans can help you grow your real estate holdings in Monroe County quickly and conveniently.
Why get a DSCR loan in Monroe County, Florida?
There are many perks to investing in real estate properties in Monroe County, Florida.
- The medium household income is $72,012.
- The average rental income in Monroe County is higher than the national average, with a two-bedroom home fetching $1,728 per month.
- 41% of the county's 75,137 residents live in rental properties.
- There's no tax on personal income.
- There is great weather all year round, with plenty of sunshine and no harsh and freezing winters.
These are some of the factors that make Monroe County an excellent investment destination for real estate investors. As remote working takes root, more people are relocating to the sunshine state in search of great weather, drastically raising the demand for excellent rental properties.
While properties in Monroe County, Florida, are higher than average, you can count on DSCR loans to fund your next real estate investment. Unlike conventional loans, DSCR loans use the property's cash flow to determine eligibility.
These low-doc loans don't consider your income. If your monthly cash flow is enough to cover the loan's monthly payment, you will likely qualify for a DSCR loan.
Consequently, the DSCR loan application process is streamlined for speed, convenience, and flexibility. If you're self-employed, a full-time investor, or have a complex tax return structure, these low-doc loans are more accommodating to your needs.
How does a DSCR loan work?
Traditional loans require borrowers to prove they have sufficient monthly income to cover their repayments. Such requirements leave real estate investors who make most of the money from investment property income.
A DSCR loan is a unique lending solution crafted to accommodate your particular needs as a real estate investor. They use the rental income from your real estate properties instead of your income to determine your creditworthiness.
When applying for a DSCR loan, you can dispense with standard documentation requirements, such as pay stubs and tax returns. You only need to demonstrate your property generates sufficient cash flow to cover the monthly payments to qualify for a DSCR loan. Applying for a loan doesn't get easier than that.
How is DSCR calculated?
A DSCR loan compares the net income from your investment property with the monthly mortgage payments. The process uses PITIA – principle, interest, taxes, insurance, HOA, and other fees – to calculate the property's net income.
DSCR is given as a decimal, such as 1.5 or 1.5x. A 1.5x DSCR indicates that the property's income is 50% higher than the loan's monthly repayment.
Typically, higher ratios increase your chances of qualifying for a DSCR loan in Monroe County. Ratios below 1.0 are frowned upon as they indicate a negative cash flow.
DSCR calculation uses a simple but effective formula:
DSCR = Income/ Monthly Payment
Since your income is 40% above the monthly income, you can easily make monthly repayments. For instance, if your rental property generates $4,000, a $2,800 monthly payment would produce a DSCR of 1.4. Most DSCR lenders in Monroe County would happily provide the loan with such a number.
How to determine DSCR income
For residential property, DSCR considers that property's monthly rental income.
For commercial property, DSCR considers your net operating income (NOI) over the previous 12 months. NOI is your net income generated from the property, i.e., the income minus taxes and all other related costs, including maintenance and professional management fees.
How to determine DSCR payment
For residential properties, DSCR loans use PITIA to determine the monthly payments. PITIA, in this case, covers the loan principle, interest, property taxes, interest, and homeowners' association fees (HOA), if any.
If you're DSCR is low or borderline, you may consider raising it, lowering your monthly repayment amount, or increasing the rent.
Here are some examples that demonstrate how both concepts at work:
Example - Raising rent to improve DSCR
| Income | Payment | DSCR |
|---|---|---|
| $4,000 | $4,000 | 1 |
| $5,000 | $4,000 | 1.25 |
Example - Lowering your monthly repayment
| Income | Payment | DSCR |
|---|---|---|
| $4,000 | $3,000 | 1.3 |
| $4,000 | $2,500 | 1.6 |
You can use either of these methods to increase your DSCR and secure a DSCR loan on friendly terms. You must determine the best way to help you get the ideal DSCR.
Before raising the rent, check the market rates and the going rates of similar properties in the neighborhood. You may then adjust your rates to match these rates. Alternatively, consider boosting the property's rental value to justify the price hike.
On the flip side, you can increase the size of your down payment to lower the size of the monthly payment.
You stand a high chance of securing friendly rates and loan terms if your investment property has a higher DSCR ratio. A high ratio increases your creditworthiness and bolsters a lender's confidence in the property's ability to cover the loan payments.
What is the minimum DSCR to qualify in Monroe County, Florida?
Since lenders are free to set their DSCR requirements, the minimum DSCR in Monroe County depends on the lender you choose. Typically, most lenders are partial to a DSCR of at least 1.25x.
Some lenders are more accommodating and can work with 1x DSCR, while others have not set a minimum. It's a mixed bag, so it's best to shop for a lender willing to accommodate your unique situation.
Some lenders might be willing to work with you even when your property is losing money and your DSCR is less than 1x. That may require you to raise a large deposit or verify your income.
However, you should keep your DSCR above 1.25X as it enables you to maximize your benefits and ensures you're not losing money each month.
How to Qualify for a DSCR Loan in Monroe County, Florida
It's easier to secure a DSCR loan in Monroe County, Florida, than a conventional mortgage. Since a DSCR loan is a low-doc loan, the lender won't require you to provide income verification documents such as pay stubs and tax returns.
However, the income verification waiver doesn't amount to automatic qualification. You must meet all the general requirements to secure funding for your next project in Monroe County.
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Loan-to-value (LTV) - Most DSCR lenders in Monroe County ask for 20-25% down. Therefore, you need a 75-80% loan-to-value (LTV) to qualify. That means you'll need to build a 20-25% equity in the new property to secure funding.
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Credit score - DSCR loans accommodate lower credit scores than conventional home loans. Most lenders require a credit score of at least 640, but others can go as low as 620.
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Loan purpose - You may use a DSCR loan to grow your investment portfolio, refinance existing mortgages, or take cash out of your portfolio.
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Verify future rental income - You'll need to verify that your property generates sufficient monthly cash flow to cover the monthly payments. Typically, you'll need an appraiser to fill in the Fannie Mae Form 1007 (Single Family Comparable Rent Schedule).
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Property types - You may use a DSCR loan to finance a single or multifamily residence with up to four units, townhomes, condos, condotels, and commercial buildings with 5+ units. Check with your lender if they allow the type of property you wish to finance.
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Property use - You may use DSCR loans to purchase an investment property but not a primary residence. Short- and long-term rental properties are eligible.
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Loan types - You may apply for any of the three DSCR loans; a 30-year fixed rate, 5-year ARM, and 5-year interest-only loan.
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Maximum loan amount - The DSCR loans in Monroe County are capped at $5 million, but most loans are in the $1-2 million range.
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Property limitations - There are no limits to the number of properties you can finance using a DSCR loan. Qualified applicants can apply for multiple loans.
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Cash reserves - Most lenders require you to have sufficient cash reserves to cover six months of mortgage payments. Borrowers with low DSCR may need a cash reserve of up to 12 months.
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Prepayment penalties - Most DSCR loans carry a prepayment penalty if you sell or refinance the loan too quickly. You'd be on the hook for a set percentage of the total loan amount, which can prove costly. A DSCR loan for the minimum required time avoids hefty penalties and saves money.
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Debt-to-income ratio, income, and employment - DSCR lenders in Monroe County don't use your DTI, income, or employment history to determine eligibility. Lenders use your investment property's cash flow and the mortgage payment to determine eligibility.
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Closing as an LLC - Most DSCR lenders allow you to close the loan using the name of your registered LLC.
- Closing costs - Most Monroe DSCR lenders allow sellers to foot a portion of the closing costs up to a set limit.
DSCR Mortgage Rates in Monroe County, Florida
While convenient, DSCR mortgages often carry a higher interest rate than conventional mortgages. Typically, the interest rate on a DSCR loan is 1-2% higher than the standard home loans sponsored by Freddie Mac or Fannie Mae.
However, the convenience of a DSCR loan – insufficient documentation, income requirement waivers, and speed of disbursement – makes the slightly higher rate worthwhile.
The five best cities to invest in Monroe County, Florida
More than 40% of the 75,000 people in Monroe County live in rental properties. Skyrocketing property prices and a massive influx of young professionals make Monroe County an ideal investment destination.
A DSCR loan can help you grow your real estate portfolio and cash in on the spiking rental property demand. Median home prices on Monroe have jumped by almost 24% since 2021, a trend likely to continue well into the future. A strong demand saw 96.5% of the properties close at their listing prices.
Here are five of the best cities to invest in Monroe County, Florida:
City of Key West
Key West is the southernmost subtropical paradise in Florida. The city is renowned for its beaches, watersports, nightlife, conch-style architecture, and historic sites. The city is home to 30% of the country's population, creating a high demand for rental properties.
Virtually every home in Key West is close to the water, which drives demand for rental properties. The city is a popular tourist destination with a healthy market for short and long-term rental properties.
- Median sale price - $850,000
- Median rent - $1,877
- Households renting their homes - 58%
- Median household income - $73,029
- Average daily vacation rental rate - $475
- Occupancy - 71%
- Monthly vacation rental income - $7,696
City of Marathon
Spread across 13 islands, the City of Marathon is best known for its picturesque beach, including Sombrero Beach. This tropical paradise is popular with tourists who frequent popular spots such as the Dolphin Research Center, Turtle Hospital, and the Curry Hammock State Park. It offers some of the best boating activities that range from the reef and deep-sea fishing to kayaking and jet-ski tours.
The high tourist volume makes Marathon an ideal real estate destination. Airbnbs and vacation rentals are in high demand because they provide the amenities of a hotel while providing a home-like environment.
- Median sale price - $610,000
- Median rent - $1,332
- Households renting their homes - 49%
- Median household income - $56,008
- Average daily vacation rental rate - $455
- Occupancy - 84%
- Monthly vacation rental income - $7,996
Village of Islamorada
Perched in the middle of the beautiful Florida Keys, Islamorada, the village of Islands, comprises four islands. It goes by the moniker "Sport Fishing Capital of the World." The town is a popular vacation destination for people looking for a slice of tropical paradise.
It offers a boatload of fun and exciting opportunities, including scenic ocean views, fishing boating, art galleries, and locally owned restaurants. The rural setting makes the village an ideal place to buy vacation rental properties.
- Median sale price - $729,000
- Median rent - $1,709
- Households renting their homes - 22%
- Median household income - $76,497
- Average daily vacation rental income - $450
- Occupancy rate - 80%
- Median monthly revenue - $7,352
Key Colony Beach
Known as the Gem of the Florida Keys, Key Colony is a tight-knit oceanfront community in the middle of the Keys oceanside. Key Colony is home to about 700 residents, but the population swells to more than 4,000 during winter.
There are about 1,400 housing units on the island, approximately 286 acres. It's one of the few places in the Keys with a private white sandy beach and permits 7-day vacation rentals.
Most of the homes on Colony Beach are vacation home rentals catering to the tourist community. Properties range includes low-rise condos on the ocean and homes by the deep water canals. All homes provide ready access to the Atlantic Ocean or the Gulf of Mexico.
Vacationers for choice when on Key Colony Beach as there are many fun and exciting activities. Vacation activities range from concerts in Sunset Park, festivals, boat parades, watersports and activities, and a 9-hole golf course.
- Median sale price - $ 963,687
- Median rent - $1,234
- Households renting their homes - 19%
- Median household income - $91,899
- Average daily vacation rental income - $306
- Occupancy rate - 84%
- Median monthly revenue - $5,637
Key Largo
Key Largo is the first and northmost subtropical paradise in Florida. It's conveniently located near two major airports but still a world away from the modern hustle and bustle. Key Largo is home to some of Florida's most fascinating botanical scenery.
It's a popular tourist spot with numerous on-shore attractions, including two state parks, nature trails, and a national park. Visitors can also enjoy snorkeling, scuba diving, sport fishing, sandy beaches, and eco-tours. The real estate offerings range from single-family homes to condominiums and vacation homes.
- Median sale price - $859,900
- Median rent - $1,389
- Households renting their homes - 65%
- Median household income - $76,00
- Average daily vacation rental income - $360
- Occupancy rate - 82%
- Median monthly revenue - $6,336
Grow Your Real Estate Portfolio in Monroe County, Florida Quickly
Don't the high property prices stand in the way of growing your real estate holdings in Monroe County. The high influx of professionals is continually driving the demand for rental property.
A DSCR loan can help you breach this high barrier to entry and join the growing ranks of happy property owners in Monroe County, Florida.
(Mar 26, 2023)
