(Mar 27, 2023)
Real estate investors are swarming to Pinellas County, Florida, to tap into the county's rising rental demand and robust economy. To penetrate this profitable market, they are leveraging debt service coverage ratio (DSCR) loans, which, unlike traditional loans, work with the property's rental revenue as opposed to the borrower's income.
Read on as we explore how DSCR loans make borrowing significantly more straightforward and quicker for investors than conventional mortgages.
How does a DSCR loan operate?
To be eligible for a DSCR loan, the income from the selected property must be more than the monthly payment. This makes lending much easier for investors as no individual income verification is required.
Borrowers like property investors tend to have complicated tax forms that do not adequately reflect their income. Because of the requirements, it often proves challenging to qualify for a conventional mortgage.
For the DSCR loan, however, it's a different case—it provides these alternative borrowers with a suitable financing option.
How is the DSCR determined?
DSCR is always reported as a decimal number, such as 1.3 or 1.3x. A property with a 1.3x DCSR generates 30% more revenue than required to meet the monthly payment.
We use the following formula to calculate DSCR - DSCR = Income / Payment
The greater the DSCR ratio, the greater the extra cash flow generated by the property. For instance, a DSCR of 1.50 indicates a 50% excess in revenue, whereas a 1.30 DSCR denotes a surfeit of 30% in income.
The reverse is true to boot. For example, a DSCR of less than 1.0 means negative cash flow, whereas a DSCR of 1.0 means breaking even.
How to Calculate DSCR Income
For the case of residential investment properties, DSCR loans typically employ the monthly rental revenue.
On the other hand, they use the NOI (Net Operating Income), which you get by subtracting the operating expenses, such as utilities and maintenance, from your pretax income.
Determining DSCR payment
When determining the monthly payment amount, DSCR loans use the principal, interest, HOA, insurance, taxes, and other fees—all of which are often referred to as PITIA.
Example - here's how a higher rent can boost DSCR
| Income ($) | Payment ($) | DSCR |
|---|---|---|
| 2750 | 2000 | 1.38 |
| 3000 | 2000 | 1.5 |
Example - here's how lower payment can improve DSCR
| Income ($) | Payment ($) | DSCR |
|---|---|---|
| 3200 | 2700 | 1.19 |
| 3200 | 2200 | 1.45 |
A quick tip - Tweak the figures on any property you're eyeing to determine how you could decrease the payment or raise the revenue. A stronger DSCR will aid in your approval.
What is the minimum DSCR to qualify in Pinellas County, Florida?
It's up to the lenders to establish their DSCR qualifying criteria; thus, the minimum ratio to cut it in Pinellas County will vary depending on the lender you pick. Most lenders, however, work with a minimum DSCR ratio of 1.25x.
Moreover, some lenders are open to lower DSCRs, and you may even come across a select few with no set minimum DSCR.
Qualifying for a DSCR Loan in Pinellas County, Florida
Provided you find a suitable property, you can easily qualify for a DSCR loan in Pinellas County, Florida.
DSCR loans were created with the individual circumstances of each investor in mind. Investors often find conventional loans challenging since they cannot provide inside-the-box revenue proof. After all, they don't always have W2 jobs.
A DSCR loan, on the contrary, allows investors to qualify based on the revenue generated from the property rather than proof of individual income.
As mentioned earlier, different lenders in Pinellas County will have somewhat varying DSCR borrowing requirements. But the following is an essential guide to what you may expect from most lenders.
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Credit score - Like with most loans, a FICO score of 640 or more is preferable to qualify for a DSCR loan. Nonetheless, specific lenders prefer a higher score while others accept a lower one.
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Loan-to-value (LTV) Ratio - The maximum LTV for DSCR loans is typically 75% to 80%, implying a down payment of roughly 20% to 25%.
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Allowed Property Types - Property types allowed by the DSCR may vary depending on the lender. However, they typically include single-family properties, townhomes, condos, and 2–4-unit properties.
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Loan Purpose - You can use your DSCR loan to buy, cash out, or refinance a property.
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Income and debt-to-income (DTI) ratio - Remember, DSCR lenders do not need income or employment verification, nor do they have a DTI limit. Instead, they concentrate on the revenue generated by your investment property.
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Verifying The Future Rental Revenue of the Property - When evaluating your eligibility, the lender must validate your future revenue. As such, an appraiser must complete the Single-Family Comparable Rent Schedule, also known as Fannie Mae Form 1007, according to the DSCR eligibility guidelines. Commercial properties like apartment complexes with five or more units and office buildings are also authorized. Consult your DSCR lender to understand the property out which types are permitted in your region.
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Property Use - Long-term and short-term rentals, along with rental and investment only, are permitted. There are no primary inhabitants allowed.
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Cash Reserves - Most DSCR lenders require investors to have six months of mortgage payments in cash reserves. Lower DSCRs, on the other hand, may necessitate cash buffers of up to 12 months.
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Prepayment Penalties - These could apply if you refinance, repay the loan, or sell your property too soon. And just like other factors, the policies governing these penalties vary by lender. So, consult your lender of choice for more information and specifics.
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Loan Type - Depending on your lender, you can have varying loan choices, from 30-year fixed rates to interest-only and 5-year ARMs.
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The Maximum Number of Owned Properties - Generally, most DSCR lenders don't have a limit on how many properties one owns.
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Maximum Loan Amount - Peak loan amounts typically reach $5 million. However, this depends on the lender.
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Closing in the Name of an LLC - In most cases, lenders allow investors to close in the name of an LLC.
- Seller-paid Closing Costs - Often, sellers cover a share of closing costs. Inquire with your DSCR lender to determine whether seller-paid closing expenses are allowed.
DSCR Mortgage Rates in Pinellas County, Florida
Despite DSCR loans being a great alternative financing solution, their mortgage rates tend to be higher than conventional loans.
In Pinellas County, Florida, DSCR loan rates typically surpass regular loan rates by about 1% and could be lower based on your DSCR.
Best Cities to Invest in Pinellas County, Florida
It's impossible to ignore that property prices in Pinellas County have risen at an unprecedented rate over time, with many cities seeing double-digit property price growth in 2022.
Homeowners have been bagging top dollar from selling their investment properties over time, thanks to the impressively low housing inventory and mortgage rates available. While the projection for 2022 does not promise such massive growth, real estate specialists and financial analysts across the state estimate that property prices will continue to rise.
With Pinellas County proving a lucrative real estate market, investing in its best-performing cities might be an excellent idea. On that note, some cities in Pinellas County, Florida are worth investing in.
Belleair Bluffs
Belleair Bluffs is one of Pinellas County's hidden treasures, and the numbers say it all. The city's median property price reached $340,000 in 2021—an 84% increase from $185,000 in 2019.
This picturesque city, which borders the bigger cities of Belleair and Largo, is renowned for its abundance of shopping and dining facilities, spacious single-family homes, and near access to the beaches.
Clearwater
Known year after year as one of America's most beautiful beaches, this award-winning Florida beach town offers an array of housing options on and beyond the coastlines. The town's popularity has grown, which is not surprising given Pinellas County's popularity surge.
Being a notable destination, Clearwater attracts millions of tourists every year, contributing to the city's thriving economic community. It then boasts a diverse downtown, which features mixed-use retail and residential space and high-rise commercial space, all of which make it a hot real estate market for investors.
The median property price in Clearwater increased by 63% to $750,000 in 2021 from $450,000 in 2019.
St. Petersburg
With seaside neighborhoods, a quickly rising downtown scene, and an old Florida vibe, St. Petersburg is undoubtedly one of Pinellas County's most renowned cities. With single-family homes, villas, townhouses, and condominiums available at a range of prices, it's no surprise that many people desire to move here.
St. Petersburg is among America's top high-tech job centers thanks to a young, highly educated workforce. It is also home to a diverse range of developing industries, including specialty manufacturing, financial services, and data analytics, not to mention marine and life sciences.
St. Pete Pier, a defining part of downtown St. Petersburg, features the Pier Marketplace, which includes dedicated recreation areas, restaurants, education centers, and local products and services.
The city's land development policies are intended to maintain a high quality of place, enable multimodal transit opportunities, stimulate mixed-use development, and increase downtown development intensity.
As such, downtown St. Petersburg provides excellent locations for residential, office, for high-rise hotel complexes. Conversely, Midtown is a hotspot for redevelopment, offering affordable commercial, residential, and industrial sites. The city's median home price has increased by 44%, rising to $320,000 in 2021 from $222,000 in 2019.
Dunedin
The City of Dunedin, which has been growing in popularity every year, swanks a downtown scene with fantastic art galleries, breweries, shopping centers, and restaurants, not to mention a unique beachfront promenade and a plethora of charming historic bungalows.
It also features a municipal marina, four miles of beachfront, and downtown mixed-use developments that offer more space for retail, offices, restaurants, and condos. Given everything the city of Dunedin provides, it's no shock that the median property price has risen from $269,000 in 2019, up by 39% to $375,000 in 2021.
Oldsmar
Oldsmar, situated on Pinellas County's easternmost edge, has recently seen unprecedented price growth. It makes an ideal destination for those who are after a convenient commute to Tampa and don't wish to compromise a suburban lifestyle.
The city's advantageous location supports hundreds of industrial and office companies from different vital industries, including aerospace, manufacturing, and information technology.
Moreover, Oldsmar boasts ten parks bounded by the Brooker Creek Preserve that span 8,500 acres and are connected by 11 miles of roadways. The city's central part is a mixed-use project featuring residences, green spaces, restaurants, breweries, hotels, and retail opportunities.
Like most cities in Pinellas County, Oldsmar's median property price has risen from $220,000 in 2019, up by 64% to $360,000 in 2021.
Five Tips for Real Estate Investors in Pinellas County, Florida
Suppose you're considering expanding your portfolio and navigating potential investments in Pinellas County, Florida; here are a few tips you want to check out.
Consider Holiday and Vacation rentals
Remember, it's The Sunshine State we're talking about. Florida is a gem for anyone planning a vacation, with an excellent all-year climate, a rich culture, an abundance of beaches, world-class amenities, and more. Therefore, you may make various vacation investments in Pinellas County, Florida, as their markets already exist.
And with everything Florida offers, from natural beauty to an exciting past, you can hardly exhaust the attractions and activities to do all year. This means investors could realize a lucrative market in Pinellas County with vacation rentals.
Prepare to Spend More Money
Novice investors often fail to budget for unexpected costs, only to be haunted by inconveniences later. That's why it's typically prudent to have a cash cushion when buying an investment property in Florida.
With some additional finances aside, you'll have an easy time if the need for unanticipated upgrades or repairs were to arise before renting out your house.
Keep Your Renter in Mind
Before kickstarting any property improvement or renovation project, you must consider who you expect your renter to be.
Suppose you make modifications that command a higher rental cost than what tenants around the specific region anticipate; you may be forced to lower the rent or rather have a tough time getting tenants—eroding potential profit.
Create a Team of Local Real Estate Specialists
It would be best if you considered working with a team of local specialists since many investors dealing with properties in Pinellas County are not from Pinellas County.
The properties are reasonably priced, and there are several prospects for fresh investors who lack a solid portfolio to support significant investments in their state of residence.
As such, many novice investors only tend to focus on the state's opportunities without considering the residents' input. Create a team of real estate professionals to advise you about maximizing your investment in that area.
Like other states, Florida's economies are diverse, from professional sports and entertainment to healthcare and education. Knowing the nuances of local community economies could shed some light on what tenants in these areas want.
Do Your Homework
As mentioned earlier, Pinellas County and Florida are brimmed with opportunities. As an investor, you must understand your specific objectives and pick investments that correspond with them.
Do you want to put your money into vacation rentals in a city like Clearwater? Spruce up single-family rental homes in or around Dunedin? Or, purchase a lovely retirement home in Oldsmar?
Remember that the state's opportunities don't come in black and white. So, ensure your investments are beneficial to both you and the tenants.
Leverage Your DSCR Loan Today!
Pinellas County, Florida, is a fantastic location to kickstart your investor journey or expand your real estate portfolio. But as seen through this piece, it may prove challenging for some investors to satisfy the documentation criteria for conventional loans.
If that's the case, DSCR loans might be the key to helping you build your portfolio by offering you the flexibility and speed you need to navigate the profitable real estate market. So, take advantage of your DSCR loan today!
(Mar 27, 2023)
