(Mar 25, 2023)
Real estate investors looking for counties rife with opportunities could consider Sumter County. The DSCR loans in the county are the perfect No-Doc way of building your real estate portfolio and capitalizing on the appealing real estate market in Sumter County.
Why Get a DSCR Loan in Sumter County, Florida?
A debt service coverage ratio loan, better known as a DSCR loan, enables borrowers to finance property without qualifying their income. The process is faster, more flexible, and more accommodating to full-time investors, self-employed borrowers, and those with irregular income and complex tax returns.
You should consider getting a DSCR loan in Sumter County because;
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You can commit to several properties at the same which allows you to scale your real estate portfolio faster.
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DSCR loans can offer quicker closing times.
- Lenders don't consider your income, so you need not worry about employment verification, lease disclosure, or proof of income. The lender is only interested in the cash flow generated by the subject property.
How Does a DSCR Loan Work?
Traditional mortgage loans look at the borrower's income to determine how much they can afford to pay as a monthly payment. The lender relies on the debt-to-income ratio for this determination.
DSCR loans are slightly different. They don't look at the borrower's income. Instead, they consider the expected monthly rent from the property to determine eligibility. You're approved for the loan if the rental income is enough to offset the mortgage payment. It saves you the trouble of providing extensive documentation like tax returns, W-2s, pay stubs, bank statements, credit history, and other proof of income.
How is DCSR Calculated?
A DSCR calculation is essential in understanding the borrower's ability to make payments on the current debt and the potential for additional debt. Mastering this calculation for lenders and yourself is crucial in making lending decisions.
The calculation compares the property's income and total payment and includes principal, insurance, interest, HOA, taxes, and other fees. Once calculated, the ratio is represented as a decimal of 1.30, meaning the property brings 30% more income than the payment. The higher the ratios, the better. If the ratio is below 1.00, there's a negative cash flow.
There are three approaches to calculating DSCR:
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DCSR = Net operating income/ Total debt service (where Total debt service = Principal & interest payments + Contributions to Sinking fund)
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The second method of calculating DSCR is useful for analyzing your real estate investment financial statement or calculating the DSCR for a business. It uses EBITDA instead of Net Operating Income. The formula is: DSCR = EBITDA / Total Debt Service (Where EBITDA = pre-tax income +income + interest expense + Depreciation + Amortization)
- This DSCR formula provides the broadest scope and allows the lender to look at the business and the business owner. It takes the personal salary of any business person into account in cash flow, personal debt service, and living expenses. The formula for this calculation is Global DSCR = EBITDA + Personal income / Business Debt Service + Personal Debt service.
Examples of DSCR Calculations
The formula the lender opts to use depends on the type of DSCR they want to determine. The second formula (In 2 above) is used to determine the DSCR for a business:
DSCR calculation example for a business
If the EBITDA for a company was $240,000 for the last fiscal year and the total debt service was $141,000, then the DSCR for the company would be 1.70x.
Each lender has credit policies that define how the debt service ratio is calculated; in some instances, the calculations are situation based. Depending on the lender and other factors, sometimes, there's a difference in how the debt service ratio is calculated.
For instance, capital expenditures are commonly excluded from the DSCR calculation because they are not considered ongoing operational expenses.
DSCR for real estate
DSCR for real estate is much more straightforward. The DSCR definition for commercial real estate is net operating income divided by total debt service.
If the Net Operating Income is $120,000 per year and the total debt service is $100,000 per year, the DSCR would be $120,000 / $100,000, which equals 1.20x.
The DCSR, in this case, is more significant than 1.0, which means your income is higher than your debt. But you can improve the DSCR by increasing rent or reducing debt payments.
What is a good DSCR ratio?
A good DSCR ratio is relative. It depends on your real estate market, growth stage, and competitors. Typically, smaller real estate investors just starting will have a lower DSCR expectation compared to investors with a more extensive portfolio.
But for a general measure, anything above 1.25x is considered a strong DSCR ratio, and anything below 1.00 indicates that you're facing cash flow difficulties.
How to Determine DSCR Income
DSCR income determines whether the real estate property in question is residential or commercial.
Your net operating income equals your income minus taxes, maintenance and management expenses, and other costs of running the property.
For residential properties, your DSCR income is your monthly rental income. And for commercial properties, it is the net operating income (NOI).
How to Determine DSCR Payment
Your DSCR payment is practically your Principal, interest, taxes, insurance, and HOA (PITIA). Ideally, you won't know the exact DSCR payment amount until you work with the lender who can determine the interest rate and payment.
Your DSCR isn't set in stone; you can improve it by increasing your rent, lowering your payment amount, or lowering your payment.
Here's an example of how higher rent can improve DSCR:
| Income | Payment | DCSR |
|---|---|---|
| $3,000 | $3,000 | 1.0x |
| $3,750 | $3,000 | 1.25x |
Here's an example of how lower payment can improve DSCR:
| Income | Payment | DCSR |
|---|---|---|
| $3,000 | $2,500 | 1.2x |
| $3,000 | $2,250 | 1.3x |
These examples show how higher rent and lower payments can influence the DSCR. You can determine which approach works best for your property to help you achieve your desired DSCR.
If you're charging the lowest rent in your neighborhood in Sumter County, Florida, you can raise rent to match the other properties. You can also boost the property's rental value or put more money into the property to lower the payment. Each of these methods serves the same purpose – increasing your DSCR.
What is the Minimum DSCR to Qualify in Sumter County, Florida?
Having a higher DSCR puts you at an advantage because you get lower interest rates and lower down payment requirements when applying for your DSCR loan in Sumter County. Most lenders in Sumter County and the larger Florida require a minimum of 1.25 DSCR. But there are some that can go as low as 0.75 depending on your real estate portfolio and other factors.
Most lenders determine the ideal DSCR on a case-by-case basis. Therefore, the best option is to connect with a DSCR lender to review your application and give you their insight on the property's potential income and the proposed payments.
DSCR Loan Guidelines in Sumter County, Florida
Although acquiring DSCR loans is much easier for real estate investors in Sumter than traditional loans, your DSCR ratio is not the only factor the lender will consider. However, having a solid DSCR gives you a strong chance of approval when purchasing properties.
Here's a look at other qualifications lenders in Sumter County will evaluate when considering you for a DSCR loan.
Coverage ratio
There are essential qualification criteria when applying for a DSCR mortgage. It is calculated using rental income determined by a signed lease agreement or estimated rental income based on the property appraisal report if a lease doesn't exist.
The coverage ratio will vary depending on the lender and your unique situation. With some lenders, the coverage ratio may be reduced if you put at least 30% down.
Loan-to-Value (LTV) ratio
Most lenders in Sumter County require an LTV of 80% for the DSCR loan program. That means you must put a minimum of 20% down payment on the property.
Some lenders might allow lower down payments, but overall, your interest will go up if you have a lower down payment.
Refinancing
Besides purchasing the DSCR loan, most lenders will also provide you with options for the duration, rate, and cash-out refinancing.
In some cases, you might be able to withdraw more money from an investment property than you can with a non-owner-occupied loan.
Credit score
A 640 credit score is ideal for a DSCR loan, but some lenders may want higher scores while others may allow lower scores. With a lower credit score, you can expect your interest rates to go up.
Loan purpose
You can use a DSCR loan to purchase or refinance a home or to take cash out. Properties allowed under the DSCR program include single-family residences, 2-4 unit properties, condos, and townhomes.
You can also use a DSCR loan to purchase commercial properties like office buildings or five-unit apartment complexes. However, you should speak to your lender in Sumter Counter to determine the exact types of properties they allow.
Property use
You can apply for a DSCR loan for short-term and long-term property rentals. You can also use the program to purchase an investment and rent properties. You cannot use the program to purchase a primary residence.
Loan Type
The loan types differ depending on your financial status and the lender. They include 50year and interest-only ARMs, 30-year fixed rates, and other options. You can discuss the options with your lender to find one that suits you best.
Debt-to-income ratio
In DSCR applications, lenders focus on the income from your investment property. They don't require income and employment verification.
Maximum loan amount
The maximum loan amount for a DSCR loan is $5 million, but this can vary by lender.
Maximum properties allowed
Most lenders under the DSCR program don't restrict the number of properties you can own as long as you have a strong ratio.
Prepayment penalties
Lenders have specific guidelines for various penalties. The most common ones are penalties for selling the home too quickly, paying off the loan too early, or refinancing too quickly.
Cash reserves
Most lenders require that you have cash reserves for the full payment of six to 12 months. The exact amount varies depending on your DSCR.
Seller-paid closing costs
With most lenders, you can pay for the closing costs only to a specific limit.
Closing in the name of an LLC
You can close the sale in the name of an LLC. Most lenders allow this, but it's safer to confirm before proceeding.
Five Best Cities to Invest in Sumter County, Florida
Sumter County provides various investment opportunities for real estate investors looking to capitalize on the growing real estate market in the region. The best city in the county depends on the type of investment, but the top five offer a little bit of everything.
The Villages
The Villages is ranked as the best city to invest in and live in by Niche.com. The city thrives with activities and amenities and has a substantial population of over 80,000. The city offers a rural feel with lots of parks and public schools. Because most people here own their homes, the best real estate investment approach is to buy and hold. The market is ever-rising, so you're bound to get a return on investment. You can also find rental properties equally attractive, especially with the city's growing population.
The city's low crime rate is another attractive factor to invest in. The city ranks significantly below national averages, representing its safety and security.
Bushnell
Bushnell offers better opportunity and a ready rental market for investors specializing in rental properties. 30% of the people in Bushnell are tenants. For investors, that means a ready market for rental properties.
The population in Bushnell is lower, but the town offers its residents a mix of a suburban and rural feel. Unlike The Village, Bushnell has a more family appeal to it. It is close to various amenities like public schools.
As more people search for Bushnell's serene but upbeat environment, there are opportunities for investors looking to buy and hold real estate options. It's also worth mentioning that Bushnell is in the lower third of the most affordable cities to live in Florida, according to Niche.com.
Wildwood
Wildwood has an even higher rental capacity, with almost half the population relying on rentals for housing. The median rent in Wildwood per Niche.com is about $1,000, which is comparable to the national average, making rentals an ideal investment opportunity.
Like other cities in Sumter County, Wildwood has numerous amenities and schools within proximity. The city has a sparse suburban environment and a growing population. It's perfect for families and retirees looking for a friendly and serene place to retire, despite the thriving rental business. The city is also attractive to buy and hold real estate investors as property prices keep soaring.
Webster
Webster is a well-balanced city with plenty of public schools, a low crime rate, and decent nightlife, and it is perfect for families. The city has a suburban-rural mix, with most residents owning their homes. But over 30% of the residents here rely on rental properties. The median rent in Webster is about $581, almost half the national average of $1,096.
With family experience that Webster offers with plenty of space only means the real estate market here will continue to grow into the foreseeable future. However, the low rent median means renting is not the best business in this location. Perhaps you should consider commercial properties to service the growing population or invest in buy-to-hold.
Coleman
Coleman has a more lucrative real estate market than Webster. The only reason it is ranked lower is that it has a lower population. The city is more diverse and has better housing and public schools.
It's a growing city with loads of potential, which makes buying hold an excellent strategy when investing in Coleman. The average median rent here is $700, which is higher than Webster with 24% of the residents living in rental properties. Like most of the other cities in Sumter, Coleman also has that suburban rural mix and makes an excellent place to live for families.
Conclusion
Investing in real estate requires some serious financial muscle which might take years for some investors to develop. But with DSCR loans, you don't have to worry about providing employment documents for verification each time to identify a potential real estate opportunity.
With DSCR lenders, you can rapidly grow your real estate portfolio by identifying the right opportunities that make economic sense to lenders. Submit your details and DSCR loan scenario to receive a professional DSCR quote and analysis to get you started on your next real estate investment.
(Mar 25, 2023)
