(Mar 30, 2023)
While you may be familiar with real estate's basic processes and terms, the concept of debt service coverage ratio (DSCR) might be new to you. Either way, it's essential to understand its role in commercial real estate transactions.
The Florida real estate market is among the most profitable investment markets in the country. If you consider investing in Volusia County, Florida, you need to know the operating income ratio lenders expect you to have to service debt. Here's everything you need to know about DSCR loans in Volusia County, Florida.
Why Get a DSCR Loan in Volusia County, Florida?
As home to more than 14,000 enterprises providing or producing goods and services, Volusia County, Florida, boasts a robust and growing economy. Since companies in this county do business locally and internationally, they contribute to the county's $16 billion GDP annually. They also empower local communities with vast employment opportunities and set conditions to nurture professional talent, improve revenue streams and attract visitors.
One key indicator of any growing economy is its ability to attract new companies. With a nationwide private/public partnership geared at economic development in place, Volusia County aims towards this goal. Investors and business owners in this county are confident that the increase in business potential will lead to sustainable economic success.
Through its economic development division, the county is on a mission to provide businesses that desire and have the potential to grow assistance at zero cost. It is currently empowering maturing businesses, second-stage ventures, and start-ups to get a footing in the county's economic success.
Getting a DSCR loan in Volusia will be a good idea if you are looking to invest without having to provide W2s, payslips, tax returns, or employment information, among other documentation. The loan may suit you if you are self-employed and want to invest in a property despite having a complex income. It is because it offers a solution to dealing with sophisticated tax returns.
How Does a DSCR Loan Work?
The debt-service coverage ratio applies to personal, government, and corporate finance. You can use this figure to determine whether you have enough income to meet your debt obligations. It helps measure the available cash flow used to settle existing debt obligations.
With a DSCR loan, you get to qualify for financing without having to use your tax returns. The loan also allows you to avoid the high points and high rates on conventional private loans, strict lending criteria, and lengthy approval processes. You can consider it a no-income loan since it lets you qualify for financing on your property's cash flow rather than your income.
Getting a DSCR loan is an excellent way of expanding your investment portfolio to new lengths. It allows you to qualify quickly and pursue your investment goals. And since you will write off all expenses on your property, the loan may be a perfect choice over a conventional loan.
Why the DSCR Changes all the Time
Since the DSCR is a financial tool used to weigh your ability to meet your debt obligations, it is bound to change over time. Taking on new debt will increase your debt obligations and lower the DSCR. On the other hand, if your earnings go up and you have more cash flow, the DSCR will be high.
Interest rate changes also affect the DSCR, so a sudden interest rate hike increases interest paid on debt and lowers the DSCR. Consequently, lowering the rates will reduce the interest paid, increasing the DSCR.
How is DSCR Calculated?
Calculating the debt service coverage ratio is dividing your net operating income by your total debt obligations. Your total debt obligations, in this case, include interest and principal payments on a particular loan.
DSCR is essential when negotiating a loan contract with your loan provider. It can help a financial institution manage its lending risks and an investor/analyst analyzes a company's financial strength.
Calculating your debt service coverage ratio is advisable when you want to gauge your financial health and ability to meet debt obligations that are almost due. Note that your debt service and operating income will affect the ratio. Debt service refers to the credit you take to finance a particular need or project, while operating income refers to the income remaining after deducting your day-to-day expenses.
How to Determine DSCR Income
Your net operating income (NOI) helps analyze the profitability of the real estate properties you invested in to get income. It is a sum of all revenue derived from the properties without the required operating expenses.
As a before-tax figure, the NOI appears on a property's income and cash flow statement. It excludes the interest and principal payments on a loan, amortization, depreciation, and capital expenditures.
The sure way to calculate NOI is to subtract your operating expenses from the total revenue a property generates. Revenue, in this context, may include rental income, service charges, parking fees, and fees charged on laundry machines and vending machines, among others.
Your operating expenses may include costs that help keep the property running. Examples of these costs include maintenance, repair, property taxes, utility bills, insurance premiums, and management fees.
How to Determine DSCR Payment
DSCR payments consider factors such as interest, principal, insurance, homeowners insurance, and taxes. The only way to figure out the exact DSCR payment amount is to consult with your lender. However, lowering your payment amount or increasing your rent can help improve this amount.
If you have a property that generates rental income, you need to figure out how to lower the payments or move the income up to hit a good DSCR amount. Means such as making a larger down payment to lower the property's purchase price or increasing the rental income can help you achieve this goal.
What is the Minimum DSCR to Qualify in Volusia County, Florida?
Though the minimum DSCR needed to qualify for a loan depends on your lender, most lenders expect a 1.25 DSCR. You may also encounter a lender that accepts a debt service coverage ratio of 1.0 or one that doesn't have a cap on this ratio.
Either way, contact a reliable DSCR lender and review your financial situation with them for insights on the payments, potential income, and the property.
Qualification Criteria for DSCR Loans
Various factors determine the qualification criteria for DSCR loans in Volusia County, Florida. You must review each of them carefully to see if the loan is within your financial means.
Here are the factors to consider as you shop for a DSCR loan.
Coverage Ratio
The DSCR lender will calculate your coverage ratio using your rental income. Rental income, in this case, may be determined by an estimated rental income based on the property's appraisal or signed lease agreement. Form 1025 rent schedule will be used on a small residential property, while Form 1007 rent schedule will be used on a single-family home appraisal report.
Depending on the DSCR lender, the coverage ratio can range from 1.0x to 1.5x, requiring the predicted or actual rental revenue to be within the 1.0 to 1.5x range. So, putting at least 30 percent down will help reduce or eliminate the coverage ratio.
Loan To Value (LTV) Ratio
An LTV ratio of 80 percent can help you secure a DSCR loan. It is the same as making a down payment of 20 percent on the property. Though you may have low down payment options when looking to get the loan, expect a higher interest if you make a low down payment.
Refinancing
When enrolled in a DSCR program, you can explore cash-out, duration, and rate refinancing options on top of the DSCR loan. The lender may also allow you to withdraw more cash from the investment property to a level you can't find on a conventional loan taken on a house you are yet to own.
Prepayment Penalty
Expect your DSCR loan to carry some prepayment penalties. Lenders charge these penalties if you pay part of your loan or all of it earlier than agreed.
The penalty will only apply to your situation if you agree to it during closing. It is, therefore, advisable to thoroughly review the loan terms and take note of any prepayment penalties or fees the lender expects you to pay.
Maximum Loan Amount
The DSCR lender will determine the maximum loan amount you qualify for. It could range from a few thousand dollars to a million dollars. The key here is that DSCR loans offer relatively higher loan limits than other loans.
Eligible Properties
The DSCR loan program doesn't apply to certain types of investment properties. They include properties with over four units and non-warrantable condos.
However, there's no particular limit on the number of rental properties you can use the loan to finance. With this benefit, you can grow your real estate portfolio fast.
Credit Score Requirement
Like other types of loans, DSCR loans have credit score requirements. In Particular, you need a credit score of 640 for a lender to consider your application.
The credit score limit may vary with the lender and your unique borrowing circumstances. You can also get qualified for the DSCR loan as a foreigner without proving your creditworthiness.
Your debt-to-income ratio won't come into play when a lender evaluates your loan application. It is because eligibility for the DSCR loan is linked to your coverage ratio. Even more, your lender won't review your income or employment history/status, thus reducing the amount of documentation required.
DSCR Loans and Appraisals
Since DSCR loans do not leverage any physical collateral, they have an appraisal requirement when underwritten. The appraisal helps assess the loan's value compared to others in the current market. It also gives lenders a picture of the potential lending risks they will incur.
Without an appraisal, it will be difficult to tell whether the lender is giving the DSCR loan at a fair price. The loan will also attract high-interest rates and fees to counter the lending risk.
DSCR Program Costs and Fees
Compared to traditional investment property loans. DSCR mortgages carry higher fees that stem from the prepayment penalty, mortgage points, and origination fee. You should expect higher total loan costs since the maximum loan-to-value ratio is 80 percent.
As a percentage of the total DSCR loan amount, the origination fee is usually in the 0.5 to 1.0 percent fee. It's common to find lenders that waive the fees or charge lower fees. Besides the origination fee, expect an appraisal fee between $300 and $500 that helps review the property's value.
Properties financed by DSCR loans tend to have interest rates between 1 percent and 2 percent higher than traditional investment properties. You should compare interest rate quotes from at least 3 DSCR lenders to find a reasonable rate. Even more, expect a higher rate if the property doesn't have a lease and its estimated rental income is drawn from the appraisal report.
The Five Best Cities to Invest in Volusia County, Florida
Located in Florida's east-central part, Volusia County, Florida, has a developing economy with a growing number of enterprises that produce and offer goods and services.
It is a great place to invest in the real estate owing to continuing support from the county's economic development agency.
So, if your goal is to invest in Volusia County, Florida, here are some of the cities you should consider checking out:
DeBary, Florida
DeBary ranks among the best places to live in the Sunshine State thanks to its suburban-rural feel and access to hospitals, schools, beaches, lakes, parks, and businesses.
If you plan to invest within DeBary city limits, you must learn about the city's investment and taxation policies. In particular, you will be required to pay business taxes to the city authorities, whether your venture is home-based or commercial-based.
Port Orange, Florida
Port Orange, Florida, is a relatively populous city (64,842 residents) within the Deltona-Daytona Beach-Ormond Beach metropolitan area. It is considered a part of Florida's Fun Coast region.
The city boasts a sparse suburban feel, with most residents being homeowners. It also encompasses 29 square miles of land, expanding commercial development potential and gated communities. Its roots were in economic activities such as farming, ranching, oystering and boat building.
Ponce Inlet, Florida
As a rapidly growing town in Volusia County, Florida, Ponce Inlet is situated on the southern end of a barrier island, south of Daytona Beach Shores and Daytona Beach. It is home to several marinas and comprises a community with stringent land use regulations.
Ponce Inlet offers residents and visitors an urban feel with plenty of development opportunities. The property prices in this city are pretty high, with the median home value at $345,300 (the state median value is $196,800 while the nationwide median value is $204,900).
Ormond Beach, Florida
With a population of 43,245, Ormond Beach boasts a dense suburban feel and many homeowners. The less strict investment and taxation policies have great potential for real estate development.
Ormond is also known for its healthy business climate and exceptional quality of life. Companies in this city draw most of their support from a strong labor force, pro-business city government, and strategic economic development plans.
Daytona Beach Shores, Florida
The steady rise in the job market of Daytona Beach Shores is one of the indicators of a strong economy. The city has favorable tax rates, with the sales tax rate standing at 6.5 percent while the income tax rate is capped at 0.0 percent.
Daytona Beach Shores, Florida, residents earn an average income of $34.767 a year, which is higher than the national average ($28,555 a year). The median household income also stands at $43,077 per year, with the national average being $53,482 yearly.
Summing up
In a nutshell, the DSCR is essential when considering investing in commercial real estate. It is because lenders want to ensure that you are in a better position to repay the loan—all the best in considering a DSCR loan to grow your real estate portfolio.
(Mar 30, 2023)
