When diversifying your real estate portfolio, you may overlook somewhere very significant: Alabama, which is rich in investment properties from single-family homes to commercial spaces.
With a debt service coverage ratio (DSCR) loan, you can purchase an investment property with a strong outlook - but they don't require income verification like a conventional loan.
Visio makes the DSCR loan process easy, helping you jump into the promising Alabama real estate market sooner than you ever expected. We've helped many investors secure DSCR loans for a variety of property types, and we can help you too.
To purchase an investment property in Alabama using a DSCR loan, investors need to meet specific requirements.
Most lenders want to see that you have experience in renting, as this proves that you understand the risks and rewards involved in real estate investment properties.
The minimum credit score for a DSCR loan is generally 680, though select lenders may allow a lower credit score.
The property will need to be appraised, as this will be used to calculate DSCR. You'll also need to show proof of the property's income through previous lease agreements; lastly, you have to submit a 1007 Rent Schedule, which calculates the fair market price for the particular property.
These types of loans are built off the DSCR ratio, which determines whether the property will generate sufficient cash flow to pay off the loan.
To calculate DSCR, lenders divide the net operating income of the property by the PITIA (principal, interest, property taxes, insurance, and association dues). This identifies whether the property is making more than the monthly mortgage payments, which indicates profitability.
Most lenders want a DSCR of 1.2 or higher, though some lenders like Visio Lending will accept a minimum DSCR of 1.
The loan-to-value ratio determines your down payment; the average lender wants an LTV of 75% or lower, meaning that you will provide a payment of 25% upfront. Some will accept an LTV of 80%, but almost never 85% or higher.
Once you know the LTV requirements, you'll need to provide the corresponding down payment, typically 20% to 25%. You'll also need to pay closing costs just as with any other real estate deal.
Alabama is a boundless opportunity for real estate investors, whether they are locals or foreign nationals, but the major cities in this state are your best opportunity for Alabama DSCR loans.
With high populations, economic diversity, and a strong job market, you'll find it easy to general strong cash flow in these vibrant regions.
Outdoorsy Huntsville draws sportsmen as well as museum junkies, making it a great place for vacation rentals and small shops. The average rent for Huntsville apartments ranges between $850 and $1,172, which is quite good, given that the average property value is $280,121. For an office space, you can expect a rent of $22.79 per square foot.
With a thriving healthcare, education, and manufacturing sector, it's no wonder that Birmingham boasts rents between $1,115 and $1,454, some of the highest in Alabama.
Redfin lists that the average property value in the city is about $220,000 right now. This makes Birmingham quite a steal, given that you can command higher rents for a lower upfront cost. For commercial spaces, the rents hover around $22.38 per square foot.
The low cost of living and numerous institutes of higher learning make Mobile quite attractive, especially with rents between $834 and $1,270. Average property values are about $184,000, making this a good place for those who want to pad out their portfolio with a strong and steady income. Its commercial rent potential is also lower at approximately $16.17 per square foot.
Check out some of Visio Lending's recently closed DSCR loans in Alabama.