Real estate investors in the Sunshine State are using debt service coverage ratio (DSCR) loans to expand their portfolios. DSCR is calculated by taking the monthly rental income and dividing it by the property's monthly debt obligations including principal, interest, taxes, insurance, and association dues (PITIA). The final debt service coverage ratio is essentially an indicator to the lender of a borrower's ability to repay their loan. Many lenders have a minimum DSCR of 1.2, which indicates positive cash flow.
DSCR loans are ideal for self-employed investors or investors with large portfolios. Rather than document income or employment history, DSCR loans enable real estate investors to use rental income as income coverage. Let's take a closer look
Traditional mortgages focus heavily on debt-to-income ratio (DTI) and require substantial documentation including pay stubs, employment history, bank statements and tax returns. Meeting debt-to-income ratio requirements for a traditional loan can be tricky for investors with multiple mortgaged rentals. On the other hand, DSCR loans have loan eligibility based on a minimum credit score and are underwritten using the property's income potential.
With a DSCR loan, borrowers can take advantage of full 30-year terms with no balloons. Most DSCR lenders will also have the optionality for interest only loans, rate buy- downs, prepayment penalty buy downs, and rate structure choices. It is great for investors to be able to tailor their DSCR loan program to meet their investment needs. For instance, investors planning to hold onto their rental property long term can choose a fixed rate and pay higher fees, while investors who might sell in the near future can select an ARM rate structure and buy down their prepayment penalty.
For the professional investor looking to build a large real estate portfolio, a DSCR program is ideal. Most traditional lenders max out borrowers at ten loans. Instead, when evaluating qualifications for a DSCR loan, lenders will use common sense to evaluate an investor's maximum credit exposure.
A conventional loan has stringent documentation requirements including requiring complicated income statements and submitting tax returns. Since a DSCR loan primarily checks to see if the property has enough rental income to cover the debt obligation, there is far less documentation. Rather than look at your job history, DSCR loans look at rental property income potential.
To calculate DSCR, use this simple formula:To calculate DSCR ratio, use this simple formula:
DSCR = Rent/PITIA
A DSCR ratio of 1 indicates that the monthly rent of a subject property is equal to the monthly loan payments. The idea is that the property’s cash flow will cover your monthly payment. For instance, if your monthly expenses are $2,000 per month and your rental income is $2,950 per month, you have a highly profitable investment property. On the other hand, if your rental income is $2,000 and your expenses are $2,950, your property is generating negative cash flow. A good DSCR ratio is a 1.2 or higher. If your debt-service coverage ratio is too low, there are some simple ways to optimize it:
Increase your down payment. Raising your down payment is the simplest way to improve debt-service coverage ratio. This will lower your rate, and therefore your monthly expenses and DSCR.
Negotiate your taxes and insurance. By fighting your property taxes and lowering your insurance payments, you can bring down your debt-service coverage ratio.
Buy down your rate. Some lenders will provide you with the opportunity to buy down your rate. This will increase your closing costs, yet decrease your monthly payments and DSCR.
Increase Rents. More rental income, means more cash flow, which means a higher DSCR.
Provide upsells to increase rental rates. If you are able to increase the subject property income by providing upsells, such as renting to pets or providing a furnished rental, this will help you optimize your DSCR.
In a post-Covid era, Mashvisor found people are moving to Florida at a rapid pace to take advantage of the warm climate and natural scenery. This work-from-anywhere ideology not only brings an average of 849 individuals to Florida daily, but it also increases the demand for SFR rentals in the state. Florida is one of Visio's top states to originate mortgage loans. The three most popular cities our borrowers purchase investment properties in Florida include:
Tampa, FL: The third most populous city in Florida is a real estate investor's dream. According to Roofstock, the average home value is $398,384, and the median rent on a 3-bedroom home is $2,300.
Kissimmee, FL: RentCafe found that 56% of households in Kissimmee are renter-occupied, guaranteeing a demand for rental homes. The average rent in the city is $1,828, so the ROI is strong as well.
Miami, FL: Miami is known for its night life and real estate investing opportunities. FortuneBuilders notes that the median rent for 1 and 2 bedroom units is $2,050, which is growing 6.3% year-over-year. The city is relatively affordable with a $556,000 median home price.
Here are some additional markets where Mashvisor recommends you look for a Florida rental property:
Palm Springs, FL: Palm Springs offers real estate investors a great entry point with a little over $200,000 median property price. The average monthly rent of $1,414 provides nearly a 4.5% cash return.
Wellington, FL: This Florida town boasts an average monthly rental income of close to $4,000, yet an affordable median property price at under $130,000. Consider Wellington for your next Florida real estate investment, and enjoy a 3% Cash return.
Port Charlotte, FL: Even though this town has a slightly higher median property price at just over $450,000, it still has a fantastic cash return at nearly 4%. Plus, renters pay an average of $1,952 per month.
St. Johns, FL: This Florida town has an affordable median entry point at $438,000. Its potential rental income of $2,152 per month gives it over a 3% cash return.
Check out some of our recently closed DSCR loans in Florida.