250k budget: Either DSCR loan or up to 250k cash purchase.Advice?

Question

Hi, I live in california and am looking for an investment property in clearwater florida. The budget is 250k...if there is a cash purchase i'm interested in that or doing a down payment and DSCR loan. Any advice on what I can get with that budget? Are there any properties right now below 250k? Interested in multifamily and single family housing...but open to condo, townhomes, etc with low HOA fees.

Jayson Cain · Answer

Hi Account Closed, I'm based in Southern California, but I have started my out of state real estate journey in Indianapolis. Now, I have a portfolio of Short Term Rentals and Long Term Rentals. I've started looking at Columbus because my business partners have found success doing Mid Term Rentals there and the returns are solid. I’ve also helped other investors with their DSCR loans and flip projects. Happy to share my experiences and chat with you more if you're interested.

Kristina Kuba · Answer

Account Closed

To qualify for a DSCR loan, the property’s rental revenue must meet or surpass the lender’s coverage ratio criteria. The coverage ratio, which varies based on the lender and borrower, is calculated as monthly rental income divided by mortgage payment. It normally ranges usually ranges from 1.0x to 1.5x.

For example, the maximum mortgage payment is allowed if the debt service coverage ratio of the lender is 1.0x and the property generates $5,000 in monthly rent. The highest possible mortgage payment is $3,333 when the DSCR is 1.5x. Your ability to borrow a particular amount depends on the mortgage rate and program.

Joseph V. · Answer

@Stephen Dispensa Wow that's great info, thank you for taking the time to provide all the details in that example. I will have to expand my horizons beyond just single family homes!

Joseph V. · Answer

@Jayson Cain Thank you! Just replied to your Dm.

Joseph V. · Answer

@Kristina Kuba

@Kristina Kuba  That is very helpful, thank you for taking the time to share!

Joseph V. · Answer

Thank you very much for your detailed response! The goal would be long term buy and hold and use the property strictly as a rental. Not interested in Airbnb or short term renting it.

For DSCR, what's the % down payment needed? To qualify, is there a certain amount of cashflow needed? For example, I've seen some properties renting for $1800 that i calculate a mortgage could be $1200. Is that good enough to qualify? Or would a larger down payment be needed to reduce the $1200 mortgage lower compared to the $1800 projected monthly rent?

Stephen Dispensa · Answer

Frankly if you can qualify for a property with a DSCR loan I would strongly recommend going that route. The DSCR loan will more or less ensure you don't have any cash flow issues because the rent roll should be more than enough to cover your mortgage / expenses. However your overall RETURN is based on only your cash outlay with a leveraged property. Going to keep the math simple and exclude management fees, capex, etc. but those things all scale. Let me show you the math :

Example 1: 250k house purchased in cash, no rehab - Rent $2,000 per month. Expenses: Taxes - $4,000

Simple Return = Annual Rent (24,000) - Expenses (Taxes - $4,000)  / Purchase price.

Simple Return = 8%

This simple return is your basis, cash on cash return. Which is useful, however the true value of your return needs to take in other factors than cash flow, namely Appreciation, Debt Paydown, and Cash Flow from Depreciation

In this example let's say you have a conservative property appreciation of 3%, you have no debt so there's no debt paydown, and you're depreciating on the standard 27.5 years with the land value being 15% of the property and you're taxed at an effective Income Tax Rate of 20%

This would provide an additional .61% in cash flow from depreciation.

So your total return in this scenario is Simple Return (8%) plus property appreciation (3%) plus your cashflow from depreciation (.61%) = Total Return of 11.61%

However, now let's look at what would happen if you used a DSCR loan for a 1 million dollar 4 plex where you're putting down 25%. Let's say the units are all 2 bedrooms 1 bath and generate $1,500 a month in rent. Property taxes are $10,000 in this example. Interest is 8.75 percent amortized over 30 years.

Simple Cash on Cash Return = Rent ($72,000) - Expenses (Taxes $10,000) - Mortgage Payments (70,800) / Initial Investment (250,000) = - 3.5%

So we're cashflow negative on the property at this point, never good because you need to go into your own pocket each month to cover the difference between the rent coming in and the mortgage payment, but let's start adding in the other factors:

Now here is the MAGIC. Let's assume a conservative appreciation of 3% once again, HOWEVER, this appreciation is on the TOTAL value of the property, not just the $250,000 you invested. However it's value in the return is calculated by the initial amount you invested. So, on a property purchased for $1,000,000, a 3% appreciation in value would be $30,000. However, this calculates in our return tabulation by calculating APPRECIATION / INITIAL INVESTMENT. In this case $30,000 / $250,000 = 12%

For our Debt Paydown based on a 30 year amortization schedule you'll have paid down $5,390 in principle at the end of year one, or .07%. But again, this value of this return is based on your initial investment, not the total price of the property. In this case $5,390 in debt paydown on an initial outlay of $250,000 = a return of 2%

Lastly we have our cash flow from depreciation. Again based on a income tax rate of 20%, land value of 15% and a 27.5 year standard depreciation timeline we are looking at $6,182 from cash flow from depreciation. Once again we divide this by our initial investment = $6,182 / $250,000 = 2.4%

Now let's add all this numbers to get our overall return:

Cash Flow ( -3.4%) + Appreciation (12%) + Debt Paydown (2%) + Cashflow from Depreciation (2.4%) = Total return of 13%

Now in these two examples, I've shown you how a house bought all cash that is cash flowing is actually returning less money than an apartment building that is negative on cashflow. That's the power of leveraging. Your returns are based upon your investment in the property, not the overall value of the property. However the inputs to those returns get based off the overall value.

Also, obviously no one wants a property that is cash flow negative. The solution in this example would be to renovate and raise rents to force additional cash flow and additional appreciation. Also remember that appreciation compounds. In year two of this example the return from appreciation alone jumps to nearly 24%.

Bottom line, if you can qualify for DSCR loans and have the money to invest, multifamily properties are a FAR better investment than purchasing single family homes outright. Also, rents tend to stay reasonably stable or increase and pretty rarely do they decrease by significant amounts. Valuations thereby hold far steadier on multifamily in the long run.

Alex Breshears · Answer

Hi Brenton!  While I am not based in the Tampa market, I thought I could offer some insight into the DSCR loan versus all cash option part of your question. First, I'm always going to ask what is your goal? Do you want a property you can visit periodically because you have kids in college there? Then maybe you need an STR, so you can use the property when you want to do that. Are STR's allowed in the area you want to own? Are you looking for steady cashflow and hopefully get some appreciation out of the game and sell in a few years for a lump sum to roll into something else? Are you looking for a place for yourself to retire to? etc etc. The list just goes on and on. Sometimes when having your guidelines too broad, you actually end up being unable to compare anything because all the options are so different.  I think narrowing down your focus that supports the reason WHY you are investing in this market will help give you options.

Something else to think about would be how long do you want that capital tied up? If you pay all cash, you are likely going to only get about 70% back out with a cash out refi, so you will have 30% stuck in there as equity. If you are using something like a HELOC on your primary to cover this $250, would the cash flow cover the mortgage and the payment on the HELOC?  You can see how this starts to become hard to answer because it's more like a choose your own adventure book, but we aren't sure which adventure you are trying to have, what your risk tolerances are, or what your goal for a property might be.

If you acquired a property with a loan of any sort, at that point it becomes a rate and term refinance, so the lenders are likely going to be more able to get 75% of the LTV, so possibly having a mortgage on the property to have this rate and term option be a possibility is worth it for you.  I will say DSCR has sort of fallen out of favor with lenders, as capital markets are not really in a rush to purchase these loans, and the rates are just sky rocketing compared to what they were even 7-8 months ago. If the property still cash flows with a rate that high, then chances are you can refinance out when the rates for a 30 year fixed come down a bit, or you can refinance into conventional money, which likely will have a much lower interest rate.

Good luck!