Financing

[Joshua Pfaff]

How can I finance for multiple rental properties at once. I want to purchase a rental property every year, though at a certain point Credit unions wont allow you to keep getting new mortgages because of debt to income ratio?

[Mike H.]

You don't need a blanket loan once you go over 4. You can still get loan for local banks - except they won't be 30 yr conventional loans. They'll be 5 year balloon. But they'll still be better terms than the blanket loans would be.

For the most part, only some of the hedge funds are doing blanket loans. Their rates are in the low 6's those. I'd rather go with the 5 yr balloon with the local banks.

I'm at house 33 and I'm actually finding it much easier to get loans today than back when I first started.

Keep in mind that local lenders don't really have the same guidelines as conventional lenders to they won't view debt to income ratios the same. Not only that, but if you have good rental income, you should end up with a better debt to income ratio with more rentals.

Here's how they're supposed to calculate the dti percentage:

First take 75% of your rental income and subtract your PITI for your rental properties. Then add or subtract that amount to your monthly income or debt payments depending on whether you have a gain or loss.

Then do the DTI calculation: Total monthly income DIVIDED BY your monthly debt payments (excluding mortgage payments).

Example: 2 houses with rents of 1,000/mo apiece or 2,000/mo. 75% of that is 1,500. Subtract PITI (say 650/mo per house or 1,300 total). That gives you a 200/mo bump to your monthly income.

So lets say your monthly income was 5k a month and your debt was 2k a month. You'd be at 40% DTI. But now you get to add the 200/mo to your income so its 5,200 and now your DTI is actually improved.

So the end result here is that as long as your rental properties have decent cash flow, the more of them you have, the better your dti ratio will actually be.

But be careful here too. Sometimes banks aren't very familiar with how to calculate this stuff. I recently had a bank tell me my dti ratio was too high and I was declined. I asked what the ratio was and they came back at some crazy number.

I said I've been doing this for quite awhile now and there's no way they're doing it correctly. I asked em to explain how they were calculating. Turns out they were using my actual rental profits from my tax returns and then deducting my PITI from the mortgages.

I explained to them that makes no sense. That if they're only counting my net profit and then deducting my PITI, they're essentially counting the PITI against me twice.

i.e. Lets say my rentas are 1k and my PITI is 650. On my return, my net profit may be 250/mo after repairs/vacancy, etc. But the net profit already took out for PITI (650). 250 was the actual net. Instead they were taking 250 and subtracting my PITI again and showing a loss.

Essentially, here was how that calculation actually looked:
1,000 minus 650 PITI minus 100 for repairs = 250/net. Then 250 MINUS 650 PITI Again which came out to a loss. But only because they deducted 1,300 total for PITI.

I had to go through the explanation a couple times before it clicked. Once they realized what they were doing, they fixed it. But it wasn't the first time, I had to fix an underwriters understanding of how investment properties' rental income works.  Its not something many of them deal with so you have to watch for it a bit as an investor. When it comes to underwriting, No does not always mean No. Sometimes it just means that they need some help understanding the numbers.... :-)