How do I build my portfolio??

Question

I'm on the verge of doing my first deal, purchasing a condo unit as a rental. I've run the numbers every which way and it's a great first deal for me. My lender is running the numbers and he needs my DTI to be no more than 45%. I have a car payment and mortgage with my wife. My DTI with all that is at 46%. When I do my taxes, I am going to try and structure my real estate expenses (I'm an agent) to show some income which will put me just under that 45%. Question is, how the hell do people purchase so many units and build a portfolio? They likely have a mortgage (primary residence), car payment, then they'll have investment properties with mortgages most likely. So unless they're not taking the investment property deductions and claiming lots of income, it seems nearly impossible to purchase more and more units. Can someone please explain how to build a portfolio of properties with a lender?

Kerry Baird · Answer

As I see it, you can sell the properties and buy multi.  You can refinance properties and buy multi.  You can 1031 exchange into multi.

Yes, you can bundle a number of properties into one loan.  A number of lenders are advertising this.  I've talked with Aaron Chapman at National Security Mortgage.  Colony American, Civic, B2R are other names to look into.

And hopefully @J Beard will chime in again with more guidance.

Jeff B. · Answer

SFRs use conventional loans, your credit & the DTI methods.

MFUs 5+ use commercial loans, and the property supports it self as seen in the DSCR number.

So how do you grow a portfolio?  Transition a couple of SFRs into an MFU 6-8 units to change the rules:)  Once you have one such, you can go back to a SFR if you like (but you'll soon adapt to the MFU).  Collect a couple SFRs and replicate the transition :)

Randy Marshall · Answer

sounds good. Thanks for the replies everyone. The unit I planned to buy fell through. The condo questionnaire came back not so favorable for my lender. He was able to put me into a different lender who takes on riskier loans like that but they needed 30% dp which I didn't have and they wanted to do a 15 yr loan. So I'm back looking in the market for the next deal. Just stashing cash from any closings I get as an agent.

Julie Macd · Answer

You have to balance showing income for your bankers versus paying higher taxes to the IRS. Your choice... Most people prefer to minimize the amounts to Uncle Sam

Jeff B. · Answer

Everything you already know on how to "buy right" an investment still holds true.

If you're already successful in managing rentals - - you're doing well, keep it up.

The significant issue in purchasing any MFU 5+ property is the commercial financing.

There's lots of postings on commercial financing here @ BP, so I'll refer you to that topic.

Randy Marshall · Answer

Forgive me if this a newb question, but how do you transition a SFR into a MFU 6-8? If I have multiple condos at different addresses can you essentially bundle them into a MFU loan? I'm assuming all this happens once you reach the stage of having around 6 units?

Jeff B. · Answer

so compare to my comment - - which is rational to you?

Randy Marshall · Answer

I listen to a lot of audio books and investing podcasts and all these investors (especially in the rich dad poor dad series) they always talk about writing everything off and to have a good accountant bla bla bla. So that makes complete sense, if you're purchasing properties with cash and don't need to show income. What's the point of writing every little thing off when I need to show some of that income for a lender? Makes no sense unless I'm missing something.

Randy Marshall · Answer

I see what you're saying. So after PITI & HOA fees, my net cash flow is about $360/mo. So after my write-offs if I still show positive cash flow on the tax return, will what's left on my mortgage for that property be counted against my DTI when I want to purchase another? Or since it's showing positive cash flow on my returns, would that not count?

Jarred Sleeth · Answer

In reality, it is something that takes time. And with that time, you will be lowering your DTI with each purchase if you're buying correctly.  If you buy with cash flow in mind, each property will have enough to cover the debt and make an income on top of that. Now, with conventional lending standards it gets very tough to purchase a lot of properties, and over a certain amount (likely 10) it becomes impossible. Many people will gravitate towards using different types of lenders like commercial and portfolio lenders to continue doing deals. These types of lenders do not base their requirements on DTI but rather the performance of the property.

How do I build my portfolio??

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