Morrison, CO · Member since 2016 · 42 posts · 12 votes
I am in the process of buying my second rental property. I already own my home in Colorado, and have purchased one rental property this past April in Vermont. So I am a fairly new investor. I have asked the bank for a pre-approval on this second property. They said my DTI looks high. The duplex is $110,000 and I am getting a cash out refi on my first rental property in the amount of $55,000 which I am going to use part of this as a down payment ($27,500). So my mortgage would be $82,500. The tenants on the top floor pay $1295 each month and all utilities, and the tenants on the bottom floor are getting evicted, but I am planning on turning that unit into a long term rental and charging $1200 a month for that. So the rents will cover the mortgage. How do people get around this when they are building momentum without getting discouraged?
Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
6y
The struggle is REAL for new investors trying to grow a portfolio with a W2- it can be really slow to start for a couple reasons:
- As @Brian G. mentioned, lenders typically only credit your income with 75% of your rents, so keep that in mind as you evaluate possible new properties.
-Lenders typically give you $0 credit for rents towards your income until you have two tax cycles as a landlord.
Creative financing is great- if you can find lenders or partners who can help on that end, it can help you to scale faster. All of that said, remember that REI is a "get rich slow" scheme. If you are buying right and being patient, in the long run your rents will continue to climb as your liabilities remain stable, which will increase your DTI over time. A decent deal a year in growing markets should put most people in a position to replace their day job salaries in a decade or so.
Property Manager · Virginia Beach, VA · Member since 2016 · 2k+ posts · 2k+ votes
6y
What is the amortization on your loans? The longer it is, the better your DTI ratio. Banks use the minimum payment that shows up on your credit report. Even if it costs a little more to get a longer term, it is better to do that to preserve your DTI and thus your borrowing power. Personally, we never pull money out of properties. This is a personal decision and know many other investors do exactly what you are doing. You could consider doing a flip or two to generate the downpayment instead, which would also help your DTI.
Rental Property Investor · Smyrna, GA · Member since 2018 · 974 posts · 645 votes
6y
@Terri O'Brien Don't be discouraged, remember your WHY. Go talk to other banks private lenders such as LimaOne. They could loan on the property itself and not your personal DTI. There are plenty of lenders out there and you CAN find one that will work with you. You got this.
Morrison, CO · Member since 2016 · 42 posts · 12 votes
6y
@Patti Robertson on my home I have a 30 year. On my first rental I paid cash so I don’t have a loan on that, but I am trying to do a cash out refi. I don’t have a car payment and I only have one credit card.
Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes
6y
@Terri O'Brien if you buy property where 75% of the rents is at least $1 higher than your mortgage payment (including taxes/ins) then your DTI will actually get better with each new purchase. Pretty cool right? So if your mortgage with taxes/ins is $1500 per month and you have a lease in place for at least $2001 (or the rent comp is at least this high) then you should not have an issue closing that deal provided you are working with a knowledgeable mortgage broker who is not constricted by overlays. The key is to purchase profitable deals.
Rental Property Investor · Hendersonville, NC · Member since 2016 · 446 posts · 412 votes
6y
What I have found is if you are buying a cash flowing deal and you get them stabilized on leases, then your DTI is relatively constant, as you're adding to your debt and income both as you grow. If you are stretching the first deal thin by pulling out so much it won't cash flow or you have one unit vacant / not under lease, then it can raise your DTI. Typically the lender will only count the rent if they are a long term tenant (years) or have a long term lease in place. This highlights the advantage of "cash" deals because you can get your tenants and leases in place before taking out the loan. In your situation the lender probably won't be counting that extra $1200/mo for you.
I would want to be able to pick my own tenants and buy with that unit vacant, but if you have to, maybe you need to get it filled beforehand. Just be aware of the risk of someone else picking the tenant, as they have no incentive to work in your best interest. I would treat this as a last resort.
Do you need $55k cash out? Can you lower that to the minimum you need for a downpayment? That may also help.
Rental Property Investor · Chicago, IL · Member since 2017 · 219 posts · 180 votes
6y
As i am learning from my lender showing good profit on my tax returns for my rental property helps with my DTI; also as my portfolio is growing potentially wrapping all my mortgages in a commercial loan, or having more reserves saved up. EVery lender is different so talk with your lender and they will tell you what will help with your DTI
Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
6y
The struggle is REAL for new investors trying to grow a portfolio with a W2- it can be really slow to start for a couple reasons:
- As @Brian G. mentioned, lenders typically only credit your income with 75% of your rents, so keep that in mind as you evaluate possible new properties.
-Lenders typically give you $0 credit for rents towards your income until you have two tax cycles as a landlord.
Creative financing is great- if you can find lenders or partners who can help on that end, it can help you to scale faster. All of that said, remember that REI is a "get rich slow" scheme. If you are buying right and being patient, in the long run your rents will continue to climb as your liabilities remain stable, which will increase your DTI over time. A decent deal a year in growing markets should put most people in a position to replace their day job salaries in a decade or so.
DTI is definitely challenging. I've had some lenders who will only count two years of cash flow that will be added to your income that will improve your DTI. You can use commercial loans on SFR but your rates will be higher then residential loans about 1% or so. I find it best to use small local lenders. There are definitely some portfolio lenders, but I find there rates to be too high in the 6%-7% range.
Morrison, CO · Member since 2016 · 42 posts · 12 votes
6y
@Ryan Howell the realtor I am working with is also the big rental property manager in this small town. They have a need for short term units for nurses, doctors and teachers who just want a place for 6-9 months. She said she won’t have any problem renting it out once the tenants are gone, and can probably get $1,200, but it’s another cost of purchasing everything I need for a 2 bedroom apartment.