Importance of Debt to Income and Proper way to Calculate?

[Jim Goebel]

What is the 'proper' way to calculate Debt to Income, and what is its importance as one moves along with a buy and hold portfolio?

I'm trying to be prepared with a framework that would give us an 'exit' strategy, or at least a more quantitative analysis that would lead us to sit on the sidelines (beyond traditional ROI) metrics, and drive me to do something else with my time.

Intuitively I feel that the debt to income and what happens to it over time (ie: does it plateau as we increase in scale) seems important, I just haven't been able to put my finger on how to think about this.

Please, any and all 

And more specifically, if we were to think about debt to income, do we calculate income AFTER accounting for mortgage (debt servicing) payments, or before?  In other words should we be looking at debt to income based on NET income, in which case we'd kind of be 'double counting' the debt servicing, it seems?

Perspective specifically by commercial lenders might be helpful.  But please anyone that has something useful to share....

[Jonathan Twombly]

@Jim Goebel  Your post is a little confusing, but I will do my best to answer what I think you are asking.

Usually, the important ratio is not of income to debt, but net operating income to debt service. Lenders on commercial deals typically want to see a debt service coverage ratio (DSCR) of net income = 1.25x debt service, at the very least. However, in my experience, when you are thinking about making money after your capex, you really want to have a DSCR of at least 1.5X or higher.

The calculation is done on a deal-by-deal basis, not a portfolio basis.  (Unless, I suppose, you get into cross-collateralization of deals, which may be allowed with some kinds of debt, but that is beyond my experience set.)

If you are doing a buy and hold strategy, you should be taking only fixed-rate debt. If you do, and you experience natural rent growth over time, then your NOI/debt service ratio should be climbing over time. At some point, if it gets too high, you may want to refinance the deal, return the DSCR to 1.5x and pull out capital to deploy elsewhere.

Hope this helps.