When will a bank let you leverage past what your salary covers?

Question

I’ve heard of hair dressers with hundreds of units in their portfolio.

Obviously their business income will not cover

The cost of all these mortgages.

When will banks start approving you for more than what your job salary allows?

Is it because they allow rental income to count

As your regular income?  Is it generally 50% of rental income that is allowed to count towards getting approved for your next property?

How are people growing these real estate “empires”?

Carlos Ptriawan · Answer

What most people don't realize is every bank has its own threshold/regulation and income verification eligibility. While basic Fanny Mae dictates the rental income can be included in a loan process with 0.75 multiplier, they need the investor to have proper skin of the game. Having said that, the right algorithm is the following:If you have 20/25% of the downpayment PLUS the property is cash flowing after 0.75 multiplier PLUS you have proper reserve........they will give you a loan (of course there's all these 0.41/0.45 DTI)

Mike D'Arrigo · Answer

@Bob Ross banks will consider all sources of income including rental income. Different banks treat rental income differently and can have different seasoning requirements so ask your lender how they deal with rents, especially if you have less than 2 years of rental history. The lender then calculates your total debt to income. The maximum allowed DTI will depend on a lot of factors such as loan amount, credit score, loan to value etc.

Michael Glist · Answer

So once you have a 2 year history in rental income bank will allow you to use the projected rental income as qualifying income which means as long as your personal debts and income are in line than you have no issues financing a new rental property (assuming credit is good and you have sufficient funds for down payment and reserves). In this case though they are likely using a NON-QM lender or a lender with a portfolio loan product. For conventional financing they only allow up to 10 financed properties (unless you are purchasing a new primary residence) so that means that with hundreds of units in their portfolio (unless its just a few multifamily properties with lots of units for each property which is a whole different story and set of guidelines) than they are likely using of of those 2 types of lenders which will typically base qualifications on the property and its ability to make money instead of you and you ability to cover the mortgage.

I hope this helps.

Erik W. · Answer

Hi @Bob Ross, welcome to BP.

I too would like to hear the story of hair dressers who own hundreds of rentals.  Most highly successful, full-time REIs I know don't own that many personally.  Are you sure they don't have spouses who work for Boeing?

That said, I suppose it's possible for anyone to own hundreds of properties with or without a bank.  Your question presumes that bank financing is the only way to acquire rentals, but there are many ways to buy without a bank.  Often times, I find lower end (Class C) properties can be purchased using Seller financing, lease options, Contracts for Deed, sandwich leasing, and a variety of other non-bank strategies.  I met an investor at a real estate conference in Indianapolis in 2015 who owned over 80 properties, none of which had ever had a bank loan on them, using those same techniques.

One great way to do this is if you can find a retiring land lord who wants to get rid of his entire portfolio and is willing to owner finance it.  Those don't come along very often, but when they do, it's a gold mine.

Will Fraser · Answer

Hi @Bob Ross, this is achieved because some portion of the rental income is being considered as income, but there'll be a dozen ways this could be considered.  Often on your personal income side the rent will be discounted by some factor (most normally 25%) to compensate for vacancy, maintenance, and repairs or some such.  The remaining 75% or so will be considered as additional income and, if bought right, this should neutralize the additional debt obligation.

Rinse and repeat.

Also, if there are more than 5 hairdressers in the country that own hundreds of units I'd be flabbergasted.  It's easy to hear an extreme case like this and feel like it is common, but owning hundreds of units itself is uncommon and doing that in a labor intensive self-employed scenario would make this probably a bit unicorn-esque.