If you want to buy and hold properties how does one qualify?

Question

I'm looking into buying a condo to keep for a year and Rent and buy another one. How does one qualify for the next property and be able to keep the existing one?

Let's say I have an income of 120k and min payments of around $300. It looks like I qualify for around 500k If I buy a 380k condo that I can live in for a year and then rent. The rent will cover the mortgage. This is in south Florida, so I won't have much cash flow if we use traditional formulas. Let's just say that I can rent it for 3k, and all my costs will be 3k. Basically, $0 cash flow on day one. My understanding is that when you are getting qualified for your next mortgage, you will need to have a signed lease for the income to be included in your next property, but how does it work?

Do they just remove that 3k from my dti or do they remove 70% of the income from my DIT for example 2100 making my now min payments be around 1200 reducing what I qualify for on the next property?

Robin Simon · Answer

Commenters above have good info on qualifying with conventional/DTI quals, however there is also the "DSCR" loan option that doesn't take into account DTI or income verification / tax returns at all and can allow you to qualify/grow your portfolio quicker

Dan Schwartz · Answer

@Jean Pierre your lenders and mileage may vary, but…. -buy the first house with <45% global DTI. -if you will live it in for a year, you can get owner-occupied rates and down payments (as low as 3%). I one year is kind of the standard for “that’s long enough,” but I haven’t asked a lender that in over 10 years. -2nd house is a little tricky since you need a signed lease and deposit payment. After you have more experience and show some Schedule Es, this gets a little easier. -75% of the rent amount less your PITIA and MI is added or subtracted to your DTI. If you have 97% LTV mortgage it might be hard to have this be additive to your DTI. Again, the second home is hard. -recalculate your DTI excluding rental income/loss, then add/subject the amount of your rental income loss. This is your new DTI. E.g. you make $10,000 a month. 45% is $4500. You have a housing payment of $2,000/mo and $300 in monthly payments on your credit report. You have $2,200 left to fund a new PITIA. You calculate 75% of your lease rent less the PITIA and MI as -$600. Now you only have $1,600 for your new PITIA. I may not have all of this 100% accurate, as I’m not an underwriter, but this what I do to pre-qualify myself. By the time I’m talking to my loan officer, it’s just to see exactly what paperwork/statements they need to see to underwrite. It gets easier as time goes on. That’s the beauty of long term real estate acquisition. Good luck!

Ned Carey · Answer

@Jean Pierre as stated above there are alternatives to traditional loans. There are many ways to finance properties. You can use Hard money loans, dscr loans, private lenders, seller financing etc. Some people have a knack for creative financing and seem to be able to scale up very quickly. Some people take a longer time to grow. There is a lot published here on BP about creative financing. I know they have a book about buying with no or low down payments. My advice is buy the first one then worry about how to get the next one.

Bill B. · Answer

Don’t forget. At least $500 of that payment is principle paydown, not an expense. So if you’re renting for $3,000 and $2250 credit (75%) and $500/mo is going towards principle. You’re only $250/mo worse than you were. The second year you raise rents 8% and you’re even according to the bank and making $750/mo according to me. After 2 years you should get 100% rental income credit and you’re golden. I bought 12 properties from 2010 to 2015 when “nobody could get loans” while “unemployed”. Banks want to make loans, that’s how they make money. Make yourself a good risk. Ps. The good news is with a condo you SHOULD be able to depreciate the whole purchase price. So you’re going to have a $13,800 phantom depreciation expense against that $6-$9,000 in income and actually show a loss on your taxes.

JD Martin · Answer

First thing they'll do is look at what you claim on your taxes. Assuming you show income & depreciation, they'll next formulate your "true" income/loss from each property. In essence, yes if you have a property that breaks even, you will likely qualify for less next time around because you will be penalized on your income statement.