How to Lenders figure DTI Ratio on Rental Units?

[Daniel Dietz]

So far I have only bought property within my SDIRA on a cash basis, so have not needed to work with lenders. Soon I will be buying one or more rentals outside of my SDIRA, using 'conventional financing'.

The question I have in regards to DTI Ratio's is this; say I have 1 or 2 rentals that I have held for a year or more with a good rental history etc.... and I would like to look into buying additional properties. I DO understand the 'personal side' of my regular income vs debt..... but not the rental business side.

Let's say I had a building worth 100K, with a 75K loan, 16.5K of income, 8,25K of Operating Expenses, 5K of Debt Service for a Cash Flow of about 3.25K a year.

How does a lender look at that? Is it as simple as 5K Debt Service / 16.5K of Income for a 30% Ratio? If so, is that a 'favorable ratio' as far as getting more loans that could create the same numbers, assuming I had 25% down for them?

Just trying to plan ahead :).

Thanks, Dan Dietz

[Jon Holdman]

@George Paiva you're confusing DTI with DSCR. DSCR is debt service coverage ratio and that is indeed the NOI divided by the debt service. And lenders do look at that, at least on commercial deals.

The 1st Bank example is for a IRA loan.

For your personal DTI, I believe it works like this:

First, completely ignore the rentals. Add up all your debt payments. Add up your (non rental) income.

DTI = debt payments / income.

Now, account for the rentals. To do this you need the net rental income. For existing properties this is right off your tax return. Savvy lenders add depreciaion back in since that's non-cash. For a new property, lenders estimate net rental income as (rent * 0.75 - PITI). Now, is the net rental income positive? If so, add it to the income in the calulation, improving your DTI. Are you running at a loss? If so, add the loss to the debt.

Examples. Assume the you have $1000 a month in non-rental debt and $4000 a month in non-rental income.

DTI = $1000 / $4000 = 25%

Now, assume you have net rental income of $2000 a month. Now your DTI is:

DTI = $1000 / ($4000 + $2000) = 16.7%

New instead assume you have a net rental loss of $2000 a month. Now DTI is:

DTI = ($1000 + $2000) / $4000 = 75%

Also note that most lenders require at least two years of landlording experience before they will consider the rental income at all. Before that the debt payments from the rentals adds to the debt part of the DTI calculation and the rental income is ignored.