Tapping Into Portfolio Equity with a High DTI Ratio

[Kesete Thompkins]

I have a real estate portfolio with good amount of equity (most of the portfolio is free and clear), however my personal DTI ratio is too high and that's stopping me from tapping into it to settle some debts and buy more properties. Other than lowering my DTI ratio (which is what I'm focusing on now), is there another way to realize that equity or am I stuck with dead equity until I can get that ratio to a better space?

I'm open to any and all thoughts and ideas. Thanks in advance.

Kay

[Jason Park]

Quote from @Kesete Thompkins:

I have a real estate portfolio with good amount of equity (most of the portfolio is free and clear), however my personal DTI ratio is too high and that's stopping me from tapping into it to settle some debts and buy more properties. Other than lowering my DTI ratio (which is what I'm focusing on now), is there another way to realize that equity or am I stuck with dead equity until I can get that ratio to a better space?

I'm open to any and all thoughts and ideas. Thanks in advance.

Kay

 Hey Kay,

If the portfolio is mostly free and clear and you're trying to pull some cash out for equity, it seems like a cash out refi would be a great choice. 30 year DSCR loans are available to lend to LLC's and depending on the situation can cash out up to 70-80% ARV. Also, DSCR looks at the individual property and the debt service coverage ratio.. This doesn't mean you have to pull out the full percentage, but whatever works best for your scenario.

Hope this helps! LMK if you need anything else!

[Kevin Walton]

Quote from @Jason Park:

Quote from @Kesete Thompkins:

I have a real estate portfolio with good amount of equity (most of the portfolio is free and clear), however my personal DTI ratio is too high and that's stopping me from tapping into it to settle some debts and buy more properties. Other than lowering my DTI ratio (which is what I'm focusing on now), is there another way to realize that equity or am I stuck with dead equity until I can get that ratio to a better space?

I'm open to any and all thoughts and ideas. Thanks in advance.

Kay

 Hey Kay,

If the portfolio is mostly free and clear and you're trying to pull some cash out for equity, it seems like a cash out refi would be a great choice. 30 year DSCR loans are available to lend to LLC's and depending on the situation can cash out up to 70-80% ARV. Also, DSCR looks at the individual property and the debt service coverage ratio.. This doesn't mean you have to pull out the full percentage, but whatever works best for your scenario.

Hope this helps! LMK if you need anything else!

 Building on what he said, if you are having trouble tapping in, and want to explore other options to maximize return, please feel free to reach out. I would be happy to do an assessment and see what I or my business partners could do for you. 

[Jay Hurst]

Quote from @Kesete Thompkins:

I have a real estate portfolio with good amount of equity (most of the portfolio is free and clear), however my personal DTI ratio is too high and that's stopping me from tapping into it to settle some debts and buy more properties. Other than lowering my DTI ratio (which is what I'm focusing on now), is there another way to realize that equity or am I stuck with dead equity until I can get that ratio to a better space?

I'm open to any and all thoughts and ideas. Thanks in advance.

Kay

Assuming your debt to income ratio is actually being calculated correctly and is still too high then a debt service coverage ratio (DSCR) would be your best bet. These loans only look at the income the subject property is bringing in.  However, I would be sure to understand what your real debt to income is before going to a DSCR loan. Do not try to do it yourself as most borrowers do not do as an underwriter will and they short change themselves. And unfortunately it seems a good % of loan officers do not know how to do it either. But, make sure you speak with someone who does before giving up on full doc. 

[Ko Kashiwagi]

Hi Kesete,

Like others have stated, a DSCR cash out refinance should allow you to qualify based off of Rent/PITI and your FICO.

[Kesete Thompkins]

Jay and Ko, thank you both for the insight. We've built a solid portfolio and I want to ensure that I am maximizing its potential so that I can position myself to do more. 

I am going to reach out to several lenders who can steer me in the right direction. I've been sitting in this position for some time and I'm ready to re-engage with the market. 

I'll respond once I've talked to someone who can assist to give you an update. 

Kesete

[Kesete Thompkins]

Thank you ALL for your responses. I didn't see all of the advice earlier in the thread and I want to say thank you again. I plan to reach out to those who have offered assistance. I appreciate all of you and your help. This community is invaluable. 

Respectfully,

Kesete
 

[Stacy Raskin]

@Kesete Thompkins, 

if you an income based loan doensn't make sense for you then DSCR loans can be a good option for rental property purchases or refinances. DSCR loans won't use your income to underwrite the loan.

More on DSCR loans:

DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.

Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 760+ generally gets best pricing for investment property loans with most lenders

780+ generally gets best pricing for investment property loans with most lenders. From there every 20 point increment affect pricing differently. So for example, a 761 credit score will be in the 760-779 credit category, then going down to 740-759 and so on.

pricing differently. So for example, a 761 credit score will be in the 760-779 credit category, then next credit category is 740-759 and so on.

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.

4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs.

I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350, Insurance = $100, Association Dues = $50

Total PITIA = $2200

Rent = $2000

DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250, Insurance = $100, Association Dues = $25

Total PITIA = $1875 Rent = $2300

DSCR = Rent/PITIA = 2300/1875 = 1.23

DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.

Happy to connect to discuss further. 

[Erik Estrada]

Quote from @Kesete Thompkins:

I have a real estate portfolio with good amount of equity (most of the portfolio is free and clear), however my personal DTI ratio is too high and that's stopping me from tapping into it to settle some debts and buy more properties. Other than lowering my DTI ratio (which is what I'm focusing on now), is there another way to realize that equity or am I stuck with dead equity until I can get that ratio to a better space?

I'm open to any and all thoughts and ideas. Thanks in advance.

Kay

This sounds like it would fit a DSCR portfolio loan. You will be able to finance multiple properties at once and minimize closing fees from doing multiple loans. A handful of lenders will allow partial releases (meaning if you sell or refinance one of the properties you will be okay).

[Alex Hunt]

@Kesete Thompkins You are thinking of only bank/ traditional financing. Do you own these properties in a LLC or business entity? If not, do you have one you could transfer them to?

With DSCR loans they are business purpose! Meaning they go under the LLC or other entity type, this would take the loan off your DTI completely! DSCR cashout refinance is typically 75%LTV.

Happy to connect on this.