Debt:Income Ratio - How do I know if I'll qualify?

Question

Hello BP,

Now that I'm in The Big Apple, my girlfriend and I are looking to get into REI and build our future here. As a professional trader, I am expecting to have a pretty good salary, so most of the REI business although a joint venture, will be on my fiance's part full-time. We were planning on saving $50k to use as down payments towards some mortgages to obtain cash flow properties. However, being in NYC 10% down is probably more like $75,000-$100,000 for a small apartment in the city or any houses in the other boroughs. So this all leaves me wondering:

1) Should I consider investing long-distance where I can use family/friends as PM in Indiana or Las Vegas?

2) How do I calculate debt:income and whether I can qualify?

3) How many mortgages can I get?

4) Are the standards the same on down-payment for a multi-family unit? Ideally, I would like to snag up some multi-family buildings in the boroughs outside Manhattan, and perhaps something I could get an FHA loan on and live rent-free.

Perhaps, @Albert Bui or @Darren Sager could chime in here. You are both experts in these areas, respectively.

Thanks In Advance.

Albert Bui · Answer

FHA does have its hurdles since FHA appraisals evaluate the property to HUD's health and safety standards. Sellers tend to give a credit for the repairs noted by a FHA appraiser but before the loan can doc/sign/fund the repairs will actually need to be confirmed by a re-inspection ( 442/1004D) which usually runs about 125 dollars for the appraiser to come back out and reinspect the property. Once cleared, the file will be able to order docs and proceed.

Some may not recommend FHA but from an investors point of view FHA can be highly advantageous depending on the price to rent ratio. For instance in parts of TX or KY where you can get a 4 plex for 175k and the units rent for 600 each or 2400 gross a month the price to rent ratio (P/R) is 2400/175,000 = 1.37%.

So rents are 1.37% of sales price which isn't an end all be all number but it gives you a quick gauge of how your gross rents will fair at the current asking price.

FHA 3.5% Down

175,000 sales price

168,875 loan amount + 2955.31 (upfront MI financed - FHA) = $171,830.31

Mtg Payment @ 3.875% = $808 per month

FHA monthly MI $189.98

Taxes $393

Insurance $100

Utilities $ 350

Repairs $ 200

Total $ 1940.98

If you live in one unit and rent the other 3 for 600 each you'd be net negative by 140.98 dollars per month ($1800- $2160.98) with conservative numbers above. There arent many places I know where you could live for $140.98 per month but this is one of them.

If you decided to vacate the property after a year you'd be making a positive net monthly of 459.02 per month or 5508.24 annually.

The initial down payment of 3.5% was only $6,125 + 4,000 closing (est) = $10,125.

Annual cash on cash would be 5508.24 cash flow / $10,125 = 54.40% return invested capital.

The upside is extreme leverage (28.5: 1) so manage it carefully and if the numbers make sense it can be very lucrative.

The downside is that a 175k 4 plex may not be the most ideal spot living spot.

The problem with FHA is you'd pretty much have to find a decent condition property with minimal repairs from the health safety standpoint or a seller that is patient and willing to go into a long escrow with you to commit to these repairs. This may be more difficult.

Darren Sager · Answer

@Jason Eyerly around here its typical to only get up to four conventional loans, not ten.  After that you'll be doing what I do and have a relationship with a portfolio lender who will look at the investment for what it is and make decisions based upon that and NOT your DTI.   The rates and terms aren't as favorable as a conventional loan in most cases however you'll be able to get as many as make sense financially.  This is why its important for you to understand the numbers.

I would be very hesitant about going the FHA route in this area.  We tried that recently and they go through their own inspection process and usually come up with a big list of items that need to be taken care of before closing.  Its something that the seller is not usually willing to do so I would resort to avoiding PMI by using alternate choices of putting less than 20% down and do an 80-10-10 loan.  Ask me Tuesday about this.

And as for accurately calculating your DTI to properly understand what you can afford I would recommend you take the time to talk to someone who can give you an accurate answer.   The reason I say this is because when you look at a multifamily different because their is added income from the rental units and that is taken into consideration as to how much property you can afford.  So it can vary dramatically versus getting pre-approved on a single family house in your favor.

As for down payment on your live in multifamily yes the requirements are the same up to 4 units.  As @Albert Bui mentioned when you cross the threshold of 4 it goes into another category.

And without a doubt my first choice for investment would always be a small multifamily over a stand alone place far away.  I think Brandon Turner  would agree with me on this for several reasons.  My reason would be that it reduces your living expense and allows you to crawl walk run into becoming a serious real estate investor.  You start out managing one or two other tenants and issues take place where you are where you can control everything.  It also allows you to save on property management which means you can get into your next one sooner!

Jason Eyerly · Answer

I am considering cheaper areas, that is why I mentioned Las Vegas and northwest Indiana, two places that I am familiar with. Is it unheard of to pay FMV or slightly less on a property that needs minimal work and you just want to cash flow?

David Lee · Answer

@Jason Eyerly have you thought about investing in cheaper areas. I am purchasing in my area in NC for around $30,000 all in and rents about $700. Then you can pay for a PM. You could also partner with someone in the area.

Albert Bui · Answer

DTI in rental income is similar to buying an owner occupied non rental property but the main difference is that you now have income and depending if you live there or don't live there the income is calculated differently and to compound that rents vary per unit per area and the formula you use varies with different FHA/HUD areas.

Rent income when vacating a primary to buy another has its own procedures as well and requirements.

When you mean multi family do you mean 1-4? Hope so because 5+ is a response too long for for the scope of this response.

It's recommended you find a professional.

How many mortgages can you get ? Such a broad question it's unlimited if you want the real answer since there will always be a portfolio lender out there who will do make sense lending for you if you have enough sizzle on your personal financial statement and you can document your ability to handle your financial affairs in a prudent manner.

Conventional is 10 if you want the simple answer and FHA is max 7 properties including the subject primary property per HUD.

Loan amounts vary per area different counties have different limits  and the more units allows for higher loan amounts as well for instance 4 units the loan amount in ca can go up to over  1 million on conventional financing.

Debt:Income Ratio - How do I know if I'll qualify?

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