Buying my first rental after getting out of debt.

[Joshua W.]

I plan on being debt free except for the mortgage on my house within the next 18-24 months.  At that point I planned on spending 2 years saving up 50k for my first real estate investment property.  My goal is to find something in the 75-85k range, spend 15-20k fixing it up, and hopefully have it value at about 120k when all is said and done.  So my thought is I bring 50k to the table, and get a 50k investors loan for the property.  When all is said and done I get a mortgage ONLY for the value of the loan so I can pay it off, which means I should have a 50k mortgage on a 120k property.  With the renters and my own cash flow, I should be able to pay that house off in under 2 years so it's 100% gain on the rent, and then save up 50k to do the next deal.

So the reason I'm wanting to pay each house off before starting the next deal is I'm slightly worried about debt risk, plus being able to get a mortgage with little to no credit and my DTI limiting how much I can borrow. I'm in the Nashville market, so snatching up houses isn't the easiest thing, but I'm going to take it slow and steady so I don't make a huge mistake. My DTI with the house is 25%, so I guess I can go up another 9% with the mortgages on the rentals. Does that seem right? Or when you are doing rentals do banks not look at your DTI anymore? I'm really new at this, but being 35 now, I'm hoping that this will snowball quickly and starting 4 years from now, I should be able to get to the point where I'm buying and fully paying off a house every year until I don't want to manage any more properties, hopefully being able to quit my job by 45-50.

Feel free to poke holes in my plan, I can't shore it up until I know where the weaknesses are lol.  But the lending thing worries me a bit.

[Luka Milicevic]

@Joshua W. Banks most definitely look at DTI.

Your plan is very conservative, but as rich dad said there is good debt and there is bad debt. 

I have a ton of debt to my name but it is all RE related and it generates monthly income as a result. (Don't tell Dave Ramsey) My DTI isn't great right now as banks are not counting some of the income being generated from my rentals since it's not on my tax return right now.

I think one of the greatest things about RE is it provides leverage like no other asset class. I would say don't be too afraid to use that to your advantage. 

I've met with experienced investors in my market and they have told me one of their goals is to have more debt than any of their competition. While that might sound a little odd, if it's generating monthly income, who cares?

There are two schools of thought. Someone will tell you to avoid debt/leverage like the plague, others will tell you to use it to your maximum ability. It all depends on your goals and what you wish to do!!!

Remember, if your DTI starts to suck and banks don't like what they see-you can ALWAYS add a partner to the deal in order to make you a stronger borrower!