Does a cashflowing property help or hurt DTI?

[Jim S.]

My current understanding is that my DTI will actually get worse as I acquire more properties even if they have comfortable cashflow margins. Example below to try to explain what I'm thinking.

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Let's say salary from my day job is 100k. I get a mortgage/insurance/etc. on a property that costs $25k/year, is currently vacant and I have no other obligations to keep it simple. My DTI is 25/100 = 25%.

My property now rents out at $40k a year, a $15k margin so I decide to invest in another identical property. My income should now be 100k + (75% * 40k) = 130k/yr, and if I buy a new property my expenses will be $25k (old) + $25k (new). 

My DTI for the new mortgage is 50/130 = 38.5%

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Is this the correct way to look at this? Will my DTI get worse even as I acquire profitable properties or am I calculating this incorrectly?

[Jared Bouzek]

@Jim S. First of all, DTI is typically viewed on a monthly basis, so I'll give you examples with your same numbers.

$8,333 Monthly Income
$2,083 Monthly PITI

So yes, not including rental income, the DTI from that single liability is $2,083/$8,333 = 25%

When you include rental income of $3,333 per month, this is what happens when you have not filed tax returns with this property:

$3,333 x 75% = $2,500 - $2,083 PITI = $417 remaining

That $417 that remains is added to your monthly income, and that mortgage liability that was offset by your rent is not included in the DTI calculation.

In the event that your monthly income is less than your PITI, the left over of the payment is added to your liabilities like so:

$2,667 Monthly Rent x 75% = $2,000 - $2,083 PITI = -$83

So $83/$8,333 = 1% DTI

Obviously your DTI would include other liabilities, but that should give you the gist. These equations change once you have filed taxes on the property, and we would use an analysis of your actual income and expenses from your Schedule E of your tax return.