High DTI- have assets to use as collateral but can’t get loan

[Andre Alves]

I have been investing in RE for the past 3 years now. It’s been a great journey! However, I’m stuck now. My debt to income is high and I can’t get any new loans. I currently have 2 properties in Orlando Florida, free and clear , each worth 80k-90k. I would like to get some cash out and continue investing. Both properties are profitable, but no bank wants to put a mortgage on it due high DTI. I would really like to keep them. I already saw at least 3 opportunities to make a flip and make money, but got stuck on the financial part. Any suggestions?

[Chris Mason]

Originally posted by @Andre Alves:

I have been investing in RE for the past 3 years now. It’s been a great journey! However, I’m stuck now.

My debt to income is high and I can’t get any new loans.

I currently have 2 properties in Orlando Florida, free and clear , each worth 80k-90k. I would like to get some cash out and continue investing. Both properties are profitable, but no bank wants to put a mortgage on it due high DTI.

I would really like to keep them. I already saw at least 3 opportunities to make a flip and make money, but got stuck on the financial part.

Any suggestions?

 At the San Francisco Bay Area Summit that ended today in Oakland, hosted by @J. Martin, I actually did some quick mental math and derived a new "rule" to answer someone's question on the fly. 1% rule, 50% rule, all these rules, now there's a new one. A question I got during the breakout sessions was essentially about "when do I have enough cashflow that I can quit my job and still get additional normal 30YF mortgages?" 

Now that I'm home, I've tested this rule a few different ways, and will share it.

So, here's the new rule that I've made up.

If your monthly cashflow is 2.5 times GREATER THAN your personal monthly PITI added to the sum total of your monthly consumer debt obligations, then you should be able to quit your job and continue to get investment property mortgages, assuming you are buying cashflow positive assets.

This isn't a "Mortgage 101" answer, nor is it a "Mortgage 202" answer, this is like if you're a Junior at Berkeley or something, so I'm assuming you're into it enough to know how rental income is calculated, etc.

Example.

- Personal SFR house PITI is $2000.

- Monthly car loan payment is $300.

- No other consumer debt.

- Monthly cashflow from the rental portfolio is $6,000.

- 2.5x PITI+ConsumerDebt = $2300 * 2.5 = $5750, which is less than $6,000, so the "Mason Rule" says it should work! NOTE: I assure you that the Mason Rule is not named after anyone in particular, it was just coincidentally mathematically derived while in a Scottish Rite Masonic Temple, hence the name. :P

- Let's test it... DTI will be $2300 / $6000 = 38%. And we can go up to 45% DTI all day long for Fannie loans.

- Loan approved, assuming nothing else gets in the way.

So there's your "when can I quit my freaking job but still get normal 30YF mortgages!?" number, hot off the press, literally I derived this today: when your net monthly cashflow from the rental portfolio is 2.5x your personal monthly debt obligations, which is the summation of your personal SFR home PITI plus all consumer debt obligations, you should be able to quit your job and continue to get financed, providing you are purchasing/refinancing cashflow positive 1-4 unit residential real estate.

Since this is relatively new and just derived today, I'd be super open to people pressure-testing it by throwing scenarios out there for the other mortgage professionals and I to play with, or to folks trying to find ones that pass the Mason Rule test, but that do not actually work. 

Does anyone want to be my beta test? We'd submit the loan to underwriting without including your W2s or paystubs in the submission, even if you still have that W2 job...