getting approved for another investment property?

Question

just real quick I would like to know that after you guys purchase one or two property's and your debt to income ratio goes higher, how do you end up getting approved for more and more.? Even if you have the 25% down for conventional I would still think they see you at more risk by purchasing more properties making it harder to get approved? Thanks for any responses

David Beard · Answer

If you do not have two years of landlording experience in your tax returns, you will not be able to use any rental income when applying for a conventional loanm, and as you've noted, you can hit a wall pretty quick.

If you don't have this experience, and you can't hit debt ratios with your non-RE income, you'll have to use a local bank's "portfolio" loan program, where they have more flexibility.  For a new property you're financing, they'll want leases to be in place.  If its vacant (or partially vacant), you'll get no rental income credit for the vacant portion of that property.  You will get credit for your existing properties that are leased up, however, so you should be fine if you've bought all your properties correctly.  The days of using someone's "market rent" estimate for vacant units are past, I believe.

You will not be able to lock a reasonable rate for longer than 7 yrs generally, and most limit the fixed term to 3-5 yrs.

If you're relatively inexperienced, they'll be looking more at you personally, so your job income, credit score, and financial statement position will be more important.  Later on, your RE empire will able to stand on its own merit, though they'll still want you to be personally on the hook for the loan.

For small 1-4 properties, make sure your DSCRs (Debt Service Coverage Ratios) are healthy on every new acquisition -- they will be if you're buying right.  Target at least 2.0 DSCR to stay on the good side of your banker (NOI divided by P&I).  Also make sure you have several mths of PITI on all your properties in liquid funds.  Avoid consumer debt -- $500 car payments will kill your ratios.

Steve Babiak · Answer

It's called a refinance ... it's certainly something you can do, but you need to find those lenders who are willing.

Account Closed · Answer

ok I see exactly what I have to do now thanks for that advice, I believe my numbers look good now shown above as my first property, hopefully I can stay on the right track with the banks haha

Also with the portfolio loan option you noted above, because you arn't getting the fixed interest rate, is that something you can reapply for a conventional loan after a couple years of land-lording experience? Also I am still waiting for the appraisal on my first property but I am hoping I have 20-30k in equity already, I will find out though. Can an option be to take out a home equity after a year and landlording success to be able to finance another house?

Account Closed · Answer

this is a 2 family I am buying so my cash flow calculated at the CTREIA also, and on here is about 175-200 each unit. My PITI is 566 and my rental income is 1300. so they would take 325 off that. I can still show a good cash flow to the bank from this property. Yes landlording experience will hurt me is the downfall because this is my first.

Jon Holdman · Answer

Finding a SFR that will cash flow $300 a month is TOUGH.  You might not buy the 50% rule, but banks apply a very similar rule.  They will take the rent amount.  They subtract 25%. Then they subtract the PITI.  What's left is considered your "net rental income".  If that's positive, the rental should be a positive contribution to your DTI.  There are some other qualifications, and if you just buy your first investment property, they may not be willing to count it when you go for your second.  But with some experience and the properties on a few (two, I think) tax returns, they will consider this income.

Jeff N. · Answer

Most banks I have worked with count 75% of rent as income.

Positive cashflow will always help as long as it is documented.

Forgot to mention that less than 2 years experience as a landlord may restrict you a little with banks.

Account Closed · Answer

ok reason I thought was that if you have more mortgage loans they may see it as a bigger risk as opposed to if you only have 1.. The loan officer said my income was tight for my first house now before  she ran the 625 a month the tenant is paying now. Once that went through she said that did it.

Account Closed · Answer

ok perfect so it can actually help me then. I want to make sure because my first investment should cash flow 300-400 a month (possibly more but that's with vacancy and maintenance) so that would get added to my income and actually show I make more which can help another loan as opposed to if I didn't have that.. ?

Jeff N. · Answer

I never had any problems through my credit union as long as they were all rented on 1 year leases, my reserves equaled at least six months mortgage payment on each property and had no more than four mortgages.

I would assume their risk assessment is based on a formula of income, cash flow, reserves and credit history, not how many mortgages you have.

Jeffrey K. · Answer

They will take a percentage of your rental income as income.  If you are making money on your rentals you should be fine.

getting approved for another investment property?

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