Loan says I got 48 "Debt to income" ratio, what he talking about?

[Philip Johnson]

Hi,

I have 5 flip-to-rent properties, and i have a day job as well ... I just refinanced a property and my loan officer said I have a "high debt to income ratio of 48" What does that mean? How do I get this down? 

I am filing my 2018 taxes soon (I asked for extension).  Does it help to have as much as possible in improvements as opposed to repairs, or not claim repairs?  Is there anything else in tax filing that helps? My properties cash flow very well, $500 a property.  But, I have lots of repairs that I claim on them every year. 

Basically, what is debt to income ratio, and how do I keep getting qualified for properties? 

[Chris Mason]

Originally posted by @Philip Johnson:

Hi,

I have 5 flip-to-rent properties, and i have a day job as well ... I just refinanced a property and my loan officer said I have a "high debt to income ratio of 48" What does that mean? How do I get this down? 

I am filing my 2018 taxes soon (I asked for extension).  Does it help to have as much as possible in improvements as opposed to repairs, or not claim repairs?  Is there anything else in tax filing that helps? My properties cash flow very well, $500 a property.  But, I have lots of repairs that I claim on them every year. 

Basically, what is debt to income ratio, and how do I keep getting qualified for properties? 

Top 3 things I routinely see on Schedule E that screw up an investor's calculated DTI:

- Fair Rental Days. CPA software defaults to 365 and it has no impact on your tax bill so most CPAs leave that default value in without even thinking about it. But underwriting uses this number to calculate your net monthly rent! So if you buy a $2k/mo property that you started renting in our in November, you will show $4000 in gross rents on your taxes. If that default 365 days is in there (instead of 60, in this case), an underwriter is going to divide $4,000 by 12 months and think you only get $333/mo in gross rents! You literally just told the IRS that 365 days of rent is only $4000... Sometimes you can fight them on this, but isn't it easier to just have accurate numbers on your tax returns and skip playing underwriting ping-pong (Back and forth, back and forth)? Does anyone here that purchased a property last year want to pull up their Schedule E and tell us what they see? This is BY FAR the most common one.

- Depreciation. The above is clearly an error, this one is a choice. Some things you can write off as a "repair" OR you can depreciate them as capital improvements over the course of several years. Underwriters assume that "repair" items are annual/recurring (DTI hit), and depreciated capital improvements are one-time in nature (no DTI hit). So depreciate everything your tax professional says you can! If your income is trending upwards, this will probably result in more tax savings over time anyways.

- Each property is a property, not each unit. A triplex is ONE property, not 3 properties. So we should expect to see 123-127 Main Street, not 123 Main, 125 Main, and 127 Main.