Rental income increases DTI ratio

[Dave S.]

Hi all. I have a question about a future problem I see with DTI ratio. As one's portfolio grows so does income obviously which is a great thing. Just wondering how people work around how banks look at rental income taking a 75% haircut. For example, if you have $200,000 a year in gross rents and a bank only allows 75% of that then you are penalized on $50,000 a year. Depending on one's other sources of income that can be a substantial hurdle. If anyone has thoughts on a different solution aside from earning another $50,000 a year in income to continue to purchase rental properties and keeping that ratio in line I would love to hear them! Thanks in advance. Dave

[Kevin Romines]

You can immediately count the income from a rental that you are buying on any Fannie / Freddie / FHA loan. If the property is leased you go off the lease agreement X .75% of the lease amount (to account for property management / Cap X / Maintenance / Vacancy) minus the mortgage. If the number ends up being a positive number, it adds to your income. If its a negative number, it adds to your liability. In either case, if bought for the correct number, it should add $100 per door to your income, otherwise, why buy it? If its not leased, the appraiser will show what the market rents are on the property and the lender will use these numbers as if it was rented to finalize your debt ratio.

Once you have had a rental long enough that it shows on your tax return (within 1 year of your purchase), the loan officer will use your taxes to determine the net profit or loss, they will also add back the depreciation as income. 

Lenders that tell you that you cant count income for the 1st 2 years are lenders that don't know what they are doing or that have overlays so radical that they will never be a good lender for the real estate investment crowd. Move on and work with a lender that does these all the time.