How to Overcome DTI Ratio Issue?

Question

Hi there,

My boyfriend and I are trying to start out with our first real estate investment by purchasing a duplex. We live in Raleigh, NC and the duplexes that we are interested in look to be 3-4 bed/unit around 200-300k. We have 25k saved, my credit score is 787 and his is 695. The idea is to rent out the other side of the duplex on a 12 month lease, and potentially list any extra rooms on our side on airbnb.

It looks like we’ll be able to get an FHA loan, except for one problem. As recent college graduates, my boyfriend and I do not have consistent work histories. I am taking a gap year before starting law school, and I will be nannying in the meantime. I will make $800/week before taxes, and it looks like it will be a W4 tax form. My boyfriend, however, works on commission, and his pay does not count for the DTI until he has two years under his belt, which he does not.

It does not look like our DTI ratio will be good. Any creative solutions to this problem and any extra insight/advice at all would be greatly appreciated! We have our hearts set on a duplex and want to make it work any way possible.

Chris Mason · Answer

What's more important, law school or the duplex...?

Angel Dominguez · Answer

@Marissa Weil Hi Marissa,

There are a very crucial matters in your post that you should really consider before investing together. I will respectfully attempt to lay them out:

1. Your relationship: Are you investing in this as a couple or as business partners? Not being married, right out of school or interim with law school as a prospect means there could be an increased potential for taking different paths in your lives. Could you really make it work if there came an emotional fall out in your relationship? How could this affect a future Mr. Right?

2. Capital to invest: This is relevant to point 1. When you state “We”, how is the $25K comprised? How much did each of you contribute individually?

3. Long-term Horizon: Are you hoping to buy a property because your income is limited so that you can save on rent? It may not be worth it if it’s simply to get through law school.

4. Advice by others: Don’t buy a condo! You have no control over what costs you may be assessed to fix someone else end of the roof, wall structure, etc... Don’t go putting it in the market. Can you really afford to lose it or pay fund managers to play with your money? At this time you need liquid cash readily accessible should the right opportunity present itself. It is also vital should you encounter an emergency.

I humbly hope this helps you in your investing and personal development. Good luck with law school. I used to live in North Carolina when stationed in Fort Bragg with the 82nd. Raleigh is a great city. UConn is on my Horizon for law school in 2021 if not 2022 while investing in real estate. It can be done if properly thought out and planned!

Jonathan Carter · Answer

I like the idea of buying a less expensive starter home (could put down less than 20% if it makes sense). Live there for a year continue saving for your next investment.

Private money is also a good idea for the duplex because the terms/requirements are flexible. But think about how the property would cash flow if you weren't living in one side, would you still consider the duplex a good deal. (If you are planning to live in the duplex for 3+ years this is less important but still you should consider if the duplex is a good investment on its own)

Angel has good points about the relationship aspect of this.

Timothy Hero · Answer

Private money lending companies will allow you to buy with 20-25% down and they don't require W2 or specific DTI. They actually don't look at either of those. You typically pay 1-1.5% higher than conventional, but easier to get approved and the mortgages are not reported on your credit.

Gabe C. · Answer

@Marissa Weil

$25k is not a lot of money for a down payment, closing costs, getting a duplex rent ready (most Raleigh duplexes are older) and a remaining cushion on a $200-$300k place. If you don't have savings aside from that, I'd use that gap year to continue to save. If you're feeling aggressive, maybe stash it in index funds to grow it faster. You'll need a little bit of cushion if you're going to rent. Appliances break, pipes burst, etc. Can you withstand a $6k roof or HVAC right after you get a place?You can also use that time to soak up more knowledge and run the numbers on a bunch of properties to figure out your criteria and get comfortable with what you're jumping into... if you aren't already. :)

Arthur Schwartz · Answer

Maybe you can start by buying a condo or inexpensive "starter" house.   Live in it for one year; then move into the duplex AFTER one year.  you will then have TWO rental units......

How to Overcome DTI Ratio Issue?

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