How to scale in an expensive market and DTI issue?

[Napat Wan]

Hello my fellow biggerpocket members,

I live in a rather expensive area, Portland, OR in particular, where 1% rule or even a positive cash flow are not possible. I wonder what strategies people in these areas use? Especially, if they want to scale. I really cannot think of anything mainly because of the DTI ratio as one purchase more and more properties. Let's say I bought one multifamily, and it almost maxed out my DTI ratio. I can probably buy another one, but that is it. I cannot buy anymore because I have reached my DTI limit. Even if I rent them out but since my cash flow only break even, that means when I apply for another loan my DTI would be higher because I can only do 75 cents to dollar on the rental income.

Do people in these expensive areas have to invest only out of state or in state but rural areas?

Thank you for your answers!

[Robert E Thompson]

Napat,

you're right - some of the 'rules of thumb' don't work well in expensive areas.

A couple of thoughts:

As to financing, you may quickly hit a ceiling with your DTI. This is when you have to start looking for other sources of money or structuring deals in creative ways (partners or owner financing, etc.) There are a lot of options out there which will require more searching (though not too much more once you're looking in the right spots) or 'thinking outside the box' than 'traditional' financing. Ultimately, if you were to continue investing (assuming buy-and-hold), you would need to find other financing anyhow (even if DTI weren't an issue), as you are limited to 10 conventional loans. I don't know your situation, of course, but I'm assuming you aren't planning on buying multiple properties at the same time. Of course I could be completely wrong on that - but I would probably concentrate on finding the first deal, making sure it cash flows, and then keep learning and thinking about what's next and how you'll structure future deals. (On your first deal, also don't forget that you have the option of living in one of the units and procuring owner-occupied financing - obviously depending on your situation.)

Finding good deals, i.e. lower prices, will also help your numbers.  Keep your eyes wide open to strike quickly (have financing ready, etc.) if a deal pops up, look for problem properties (or owners who need help), properties that have been on the market "too long" (they could simply be overpriced but sometimes there are more benign reasons) but buyers (and agents) won't look at them because they've been on the market so long.

As to location, I won't speak to investing in another distant area of the country. But you can certainly, fairly close to Portland, find rural areas (or even not-so-rural - just not in Portland proper) where the prices are lower, the DTI's are more appealing, and cash flow is more likely . I live in Molalla (east of Woodburn, south of Oregon City) where 1-4 unit properties are much less expensive (rents are also lower but not necessarily proportionately).

I've also recently worked with folks in both Independence OR and in Lyle WA.  I sometimes do double-takes when I see the prices.  And neither of those spots is so far away that it can't be managed fairly easily (depending on your definitions and desires, of course!).  Some out-of-the-way areas also may have potential of being in the way of progress so eventual appreciation is also on the table (not a certainty of course) - as long as it cash flows (important to almost all investors).

Hope that helped!