How to buy more properties after you debt to income ratio is done

[Tommy Totevski]

Hi there smart experienced investors,

I’m new in the game and have 1 rental thus far. I want to buy more but the lenders are saying that the income to debt ratio is close to shot. How do I acquire more properties getting around this. Obviously, I don’t have cash to buy outright. I’m on Long Island NY. 

Thanks,

Tommy

[Eric Veronica]

@Tommy Totevski I also see a lot of investors on this site talk about issues with DTI when they get into multiple properties. There are situations where this is true but most of the time I am perplexed by this issue. if you are buying a rental property then the lender should be able to use proposed rental income when calculating your debt ratios. This is accomplished by the lender ordering a comparable rent schedule (form 1007) when they order the appraisal. The 1007 gives the lender a market rent for the area. An investor friendly lender should be open to using this proposed rent.

Let’s say you currently make $10,000/month w-2 income. You have an owner occupied mortgage payment of $3000. Car payments of $800/month and student loans of $900/month. This totals monthly debt of $4700. With a monthly income at $10,000 you are at a 47% ratio. No way you will qualify for an investment property mortgage. right?

Not so fast.

Let’s say this property you are purchasing will result in a $1000 monthly payment. Let’s also say that 1007 rest schedule form comes in with expected monthly rent of $2000/ month. Our approach is to hit the rent with a 75% vacany ratio which gives you expected monthly rent of $1500/month. We then deduct the $1000 mortgage payment from the rent and you end up with $500 in additional monthly income.

The awesome part is that the $1000 monthly payment is not counted against you at all because it is completely negated by the rent. The awesome-er part is that the $500 expected income can actually be used as qualifying income!

Debt ratio before rental purchase $4700/$10000 =47%

Debt ratio after rental purchase = $4700/$10,500=44.7%

Taking out a new $1000/month mortgage actually lowered your debt to income ratio!