Avoiding the debt to income ratio caps

[Adam Philpot]

Does anyone have any idea on how they’re getting around debt to income ratios restrictions when they’re ready to acquire their 7th or 8 th property? I’ve thought about transferring the loans in my wife’s name so I could put them under my name but that doesn’t seem to be the right approach Any thoughts, BP’ers?

[Don Konipol]

@Adam Philpot

I assume you’re referring to the properties being residential one to four family units? If so, and if your plan is to increase the size of your portfolio substantially you realistically have three options, all of which I’ve either used or witnessed the use of by another investor.

As mentioned, the first is to move over your portfolio to a commercial loan basis. An acquaintance of mine built a portfolio of 200 SFR in the south Houston Texas area. He'd package 20 houses into a single commercial loan. He had these type loans from 3 small to midsize local banks. Another approach, used by a student housing provider in Ann Arbor, Michigan was to combine his portfolio with another investor of student housing and obtain a commercial loan secured by both portfolios.

Second approach is to add to your portfolio by acquiring properties in which the seller is willing to carry back financing. If a seller owns a property free of debt he often would be willing to carry back a note if the buyer has 20% + in a down payment. I have probably sold 20 properties, both residential and commercial in which I’ve accepted 15-40% down and carried the balance.

The third approach I used about a hundred years ago when I was young and trying to built a portfolio that cash flowed. Purchase a property subject to the existing mortgage. My business partner sold his personal residence this way. We all realize this MAY trigger the due on sale clause existing in almost all deeds of trust and mortgages, but the actual chance of the lender accelerating the note is quite small. Hence the risk is a lot less than other, more commonly accepted investing risks.

There are other approaches, but either they do not directly answer your question or I wouldn’t recommend the. One approach that I would recommend but doesn’t directly answer your question is to trade up to a commercial portfolio. Depending on the size and type of property, the debt income limitation would be substantially loosened, or eliminated altogether.

Other approaches I’ve seen used, but for one reason or another won’t recommend, are partnerships where essentially someone is paid by the investor for the use of his credit. So for example you engage someone with qualifying credit to purchase a property on your behalf, you immediately purchase the property from him using a contract for deed so the transfer of title is not recorded, you have equitable title to the property and legal title when the loan is paid off, and in some form the person providing the use of his credit is compensated by you. Another approach I’ve seen but don’t recommend is where an investor purchased a new identity and was able to establish credit and buy property under the new identity. In an interesting note this investor ended up filing bankruptcy in his new identity, and was quite surprised when he was ultimately exposed. The bankruptcy court turned the case over to the AGs office, and bankruptcy fraud charges were filed, based on non disclosure of assets. The investor fled to France, the AG named his wife as an additional defendant, and the investor accepted a plea bargain which dropped the charges against his wife and put him in Federal prison for 4 years. Who says real estate isn’t a contact sport?