All Forum Posts by: Derek Sperzel

So a conventional lender typically wants to see your DTI come in at 45% or lower including your potential new mortgage payment.  Anything higher doesn't meet conventional lending standards, and halts all efforts for these type loans.  I am currently facing the same issue, and here are the steps I have taken to remedy it.

1.) You'll need to determine your current DTI with the following formula:

monthly income divided by 12, and multiply that by .45 (you'll really get a lenders attention by knowing this ahead of time, and come off much more professional).  I like to present any potential lender with a packet of my financials.  I include the following: personal financial statement, 1,3,5,20 year business plan, prior two year tax returns, and my companies operating agreement.

So, if you made $50k per year, divide that by twelve and you get $4,167.00, then multiply that by .45, and you get $1,875.00.  That means the maximum fixed debt (all your personal mortgages, loans, etc) you can afford including your new loan payment needs to come in at, or under, $1,875.00 per month.

2.)  Notice I said personal loans above. Loans originated to your LLC typically won't affect your personal DTI, even if they're a sole member LLC. Sometimes this isn't true if you try to quitclaim deed a property to your LLC after the loan originated in your personal name.

3.) I am currently paying off some of my personal debt to improve my DTI, but I am only doing so on loans which have already experienced a significant amount of pay-down.

4.) I know this isn't quite applicable for you yet, but you can also speak to your CPA (the biggest impact route I've taken) about how to increase your reported taxable income. I know it sounds counter intuitive, but you can increase your passive income by claiming everything legally possible as capital expenses. This will improve your DTI by boosting your earnings, while simultaneously increasing the amount of deduction you can claim under the new tax deduction 199a. BTW, that deduction is added back in to your AGI for lending purposes, and currently eligible for the next 7 tax years. Speak with a CPA before attempting this, because the IRS specifically mentions multiple passive investment properties are required to qualify for this deduction.

Best of luck, and I hope you find something here helpful!

Investment Info:

Single-family residence fix & flip investment in Jeffersonville.

Purchase price: $70,000
Cash invested: $90,000

This property was the biggest transformation so far in my REI career, and it fought us every step of the way. I found this property on the MLS listed for $88k, and the seller accepted my all cash offer of $70k. We invested more than $90k in renovations, and it took a total of 9 months to complete. On 10/20/2018 we listed the property for $259,900, and the payoff is right around the corner!

What made you interested in investing in this type of deal?

The mid-century modern look caught my eye while combing through properties on the MLS. This property had been on the market for a long time, and it had an enormous amount of issues.

How did you add value to the deal?

We inserted a partition wall in the large addition on the back of the property to create a master suite, and a family den. By adding the wall and closets we converted the property to a split floor-plan while also adding a 3rd bedroom. We also finished the basement by adding a 4th bedroom, and a half bath since there was already an existing waste line. Oh yeah, we also renovated every square inch, including a new roof, HVAC, hot water heater, windows, waterproofed the basement,

What was the outcome?

I expect to have multiple showings tomorrow, and hopefully we'll receive an offer this week! If you'd like to see all of the before/after photos please 'LIKE' Sperzel Properties on Facebook! If you'd like to write an offer that would be fine too! https://www.facebook.com/SPERZELPROPERTIESLLC

Schuler Bauer Rental Division for SFH. Margaret and Diane so a great job, and their fees are typical. They charge 10% gross collected rent , and take 50% first months rent when they sign a lease. Feel free to mention my name if you contact them, and let me know if you have any questions.

I've learned a lot throughout this process, and next time should be much smoother. We're scheduled to close on the refi next week! I ultimately had to get my attorney to create and file a Mortgage note with the County Recorder, because they won't record a Promissory note ( your county could be different and I would check in advance). My attorney also filed a quit claim deed to move the property into my LLC and he insures me that won't throw a wrench into my refi, fingers crossed. Hope my mistakes help you!

I notice that you didn't count in for Capex, vacany, or maint/repairs?!? These are all items you need to consider for the BRRRR Strategy, and any buy & hold property for that matter. Also, are you self-managing, because I see that you didn't include any Mgmt fees either.

Natalie, I just closed on an off market deal last week, and the situation sounds similar.  I actually wrote the owner two offers, one was all cash, and the other was seller financing. The seller financing offer was $10k higher than the cash one.  I also gave them my Realtor's card so they could call him with any questions about the seller finance option (he did this free for me).  Ultimately, she took the cash offer because she was in poor health.  Maybe write at least one offer based on the terms YOU need, and negotiate from there? Good luck! 

I'm literally at the closing now. We amended the purchase agreement to state that I am purchasing the property in my name, my LLC will be issuing ne a loan on said property, and I have a promissory note that I will be filing at the County Recorders Office. Once that filing has occurred I will apply for a normal refi with a local mortgage company to get my cash out. Wish me luck, and thanks for all you help!

Why not complete the 1031 exchange, and then cash-out-refi?  Best of both worlds.

Why not complete the 1031 exchange, and then cash-out-refi?  Best of both worlds.

@Andrew Postell 

That post is packed with information, and I appreciate you pointing me to it. Everything in your post makes sense, but I want to clarify step two of my LLC issuing me a loan after buying with cash. Does it matter if I purchase the property in my personal name or an LLC (so long as it isn't the LLC that will later issue the loan)? Thanks again for all your help!