All Forum Posts by: Miguel Nava

For existing owners it is important to increase rents, if possible, every 12 months to offset this cost increase. I took that into account with a performing rental I have on the south east side of Cleveland. I have the reserves to absorb the increase. I also have a plan in place for increasing rents every 12 months to build the reserve back up after the 3 year reassessments cut into that reserve. 

I think that @Cara Lonsdale hit the nail pretty close to the head on this one.

From my experience, for a residential (1-4 unit) loan, the bank is going to use standard underwriting practices including DTI (unless they are going to portfolio the loan, in which case looking at DSCR would be the wisest choice in my opinion).

However, just to clarify a bit:

My experience is that they are going to do a personal DTI, not a property-only DTI (again, unless they portfolio, in which case they can do whatever they want). In other words, they are going to take 75% of each rental property's rental income, subtract the PITI payment from that, and then add what's left to your income (or to your debt if it's negative). Then, once each rental is done this way and applied to income or debt, they are going calculate your DTI and qualify or deny you based on the DTI requirements of that particular loan program (28%, 30%, 35%, 40%, 60+% back in 2005, whatever).

The above underwriting method is know as "washing" the debt of each rental property with its income.

Another way that they do it is they simply take the PITI of each property straight to the debt, and the rental income from each property straight to the income (usually also reduced to 75%); rather than washing it first.

It is advantageous to the borrower's qualifications to "wash" the PITI with the rental income and then apply the remainder, whether positive or negative, to income or debt.

To see why:

Let's say the property in question (loan subject property or not) rents for $1K/month and the PITI is $700/month. $750 (75% of rent) minus $700 equals $50 added to your income; thereby moving DTI in your favor.

On the other hand, let's say that the $750 is added to income, but the $700 to debt. The DTI for this portion alone equals 93.33% which moves the global DTI against your favor. In fact, even if they don't reduce the income and give you the whole $1K, it still results in a 70% DTI which still moves you in the wrong direction.

So, if your qualifications are tight, but your properties cash flow, find a bank that washes PITI with a portion of rental income before applying it to DTI.

Happy Investing,

Troy

Miguel Nava thanks for walking us through that first purchase. You definitely make it sound doable and I'm feeling hopeful right about now!

How did you go about finding an agent in another state that you felt comfortable with? And was it the agent that set up the inspection and recommended a property manager?

 Well done sir. Keep up the good work.

@Jessica Beard thanks for posting this! I am also brand new and seeing everyone's responses to your question has been very helpful. I'm also on the west coast (Los Angeles), I also need to save up a little more before jumping in, and am also looking to start out of state. 

I have a further question, for someone who's a newbie to REI and they want to start by buying out of state, is it automatically safer to do it through a turnkey company? And if they decide not to go through a turnkey company would that necessarily require flying to the location? What would be the best way to meet real estate agents in another state, as well as PMs, etc?

Btw, thank you @James Wise for your response to my post in the other thread and your response to Jessica here. They were very helpful 

You dictate the terms.  In my area I do not pay water or sewer.   Tenants reponsability to pay the required deposit with the city and gets billed directly.  I do receive a copy of the monthly invoice.