All Forum Posts by: Ellie Narie

It's not going to pan out if you're trying to do multi->multi->multi, but it's realistic, and can pan out that way, if it's SFR->SFR->SFR.

I know someone on house #7 in Oakland that would put just 5% down for the first 4. Around house #5, #1 had enough equity to do a cash out refi, so lately she's been putting more down to improve cashflow. For #6, #2 had enough equity for a cash out refi, and so on. She legit moves in and lives there for 12 months each time, and yes we have ways to check for that.

Income goes on the income column, PITI/expense goes on the debt column.

Same house, same data, calculated differently. Let's suppose that $50 positive came from $3000 rent (after applying the 75% thing) and $2950 expenses. Ah, but it's owner occupied, you obviously can't collect rent from the unit of the duplex that you're living in. So now it's $1500 in rental income, $2950 expenses. But we're not done. You're also putting down 3.5% on an FHA loan, so the PITI isn't $2950, it's $3600.

Starting:

$4000 / $10000 = 40%.

Let's suppose that $2000 of that $4k was their personal rent. Cars, personal debt, student loans, etc, are the other $2k/mo. They're buying a primary residence, so the rent they are presently paying goes away, but the cars and student loans aren't going away.

$2000 / $10000 = 20%

We need to add in the $1500 in rental income, and the $3600 of expenses. 

($2000 + $3600) / ($10,000 + $1500) = $5600 / $11,500 = 48%.

Same exact house, 25% down investment property v 3.5% down owner occ. 

Suppose your DTI is $4000 / $10000 = 40%, without the rental property.

There are about a half dozen ways to calculate the net cashflow that are situation dependent, but suppose the resulting number is -$50/mo in one scenario, and $50/mo in another. The rents, the expenses, the mortgage payment, have all already been baked into that number, so we do not need to include them a second time.

For the negative cashflow scenario, that's included in the debt column. So the DTI would be $4050 / $10k = 40.5%.

For the positive cashflow scenario, the net number is included in the income column. So the DTI would be $4000 / $10,050 = 39.8%.

Note that the math is less generous for owner occupied 2-4 unit real estate. The lower down payment requirement & better rate is why they don't get the more generous treatment that non-owner occ loan applicants get. Non-owner occ, you're fronting a larger down payment & sucking up a higher interest rate or fees (or both), so you get the most generous arithmetic. 

Well in the situation you described the debt for the rental property shouldn't have that material of an effect on your DTI, as much of the debt is covered by the rental income. In some instances, individuals cash flow well enough on their property for it to actually lower their DTI. There are also loan products that don't take DTI into consideration.

Hi @Ellie Narie - Short answer is yes, the debt associated with the rental property (as well as all other active debts in your name) are supposed to be factored into your DTI. You can use rental income to offset the debt, but there's a few factors that go into how that income is calculated. Also, max DTI is not necessarily 45%, the max can vary by the loan profile and your own financial profile. You'd save yourself a lot of trouble by reaching out to a lender and having them help you figure out what you can qualify for.

The below is a snippet from Fannie Mae's site regarding how to consider rental income on properties: B3-3.1-08, Rental Income (06/03/2020) (fanniemae.com)

The method for calculating rental income (or loss) for qualifying purposes is dependent upon the documentation that is being used.

Federal Income Tax Returns, Schedule E. When Schedule E is used to calculate qualifying rental income, the lender must add back any listed depreciation, interest, homeowners’ association dues, taxes, or insurance expenses to the borrower’s cash flow. Non-recurring property expenses may be added back, if documented accordingly.

If the property was in service

• for the entire tax year, the rental income must be averaged over 12 months; or
• for less than the full year, the rental income must be averaged over the number of months that the borrower used the property as a rental unit.

See Treatment of the Income (or Loss) below for further instructions.

Lease Agreements or Form 1007 or Form 1025: When current lease agreements or market rents reported on Form 1007 or Form 1025 are used, the lender must calculate the rental income by multiplying the gross monthly rent(s) by 75%. (This is referred to as “Monthly Market Rent” on the Form 1007.) The remaining 25% of the gross rent will be absorbed by vacancy losses and ongoing maintenance expenses.

Same thing. I have an Add Tenant Addendum. Tenant C applies, gets approved, and all persons sign the Addendum to add them to the lease.

The basic premise is this: the deposit stays in place from start to finish. It does not get shuffled around as tenants move in or out. When the lease ends, the deposit is paid out to the current tenants on the lease and they determine how it's divided.

Again, I have forms if you would like copies. Get it in writing. Make it clear and simple.

I also charge $50 any time I make changes to a lease. $50 to add a tenant (application fee is separate). $50 to remove a Tenant.

Get everything in writing.

When one tenant wants to leave, I use a "Remove Tenant Addendum" that says Tenant A is staying, Tenant B is leaving. Specific dates. It also states the deposit remains in place and becomes the property of Tenant A that is staying. If any portion is owed to Tenant B, it is his responsibility to work that out with Tenant A.

Connect with me and send a request, I'll share my form.