I need to be reminded again of the basics of the property acquisition investment concept and how it works.
But let's say I buy the first investment and rent it out and cashflow between $100 to $300 a month. How is it that I will qualify for conventional financing for the NEXT investment if my debt to income ratio is at it's max? Will the bank view the rental income as qualifying income?
If they do then I can assume that will bring my debt to income ratio back to within the required lending guidelines again then allowing me to apply for more credit for the next investment?
How does the 20% down payment factor in to this on each investment property? How long is it going to take me to save up 20% on average in between investments? (Assuming the average purchase price is between $250k-$350k based on frugal living and a $40k a year job)
Also, if I am to rely on pulling equity out of the previous investment to get into the next investment, wouldn't that just push my payment up on investment I just pulled the equity out of thus cancelling out any profits?
First, $250K properties rarely make profitable rentals. There may be an appreciation play there, but you're very likely to be cash flow negative after all expenses, capital and vacancy. If you get $2500 a month in rent and use a PM you will be just about break even. If you manage yourself you'll make some money, but that's coming from doing the PM's job. That may be OK, but realize you're earning that money doing a job. The property isn't producing it.
Once you have two years landlording experience (i.e., rental income on two tax returns) you can include the rent when qualifying for a new loan. Further, the lender will usually include the expected rent on the new place.
The DTI calculation is more complex when you have rentals in the mix. Here's my understanding of how it works.
1) First, completely ignore the rentals. Add up all your other debt payments and your other income. Debt is the numerator, income is the denominator: DTI = debt payments / income.
2) Now, look at the rentals. For existing ones, lenders use the net income from your tax return. Savvy lenders will add depreciation back in. For new rentals, lenders compute the net rental income using: net rental income = (rent * 75%) - PITI. So, add all these up and come up with a total net rental income from all properties.
3) If net rental income is positive, it adds to the income. So DTI = debt payments / (other income + net rental income). Your DTI improves as you add cash flow positive rentals to your portfolio.
4) If net rental income is negative, the loss adds to the debt. So DTI = (other debt payments + net rental loss) / (other income). Adding this sort of rental to your portfolio hurts your DTI.
How long it takes to save up a down payment depends on the amount you save.
The "pulling equity out" strategy doesn't work very well unless prices are REALLY appreciation fast.
Jon Holdman, Flying Phoenix LLC
Thanks Jon for that detailed answer. Much appreciated.
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