I am running into a problem with DTI. I live in Massachusetts and the cost of real estate is quite high. There are still a lot of good deals that will cash flow, however the barrier to entry is a significant amount of debt. I currently own a home(primary residence) that i rent out bedrooms in. I am looking to get another property, either SFR or multi, and rent out my current house but my mortgage lender is already talking about being maxed out for DTI with the next property purchase(SFR). It may differ if my next purchase is a multi, but it got me thinking/worried about maxing out DTI this early/new to REI.
Just want to make sure i take the right steps now to not get bound up in the future.
Any advice or experiences with overcoming DTI would be a great help.
Hi @Patrick Chafe , its great that you've taken the house hacking game to another level by renting out rooms in your home, its a smart approach! Likely when it comes time to rent it out, your cash flow may not be too strong while renting out a single family home in Massachusetts. When did you purchase this home? You may have a decent amount of equity where you could sell it and redeploy the funds in a multi family property where you can do the same thing, but with far greater cash flows.
After 2 years, most lenders will count your rental income, @Patrick Chafe . Another option is to consider commercial financing, which is more interested in the deal, then your DTI. The trade-off is less favorable terms.
Also worth asking where they want to see your DTI in order to qualify for your next mortgage. You can work to bring down your debt, if that's feasible.
@DJ Richmond Thanks DJ! The house is in Peabody and was a private sale for $250k, the house is quite small but a great starter home or someone looking to downsize. I renovated the whole property, did a cash out refi, paid off my schools loans, and now have a mortgage of $278k so the property should cash flow $485/mn if i can get $2500/mn which i think is doable as i am just finishing updating the kitchen. I got the property through an FHA so it was a very small down payment (3.5%). If i can achieve that rent i should have a CoCROI of 20.4%. Even if i could only get $2300/mn it will still cash flow 13% return.
Original Reno: $20k
Closing costs: $7k
Kitchen updates: $1500
Figuring 2% vacancy, 5% repairs, 5% CapEx
Approx Equity(If sold for $340k): 18%
Let me know what you think!
@Jaysen Medhurst Thanks for the advice Jaysen!
It sounds like you got a nice start in your real estate investing career! The numbers sound reasonable. With your FHA loan, did you do the 203k renovation loan?
How did you renovate the entire home for $20k? I assume you did most of, if not all the work yourself (if that's the case, you likely didnt need the 203k). Doing the cash out refi must have allowed you to pull out all your original cash you had invested and some. If you pulled out all the cash here, your cash on cash return is going to be infinite, even if your monthly cash flow numbers aren't strong.
One thing that jumped out with those numbers is your projected rent. You mentioned it being a small home, but when I pull data from the MLS for Peabody rentals, the most expensive single family rental was $2400 and that was for a 1600 sq ft 3 bed/1 bath. The $2500 seems a little high.
Something to be mindful of are your future plans. With this being a single family you've owner occupied, you won't need to pay a capital gains tax on the first $250k of the profit if you live there for 2 of the last 5 years. Once you decide to rent it out for more than 2 years, you'll be subject to that tax, unless you're able to 1031 exchange it. Not sure how you're reporting the rent from roommates, but both could be a conversation for your CPA so you can predict future tax hits/savings with either route.
@Patrick Chafe thanks for bringing this up, I'm currently on the same boat. However my primary residence became my rental 3.5 years ago and been living in my girlfriends house looking to expand to another MFR but my debt to income is looking a little rough. I make good money but I also have a few high ticket expenses. I appreciated the responses you got on here.
Private Money lenders provide up to 8o% LTV on Purchases with rates starting at 4% with a great FICO and can close in 2 weeks low doc and no do options - no DTI requirements
@DJ Richmond Thanks DJ! That's really helpful! On that one, I did not do a 203k but i did do everything myself besides the blueboard/plaster and refinishing the wood floors, which helped the budget. However it did take me about 4 months to do it all.
@Oliver Carey Thanks Oliver! Still working on finding some private money lenders, i have a couple leads i'd like to pursue, but nothing yet. Thanks for the advice though!
Be careful when getting into Hard Money Lender. Don't be fooled by advertised rates. You wont see lower than 8.5%, unless you payoff early and have no prepayment penalty. There's the ones that do it right, and ones the fly by night. Make sure you do your due diligence and research.
I'd love to connect and discuss further
@Patrick Chafe There are commercial programs you can tap into for 1-4 unit residential that use the property's projected cash flow and your FICO to qualify you rather than your DTI. It's designed for self employed investors, those who don't have 2 year work history, those who've reached their 10 property conv. limit, and those who've written off so much of their income that they no longer qualify for conventional.
The best part is that it's the most competitive time for this type of product and you can still lock a 30 year fixed rate in the mid 5s. Just like a standard mortgage process, while they won't ask for W2s or Tax Returns they will of course have the property appraised, go through title & escrow, etc etc.
Do not even look into spammy ads advertising private money at 4%. Would you lend your own money at 4% to anyone? It simply doesn't exist.
Thanks @Alex Bekeza ! That is a huge help! I'll have to look into those programs