Hello everyone ! I'm in Honolulu area.I currently own a rental property that is cash flowing. My wife and I are planning to buy, hold and rent. Can anyone advice or help me on what's the best way to finance or qualify in purchasing another property ? I think I am having issues with the DTI due to my primary and rental mortgage responsibility. I have about 740 FICO score and income. All your expert advise is appreciated. Thank you all!
Investor · Colonial Heights, VA · Member since 2015 · 78 posts · 53 votes
6y
@Robert A. Coloma Look for commercial lenders if your DTI prevents you from qualifying for a conventional mortgage. The downside is that you will be paying a higher interest rate and the interest rate may not be fixed. Commercial lenders will focus more on Debt Coverage Ratio (DCR) rather than DTI.
Property Manager · Katy, TX · Member since 2015 · 1k+ posts · 1k+ votes
6y
Hey Robert,
If you have equity in the property, you could do a HELOC or cash-out refinance to purchase another property. But, if you have DTI issues, then you'll need to get a partner onboard or payoff some debts.
I'm not too familiar about commercial lending. Can you help me more understand what commercial lending is and if I can use it for residential investment/rental property? Thank you !
Real Estate Broker · Vancouver, WA · Member since 2018 · 168 posts · 120 votes
6y
Hey Rob,
Debt Coverage Ratio (better known as the debt service coverage ratio or DSCR) is essentially cash flow vs debt amount.
Commercial lenders take DSCR into consideration on income properties, as cash flow is the primary and typically only driver behind CRE investments. The DSCR threshold standard is 1.20x - 1.25x (<- that's the formatting lenders use for DSCR. Think of it as 120% - 125%) Each lender will have their own threshold per their lending requirements, but no lender will drop below 1.20x. As markets get hotter, the entry threshold lowers. When it gets colder, it rises.
Here's how it works:
You want to buy a $1,200,000 rental property that will cash flow to give you a clean NOI of $100,000/yr
A lender will give you a loan on $1,000,000 at 5% over 20 years amortized.
Your Debt Service Coverage Ratio (DSCR) would equate out to 1.26x (126%)
You meet the threshold (amongst other lender requirements), therefore qualifying for the loan.
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If you want to figure out if you qualify for a commercial loan, googling commercial real estate lenders and calling around to ask questions may not be a bad place to start. I'm CA-based, so I'm unfortunately handicapped from passing my people on your way.