How can I get my second rental property?

24 Replies

I currently live in Amarillo, TX but I'm planning to move to DFW area within the next 3 to 6 months. I currently own my home in Amarillo but its up for sale and I recently bought a rental property in Fort Worth, TX in October. My plan is to purchase a 4 unit property in the DFW area to live in one and rent out the others. I have found one that I'm very interested in but I'm concerned about my DTI ratio, what are some creative ways that will me to make an offer on this property, with the confidence to close?

You might look at the equity in your house as a money source, you can also look for someone with good credit who needs a partner with down payment money.  The market there seems to be pretty hot so motivated sellers will be hard to find.  After you have owned your rental property long enough the bank will look at its income as well.

Go to a bank explain what you want to do and see if they will pre-approve you. If one won't check other banks and lenders and hopefully one of them will approve you for the purchase. If not you can talk to the seller directly or through a realtor and see if they will finance all or part of of the sale. Banks are probably more likely to finance but some sellers will finance especially if you have a good down payment.  

@ Jason L. 

I don't know you financial situation. But if you're moving do you have a retirement account now? Im guessing your leaving for a new job. and i'm thinking that if you had a retirement account at your old job you can roll your old retirement account into a self directed IRA and buy it with that money and keep it in your ira for wonderful tax benefits.

I know this is a stretch but i love creative financing. 

Ever think about hard money or private funding. Just in the short term till you can sell your rent out your old house and refinance the 4fam with a bank. I would think that would take less than 3 months. Just my thoughts or wait till your house sells. 

Peter MacKercher, Real Estate Agent in MO (#2010004223)
(314) 210-4414

Commercial banks loan on deals. Have a history to show the banks and get the loan. I think my DTI was around 10-12. And in a couple weeks we are getting bank financing to purchase 32 units. Some seller financing. My DTI will be 20 or more. A deal will sell itself if you have a history.

@Peter MacKercher   I've used some of my retirement money for my first rental property but this is something I will consider in the future...

Thanks!

@Troy Young  I'm currently in the process of doing this and my fingers are crossed, Thanks!

@Jerry W.  I will look at using my first property as the source but right now, I'm not comfortable working with partners. 

Thanks!

Dear Friend do not go over board. do you know even warren buffet has to keep 30% of his assets in cash even in a good market. be careful go slowly.

your first rental should count as income after it has had renters in it for 6 months. You will also have to have 6 months cash to cover PITI set aside for that property as well. If those thing are meet, you should be able to get a mortgage on the new property without much issue.

As long as you have claimed being a landlord on your tax return for 2 years... 75% of income from all new, LEASED, rental property will be counted as income for your DTI ratio.

 If you have not claimed being a landlord for 2 years, another option would be talking to a local/regional bank such as First Financial or Justin State Bank about their financing options.   Because they do all of their own underwriting and hold their own paper, they are able to work with investors on more of a relationship basis.  

As long as your can count your income from your first rental property,and if you don't carry much other debt, you should be fine.

The question is how long have you claimed rental income, as @JD Castillo  

 stated, I believe you have to have rental income on your return for 2 years to count it (not from that particular house or that tenant, just rental income),,however I can't promise you that's right,,talk to a mortgage broker.

Your first rental, if you can count the rental income, will allow you to use 75% of that income toward the payments on the property (if you've held it for 2 years of tax returns it gthen goes to your actual expenses/income on that property)

If at 75% it covers PITI, then it won't hurt you at all (in fact anything over that will be counted as additional income. Your rental properties are counted separately, then how they perform is used as income or an expense when calculating your DTI

@Andy Collins  Thanks Andy and I will speak with a mortgage lender about my current situation.  

Originally posted by @Arlan Potter :

Commercial banks loan on deals. Have a history to show the banks and get the loan. I think my DTI was around 10-12. And in a couple weeks we are getting bank financing to purchase 32 units. Some seller financing. My DTI will be 20 or more. A deal will sell itself if you have a history.

sorry for my ignorance in advance, 

what is DTI?

DTI first to your debt to income ratio. So if you add up all of your minimum monthly payments each month then divide it by your monthly income, you will have that number. Due to the Dodd Frank the current requirements for a Fannie Mae loan say that you should have a debt to income percentage under 43% (including your new payment for the property that you are purchasing)

Remember that it is talking about your monthly debt. So if you owe $10,000 on a car but your minimum monthly payment is $400, then for the purpose of DTI, you don't want to dollars to your monthly debt. Not the $10,000.

So, you're self-employed in order to determine your debt to income, a loan officer cheese will add up two years of income and divided by 24 months to calculate your monthly income.  

Sorry for the typos.   Talk to text. :)

*** DTI refers

(Not "DTI first")

***you only want to add $400 to your monthly debt.  Not the $10,000

Some lenders look at the tax return for the property, not just your expenses and rent collected. Depends on what your buying and what type of lender you use. If you leveraged the purchase, rolled a big rehab into the loan and claimed big (allowable) losses on the tax returns then your property can be an IRS loss on paper even if it cash flows $400+ a month.

I had this scenario where the property created additional debt that counted against my income for loan purposes and It cash flowed over $400.

Even with the 75% of the rent calculation it still showed me cash flow positive over all expenses but the depreciation of the roof, hvac and rehab tax write offs killed it on paper. The individual depreciation schedule for each item and property differs and is not an easy thing to figure out. Find a good real estate accountant if you plan to keep purchasing or you might be surprised when looking for loans.

Some lenders look at the tax return for the property, not just your expenses and rent collected. Depends on what your buying and what type of lender you use. If you leveraged the purchase, rolled a big rehab into the loan and claimed big (allowable) losses on the tax returns then your property can be an IRS loss on paper even if it cash flows $400+ a month.

I had this scenario where the property created additional debt that counted against my income for loan purposes and It cash flowed over $400.

Even with the 75% of the rent calculation it still showed me cash flow positive over all expenses but the depreciation of the roof, hvac and rehab tax write offs killed it on paper. The individual depreciation schedule for each item and property differs and is not an easy thing to figure out. Find a good real estate accountant if you plan to keep purchasing or you might be surprised when looking for loans.

This is for rental properties that you already own and have filed a return for.

depreciation expense is not held against you when calculating DTI, since it is not a 'cash' item

andy

Originally posted by @Andy Collins :

depreciation expense is not held against you when calculating DTI, since it is not a 'cash' item

andy

 The tax return was 65 pages and I stopped trying to figure out what counted for what. I went to purchase a new primary residence and the lender used the tax returns to calculate the profit and loss from the properties. The properties showed a loss on paper which the lender had to calculate as monthly liability.  Maybe it was just for the primary purchase underwriting but I went back and forth and didn't win.

I don't know if it is the IRS, FNMA or both but it seemed as if you want to own to rental property and buy a new primary you either pay cash and don't finance rentals or don't claim losses. The properties where less than 75% LTV and cash flowed. $1000 rent - $600 PITIA wasn't good enough for one of them.

I have not bought a rental since purchasing a primary so the criteria may be different but this scenario was my most recent personal transaction.

Each rental should have its own schedule (or they have them in columns anyway), the depreciation is the one thing the IRS allows you to deduct, but they add that back in when figuring if the house made money or lost.

You can show a loss to the IRS, and still have your rentals count positively in your DTI.

andy

Originally posted by @Andy Collins :

Each rental should have its own schedule (or they have them in columns anyway), the depreciation is the one thing the IRS allows you to deduct, but they add that back in when figuring if the house made money or lost.

You can show a loss to the IRS, and still have your rentals count positively in your DTI.

Yes, depreciation is deductiable but it is the lender giving you the loan that chooses how they interrupt the numbers and what formula to calculate your DTI.

Either way, in response to the original posters question I would just check with your lender as you add more properties. Whoever is going to give you a loan will follow the underwriting criteria that they choose to use.

I had 3 different lenders working the loan before choosing one and it was the same issue. There was new change to FNMA underwriting guidelines to how they calculate DTI (at least that's what all 3 told me). If your lender follows FNMA for purchase or refinance its something to be aware of.

the FNMA guidelines allow it to be added back in,,obviously any lender can have an overlay with whatever guidelines they want, however that is one I have never heard of, and I have 6 conforming mortgages,,,if you qualify without depreciation being added back in, it doesn't matter, but if you need it, finding a lender that would allow shouldn't be a problem.

Everything your saying is what I was saying. I was real frustrated for a few weeks but it all worked out. 

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