What's the secret to three-peat?

Question

Howdy,

Been running a lot of numbers in the past few days. I found some advice that the back-end debt-to-income ratio should be under 36% for lenders to be happy. (Some mentioned 45%.) Great!

I figured out a way to do that, buy a second property, and rent out my first. Right at 36%. Then after some time the rental income would add to my income, and DTI becomes something like 30%. Great!

Then I had an ah-ha moment. Can I do it a third time? Attempting the exact same deal would put my DTI to 40%. D'oh.

Of course extrapolating that makes sense. If I had 50 of these, with the 50% rule (unrealistic in California, but assume.) The DTI would gravitate towards 50%.

So my question is. Adding rental income to mine, how do we get numbers to work for the mortgage lenders to be happy with the third property? And fourth, fifth, sixth?

Thanks,

-Dustin

Dustin Graham · Answer

Thanks for the info Logan.

That sounds in line with other stuff I've been reading in the last 48 hours. I think the answer to my question is basically that properties three and four will be feasible if the rental property covers the PITI.

I'll shoot you a PM to discuss actual loan considerations.

Logan Drew · Answer

Thanks Dustin:

You don't need 2 years rental history to use the rents.  Also, as for your debt-ratio, you literally add up all your debts (and costs to carry the rentals that are shown on tax returns) and divide that by the total of your income and gross rents (adding back in your depreciation... not counting it as an actual cost).  Aggressive lenders (that do exist as I am one) don't require the rental income to be seasoned.  If anything, 1 year seasoning gets you done and done.  2 years is not a requirement.  Hope this helps.

Dustin Graham · Answer

Thanks Logan.

Two questions. Does that mean I need to wait two years for the rental income to show up on tax returns before I can get my third property using the rental income of the first while living in the second?

Second, even with positive cash flow, the back-end debt-to-income ratio for three mortgages comes out to 40% or so. The fourth would be close to 50%. I'm calculating this by adding my income, plus 100% of the first rental income against the PITI of three properties. And, for the fourth, my income, plus 100% of two rental incomes against the PITI of four properties. How is this an okay debt-to-income ratio? Seems to high compared with what I have read.

Logan Drew · Answer

Assuming you are picking up properties that are cash-flowing with a certain margin and you're showing the new rental income on your tax returns year after year, you should be able to buy up to 10 financed properties without maxing out your debt-ratio (all while making sure you are using a lender that gives you 100% of your rental income and doesn't hit you for rent loss of 15%-25%).  The conforming limit on financed properties is 10 properties financed.  After that, you are relegated to portfolio or other non-conforming financing products.  It's all about the deals you find and how well they cash-flow.  Let me know if I can help you with this.