How you purchase property with 20% down with borderline DTI

Question

I was wondering how you purchase property with 20% if your DTI is already on the limit?. For instance, let say you have 200k Cash and ready to invest. I read a lot of responses saying that you can buy $1M of property? How you finance 800K without sending your DTI to the moon. I will appreciate your feedback. I am confused.

Javier

Doug McVinua · Answer

@Javier G. Debt to Income (DTI) Another perspective would be if you are buying a $1M property for personal use it is going to need a full-blown offset from other income like your job or other investments as it's debt not offset with an income element from the property.

If you are buying a $1M investment property it should have an income side (rent roll) as Account Closed lays out. An appraisal for most income property includes an analysis of the rent roll (income side) that is utilized to calculate the income portion. Lenders may treat the income differently depending on many factors including if this is your first or 5th property, vacancy, etc.  If the income is high enough it may not have much impact as both sides can offset each other. Of course your debt increases but it may or may not affect the ratio as such.

Hope this helps you in some manner!

Account Closed · Answer

For some reason banks like to get paid back so they impose DTI limits. Adding $800,000 in debt does indeed cause your DTI to balloon. There has to be an offset from the income generated from the investment. For instance, $800,000 at 5% on a 30 year fixed is about $5,000 a month with taxes and insurance. You'd have to be able to rent the property out for about $6,500 a month to compensate for the only 80% credit the bank would give you for the rental income (they have vacancy factors, etc)

On another approach your $200,000 would buy 3 cash flowing Turnkeys in Arizona that don't require bank approval and are not subject to DTI limits. It's all in how you choose to invest. Here is a sample:

Average Turnkey Cash Flow Per Door In Phoenix
Metro Area No Bank Financing Needed

https://www.biggerpockets.com/forums/600/topics/584916-average-cash-flow-per-door-in-phoenix-metro-area

David Nacco · Answer

@Javier G. I’m gonna start by saying I don’t know and have no experience with this personally but that price sounds to me like something that would qualify as commercial? If so I’ve heard commercial lenders are a lot more focused on the asset / business model and you may have better luck there.