How to buy more rental properties with debt to income limited out
My current situation:
1 primary, 5 rentals, no additional debt, heloc out (invested in one of the rentals), and cash to buy more, but at 43% debt to income. I am looking for a solution where I can buy more rentals. I was thinking of:
A) Giving a family member the cash to buy more, and having them deed me over the house after a period of time
B) Setting up a trust and putting the rentals there, so they are not on my name, and buy more
Are any of these actually viable, or something anyone has actually done? Open to suggestions as well.
#2 General Landlording & Rental Properties Contributor
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#2 General Landlording & Rental Properties Contributor
@John Patterson Pay down some of your mortgages, increase savings and pay cash or find a way to increase your income. You could also look at partnering with someone to either do flips whereby you could potentially make money and use that profit to help buy another rental or simply partner with them in rentals.
Have any of your rentals increased in value such that you could sell them and buy two other rentals?
@Theresa Harris. The rentals have increased in value, but my strategy changed a few years ago to not sell, and just purchase for cash flow. I also took quite a big hit on expenses last year for the rentals. I'm thinking I could just not claim some of my expenses this year on taxes, so it shows as income, and just pay more taxes. Thus, increasing my income.
Also, my cash position is not at a place where I could pay cash, but could pay 2 DPs.
@John Patterson You could consider purchasing properties with owner financing, with private lenders looking for long-term interest income, or subject-to the existing mortgages. The banks will calculate your DTI using your credit report and your tax returns, so moving properties into trusts, but keeping the mortgages in your name will not change your DTI. Partnering with family might work and refinancing them out later will work (I call this a credit partner), but make sure that the property is quit claimed to your LLC soon after your purchase the property and that they understand the plan. As a CPA, I'm vehemently opposed to paying more taxes than required by law, so I recommend claiming all the expenses you are entitled to and paying less tax. After all, real estate is a great investment in part because it is a great tax shelter.
@John Patterson
How are you at 43% dti if you on,y have debt on your primary and rentals? Your rentals should be cash flowing which means you have too much house?
Are you only looking for a conventional product? there are a ton of long term stated income options out there that do not calculate DTI
@Tarik Turner. I've never heard of this. I'd love some more info. I'm not 100% into conventional.
I'm mainly confused how people grow from 5 to 20 without coming up against a debt to income issue while buying rentals.
Not sure I follow. My primary is 1600/month, my bank only calcs 75% of rents in the area, and my rental income is also lessened by my tax write offs. My primary isn't too much house. Any less of a house, and I'd be living in a 2/1 in the country.
You are at the point where you should start investigating your commercial loan options.
I'm mainly confused how (single) people grow from 5 to 20 properties. If I had a wife, we could buy them under her name. :) I just see it as a major ceiling.
@John Patterson
I may have been told the wrong information from my lender and other people about this, but from what I understand is after showing rental income on your tax returns for one year the rents should add to your income, Lowering your DTI so you continue to purchase. That is although if you bought them right and the rent is greater than the payment by whatever percentage your lender uses. I may be wrong but I was having this conversation with my lender just the other day.
@Tamara Deering. This is the kind of advice I was looking for. I can buy residential properties on a commercial loan? Are the terms the same?
How to keep buying is easy. Find a local small bank or credit union that keeps loans in house.
@Clifford Paul. They don't have to abide by the federal regulations of DTI (is that even a fed regulation)? Or do they just calculate it differently?
Sort of in the same situation as you. I have (5) rentals and currently in the process of buying my primary. If I wasn't purchasing my primary I could definitely keep going to buy 3-5 more in the next 12 months. My method of acquisitions has been the Cash-BRRRR, you only need to save up for the purchase price of one property and theoretically you can recycle that cash over and over. I like this method because it's very versatile in terms of timing, stabilizing period for your cashflow, ability to scale and cash availability for other investments. Luckily my last (2) properties are still owned free and clear and haven't been BRRR'd yet (6 month seasoning), so there is equity to be tapped for cash-outs refi's without further increasing my DTI since the gross revenue will cover the expenses.
There's a few options if I was in your shoes: let my savings from W2 + Schedule E + C income build my fund, build more steams of income, buy deals at an even steeper discount, pull a 5 year 50k loan from my 401k to purchase and quickly pay the principal back if there's a deal I can't pass up and I'm missing some cash, last resort I'm selling my stocks from my taxable accounts or pulling my Roth IRA contribution balance (tax and penalty free). Not a big fan of commercial loans for residential investment properties but if you've exhausted all other methods, then that's the way to go.
Some of these methods could be more difficult for you to stomach but all roads lead to Rome.
Awesome! I'll look into these. Thank you!
Originally posted by @John Patterson:@Clifford Paul. They don't have to abide by the federal regulations of DTI (is that even a fed regulation)? Or do they just calculate it differently?
Correct, they don't have to follow all the lending requirements because they do not sell off in house loans. Loans are based on DSCR. Every January I provide my bank a P&L statement and a net worth statement. They haven't pulled my credit report in 10 years. I usually pay 1 point higher in interest but in the big scope of things that's peanuts.
@John Patterson
How do you know you're at 43% DTI? Is this your calculation or a bank calculation? The guidelines add the depreciation deduction back in since it's not an actual incurred expense. Do you know if that was accounted for?
@Marco G. That's what my banker is telling me. I just spoke to my banker again today, and had a great revelation. I was thinking in my mind that I would be tapped out because my DTI is at the top. He's saying that if I buy a rental that can cover all my mortgage, tax, insurance payments (cash flow positive which I only buy rentals that do) I should not be adding to my DTI if I buy right.
Yes, you can buy residential property with a commercial loan. Commercial just references that the properties are used for a business purpose vs. a consumer loan which is what you would get for your personal residence. The LTV allowed on a commercial loan is usually between 65 and 80% depending on the product and your credit score and the interest rates are a bit higher. Your fees may be higher with a commercial loan as well. This is where a mortgage originator can help you, they can evaluate the programs they have available and come up with the best product for your situation.
@Clifford Paul Great info. So, would I just google local credit unions and give them a call? What am I asking of them exactly? Do you have DSCR loans?
John Patterson, I've recently had experience that may help. My wife and I obtained a commercial line of credit based on 80% LTV of our income properties. That gives us enough to pay cash for a decent property to flip if we want to go that route, and still have enough to fix the property. We also took out a line of credit on out primary which was 90% LTV. When borrowing from the commercial LOC they charge a pretty standard (from what i understand) 5% on the amount. Payback is at minimum the interest on that money. every month. There are fees associated with setting up the commercial and personal LOC as Tamara mentioned.
@John Patterson. Having a commercial loan in a LLC would not show on your DTI