I have a question i am struggling to get answers for.
I currently own 2 rental houses and my wife owns our personal residence in her name. My latest purchase was funded through a family member where they loaned us the money to purchase the house in cash (in my name) and i payed for the renovations and currently rent it out with the goal of doing a cash out refi early next year.
Meanwhile, our dream house has come up and we qualify to buy it, but I'm worried it will mess up my DTI to be able to cash out of my BRRRR deal.
So my question is do brrrr cash out refi's all deal with DTI or are there some more creative options that follow a different formula (I've read a little about some commercial lenders just making sure 75% of your rent will cover the mortgage?) I have steady W2 income, but with adding more rentals i think i need to find a way around DTI to continue scaling.
Any thoughts? My wife and i really want to put an offer on this new house, but i want to make sure I’m not biting off more than i can chew, and be 100% positive i can cash out of my other brrrr deal to be able to pay back my gracious family lender with interest (as planned).
I think you can't be 100% about anything, and I start there because I caught a lot of emotion-driven thought patterns in how you are viewing the situation. Risk is part of real estate investing, and sometimes the best looking deals end up being terrible decisions that injure our wallets and our pride.
That said, the other side of your dilemma is the dream house. Try to view this as objectively as possible, as if it's not you in the situation but your best friend Ryan. Ryan says he's found his dream home, and you think, "Hey, buddy, there's plenty of fish in the sea." And you think. "Another great property is going to pop up sometime." Or you think, "Maybe I want the kind of wealth in the next five years that I can self-build a dream home unlike any anyone else has."
Typically, dream homes are the worst purchases of our lives. We're too precious in our thinking about them, so we spend where we should save, give time where we should rush, and generally indulge when restraint is the better course.
It sounds as if you're early on in the investing journey. If you can rescript your thinking to say, "In five years, my assets will pay for the house of my dreams so I don't even have to care what the bank says," then you will be financially free rather than bowing to the banks. Best of luck, no matter your road!
@Jody Sperling Do you have any thoughts on the questions posed? This really isn't about the "dream house" or being 100% sure. The real question is about financing once you max out your DTI. I want to grow our portfolio at this stage by purchasing a personal property (with 3%-5% down instead of 20%), but I definitely don't want to jeopardize being able to refinance a property that I directly owe a $155,000 short term loan payment on this spring (original loan amount + interest). The Brrrr went great and we added more than enough value to cash out $190,000 to pay both the lender and our expenses back in full, and right now I technically own that house in cash which is helpful for my DTI to purchase a personal property. If there is a way to grow now and still be able to refinance through a commercial loan (That deals with a Rent to Mortgage Payment ratio instead of a debt to income ratio) I would love to know more about it! If it's not an option I will just wait to be safe with the investment I've already made. In our area any house purchase at this point will put our portfolio at over a million dollars of real estate, and I foresee this wall with my DTI is coming at the 4th house mark for us regardless (whether it's now with this house, or even if I wait to refinance and look for a 4th house after), so I am looking for creative solutions from people who have crossed this barrier successfully.
People make too much of the DTI and Fanny and Freddy guidelines. Work with local banks and credit unions. Get to know the commercial lenders. All of my properties are on commercial mortgages except the one I own outright. The interest rate is a bit higher, but I'm cash flowing well, so its gravy to me.
Commercial lending immediately considers rent as income, whereas personal banking needs to see the rent payments season for two years before including it as income. I found it helped to divorce from questions of rates, because they're misleading anyway.
@Jody Sperling Thanks, that's super helpful! I know more about traditional lending (since it's all that I have used at this point), so pardon my ignorance. I have found it hard to get concrete info on what the commercial lending process actually looks like.
You said they "consider rent as income", but what is the criteria they are using to qualify your loans, and what LTV do you typically get? Is it pretty much just making sure your rental will cash flow, or is it more complicated than that? My BRRRR is currently renting for $1,800 and a typical loan with a 75% LTV cash out would put a payment with taxes and insurance somewhere around 1,000 - 1,200 depending on the interest rate.
@Ian Thornton Look for a commercial loan based on DSCR (Debt Service Coverage Ratio). This won't be a conventional fixed rate 30 year loan, it will be 20-25 year smortizstion with a 5/7 year refinance/balloon. These loans do not consider your DTI.
Commercial loans underwrite the asset's potential for income. They still run your credit and you can absolutely be denied for poor credit, but it's a much more open process. If you don't research, you'll likely not notice much of a difference in how the lending process goes compared to personal mortgage loans.