What I Learned about DTI

Cincinnati, Ohio
General Real Estate Investing
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What I Learned about DTI

Andrew BroxtermanPro Member
Member since 2022 · 14 posts · 6 votes

Hello,

I posted about 1 month ago after a lender told me buying an investment property in an LLC would negatively affect my debt-to-income ratio when buying a personal house in the future. I was super disappointed, as I am itching to get my first rental. The reason he said it would negatively affect my DTI is that banks typically count an entire mortgage against your debt but will only give you 75% of rental income. He was correct, but only because I was going to be a personal guarantor on the loan.

I have talked to 10-15 investors, lenders, and a tax accountant over the last month trying to figure out how to keep an investment property from counting against my DTI. The answers were basically split in half whether an investment property would negatively affect my DTI, and the confusing part was that both sides were very certain of themselves.

My solution is that my investment partner will be the only guarantor on the loan. We had to revise our operating agreement to state that he has a 51% stake in the LLC, leaving me with a 49% stake. All lenders I've talked to require this revision to keep me off the personal guarantee. Banks cannot count an investment property against your DTI if you are not a guarantor on the loan. The tax accountant confirmed this.

If you find yourself in this situation and want to buy an investment property without a partner, the investment property will count against your DTI for a personal mortgage as you will need to be the personal guarantor on the investment loan. This applies even if the property is in an LLC and applies to both conventional and DSCR loans.

Hopefully this saves someone the time I spent trying to figure this out.

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Jaycee GreenePro Member
Real Estate Consultant · St. Louis MSA · Member since 2024 · 3k+ posts · 727 votes
1y
Quote from @Andrew Broxterman:

Hello,

I posted about 1 month ago after a lender told me buying an investment property in an LLC would negatively affect my debt-to-income ratio when buying a personal house in the future. I was super disappointed, as I am itching to get my first rental. The reason he said it would negatively affect my DTI is that banks typically count an entire mortgage against your debt but will only give you 75% of rental income. He was correct, but only because I was going to be a personal guarantor on the loan.

I have talked to 10-15 investors, lenders, and a tax accountant over the last month trying to figure out how to keep an investment property from counting against my DTI. The answers were basically split in half whether an investment property would negatively affect my DTI, and the confusing part was that both sides were very certain of themselves.

My solution is that my investment partner will be the only guarantor on the loan. We had to revise our operating agreement to state that he has a 51% stake in the LLC, leaving me with a 49% stake. All lenders I've talked to require this revision to keep me off the personal guarantee. Banks cannot count an investment property against your DTI if you are not a guarantor on the loan. The tax accountant confirmed this.

If you find yourself in this situation and want to buy an investment property without a partner, the investment property will count against your DTI for a personal mortgage as you will need to be the personal guarantor on the investment loan. This applies even if the property is in an LLC and applies to both conventional and DSCR loans.

Hopefully this saves someone the time I spent trying to figure this out.

Hey @Andrew Broxterman By only owning 49% of an LLC that owns a single asset, I'd argue you're in a much WORSE situation than you would have been, unless you have an operating agreement where you and majority owner have to agree on everything. Otherwise, they are the GP, and they have final say on everything.

I guess my question is: Why are you concerned about your DTI? Are you trying to borrow money for a home loan as well?

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  • Jaycee GreenePro Member
    Real Estate Consultant · St. Louis MSA · Member since 2024 · 3k+ posts · 727 votes
    1y
    Quote from @Andrew Broxterman:

    Hello,

    I posted about 1 month ago after a lender told me buying an investment property in an LLC would negatively affect my debt-to-income ratio when buying a personal house in the future. I was super disappointed, as I am itching to get my first rental. The reason he said it would negatively affect my DTI is that banks typically count an entire mortgage against your debt but will only give you 75% of rental income. He was correct, but only because I was going to be a personal guarantor on the loan.

    I have talked to 10-15 investors, lenders, and a tax accountant over the last month trying to figure out how to keep an investment property from counting against my DTI. The answers were basically split in half whether an investment property would negatively affect my DTI, and the confusing part was that both sides were very certain of themselves.

    My solution is that my investment partner will be the only guarantor on the loan. We had to revise our operating agreement to state that he has a 51% stake in the LLC, leaving me with a 49% stake. All lenders I've talked to require this revision to keep me off the personal guarantee. Banks cannot count an investment property against your DTI if you are not a guarantor on the loan. The tax accountant confirmed this.

    If you find yourself in this situation and want to buy an investment property without a partner, the investment property will count against your DTI for a personal mortgage as you will need to be the personal guarantor on the investment loan. This applies even if the property is in an LLC and applies to both conventional and DSCR loans.

    Hopefully this saves someone the time I spent trying to figure this out.

    Hey @Andrew Broxterman By only owning 49% of an LLC that owns a single asset, I'd argue you're in a much WORSE situation than you would have been, unless you have an operating agreement where you and majority owner have to agree on everything. Otherwise, they are the GP, and they have final say on everything.

    I guess my question is: Why are you concerned about your DTI? Are you trying to borrow money for a home loan as well?

    [email protected]
    3Reply
    • Andrew BroxtermanPro Member
      OP
      Member since 2022 · 14 posts · 6 votes
      1y

      @Jaycee Greene I am going to borrow money for a home loan within the next year or two.  Also, this is a trusted partner who I have known for about 10 years. The goal is to own many more properties. 

      1Reply
  • V.G JasonPro Member
    Investor · Member since 2022 · 3k+ posts · 3k+ votes
    1y

    The solution to not having it count against your DTI is to relinquish majority control of the asset?


    If you don't want it to count again, form a relationship with a local credit union. Be prepared to put north of 50% down.

    1Reply
    • Andrew BroxtermanPro Member
      OP
      Member since 2022 · 14 posts · 6 votes
      1y
      Quote from @V.G Jason:

      The solution to not having it count against your DTI is to relinquish majority control of the asset?


      If you don't want it to count again, form a relationship with a local credit union. Be prepared to put north of 50% down.


       Do you mean be prepared to put north of 50% down on a personal home after owning my first investment property?

      0Reply
  • Matt Devincenzo
    Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
    1y

    Unfortunately I'm not sure you got sound advice on DTI...

    Initially the rent may be discounted 75%, and the entire loan counted, but a cash flow rental should still at least break even on this calculation. And once you file a year or two of returns, then they should use the actual cash flow for your DTI, so in your case you'd have been able to use real numbers by the time you're talking about purchasing.

    Also another discrepancy, the DTI may not be calculated the way you think. This rental would get its income, minus its expenses and then the net number is added to your DTI. So if the net number is positive CF, then your DTI actually improves, not gets worse.

    Final thought, I've seen that loan applications want any entity owned 20% or greater included...I'm not sure if the PG vs no PG plays a role here as well, but I'm still not sure this solves your concern.

    1Reply
    • Andrew BroxtermanPro Member
      OP
      Member since 2022 · 14 posts · 6 votes
      1y
      Quote from @Matt Devincenzo:

      Unfortunately I'm not sure you got sound advice on DTI...

      Initially the rent may be discounted 75%, and the entire loan counted, but a cash flow rental should still at least break even on this calculation. And once you file a year or two of returns, then they should use the actual cash flow for your DTI, so in your case you'd have been able to use real numbers by the time you're talking about purchasing.

      Also another discrepancy, the DTI may not be calculated the way you think. This rental would get its income, minus its expenses and then the net number is added to your DTI. So if the net number is positive CF, then your DTI actually improves, not gets worse.

      Final thought, I've seen that loan applications want any entity owned 20% or greater included...I'm not sure if the PG vs no PG plays a role here as well, but I'm still not sure this solves your concern.

      Matt, the tax accountant I talked to stated that not being a personal guarantor shields me from the loan counting against my debt.  

      Also, we are looking to buy on the MLS, and even the better deals we've looked at do not cover the PITI if you only count 75% of the income.  Best case scenario for me, I purchase a personal home within a year, so I don't want to wait 1-2 years.
      0Reply
  • Michael K GallagherBusiness Member
    Real Estate Agent · Columbus OH · Member since 2018 · 1k+ posts · 1k+ votes
    1y

    I'd have to 1 up what @Matt Devincenzo says here. In my experience after owning and operating the rental for a year or so and filing the returns you essentially end up canceling out the "debt" portion of the DTI. So yes your debt is tech higher, but the income balances it and the ratio ends up being the same if not better. I'd much rather have this situation than a partner personally.

    [email protected]614-362-2231
    0Reply
    • Andrew BroxtermanPro Member
      OP
      Member since 2022 · 14 posts · 6 votes
      1y
      Quote from @Michael K Gallagher:

      I'd have to 1 up what @Matt Devincenzo says here. In my experience after owning and operating the rental for a year or so and filing the returns you essentially end up canceling out the "debt" portion of the DTI. So yes your debt is tech higher, but the income balances it and the ratio ends up being the same if not better. I'd much rather have this situation than a partner personally.


       Michael,

      I have heard that banks will only count 75% of rental income. Even if we got a really good deal, an investment property would still raise my DTI.

      I am very comfortable with my partnership and am not worried about minority control.

      0Reply
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