Skip to content
×
Pro Members Get
Full Access!
Get off the sidelines and take action in real estate investing with BiggerPockets Pro. Our comprehensive suite of tools and resources minimize mistakes, support informed decisions, and propel you to success.
Advanced networking features
Market and Deal Finder tools
Property analysis calculators
Landlord Command Center
ANNUAL Save 16%
$32.50 /mo
$390 billed annualy
MONTHLY
$39 /mo
billed monthly
7 day free trial. Cancel anytime
Private Lending & Conventional Mortgage Advice
All Forum Categories
Followed Discussions
Followed Categories
Followed People
Followed Locations
Market News & Data
General Info
Real Estate Strategies
Landlording & Rental Properties
Real Estate Professionals
Financial, Tax, & Legal
Real Estate Classifieds
Reviews & Feedback

Updated almost 8 years ago on . Most recent reply

User Stats

45
Posts
38
Votes
Alexander Monnin
  • Ohio
38
Votes |
45
Posts

How do appreciation investors satisfy Debt Coverage Ratio

Alexander Monnin
  • Ohio
Posted

So I was wondering how appreciation investors satisfy the debt coverage ratio?  I keep seeing that banks require a 1.2-1.3 ratio.  I know that a lot of appreciation plays barely break even on cashflow or are sometimes even negative at first.  Obviously this would not satisfy the ratio requirement.  So are there ways to work around this?  Do I just have to find a small investor friendly bank?  Will banks overlook this if I have a high enough income?  Also, I know that you could just make a bigger down payment but that would be less than ideal for my situation.

Most Popular Reply

User Stats

9,935
Posts
10,791
Votes
Chris Mason
  • Lender
  • California
10,791
Votes |
9,935
Posts
Chris Mason
  • Lender
  • California
ModeratorReplied

People buying for the tax shelter and long term net worth gains more than the short term cashflow tend to have no problems getting residential financing on the first couple cashflow negative properties simply because their 'day job' income is so high.

Eventually they do come up against a DTI wall that cannot be avoided.

How it sometimes plays out is they come to me after having a primary plus, say, 3 rental SFR McMansions. DTI not counting rent, which most lenders don't know how to do, is like 42%. Essentially at the max.

Then I count the rent and DTI improves to 32% or something, giving them capacity for 1 or 2 more.

Then they're at the DTI wall even when DTI is being correctly calculated, including the cashflow negative property they want to purchase (If net rent is $5000 and PITI is $6000, it only counts as a $1000/mo liability, not $6000).

Aaaaaaaand I cut them off and make them buy casfhlow positive MFRs or talk to a HML. And their agent is typically baffled when I tell them that this incredibly wealthy person isn't allowed to buy SFRs any more, only 2-4 unit properties that cashflow. I think most real estate agents regard rental property mortgage math as straight up witchcraft.

  • Chris Mason
  • Loading replies...