Rental property dti with multiple properties
I searched for answers to this topic but couldn't get any information. My question is simply if i own 5 rental properties and they each are cash flow positive. How can i get a 6th one? My dti will be reaching 50%. I have an 790 credit score, plenty of cash reserves and never late on a payment ever.
the 5 properties have a 2000 mortgage but each bring in 1000 cash. The 2000 includes property tax and insurance. I make 10k a month. My income is 10k + 5k(rental income) . Total debts are 3k primary residence + 10k (rental properties mortgage) this is 13k/15k is about 86% or am i calculating this wrong? Seems like it's a high dti but cash flowing 1k a month per property should count but looking at pure numbers it's looking horrible.
If the properties are cash flowing as you noted and your other debts is $3,000 compared to your 10k income - separate from the rental income then your debt to income ratio is 30%.
The great news is the next rental property that you buy, provided it also cash flows (and why wouldn’t it? That’s the reason you’re buying it :-)), then you’re in great shape because the projected rent will offset the new mortgage payment.
I recommend speaking to a loan officer in your market to help guide you.
Good luck in your journey.
-
Lender (#NMLS 199791)
- Vellum Mortgage, Inc
Thanks, so the rentals are basically a wash? When if it's positive income? And the only calculation for dti is primary residence and wages. 3k mortgage, 10k a month salary.
i need to shop around because my last lender really calculated things in a weird way. Ultimately I'm glad to hear that there is a way to get another property.
I've read that some lenders will consider the cash flow properties as income and not count the debt, or some just call it a wash. Most will count 75% of the rental income if it's been rented for 2 years or can show rental projections. Obviously real rent is better than projected.
thanks
@Tobias Joneses I believe as long as 75% of the projected rent is $1 more than your mortgage payment (P/I, taxes and ins.) it won’t count against your dti provided you are working with the right mortgage broker. And cash flowing rental property should not count against your dti ratio either especially if it’s been claimed already on your taxes in previous years.
Thanks i need to find the right mortgage broker that thinks this way. Every mortgage broker I've worked with in the past didn't 😟
Follow-up question, if anyone knows: are tax returns for 1-2 years showing rental income required for the DTI to be offset by the rents? Or do some lenders simply accept executed lease agreements?
tax returns arent' required but each lender is different. from what I've read if you go with a smaller bank they are more leanient and you can negotiate more. What is laughable is that if I'm buying a rental property and it is vacant, the lenders will let me use a rental agreement with a deposit and use that rental income in the figures even though its not rented AND I don't own it yet. This has come up multiple times, and I always find it weird, that they would want me to get a lease for the property, but I am in the process of purchasing it. They also sometimes will take what you think projected rents will be, using rentometer.com, craigslist, or going rents around the area.
bottom line is for me, go with a small bank they are smarter than big banks and will use their brain to figure out if the dti makes sense. I could have 100 properties all with a mortgage of 2000 a month(Principal, Taxes, Interest, Insurance) and rent them out for 3000 each. That means I would have 1k profit right? so if you take debt/income (100*2000) / (100*3000) = 66% which is extremely high, as most will only lend to you at 43->50% maybe. but you're clearing 100,000 a MONTH in profit, but DTI is still so high. this is the difference between big banks and small banks. Small banks will see that 100k a month profit isn't something that is risky.
Originally posted by @Tobias Joneses:Thanks, so the rentals are basically a wash? When if it's positive income? And the only calculation for dti is primary residence and wages. 3k mortgage, 10k a month salary.
i need to shop around because my last lender really calculated things in a weird way. Ultimately I'm glad to hear that there is a way to get another property.
I've read that some lenders will consider the cash flow properties as income and not count the debt, or some just call it a wash. Most will count 75% of the rental income if it's been rented for 2 years or can show rental projections. Obviously real rent is better than projected.
thanks
You're hearing different things on how it's counted because there are 4 or 5 ways to calculate, as specified by Fannie, depending on the scenario. Projected rental income on a new house is calculated differently than rental income on a former primary residence being converted, and that math is different than the math for an existing rental property appearing on your tax returns, etc.
But, in any case, a local investor friendly lender shouldn't really have DTI issues provided you are buying good cashflowing real estate.
If the lender follows Fannie Mae guidelines, this is one of most interest to you. You may have to help the lender understand it if they are not following it correctly:
"Calculating Monthly Qualifying Rental Income (or Loss)" "When Schedule E is used to calculate qualifying rental income, the lender must add back any listed depreciation, interest, homeowners’ association dues, taxes, or insurance expenses to the borrower’s cash flow. Non-recurring property expenses may be added back, if documented accordingly." "Treatment of the Income (or Loss)" "If the rental income (or loss) relates to a property other than the borrower's principal residence: If the monthly qualifying rental income (as defined above) minus the full PITIA is positive, it must be added to the borrower’s total monthly income. If the monthly qualifying rental income minus PITIA is negative, the monthly net rental loss must be added to the borrower’s total monthly obligations. The full PITIA for the rental property is factored into the amount of the net rental income (or loss); therefore, it should not be counted as a monthly obligation."
The last sentence clearly states that after including the net rental income in the denominator or loss in the numerator, that the rental property mortgage payments are not also supposed to be included in the numerator as monthly obligations. So if your DTI excluding rental properties is D/I, your existing Sch E rental income is $4000/month and ongoing Sch E rental expenses (do not include amortization of expenses already incurred or depreciation) plus current rental PITIA payments are $3,600/month, your new purchase rental income is 75%*$2,000=$1,500/month, and your new purchase rental PITIA is $1,800/month, your new DTI would be (D+($1,800-$1,500))/(I+($4,000-$3,600))
"Rental Income Worksheet – Individual Rental Income from Investment Property(s) (up to 4 properties) (Form 1038)"