My question is on debt to income ratio and how that metric limits your ability to obtain additional mortgages in order to expand your MF residential real estate portfolio.
When I purchase my first MF residential property, with the intent of holding onto to it for the long term, it will be difficult to get approved for another mortgage as I will be close to my debt to income ratio limit.
Are there strategies or suggestions on how to best navigate the debt to income ratio limits for a buy and hold strategy investor?
@Duke M. Generally speaking, as long as you can qualify for the first home you should be able to qualify for the 2nd, 3rd, etc. more easily. This is because your property should cash flow (that's the idea at least). So if your property cash flows, then that means it covers more then the debt. So you should look better DTI wise with each property that you purchase. Hope that makes sense.
@Andrew Postell thanks for your explanation. Just to make sure I understand, if the property is producing positive cash flow to at least cover the mortgage principal, interest and taxes, that cash flow negates the debt of that mortgage which keeps my DTI in line. Am I understanding this correctly?
Hey @Duke M. thats the financing wall. Every investor hits it eventually. I hit mine early due to low income at the time. @Andrew Postell has it right shoot for cash flow on your deals for the reasons he mentioned. Eventually you will still hit a financing wall at that point you can turn to private financing to continue growing.
@Duke M. How you report rental income and expenses on your taxes will have the most impact on your debt to income ratio. Even if the monthly rent covers the mortgage payment, taxes, and insurance (and HOA dues, if applicable), if you're writing off lots of repairs, management fees, advertising expenses, utilities, and more, those additional expenses will reduce the rental income and usually will end up hurting your debt to income ratio.
In the beginning, and in the first year of ownership before anything is reported on your taxes, lenders will use 75% of the lease amount as rental income. As long as that amount covers the payment, it will not hurt your debt to income ratio.
@Stephanie Medellin thanks for this helpful information. Prior to buying my first residential MF, I will certainly bring this up to my accountant and attorney.
Any other advice please feel free to share.
@Duke M. you are correct. That is it. And yes, this is assuming you are reporting your income.
@Duke M.- The alternative to your DTI issue, would be a DSCR (Debt service) Income qualifying loan, which would be through a Private Lender as opposed to your traditional bank/ Conforming lenders. DSCR Income takes 90%/100% of the current Lease income and divides that into the PITIA payment- If that number results in a positive cash flow (1.0x-1.15x+) that would qualify. Private money does not ask for Tax Returns/Paystubs/W-2's etc..This applies to Purchases | Rate-Term Refinance and Cash-Out Refinances.. And traditionally these Mortgages are not reported to the credit repositories.