BRRRR and Debt to Income Ratio
Investor · Nashville, TN · Member since 2018 · 10 posts · 7 votes
Hi all!
I have a question about financing that I was hoping to get some guidance on.
I am currently working on a development project and once it is done, my debt to income ratio will be at about 40%. I would like to continue growing my real estate portfolio and am trying to find creative ways to continue leveraging.
I have an investor who has agreed to put up the money for some BRRRR projects and he has a very high annual income (over $1M a year) and only $5k a month in debt. I would find the deals, manage the rehab, and manage operations of the property and we would split the deals 50/50.
Is there a way that we could refinance the properties without them effecting my debt to income ratio?
Thanks in advance for the help!
@Travers Xanthos the main crux here that you SHOULD look better with rental property that you receive. That is, if you are buying properties that cash flow....which I would assume you would be. Now, I say "should" because that is if you are working with a lender that ALLOWS rental income to be used immediately. When speaking with lenders I would recommend asking the questions below. Not because each question would apply...but asking these questions might show you if they are flexible....or even know what we are talking about as investors. Sometimes working with investors is a very rare occurrence with a lender. So even though they say "yeah, we can do it"....it doesn't mean they are very good at it. These questions will help you find out how good they are.
Questions for Lenders
@Travers Xanthos the main crux here that you SHOULD look better with rental property that you receive. That is, if you are buying properties that cash flow....which I would assume you would be. Now, I say "should" because that is if you are working with a lender that ALLOWS rental income to be used immediately. When speaking with lenders I would recommend asking the questions below. Not because each question would apply...but asking these questions might show you if they are flexible....or even know what we are talking about as investors. Sometimes working with investors is a very rare occurrence with a lender. So even though they say "yeah, we can do it"....it doesn't mean they are very good at it. These questions will help you find out how good they are.
Questions for Lenders
I'm not sure what you are worried about as far as the debt to income ratio? If you are forcing appreciation and forcing rents through the rehab, you should cash flow very nicely when you get to the refinance. If you are cash flowing nicely, it will add to your income and help lower your debt ratio. You are allowed 50% for now until sometime in 2020 when Fannie and Freddie have to change their debt ratio's to 45%. But even if its 45%, you should still be cash flowing enough to add to your income rather than adding to your debt ratio.
Remember the calc. goes like this. Gross rents X 75% minus PITI Payment = Income/loss. If income, it just helped lower your debt ratio, if loss, it just raised your debt ratio.
You should be able to figure out the anticipated rents on a rehabbed property at the time you are considering buying it. You should be able to determine if a property will lower your debt ratio or raise it, all before you buy it.
I hope this helps?
@Kevin Romines
Ok, that makes sense. So if the bank counts the rental income immediately, then it would actually help my debt to income ratio, if profitable enough. Am I understanding that right?
The problem is, I am planning on renting the homes out as short term rentals. I have a rental arbitrage business that signs master leases with buildings and runs Airbnb’s in the units. I was wondering if I would be able to get through the refinance by leasing the units from myself (separate llc) so the lender’s would look at them as leased/ long term rentals. Do you think that would fly?
It shouldn't be an overlay that a bank would have over the Fannie Mae rule. Meaning, Fannie Mae allows the immediate counting of rents. Even if the units were vacant, the appraiser will show what the market rents are for the property and they will count that when its vacant. If its leased up, they go by the lease amount versus what the appraiser says.
If your going to Air BNB it, just let the units be vacant through closing and use the market rents the appraiser will show on the appraisal. You should still be fine as far as cash flow goes, because of the rehab that you did and the purchase price versus market rents?
@Kevin Romines
So if that’s the case, I wouldn’t even need to show a lease or several months of rental income. As soon as the rehab is done and the appraisal has been completed, I could refinance based off of the rental value that the appraiser states?
It seems like everywhere I have read, people talk about having to wait a few months after leasing the property before they can refinance...
You are just completing the rehab, that is the reason that you don't have a tenant in it. You can start the refinance a month away from rehab completion and that will further support the reason that its not rented yet?
Some lenders can have overlays in this area and will require you to get it leased up, but others wont. So that would be one of the 1st questions I would ask of a loan officer. Have them go to their underwriting staff and clear it through them prior to starting the loan with them?
@Kevin Romines Great, thanks so much for the help!