Pay off Debt for higher DTI Ratio or Invest? HELP!

[Fernando H.]

Current Debt.

1 SFH: rented - $200 positive cash flow after paying off mortgage

2 Duplex: rent one and live in another: $200 positive cash flow afer paying off loan

3. SFH: *currently rehabbing* - free and clear - ARV 70K

4. Car Loan: 17k left - 60months - 3% interest

5. Home Improvement Loan: 30k left - 10yr loan - 8.75% interest

6. 20k credit card - maxed out - no interest for the next 12 months.

OPTIONS AFTER REHAB OF #3.

Option 1: Sell number 3 after rehab in a month, pay off 6 and 5, and 4 (no debt)

Option 2: Home Equity Loan at 80%, $200 cash flow in rent income, pay off 6 and 5.

Option 3: Home Equity Loan at 80%, $200 cash flow in rent income, pay off 6 and invest the rest in 1 duplex or 2 SFH

[Eddy Dumire]

As a general rule, if your DTI is high enough to cause underwriting problems then I would address it. Otherwise, keep buying investment property. Reduce your DTI not by targeting the highest interest rate or the biggest balance, but buy targeting the highest monthly payment.

For instance, I have a HELOC with a payment of $700/month, a personal loan with a payment of $1000/month, and a student loan with a payment of $107/month. It will help my DTI more to pay off the personal loan first, no matter what the terms of each of the two loans are.

What I like to do is to make a spreadsheet and divide the monthly payment by the outstanding balance and sort by this ratio. The higher this ratio, the more benefit you will see in your DTI by paying it off early. When you consider this, I get more DTI reduction per dollar by paying off the student loan first (it only has a remaining balance of $1814).

Keep in mind that if you'll pay off any debt within a few months (I think the rule is 6) then it is not considered in the DTI anyway, so don't throw cash at paying off balances that will be gone in less than 6 months.

What I don't like in your description is your cash flow after paying off mortgage. I'm not sure if this means you consider your cash flow to be Rent - Mortgage = $200. If so, this isn't correct and you need to add factors into this for vacancy, maintenance and capex. If you mean that once you pay off the entire mortgage balance the property will cash flow $200/month, then I'm concerned that you purchased a properties that do not currently cashflow. Whichever is true needs to be addressed urgently and is much more important than DTI reduction.

I hope this helps.