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.
what is your monthly rent for your 2 rental properties? what is your PITI (principal, interest, taxes, insurance) per month? take the other things (vacancy, repairs, etc) out of it for the moment.
I vote for Option 1....except don't pay off the car at 3%. Pay it off as per terms and keep the car for 200K miles---theres more satisfaction driving a 2002 civic with 200,000 miles and a Million in the bank than there is driving a 2016 Mercedes with Pennies in the bank. Then buy used in the future.
Pay off the Home improvement and the credit card. Those cards are then free to use again (to fund your next deal if needed---likely at 0% with a transaction fee). I have no problems with leverage is it is a great accelerant for growth but from what you describe, it seems you are a bit over leveraged. I agree with others that you need to "stabilize" and protect what you have acquired before the house of cards tumbles. I'm not picking on you here. I did the exact same thing and was fortunate enough to stabilize things before things blew down. I didn't even know I was too leveraged until I had the luxury of hindsight.
Keep in mind that A million Dollars of RE free and clear can make you as much money as 5 Million leveraged to the hilt (numbers for illustrative purposes only)...the difference being the Million Dollar portfolio has 20% of the headaches as the 5 Million Dollar Portfolio.
I agree. I use 30% as my number as well. I was asking because I find that most people that are new to fairly new use much smaller numbers. I wanted to see if he actually had cash flow or not.
When you calculate DTI ratios, do you factor in W-2 and rental income, or just rental income?
I honestly don't know what my DTI is. I don't think rental income comes in to play in my DTI calculation because after depreciation our real estate hovers somewhere between +$2k to -$2k for the year. That does flow through to me and my partners taxes 50/50 because we are an LLC.
That being said my partner and I are pretty conservative and so never really get close to debt being an issue. or at least, our bank hasn't started complaining yet.
Kinda curious where you get a 0 interest cc with that high of a limit. My credit score is very very good and I like to think I have higher then average income but my limits on my cards arent close to 20k.
I would lean towards option 2. It will help your DTI ratio. The only exception is if it doesn't leave you with enough money to buy another place to fix up. Folks here are correct that paid off places are less headache for cash flow, but what is not mentioned is you are paying off the 5 million debt that was given in the example while still making cash flow.
I honestly don't know what my DTI is. I don't think rental income comes in to play in my DTI calculation because after depreciation our real estate hovers somewhere between +$2k to -$2k for the year. That does flow through to me and my partners taxes 50/50 because we are an LLC.
That being said my partner and I are pretty conservative and so never really get close to debt being an issue. or at least, our bank hasn't started complaining yet.
Why do you ask?
I ask because I am curious how I should and how banks are calculating my DTI.