My DTI has hit a wall

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My DTI has hit a wall

Brent Salazar
Investor · Flagstaff, AZ · Member since 2015 · 38 posts · 8 votes

Hello BP,

I have an interesting problem. I currently own 2 duplexes in my home town. 1 has tenants and the other I am house hacking. I am ready for my next deal and have hit a wall with conventional financing. The banks will use my W2 income and 70% of my total rents as income, and the mortgages/ credit card/ car payment/ ext as debt. I ran a scenario where I project my income with all 4 units rented and my DTI is maxed out for lending. Both units are still cash positive after counting 70% of the collected rents. See my financial footprint below. I have well over 20% equity in each property and have thought maybe I could shield the debt of these properties by either transferring ownership into an LLC or possibly having an LLC purchase them from me through a commercial lending? Not sure if either of these is an option. Thank you for your infinite wisdom!

income:

“Rents: 100%/ 70%”

Unit 909: 1300/910

Unit 909 1/2: 1400/980

Unit 101:1700/1190

Unit 101a:1000/700

w2: 4800

total:10,200 / 8580

expenses:

Truck: $500

Line of credit:$125 “$0 balance”

MV mortgage:$1550

Sedro mortgage:$1550

total:$3725

DTI:36% / 43%

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Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
6y
Originally posted by @Brent Salazar:

Hello BP,

I have an interesting problem.  ...credit cards and a truck payment of $500.

Not that interesting and the solution is obvious when broken down like this.

Sell the truck and pay off the credit cards or get really good at creative financing.  Your choice.

7Reply
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  • Matt Nico
    Member since 2019 · 448 posts · 306 votes
    6y
    Originally posted by @Brent Salazar:

    Hello BP,

    I have an interesting problem. I currently own 2 duplexes in my home town. 1 has tenants and the other I am house hacking. I am ready for my next deal and have hit a wall with conventional financing. The banks will use my W2 income and 70% of my total rents as income, and the mortgages/ credit card/ car payment/ ext as debt. I ran a scenario where I project my income with all 4 units rented and my DTI is maxed out for lending. Both units are still cash positive after counting 70% of the collected rents. See my financial footprint below. I have well over 20% equity in each property and have thought maybe I could shield the debt of these properties by either transferring ownership into an LLC or possibly having an LLC purchase them from me through a commercial lending? Not sure if either of these is an option. Thank you for your infinite wisdom!

    income:

    “Rents: 100%/ 70%”

    Unit 909: 1300/910

    Unit 909 1/2: 1400/980

    Unit 101:1700/1190

    Unit 101a:1000/700

    w2: 4800

    total:10,200 / 8580

    expenses:

    Truck: $500

    Line of credit:$125 “$0 balance”

    MV mortgage:$1550

    Sedro mortgage:$1550

    total:$3725

    DTI:36% / 43%

     Brent,

    I am in the exact same position/problem as you are. I own 4 rentals, all cash flowing $1000+, and lenders still wont lend to me. They are only counting $75% of my income. From what I have gathered on the forum and in my own research, you have a couple options....

    1. Save up 20% for a down payment and do a no-doc loan. These loans will have a higher interest rate and that sucks, but its better than not buying property. You could always buy it and rehab it, and then refi out of the high interest later.

    2. Find seller financing. This is what I did. I love it.

    3. Find a really great lender who understands rental properties and how the cash flow works. I'm no expert at all on lending (its actually one of my weak points but I'm trying to get better). My understanding is that some lenders out there will have your rentals be a wash if you can prove that they cash flow. So then you can use your W-2 income to buy the next one. Perhaps some other folks on here can explain lending better to both of us.

    4. Get a co-signer or a partner.

    I hope this helps.

    Happy Housing,

    -Matt

    6Reply
  • Brent Salazar
    OP
    Investor · Flagstaff, AZ · Member since 2015 · 38 posts · 8 votes
    6y

    Thanks for the tips Matt. I’m definitely going to do more homework on specialized lenders. Any tips for finding/ executing a successful owner finance deal?

    @Matt Nico

    0Reply
  • Jordan Jones
    Rental Property Investor · Temecula, CA · Member since 2018 · 34 posts · 21 votes
    6y

    Hi @Brent Salazar. I'm not 100% sure but I think there are portfolio lenders who will lend to you based on your portfolio cash flow looking at DSCR rather than traditional criteria. Interest rates are higher, though. I looked into it before but have not personally used one. Also, read Brandon Turner's book "The Book on Investing in Real Estate with No (and Low) Money Down." It explains seller financing and looking for / sourcing seller financed deals. May be helpful. Good luck!

    3Reply
  • Ben Zimmerman
    Rental Property Investor · Raleigh, NC · Member since 2016 · 393 posts · 995 votes
    6y

    I think I might be missing something, but if you currently own 2 duplexes and are looking to buy another then you would have 3 mortgages and not 2 for your final DTI calculations. You would also have 3 units worth of rental income + however many units are in the project you are attempting to purchase.

    However regardless of the situation, you want to minimize your debt as much as possible. Since everything is a ratio, your debt hurts you more than your income helps you. So for example your 500 car payment needs 1250 worth of income every month to keep your DTI ratio at 40%. Try paying off any credit card debt, auto, student loans etc.

    How long have you owned these units?  Typically I have seen most lenders start using 100% of rent income after being able to prove 2+ years worth of rental income via tax statements.  New rentals are typically subject to the 75% income problem that you are facing. 

    2Reply
  • Brent Salazar
    OP
    Investor · Flagstaff, AZ · Member since 2015 · 38 posts · 8 votes
    6y
    Originally posted by @Ben Zimmerman:

    I think I might be missing something, but if you currently own 2 duplexes and are looking to buy another then you would have 3 mortgages and not 2 for your final DTI calculations. You would also have 3 units worth of rental income + however many units are in the project you are attempting to purchase.

    However regardless of the situation, you want to minimize your debt as much as possible. Since everything is a ratio, your debt hurts you more than your income helps you. So for example your 500 car payment needs 1250 worth of income every month to keep your DTI ratio at 40%. Try paying off any credit card debt, auto, student loans etc.

    How long have you owned these units?  Typically I have seen most lenders start using 100% of rent income after being able to prove 2+ years worth of rental income via tax statements.  New rentals are typically subject to the 75% income problem that you are facing. 

     Ben,

    Thanks for chiming in, you are correct in stating my dti calculation is only including my current mortgages not any future mortgage with additional income. I have owned one of the property’s for 3 years, and the other is about 1.5 years. Your suggestion of using the true asset performance after the 2 year mark may be the ticket if I wait another 6 months, with the additional income of the future purchase. As for lowering my debt the bad debt I carry is the truck at $500 a month. The line of credit is intended for emergency situations or potential rehab costs. Thanks for the input! 

    Side note, anyone have experience with shielding asset debt from personal debt through a business entity? It seems that investors with a lot of property all do so through an LLC. The LLC purchases / owns the property through commercial lending. Lending is evaluated via DSCR of the asset instead of Personal DTI. This option would be more expensive but also allow for scale. I am understanding this concept correctly?

    0Reply
  • Mike Barry
    Plainfield, IL · Member since 2015 · 111 posts · 17 votes
    6y

    Will paying down or paying off the truck make a difference?

    1Reply
  • David AcostaPro Member
    Wilmington, NC · Member since 2014 · 208 posts · 144 votes
    6y

    Hey @Brent Salazar -- I would second @Jordan Jones's suggestion. Commercial lending may be a good option if you're maxing out your DTI. Using this option, the asset's DSCR and performance are going to be the focal point. I would reach out to local lenders familiar with the submarket and seek out commercial products. All the best moving this forward!

    2Reply
  • Lesley Ray
    Architect · San Francisco, CA · Member since 2017 · 89 posts · 41 votes
    6y

    @Brent Salazar I’m running into a similar issue as I am self employed. So far the lowest interest rate I’ve been able to get is 5%, which significantly eats into my cash flow.

    Would love to keep in touch if either of us come across any viable solutions!

    There’s gotta be a way!!

    0Reply
  • Account Closed
    Member since 2019 · 1k+ posts · 1k+ votes
    6y

    @Brent Salazar

    Ditch the truck payment. This is a mistake many (including myself once upon a time) make. Only mine was $860 monthly. Now I have mortgage payments that are barely more than $860. Yes, it’s sucks to drive a 2005 f150 and yes there are ways around it with different lenders, but your income and expenses won’t be different with another lender, just the way they calculate your debt coverage.

    3Reply
  • Michael Ablan
    Real Estate Broker · Watertown, NY · Member since 2016 · 1k+ posts · 1k+ votes
    6y

    @Brent Salazar - Go with commercial lending.  They have more flexibility and can underwrite the future rent from the subject property

    0Reply
  • Vincent Galante
    Rental Property Investor · NY (long island) · Member since 2020 · 4 posts · 1 vote
    6y

    @Brent Salazar I would suggest doing things in a LLC and using commercial financing. The terms aren't quite as attractive but the loans don't show against your personal DTI. Also sometimes lenders can be a little more flexible when lending against income producing property with a commercial loan.

    0Reply
  • Lee RipmaPro Member
    Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
    6y

    @Brent Salazar

    As others have suggested use Commerical loans. I have never gotten a RES loan and I’m doing fine.

    Podcast Guest on Show #373
    0Reply
  • Reginald Ross
    Rental Property Investor · Gulf Shores, AL · Member since 2019 · 107 posts · 115 votes
    6y

    @Brent Salazar

    Transfer properties to an LLC AND refinance using commercial lender OR use private capital or hard money to expand.

    0Reply
  • Varinder KumarPro Member
    Real Estate Broker · LA & ORANGE COUNTY CA -Multi Family · Member since 2016 · 374 posts · 132 votes
    6y

    @Brent Salazar

    See this is one of the things that people don't touch up on when it comes to the BRRRR strategy and its that the most important part of the BRRRR is the refi part, because you want to make sure you can repeat it and keep it going. Like having a rabbit farm and you keep eating the rabbits. You have run into the very same thing in a way. Read the blog below and it might be able to give you some insight, hopefully a solution as well. Good luck! And I'll do some research and see if I can come up with anything I'm the meantime - as I'm sure you won't be and aren't the only one who will is facing and will be facing the same scenario.

    https://www.biggerpockets.com/blog/conquer-common-refinance-issues-brrrr

    4Reply
  • Varinder KumarPro Member
    Real Estate Broker · LA & ORANGE COUNTY CA -Multi Family · Member since 2016 · 374 posts · 132 votes
    6y

    @Brent Salazar

    Really the focus should be RRRRB - with the end in mind, but people focus so much on acquisition that it becomes the center of everything...

    0Reply
  • Varinder KumarPro Member
    Real Estate Broker · LA & ORANGE COUNTY CA -Multi Family · Member since 2016 · 374 posts · 132 votes
    6y

    @Brent Salazar

    And I would caution against LLC for the following reasons:

    First off don't use an LLC when house hacking, because it may prevent you from getting the financing you want. For instance, low-money-down, Fannie Mae, or FHA-backed mortgages can't be held under an LLC. As a first-time home buyer, you're able to put down as little 3.5 percent with an FHA loan. But this type of loan is available only to people purchasing primary residencies aka under your personal name.

    The same bank that would allow you to purchase a property for just five percent down may require 20 percent down for you to buy using your LLC. Think about the type of investing you want to do before starting an LLC.

    Plus, you might be able to get lower interest rates when purchasing a property as yourself, not an LLC.

    “Special tax breaks”

    Interest on a mortgage for a primary residence is tax-deductible on your personal income. And if you opted for an FHA loan with a low down payment, your mortgage insurance is also tax deductible.

    You might not be able to claim either of these tax breaks on your personal tax return were you to move the property into an LLC. These tax breaks are especially important to highly leveraged owner-occupiers—like house-hackers—who pay lots of interest and mortgage insurance each month in the first few years of ownership. Even in pass-through entities, like single-member LLCs, these tax breaks are minimized because investors can't leverage as much. Putting down five percent or less through an LLC is a rare feat.

    “Tax-free capital gains”

    Assuming that you live in the property for at least two years—and assuming that the property appreciates over that timeframe—you can sell your investment for a tax-free capital gain. This gain caps at $250,000 for a single person and is limited to primary residences only. Unlike a 1031 exchange, the money is truly tax-free and can be spent on your next vacation, manicure, or other non-real estate assets.

    Assuming that your property appreciates 10 percent over the next two years, I’m looking at a cool $20,000, instead of perhaps $13,000 after taxes. That’s a meaningful difference to me.

    2Reply
  • Michael Fleet
    Rental Property Investor · Orange County, CA · Member since 2019 · 6 posts · 5 votes
    6y

    @David Acosta

    I agree. Go to a local community bank or credit union. My local credit union is underwriting a commercial portfolio loan for a SFR and a Duplex in one loan. They are concerned wotj the DSCR, Cap Rate, GRM, etc., which I provided them in my Pro Forma. They are flexible with a rare around 3.75% - 4.25%.

    You have to be willing to make 30 calls to lenders and not be afraid they will say no.

    On to the next one!!!!!!

    5Reply
  • Matt Nico
    Member since 2019 · 448 posts · 306 votes
    6y
    Originally posted by @David Acosta:

    Hey @Brent Salazar -- I would second @Jordan Jones's suggestion. Commercial lending may be a good option if you're maxing out your DTI. Using this option, the asset's DSCR and performance are going to be the focal point. I would reach out to local lenders familiar with the submarket and seek out commercial products. All the best moving this forward!

    Could anyone give a good lender that they know that would use the DSCR for lending and what exactly is a good DSCR? Or perhaps a way to find these lenders? I would assume a quick google search of "Commercial Lenders" with your state at the end would at least result in something.

    I guess I could use my own deal as an example. Property Purchased for $257,000 (short term seller financing.) Assuming an interest rate of about 6.5%, i'm looking at the PITI to be about $2,000/month.

    My property cash flows $2900. So If I am calculating DSCR right, my property would be at a 1.45.

    0Reply
  • Matt Nico
    Member since 2019 · 448 posts · 306 votes
    6y
    Originally posted by @Brent Salazar:

    Thanks for the tips Matt. I’m definitely going to do more homework on specialized lenders. Any tips for finding/ executing a successful owner finance deal?

     Brent,

    The way I got my seller financing deal was just by telling everybody that I was looking for a property. My neighbor ended up giving me the phone number of a guy that owned the property across the street from another rental I have. I called him and we talked for a bit and I asked him if he would want to carry financing for a while while I fixed the place up and he said no problem.

    If I were you, I would understand the benefits of seller financing from both sides before you go asking everyone for it. Its an easier sell when you can explain to the seller why its good for them as well. Interest rate, short closing, no more maintenence....ext.

    Hope this helps,

    Matt

    1Reply
  • Jordan Jones
    Rental Property Investor · Temecula, CA · Member since 2018 · 34 posts · 21 votes
    6y

    @Matt Nico, I had looked at Visio Lending. From what I remember, they were looking for a DSCR ratio of 1.2, but their rates and appraisal fees were higher. I think they also wanted to see a certain amount of reserves as well. There have been quite a few posts on these boards about their services. If you search the forums you can find all kinds of feedback discussing the good and bad. I'm sure there are plenty of other options as well.

    I personally didn't wind up using them because I am still able to get conventional loans with better terms. But I would definitely consider using them in the future as I continue to grow my portfolio. Good luck! 

    Jordan Jones

    0Reply
  • Matt Nico
    Member since 2019 · 448 posts · 306 votes
    6y
    Originally posted by @Jordan Jones:

    @Matt Nico, I had looked at Visio Lending. From what I remember, they were looking for a DSCR ratio of 1.2, but their rates and appraisal fees were higher. I think they also wanted to see a certain amount of reserves as well. There have been quite a few posts on these boards about their services. If you search the forums you can find all kinds of feedback discussing the good and bad. I'm sure there are plenty of other options as well.

    I personally didn't wind up using them because I am still able to get conventional loans with better terms. But I would definitely consider using them in the future as I continue to grow my portfolio. Good luck! 

    Jordan Jones

    Jordan,

    Thanks for the lender. I just looked at their website and what they offer. The LTV seems a tiny bit low on commercial but the Rental loans look pretty decent. I would be interested to see where their interest rates would be at. I will call them in the next week or 2 for sure.

    How are you currently doing your loans? I'm not sure how many properties you have or if you have a W-2 job but at some point I would think you would run into a similar problem a few of us are having.

    -Matt 

    0Reply
  • Steven Goldman
    Lender · PA · Member since 2019 · 533 posts · 461 votes
    6y

    Investor and Commercial Loan Consultant

    Brent their are a large variety of specialized lenders who lend on credit score, cash reserve and debts service coverage only. Your D.T.I. is not a issue. We represent 25 lenders who have products that would get you where you want to go. Keep in mind the market is in a state of flux so that the product guidelines are evolving in the new reality of lending in a pandemic.  We suggest that as you come across properties you are interested in, that you run the scenario past a mortgage consultant to insure it will qualify. Each company has their own matrix and qualifications. Debt service coverage ratios, fees and charges vary widely.  

    Good luck, Steven Goldman, G2 Loans/Goldman Mortgage Lending LLC

    0Reply
  • Andre TaylorPro Member
    Rental Property Investor · Chicago, IL · Member since 2017 · 219 posts · 180 votes
    6y

    I agree with most the other investors you have to go commercial lending... there is nothing more you can do for the DTI unless you clear up any debts but if you only have a truck payment then it won't make a big difference like that so I would suggest talking to your small local bank they are more investor friendly that can structure but dont be surprise if their commercial department is not taking on any new loans due to the commercial market being hit by Covid-19

    0Reply
  • Jordan Jones
    Rental Property Investor · Temecula, CA · Member since 2018 · 34 posts · 21 votes
    6y

    @Matt Nico no problem! I hope it works out.

    I have a W2 job. I have a primary residence that I house hacked until this past January, and 3 SFRs. All my loans are 20% down conventional. I was looking into portfolio lenders because I was told (erroneously) a person could only carry four conventional mortgages at once. At that time, I was about to be at four. So that's what prompted me to start looking into portfolio lenders. However, I spoke with my mortgage broker and he said he could get me 10 mortgages. So I ended up just doing conventional. The interest rates and costs are lower. 

    You are right; I will eventually hit a wall. At that point I'll switch over to a portfolio lender who lends based on DSCR. Or at least that's the plan :)

    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    6y
    Originally posted by @Brent Salazar:

    Hello BP,

    I have an interesting problem.  ...credit cards and a truck payment of $500.

    Not that interesting and the solution is obvious when broken down like this.

    Sell the truck and pay off the credit cards or get really good at creative financing.  Your choice.

    7Reply
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