Investment property without it affecting DTI

[Patrick Forelli]

Hello BP community.

I currently make 125 k a year and I own 1 property that is performing well as an STR.

I dont have the upfront cash to purchase another for a down payment but my parents are interested in financing my down payment with a 5% interest rate. 

I should be able to qualify for a DSCR loan or conventional loan, but I see down the road that this could affect my DTI and make it difficult for me to get more mortgages in the future.

I understand I could use a conventional investment loan and my parents could co-sign the loan to give me better terms, but does this remove the loan from my DTI? I assume not.

If the property was purchased under an LLC and my parents get a 5 % preferred return and they personally guarantee the loan, but I take the majority of the income, does this remove the loan from my DTI?

My parents are interested in supporting me and they are at a stage where they have a comfortable amount of money, they have excellent credit and they have no plans of taking out a loan in their lifetime. 

Are there any creative strategies for them to secure the loan without it affecting my DTI?

They also want to avoid any liability at all cost which is why I suggested an LLC structure. Is an LLC a secure, 100 % fool proof method to protect my parents assets?

[Corby Goade]

This is the same struggle that every new investor has- DTI will keep you from getting more loans quickly than any other factor. That's why it's important to buy in growing markets with solid rent and population growth.

There will be risk to your parents regardless. The best way to mitigate that is to BRRRR and build some equity for a cushion for them.

Best bet is a DSCR, but you might have trouble with a BRRRR, but you could always refi in to DSCR after rehab.

[Bruce Lynn]

I would not borrow money from your parents.  I understand you are eager to get going, but borrowing money from family is 95% of the time a recipe for disaster.  It changes relationships.  It ruins relationships.  We probably all have horrible stories around this concept.  I can't even really think of a success story, although I am sure there are some.  It's almost the same as if you buy a home and then rent it to your cousin or brother, and then they can't pay rent this month, next month, or the next month and that happens.  When that happens you are paying the mortgage and start to get frustrated?  If you can't pay it, or start being late, then that affects your credit.  Think of how frustrated you are about that.

One idea if they really want to be investors is put everything in their name.  They own the house, they're responsible, they choose the house, the tenant, responsible for taxes and insurance and loan payments. Then if they want to pay you a fair fee for you to be their property manager, they could do that.  Maybe that is not even good idea, but perhaps better chances of success and maintaining a relationships.

Probably NOT what you want to hear, but if you're making $125,000 and you don't have the discipline or willpower or willingness to save for the down payment and closing costs on property #2, then what will you do if things go south..like your tenant doesn't pay rent, you have 3 months of vacancy, or the tenant destroys the property and you need to rehab?   Sounds easy to go to the bank of mom and dad, but things happen in real estate.   What if there is a storm and the roof needs to be replaced and someone needs to pay the deductible?

If they know, love, and trust you, and think you will be successful running rental property, maybe have them gift you each year for a couple of years enough down payment money.  There is a limit of what they can gift, so have them check with CPA.  I'm thinking between your fanatical approach to savings and cutting expenses for two years and their gift money for two years, you should have a big chunk of money where you can go after this concept on your own.

[John Underwood]

DTI would include the Income from all your rentals. So if you buy smart and have a good cash flowing property this could help you.

It is more difficult in this environment to find great properties at great prices at interst rates that work well.

I would also caution everyone to not put all their eggs in the STR basket. I have a healthy mix of LTR's that allow we to weather a potential STR storm.

[Jessie Dillon]

- most lenders will not be ok with your having secondary debt for the down payment on the next property. are your parents open to instead PARTNERING on the next one in exchange for, instead of a fixed rate of return, a % of equity/cashflow? the 5% preferred return may even be enough for the lender to say no. & you'd all have to personally guarantee anyway. only have the mortgage would count against your DTI if you have a 50/50 split.

- what if your parents alone get the loan and buy the property, then quit claim deed it to a trust with all 3 of you as beneficiaries. the trust would have a jv / operating agreement outlining everyones percentages and responsibilities. the debt would only be in their name.

- every investor reaches a point where their DTI is trashed and they have to move into different loan products. there are tons of lenders out there that specifically work with REIs & have many ways to navigate this. don't let DTI concerns keep you from moving forward.

- LLCs provide minimal legal protection in case of an incident. work with an asset protection attorney to come up with a better plan if they are that concerned. also have great insurance and an umbrella policy. 

[Deb S.]

I can think of 2 things off hand:

1 is to buy a property subject to the existing mortgage (this is different from assuming a mortgage). In this scenario you take over a seller's existing loan (mortgage payments at the existing loan rate). Finding a seller that wants to do this is not so easy. There are also other things that can go wrong which I won't dive into here. That said, this method is only for investors, title companies and sellers who fully understand what a 'subject to' transaction is and put the proper protections in place with the respective paperwork.

2 is to use an Infinite Banking strategy which is done by using the cash value built up in a permanent life insurance policy through a loan at roughly 5.5%. So your 'cost' would actually be 10.5% since your parents want to earn 5% but.........this method avoids this 'loan' showing on your DTI because the only people who know about the loan is the insurance company and the owner of the policy that took the loan. In this case your parents could give you the money to fund the policy if you need the money right now (clearly you have to work out repayment with them). If you don't need funds immediately, start a policy with your own funds and start building up cash value that you can borrow against. Another plus to this strategy is there is no structured repayment of the loan - you decide how often loan payments will be made and what amount.

Hope this helps!