All Forum Posts by: Andrew Broxterman

Quote from @Matt Devincenzo:

Unfortunately I'm not sure you got sound advice on DTI...

Initially the rent may be discounted 75%, and the entire loan counted, but a cash flow rental should still at least break even on this calculation. And once you file a year or two of returns, then they should use the actual cash flow for your DTI, so in your case you'd have been able to use real numbers by the time you're talking about purchasing.

Also another discrepancy, the DTI may not be calculated the way you think. This rental would get its income, minus its expenses and then the net number is added to your DTI. So if the net number is positive CF, then your DTI actually improves, not gets worse.

Final thought, I've seen that loan applications want any entity owned 20% or greater included...I'm not sure if the PG vs no PG plays a role here as well, but I'm still not sure this solves your concern.

Matt, the tax accountant I talked to stated that not being a personal guarantor shields me from the loan counting against my debt.  

Also, we are looking to buy on the MLS, and even the better deals we've looked at do not cover the PITI if you only count 75% of the income.  Best case scenario for me, I purchase a personal home within a year, so I don't want to wait 1-2 years.

Quote from @Michael K Gallagher:

I'd have to 1 up what @Matt Devincenzo says here. In my experience after owning and operating the rental for a year or so and filing the returns you essentially end up canceling out the "debt" portion of the DTI. So yes your debt is tech higher, but the income balances it and the ratio ends up being the same if not better. I'd much rather have this situation than a partner personally.

 Michael,

I have heard that banks will only count 75% of rental income. Even if we got a really good deal, an investment property would still raise my DTI.

I am very comfortable with my partnership and am not worried about minority control.

Quote from @V.G Jason:

The solution to not having it count against your DTI is to relinquish majority control of the asset?

If you don't want it to count again, form a relationship with a local credit union. Be prepared to put north of 50% down.

 Do you mean be prepared to put north of 50% down on a personal home after owning my first investment property?

@Jaycee Greene I am going to borrow money for a home loan within the next year or two.  Also, this is a trusted partner who I have known for about 10 years. The goal is to own many more properties. 

Hello,

I posted about 1 month ago after a lender told me buying an investment property in an LLC would negatively affect my debt-to-income ratio when buying a personal house in the future. I was super disappointed, as I am itching to get my first rental. The reason he said it would negatively affect my DTI is that banks typically count an entire mortgage against your debt but will only give you 75% of rental income. He was correct, but only because I was going to be a personal guarantor on the loan.

I have talked to 10-15 investors, lenders, and a tax accountant over the last month trying to figure out how to keep an investment property from counting against my DTI. The answers were basically split in half whether an investment property would negatively affect my DTI, and the confusing part was that both sides were very certain of themselves.

My solution is that my investment partner will be the only guarantor on the loan. We had to revise our operating agreement to state that he has a 51% stake in the LLC, leaving me with a 49% stake. All lenders I've talked to require this revision to keep me off the personal guarantee. Banks cannot count an investment property against your DTI if you are not a guarantor on the loan. The tax accountant confirmed this.

If you find yourself in this situation and want to buy an investment property without a partner, the investment property will count against your DTI for a personal mortgage as you will need to be the personal guarantor on the investment loan. This applies even if the property is in an LLC and applies to both conventional and DSCR loans.

Hopefully this saves someone the time I spent trying to figure this out.

@Scott Wolf understood. Thanks for your help. 

Quote from @Scott Wolf:

Quote from @Andrew Broxterman:

@Scott Wolf and on top of that, do you know any DSCR lenders that could guarantee it wouldn't show up on my personal credit?

It won't show up on your credit report, but if held for over a year, it will turn up on your tax returns which can affect your DTI.

If the property is profitable on paper, it can offset the mortgage payment or even contribute positive income.
BUT, if the property shows a loss (after depreciation, vacancy, expenses), it could negatively affect your DTI.

Some lenders add back depreciation, but still, a paper loss can reduce borrowing power.

One more question if you don't mind - if we are not taking any money out of the LLC during the first year, will it show up on my personal tax return?

@Scott Wolf understood. I think I will need my investment partner to be the guarantor but I still provide half the money down. Promissory note between us until I buy a personal property, then move investment into LLC after

@Scott Wolf and on top of that, do you know any DSCR lenders that could guarantee it wouldn't show up on my personal credit?

@Scott Wolf Scott, I appreciate your response. I have talked to 6-8 people now and the responses have been 50/50 about whether a DSCR loan on a property in an LLC will affect my DTI for a personal mortgage later. I have heard from a few that the DSCR will still be personally guaranteed by me, and I would have to report it when applying for a personal mortgage. Any additional thoughts? Thank you