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Author Topic: Do lenders impose a max on # of rental properties?  (Read 19102 times)

Offline LandmarxProps

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Re: Do lenders impose a max on # of rental properties?
« Reply #15 on: October 31, 2007, 03:16:37 pm »
On a rental property debt is what you owe after applying .75 * rent to your PITI. If you owe nothing- no debt. It is not a reoccurring debt then.

Rent is not income but a payment toward PITI and expenses , then if there is money left over it becomes taxable income.

right?

Offline LandmarxProps

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Re: Do lenders impose a max on # of rental properties?
« Reply #16 on: October 31, 2007, 03:18:14 pm »
On a rental property debt is what you owe after applying .75 * rent to your PITI. If you owe nothing- no reoccurring debt then.

Rent is not income but a payment towards PITI and expenses ,then if there is money left over it becomes taxable income.

right?

Offline christopher w

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Re: Do lenders impose a max on # of rental properties?
« Reply #17 on: October 31, 2007, 03:33:42 pm »
100% of the PITI is added as debt and the rent X 75% is added as income. For example if the property PITI is $1000 and it is rented for $1200 then $1000 is added as debt and $900 is added as income.
Christopher W
C-214.923.5781

Offline LandmarxProps

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Re: Do lenders impose a max on # of rental properties?
« Reply #18 on: October 31, 2007, 04:36:49 pm »
So for every $1000 of debt you need $2000 of income to keep your ratio at .5? On a rental at $1000 PITI you would have to be offset by a $2000 net rent not to hurt your existing DTI ratio?

How can you ever structure a rental property deal then that doesn't kill your DTI ratio? Especially if you own more than a few?

Offline christopher w

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Re: Do lenders impose a max on # of rental properties?
« Reply #19 on: October 31, 2007, 05:32:18 pm »
No this is not correct. You don't need to have a 50% DTI per property just over all. If you have $1000 of debt and 1200 in rent you get 75% of that rent or $900.00. So for example if you make 60K per year then you make 5K per month. So lets just say all of your credit debt and current house payment total $2000 before you buy this property. You would be at a 40% DTI ratio. $2000/$5000 = .40 or 40%. Now say you wanted to purchase this property and it was going to be $1000 a month and rent for $1200. So now your debt would be $3000 and your income would be $5900 ($5000 plus the $1200 X 75% or $900). This would put you at a 50.8% DTI which would probably be okay depending on your credit score and your assets.
Christopher W
C-214.923.5781

Offline LandmarxProps

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Re: Do lenders impose a max on # of rental properties?
« Reply #20 on: November 01, 2007, 10:06:39 am »
Hey Chris, that is my point, you just increased your DTI by 10% with 1 property.

I would like to own multiple rental properties. What's the way to go about adding more rentals to your portfolio without banks denying you because of your DTI ratio? What if you are cash flowing nicely on every house you own? Most loans would be around 80% LTV for me.

Will banks treat purchase to lease properties different than primary or second homes? In other words isn't that how they do it for commercial property analysis? Basically see the ratio of rents to your costs to decide if the property is worth buying or lending on?

Thanks.

Offline kkiefer216

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Re: Do lenders impose a max on # of rental properties?
« Reply #21 on: November 01, 2007, 10:55:19 am »
Thanks for clarifying Chris, although I think you spoke to soon.  In your most recent post you proved my point!  I have five properties, all cash flowing nicely, my income and expenses by themselves brings my DTI in around 35%.  When you start adding my properties at 75% of the gross rentals and the PITI associated with them, my DTI goes up to 83%.  By the way, if you had rents of $2,275 and PITI of $1700, your DTI on that property would be 100%.  Therefore, given what your other income and expenses were, it would increase your DTI.  Lets say for example your income was $5,000 and expenses were $1,750.  My DTI is then 35%.  When you add in this property my DTI increases to ((1,750 + 1,700)/(2,275*75% + 5000)) = 51.45%.  Now keep the personal income and expenses the same, and add four or five more properties like the first; you see where I'm going!  My explananation before was stating no other income or expenses, which is obviously never going to be the case, but was only for simplicity in proving my equation.  I'm not trying to argue, I am enjoying reading all the posts and learning new things from other professionals!  If you have any suggestions to somehow keep from my DTI from continuing to increase, please let me know.  Did you have any more info on the requirements for blanket loans?  I am getting ahold of a bank in my area shortly.

Offline christopher w

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Re: Do lenders impose a max on # of rental properties?
« Reply #22 on: November 01, 2007, 11:14:58 am »
The only way to keep your DTI from increasing with each property is to buy at a large discount and rent at market value. I understand you are not trying to argue but your numbers are not correct. Your original argument was that banks double dip and that you had to make over 250% more income on the property than debt to actually qualify for several properties. Now your changing it to "it DOES have an affect on your DTI". They are not the same argument. If you are renting it for $2275 and your payment is $1770 then the rent would wash away the debt and it would have ZERO affect on your DTI. Because  the debt that was added would be almost the same as the income that was added so your DTI would stay the same. That is all I am saying. Another option to use is to go with No Ratio loans to buy your houses. Using this type of product your DTI is not considered just your credit, the LTV, and your assets are used to qualify. Finally, I have no more information on blanket loans. Call around your area and speak to some loan officers at local or regional banks.
Christopher W
C-214.923.5781

Offline kkiefer216

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Re: Do lenders impose a max on # of rental properties?
« Reply #23 on: November 01, 2007, 11:32:39 am »
Thanks for the info.  Again, look at my previous post.  What I meant by the bank double dipping is the fact that they are only taking 75% of your gross rents in addition to the expectation that with the property added into your DTI calc, that your DTI will stay w/in their criteria.  The whole reason for the bank requiring a DTI of 50% or less is to factor in regular expenses from your personal life (groceries, utility bills, savings, etc...)  The same thing is done when the banks take 75% of your rental income for operating expenses (water, sewer, maintenance, etc.).  Therefore, to not double dip, the bank should net 75% of your rental income, net it against your PITI, and add or subtract that number to your personal income number.  Then they should factor your DTI based on your personal expenses and your personal income plus the net rent income (75% rents - PITI).  I don't know how to explain this any easier!  The banks do not "wash away the debt" with your rental income.  The 75% of gross rents gets added to your personal income, and 100% of your PITI get added to your debt.  Therefore, when you have a property with gross rents taken at 75% that equal or are close to the PITI on the property, this is going to negatively affect your DTI.  Thanks for the help, I will be getting in contact with some people to try to find a no ratio product out there.  I am assuming there are not many, if any, doing these on non-owner occupied three families; even with a 80% LTV.

Offline LandmarxProps

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Re: Do lenders impose a max on # of rental properties?
« Reply #24 on: November 01, 2007, 12:51:30 pm »
There are 2 scenarios here both are completely different. Which is right? Still getting 2 answers.

Scenario #1. If the 75% of the rent pays the debt on a property it does not affect your DTI.
This would wash out the property and it is no longer added to income or debt on the DTI ratio.

Scenario # 2. The next is to add 75% of your rent to your Income on the DTI and your PITI amount to your Debt  in the DTI. Let's look at an example.
 
Debt currently: $2000 Income currently: $6000
House A Net Rent: $1000 House A PITI: $1000

1. If the property does not affect the DTI because the rent pays the debt then the DTI is $2000/$6000 = 33%.  Your DTI Stays the same and the bank in this example does not count the property toward your DTI. It washes out as was mentioned earlier in this post.

2. BUT on the second scenario if you add $1000 rent to income and $1000 PITI to debt you get a completly different number. Here it is: $6000 + $1000 = $7000 debt.  $2000 + $1000 = $3000
$3000/$7000= 43%. Your DTI goes up 10% in this example from the previous example. The debt therefore is not washed out even though the rent covers the debt payment.

Which one is correct? There is a HUGE difference between the two when you start buying and holding multiple properties. That is the question we are trying to get at.

Offline kkiefer216

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Re: Do lenders impose a max on # of rental properties?
« Reply #25 on: November 01, 2007, 01:29:37 pm »
Props,

Scenario 2 is correct.  I own five properties and have watched my DTI get higher and higher.  They in fact take 75% of your rental income and add it to your income, as well as taking 100% of your PITI and adding it to your debt!  My properties generate between five and eight hundred dollars positive cash flow each, although my DTI keeps on going up with every property I buy.  The suggestion to find lenders that do no ration loans is the way I may have to go, outside of finding private lending at this point.

Offline christopher w

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Re: Do lenders impose a max on # of rental properties?
« Reply #26 on: November 01, 2007, 01:34:48 pm »
Your DTI is only affected if the PITI is more than 75% of the rental income.

In the example you showed your DTI would be negatively affected by this property because you are having $1000 to your debt but only $750 added to your income. So your DTI would go from 33% to 44%. The only way for the property in the example to not have an effect on your DTI would be if you rented it for $1350. $1350 X 75% would be $1012.50.



Christopher W
C-214.923.5781

Offline christopher w

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Re: Do lenders impose a max on # of rental properties?
« Reply #27 on: November 01, 2007, 01:36:49 pm »
Keif,

You must be buying jumbo size properties to have that much cash flow and still be getting hit on your DTI.
Christopher W
C-214.923.5781

Offline christopher w

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Re: Do lenders impose a max on # of rental properties?
« Reply #28 on: November 01, 2007, 01:50:20 pm »
Kief,

So you went from saying this...

So the bank is not being fair by adding in your PITI into the debt part of the equation, but only including 75% of the rental income.  They should take the 75% of the rental income and not factor the PITI from the investment properties into the DTI calc at all, or give you credit for 100% of your gross rental income, then factor your DTI with the PITI.  It seems like the bank is safeguarding itself by factoring out "operating expenses, not once, but twice out of your investments.  That is why I am now having a hard time obtaining financing on great, profitable properties!!!  What ever I do, my DTI still comes in above 50%!!!   It's like they are expecting you to obtain rents that would be in excess of 267% of your PITI!!!!!


To saying this...

  The 75% of gross rents gets added to your personal income, and 100% of your PITI get added to your debt.  Therefore, when you have a property with gross rents taken at 75% that equal or are close to the PITI on the property, this is going to negatively affect your DTI. 

And your acting as if I don't understand what you are saying. When in fact I said this...

100% of the PITI is added as debt and the rent X 75% is added as income. For example if the property PITI is $1000 and it is rented for $1200 then $1000 is added as debt and $900 is added as income.

Yesterday.

I don't mind conversation and trying to help people understand something that might seem difficult. But don't act as if you have been trying educate me and I just was not getting it. I do this type of calculation all day everyday.

This...

100% of the PITI is added as debt and the rent X 75% is added as income. For example if the property PITI is $1000 and it is rented for $1200 then $1000 is added as debt and $900 is added as income.

Is much easier to understand than this...



To prove this crazy percentage, I have entered the following equation assuming your PITI is $1000 (for simplicity).

.75i = 2d

.375(i/2) = d

i = (2d/.75)

i = ((2*1000)/.75)

i = 2,667

d = 1,000

i/d = 267%


Now that we have that settled. On to better topics. You should be able to find no ratio loans at almost any mortgage company. Although on multi-family you will most likely be capped at 75%. Although there are wholesale companies that will go to 80-90% depending on credit. You will need to speak with your mortgage broker to use them though as wholesale lenders do not deal with the general public. Hope this helps.

Christopher W
C-214.923.5781

Offline kkiefer216

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Re: Do lenders impose a max on # of rental properties?
« Reply #29 on: November 01, 2007, 02:21:18 pm »
Don't get offended, but you didn't explain yourself very well either.  Earlier today, you said:
If you are renting it for $2275 and your payment is $1770 then the rent would wash away the debt and it would have ZERO affect on your DTI. Because  the debt that was added would be almost the same as the income that was added so your DTI would stay the same. That is all I am saying.

That would in fact increase your DTI: 2/4 = 50%; add 1 to both the numerator and denomerator: 3/5 = 60%. 

Alright, I think we are all now on the same page.  Thanks for the insight!  I will be contacting some brokers to help me find no ratio products!
« Last Edit: November 01, 2007, 02:25:48 pm by kkiefer216 »

 




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