Each Successive Property Worsens My Ratios...
I've got a question. My lender tells me that with each successive property I purchase, my back end ratio will get worse. He's telling me that about 41% on the back end is all conventional lenders can finance.
My erroneous understanding is that if I were getting positive cash flow from a property at 75% of rents compared to PITI that it would actually IMPROVE my cash flow situation by the net of 75% - PITI.
He's telling me that my entire PITI counts toward my debt and 75% of rents count toward my income. I'll be maxed out at 3-4 income properties at that rate. Who's right, who's wrong, what's the way "around" this requirement?
Thank you all in advance for your wisdom. :-?
Your are both correct. 75% of rents will be included to your income but 100% of PITI is added to your debts. Trick is to try to charge roughly 133.5% of PITI for rent, so both will cancel itself out. Ex if PITI is $750/mo, you would need to charge $1000/mo rent. If PITI was $1000/mo, you would need to charge $1335/mo, etc.
Switch to using a COMMERCIAL mortgage broker and you won't have this problem. Commercial brokers are very hard to find but if you can find a good one they can be a great asset.
GOOD LUCK
jmB,
Thank you very much for your response.
To clarify, if my PITI is $1000 and my rents are $2000 (75% = $1500) then my ratio for this property is then $1000 / $1500 = 67% right?
This is where I'm panicking about my ratios. Seemingly, I'd need an ungodly deal to allow me to continue investing.
myfrogger,
Thank you very much. Will commercial brokers look at anything under 5 units?
try forming an llc or incorperating. this way the business can own and run the properties and it won't be so bad on you.
raymo,
Thank you for your input. Would a corp or llc not have the same ratio requirements that an individual would have?
If the loan is in the name of a corporation, it will not show up as personal liability....only personal income, and therefore your ratios get better with each purchase, not worse.
Also, once you max out one lender, move on to another and use them for a while. You may be a "highly leveraged, maxed out" investor to one, and a "skilled and seasoned" investor to another.
Hey,
I don't understand why forming a corporation or LLC would have any effect on required ratios. If the houses are owned under a corporate name, the rental income and debt are both assigned to the corporation. You can not take the rental income as personal income and leave the debt as corporate.
The very best rates are for OO property. Next (more or less) is NOO that is purchased by a very credit.
When using an LLC you have two options.
1. You buy in your name and then transfer (a sale actually) to the LLC. A bit messy and you will still have the loan in your name.
2. You buy in the name of the LLC. If you go this route the LLC has to qualify and it has to be something the lender wants to deal with. Not likely to be as credit worthy (short live, few assets, little income not related to property) so you will have higher rates and worse cash flow.
There is no magic here when dealing with the fundamental issue. You want to have enough income from a property so that your position is improved by each purchase. Difficult in many rental markets.
John
[addsig]
jmB,
Thank you very much for your response.
To clarify, if my PITI is $1000 and my rents are $2000 (75% = $1500) then my ratio for this property is then $1000 / $1500 = 67% right?
This is where I'm panicking about my ratios. Seemingly, I'd need an ungodly deal to allow me to continue investing.
Bbadger,
This is what you want. If you take the $1500 away(75%) from your $2000 rent than you have a positive $500 going toward your debt to income ratio.
Lets put it in these terms.
PITI= $750 (which isnt a bad payment for investment properties if you buy right)
Your rent needs to be $1000 to break even on your debt to income ratio.
Now if you charged $1020 a month for rent you would have a positive $20 toward your debt to income ratio.
I hope this helps some.
Hibby is right, if you can put the property in the name of an entity and the rents are pass through to you then it will only improve your scores. Additionally, if your looking to be a landlord of magnitude by buying more properties over the next few years then why not go bigger? Go to buying 5 units and up and get a commercial loan on them. COmmercial loans are based more heavily on the properties ability ot pay for itself than your credit...
[addsig]
The ratios are for a manual underwrite on your file. Most lenders now use and prefer the automated systems where your existing assets, LTV, and credit score weigh more importantly than just your ratios alone. There are also many stated income and no doc programs available. Staying away from commercial lenders would normally be your best bet as the rates, terms, costs for a NOO is much better than going the commercial avenue.
My advice-find a lender that isn't so traditional. It sounds like you are maybe using a small town bank. FYI, More and more lenders aren't even doing manual underwriting anymore. Hope that helps!
Thank you all very much. I immensely appreciate all the sound advice and thoughts I've received. I'll certainly be shopping around to find more lenders. I've tried the lenders listed on this forum but when I call them or send an email I don't seem to get any response. Odd, but oh well.
THANKS!!!!