75% Rental Income Makes REI Tricky
I am a beginner at REI and have been working on creating my b-plan. My plan involves purchasing & holding rental properties with 10% down and generating enough positive cash flow such that I am break-even or better at 75% of the rental income. My goal is to continuously grow the portfolio of rental properties by using the cash from a refi on one to buy the next.
I have found out that in order for this plan to work and avoid adverse effects to my debt-to-income ratio, I have to find (unrealistically) undervalued properties to generate enought positive cash flow so that @75% of rental income, I am still cash flow positive.
My question is: Are there other lender considerations to calculating debt-to-income? For example, should I consider depreciation expense to create more income from a lender's perspective? What else can I do to maintain a strong debt-to-income ratio?
Robert
I just closed on a property using a liebor loan. Its a variable rate at 3.5 percent which can never exceed 5.5 percent and is interest only for the first 10 years. so my payment on a 60k loan for a investment single family residence is 275 a month. thats taxes ins everything, including mortgage insurance of 33 dollars. the house will rent for 675-700 a month. if your having cash flow problems then this may be the way to go, at least until you get enough properties under your belt and you have so much cash flow that youll be swimming in it(I plan on buying several more houses with this loan). good luck. Dan
Good thought on the int only loan. I suppose if you find a property that is already in the money (which a good REI should do), than making principal payments is not as important to buidling equity.
The lenders know that depreciation is a phantom expense. It does not create any cash flow, it only reduces your tax liability.
Lenders generally take 75% of your gross rental income and 100% of your PITI and mandatory fees (PMI and HOA dues for example) when calculating your ratios.
Your plan might work but success depends upon property appreciation and increased rents over time. Perhaps a five or six year interval between purchase and refi is needed to make your strategy work for you.
Every now and then place a new property in a trust to keep it off your credit report and public record. Although this may work Don't leverage to far. Also you may want to consult with a real estate attorney.
I'm not recommending this but its available.
The focus should not be on the 75% but on the cash flow.
Lenders need to use an average. They use 75% in the US normally.
The point is they want to make sure there is enough for vacancies, maintenance, taxes, insurances, property management, etc. There are running costs in the RE investing business.
John
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