Want To Own More Properties Without the Bank saying No?
For many investors, the ultimate dream is to build passive income high enough to say good bye to your day job. This is what we learned through Robert Kiyosaki’s four quadrant where you move from the initial quadrant of employee to fourth quadrant as investor. This is where your money is working for you and you not working for your money.
How To Buy More Than One Investment Property
This all sounds great investing into Real estate, but banks has a way of capping this dream of yours. As we know with our current banking rules, to get the lowest mortgage rate, an investor has to provide a minimum of 20% down plus closing cost for investment properties. Unless the investor has a minimum of 3 income properties, the banks will only approve the loan based on Rental Offset where they will take only a portion of the rental income and all of your debts including your personal mortgage. Your total amount of debt cannot exceed 40% of your gross income or slightly higher depending on the lender. Unless your income is high enough to offset the difference, a glass ceiling is put in place preventing you from buying more rentals and you achieving your dream.
If you own more than 3 income properties, you have the opportunity to qualify under the Debt Coverage Ratio (DCR) financing with several lenders without door limits. The bank would like to determine your ability to generate enough income in your operation to cover the expenses of the mortgage.
Debt Coverage Ratio = Net Operation Income / Debt Service = DCR
(You can download a copy of two different major bank lenders DCR spreadsheet from the link)
How To Raise That Glass Ceiling? It doesn’t matter if you are buying long term buy and hold or rent to own deals, the lenders will only take a portion of the income and offset it with debt. So let’s take for simple example of a home costing $200,000, with 20% down based on 2.79% rate and 25 year amortization, the cost of borrowing is $740/month and taxes are at $200 a month. Vacancy is set at 4%
Buy and Hold- Rent is $1,200 a month, utilities covered by tenant.
DCR (B&H) = $1,200 (.96 vacancy) / 740 + 200 = 1.23
Rent To Own – Rent is set at $1,600 a month, utilities covered.
DCR (RTO) = $1,600 (.96 vacancy) / 740 +200 = 1.63
The difference is dramatic, it is the same house purchased at the same price. Both qualify under the same rental program except the RTO investor is qualifying with more income. This opens up the glass ceiling and raises it to you as an investor can push for more doors and make that passive income stream a reality. Plus the RTO investor has an occupant with more skin in the game than a rental tenant with first and last. Which investor would you like to be?