High DTI (Debt-to-Income)? How to Still Buy Rentals (Rookie Reply)

0:00Ashley Kehr:On today's Rookie Reply, we're tackling three more thoughtful questions straight from the community, covering some really creative and challenging situations.

0:10Tony J. Robinson:First up, we'll talk about a property manager exploring a unique way to earn income by tying their pay to appreciation instead of rent. Then we'll help a rookie investor figure out how to buy their next property despite a high debt-to-income ratio. And finally, we'll give some tips to a couple with kids who want to rent out a room in their home to medical students.

0:35Ashley Kehr:Welcome to the Real Estate Rookie Podcast. I'm Ashley Kerr.

0:39Tony J. Robinson:And I'm Tony J. Robinson. And with that, let's get into today's first question. Our first question up comes from Jeff. And Jeff says, I'm a super host on Airbnb for my own property, and I'm considering starting to offer management to other people. But rather than taking a cut of the revenue, which can make the cash flow challenging for the owner and markets with decent forecasted appreciation numbers, I'm playing around with the idea of taking a percentage of any future appreciation. Has anyone come across that business model? Any way to do this where I can see myself with X percent of zero dollars unless there's no appreciation?

1:11Tony J. Robinson:Would this be an attractive option for you as a property manager as opposed to a percent of revenue? This is interesting. I've literally never heard anyone frame this question as a property manager to say like, hey, I don't need cash flow. I just want a piece of the appreciation. Have you ever heard anyone structure a management deal like this, Ash?

1:29Ashley Kehr:Actually, I think that I have. I don't think that I would do this, but I'm pretty sure that I have talked to people that instead of wanting part of the cash flow, they want part of the equity in the property, and it's a way to get them started in real estate investing. You see this in business models where someone goes and works for a company and they say, instead of taking X amount of salary, I'll take a little bit less. But I also want some profit share or equity in the company, too. So I don't think this is uncommon. The reason that I would not do this as the property owner is because I wouldn't want to tie myself to someone.

2:11Ashley Kehr:And I think it gets more complicated if they don't perform or don't do a good job to actually separate from them. So first step is talking to an attorney to see what you would need to set this structure up and what would happen when you decided to part ways and to separate from each other. The thing that I would not want to happen is Tony comes on as my manager. I give him some equity. He does a horrible job. I tell him he's done. but yet he still owns 10 % of my property until the day that I sell it.

2:44Tony J. Robinson:Yeah, I couldn't agree more. I feel the same way as an owner. I would not give up a percentage of ownership of my property to a property manager for all the reasons you just said. I think what would be a better approach, Jeff, if you have the skill set of effectively managing Airbnbs, I would either just go the traditional route of offering a percentage. And if you want to be conservative of their cashflow, then I don't know, maybe structure where it's like, hey, I'll only take a percentage of the revenue above X dollar amount per month. Like, hey, you're going to earn a thousand bucks a month.

3:23Tony J. Robinson:I'll take everything above the thousand dollars, then I'll get my 15 % or whatever it is. But hey, if you don't get at least a thousand bucks, and you don't pay me anything. And maybe that's a more attractive way to protect the owner's cashflow without marrying yourself to that deal. But I think it would be a tough sell, in my opinion, to go to someone and say, hey, I'm gonna manage your property in exchange for that I want a percentage. Now, I think it's different. And Ash, you let me know if you think differently here, but if Jeff came to someone and said, look, I found this amazing deal. I'm going to set the property up.

3:58Tony J. Robinson:I've already got it under contract. I just need you to buy it. I need you to fund the deal. And then we're going to partner on this thing. I think that's a different proposal than going to someone who already has a running Airbnb and saying, hey, can I get 10, 15, 20 % of your equity? What do you think, Ash? Would that be a better approach than trying to do it as a management partner?

4:18Ashley Kehr:Yeah, I think that's a great idea. You're bringing somebody who has the capital, you're doing all the work for them. and that's how I got started. I brought my first deal to my partner and I said, I'll manage it. I'll, you know, find the tenants. I'll, you know, manage the contractors for a little bit of repairs and they became the money partner. So yeah, I definitely think you probably have a better opportunity with that. The one thing I will say though, is even though me and Tony are kind of, you know, crapping on this idea of like, don't do this. You should still ask people. You should still put it out there because just like we say with lowball offers, you never know until you ask.

5:00Ashley Kehr:So I would not say don't do this, but I think look at other ways that you could partner with somebody or become a co-host, provide value with not only this structure, like maybe have different options for someone and say, hey, you give me equity, I'll manage your property and this is what it would look like. And then there's the offer too, where it's maybe a step up where the first month I'm going to make all these changes. I'm going to manage it. And after the first month, if I've increased your revenue by X amount, you owe me a percentage. If I don't do that, okay, we can continue on if we're seeing a growth trend, but you don't have to pay me anything until I hit that number or something like that.

5:46Ashley Kehr:So I think you'll have a better chance of getting those partnerships if you have different options. And once you've kind of gotten that track record of doing it for other people, you'll have a lot more wiggle room of being able to say, this is how I structure the people I co-host for. This is my structure. But I think just to start building that brand and building that confidence in other people, to have those different options available is a great start.

6:13Tony J. Robinson:Yeah. So Ash, we talked about maybe not taking your management fee unless a certain revenue threshold is met. But I think the other piece is the profit sharing. Maybe instead of you taking your management fee off of gross revenue, you can say, hey, I want a percentage of the profits. And if you approach the property owners with that perspective, well, now you're almost like a partner because you're not incentivized just to maximize the top line, but you're also incentivized to maximize the bottom line and the actual profits that owner's seeing. So I think maybe adding in the option of, hey, I don't charge my management fee off of the top line revenue, but actually charge a fee off of the actual profit that hits the bank account is another creative way to approach owners in this situation.

6:56Ashley Kehr:Okay, we're going to take a short break. When we come back, we'll have another question from a rookie investor.

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10:38Ashley Kehr:Okay, welcome back from our break. Today's next question is from Daniel. Since joining this forum less than a year ago, I had the good fortune to connect with a real estate pro who helped me buy my first investment property, a house hack owner occupied duplex with 5 % down. I've caught the bug and want to buy another property as soon as possible, but my debt to income is already dented from my current mortgage and my six-figure student loans, which I've been comfortably paying back. How can I get around this, or is it more prudent to pay off these loans first? Okay, so I think probably the first thing to talk about is DTI.

11:19Ashley Kehr:What is DTI? And it is your debt to income. And this is calculated by mortgage brokers, lenders, banks, when they're seeing how much debt you have compared to your income. So for example, if your monthly mortgage payments add up to$10 ,000, maybe that includes your auto payment, your student loan payments, that's$10 ,000. And then your monthly income is$20 ,000. So that means you have a 50 % debt to income. your debt payment is 50 % of your income. So with this question from Daniel is saying he wants to buy another property as soon as possible. So right here, we have two options that we're not sure what he is trying to do.

12:10Ashley Kehr:You can live in his house hack for a year, and then he'd be able to move to another property to make it his primary. When he did this option, the bank would then look that He is filling his side of the duplex with rental income, and they could take a portion of that, a percentage of that rental income, and count it towards his income, and that would lower his debt to income. And that would free up some debt to income room for him to purchase his next primary. If he is going to buy the second property solely as an investment and not a primary residence, then he should look at a DSCR loan. So this is a debt service coverage ratio loan where instead of looking at your debt to income, it is looking at the income of the property and how much debt you're putting onto the property.

13:03Ashley Kehr:So what the lender will want to see is that the property is able to support itself and to pay the mortgage payment on the property. I think that is probably the best route for him to go. And then he doesn't have to worry as much about paying completely off his student loans, especially when there's six figures, to be able to get that debt to income lower to go and purchase the next property.

13:32Tony J. Robinson:Great point, Ash. But you know what stuck out to me was he says, my DTI is already dented. But he didn't say like, I've been told by a mortgage broker, right? Or I've been told by a loan officer. So I think what I would do first, Daniel, is just go to a few lenders and give them your current financial situation and let them actually tell you if your DTI is an issue. But what I wouldn't want you to do is just assume that because you have the student loans, because you have the mortgage from the House Act, that you can't get qualified for another loan. So I think the first thing is just go talk, go shop around to as many lenders as possible to understand what the different options are.

14:09Tony J. Robinson:and as you bring up a good point of the DSCR, but as you talk to more lenders and we just had Jeff Welgan on episode 588 of the Ricky podcast, and he talked about lending and he just like, he, he talked about so many different loans that Ash and I had never even heard of before, you know? So I think the, the first and maybe most important step, Daniel is go shop, talk, and get the option of what makes the most sense for you. Um, I think the, the second part of that question is like, should I pay off my student loans? I think maybe it depends. If you do go talk to a lot of lenders and they all say the same thing, like, Daniel, dude, these student loans are like killing your ability to get approved, then maybe it is the prudent choice to pay those down.

14:51Tony J. Robinson:If you've got super high interest rates on the student loans, maybe it is a good idea to pay those down so you can free up more cash flow to get approved. But if the lenders are like, eh, it doesn't really hurt that much and you've got like a 2 % interest rate, then maybe it is the better decision to go out there and use that money to buy that next deal. So I think there's some nuance to the question, some detail maybe that we're lacking, but I just wouldn't make any moves until I've gotten no from multiple lenders about buying that next deal.

15:18Ashley Kehr:Tony, did you have student loans?

15:20Tony J. Robinson:Yeah, I still do.

15:22Ashley Kehr:Did you prioritize paying them off or did you invest first?

15:26Tony J. Robinson:I invested first because they're all federal loans and all of my student loan debt is like like a 2 % interest rate. It's crazy. So it's like, I have no, you know, to like pay that off. So I'm paying what I need to pay. Um, and I I've used that money to go out there and buy all the real estate deals we've done, you know? So for me, it was the right financial decision, but mathematically it made more sense for us as well.

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