Leverage

Over time, a private investor can create a portfolio of rental properties while earning the same salary. This is possible through the mortgage regulations. A mortgage is financial leverage for private investors, like you and me, and when used strategically, this leverage allows a private investor to create a portfolio of real estate.

But How?

The mortgage regulations require your DTI (debt-to-income) ratio to be 43% or less. When you buy an investment property, the monthly debt payments (contribute to the numerator of the DTI formula) increase your DTI ratio. Once you rent that investment property, the rental income (is added to the denominator) brings down your DTI ratio. As result, you can continue to purchase and rent investment properties, without making a higher salary, and build yourself a portfolio. Below I will walk you through the steps to determine your DTI ratio and to find your Available Leverage Power. Now, there are a few mortgage regulations that you must know. The most important regulation is the need for a 20% down payment per investment property.

understanding your Leverage?

Step 1. Understanding how much real estate you can afford based on your current income and expenses. To find your purchasing power, fill in your monthly income and debt. This will determine your DTI ratio and Available Leverage Power.

Step 2. Based on your inputs, the table above provided two figures: DTI ratio and Available Leverage Power. These figures show your ability to qualify for a loan. As discussed above, your DTI ratio must be under 43%. If you have a DTI ratio under 43%, the table converts your leverage into a dollar amount that represents a monthly mortgage payment that a lender would approve you for (Available Leverage Power).

Step 3. Now that you know your Available Leverage Power, use the table below to find your purchasing power or the purchase price you would qualify for. When you use the table below, keep in mind the two requirements:

1. At least 20% down payment; and
2. The interest rate will be higher than your primary home mortgage interest rate. 4.5% would be a good estimate if you are unsure.

Now that you know how much property you can afford (given your DTI ratio and Available Leverage Power), let's search the market to find an investment property that is within your price range.

This is where I come in. The important part of this information is not how much property you can afford, it is ensuring your monthly rental income covers your monthly expenses related to the investment. Finding the correct investment at the right price and earning the right rental income will allow you to continue to leverage your economic power and grow your own portfolio. As a team, we will search the market to ensure your investments matches your goals.