The business of real estate investing

No matter how much money you have, at some point in your real estate investing career you will hit the wall on how much money your bank will lend you. You are astute and understand the business of real estate investing and as such want to continue buying and selling investment properties. However, the bank may not be as keen on helping you unless you supply them with great properties for their mortgage money.

The bank is understandably concerned with your Total Debt Service Ratio, which cannot be more than forty percent of your income. In other words, you can’t spend more than forty percent of what you bring in on things like your mortgage, loans, credit cards or other such debts. The bank will let you use between fifty and seventy five percent of your rental income along with your verifiable income to service that debt but certainly no more than that. There is however, a way to continue buying real estate properties with money from the bank and it’s called the 1.1% Rule.

If you have three properties where the income (rent, etc) amounts to more than 10% of the debt service of mortgages, property taxes and condo fees, the bank will then look at your rental properties as a portfolio. The reason this works is that when your properties meet or exceed these criteria, the bank overlooks them when calculating your debt service ratio because they are carrying their own weight. It’s as if the mortgages you hold don’t exist and you are starting from scratch again. You can keep buying and selling real estate as long as your properties fit the 1.1% Rule!

Rhonda Hoffman

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