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Why You Should Stop Worrying About DTI

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Many real estate investors are very focused on managing their “DTI”: Debt-to-Income ratio. Why? Because they think it’s the key to qualifying for the loans they need. But being so focused on DTI is a choice, not a requirement.

In this episode, Jeff explains how designing your financial life around DTI is like letting the tail wag the dog—it’s focusing on the wrong thing. Instead, Jeff explains how to stay focused on the most important things: the game of wealth-building, not the game of loan qualification.

Episode Transcript

If you had asked me a couple years ago, what the three most feared letters for real estate investors would be? I would have told you it was IRS, but you know what, I am wrong. Because the more time I spend with other real estate investors, I find out that the most three feared concerned about and focused on ladders are DTIdebt to income. In this episode, we’re going to talk about why being so focused on DTI is a choice and it’s a choice you don’t have to make. Let’s cue up a theme song we’ll dive right into this.

Welcome to Racking Up Rentals, a show about how regular people those of us without huge war chest of capital or insider connections can build lasting wealth acquiring a portfolio of buy and hold real estate. But we don’t just go mainstream looking at what’s on the market and asking banks for loans nor are we posting We Buy Houses signs are just looking for “motivated sellers” to make lowball offers to. You see, we are people-oriented deal makers. We sit down directly with sellers to work out win-win deals without agents or any other obstacles, and buy properties nobody else even knows are for sale. I’m Jeff from the Thoughtful Real Estate Entrepreneur. If you’re the kind of real estate investor who wants long term wealth, not get rich quick gimmicks or pictures of yourself holding fat checks on social media. This show is for you. Join me and quietly become the wealthiest person on your block. Now let’s go rack up a rental portfolio.

Hey, thanks for joining me for another episode of Racking Up Rentals. Show notes for this episode are at thoughtfulre.com/e74. Please do us a massive favor by hitting the subscribe button in your podcast app. It really does help fellow thoughtful real estate entrepreneurs to find this show. Okay onward with today’s episode.

And in today’s episode, we’re going to talk about DTI, as I said in the intro, what I truly believe are the three most feared and focused on letters in the vocabulary of many real estate investors. So what is DTIdebt to income? It’s a ratio that banks and lenders use to understand how much debt you have in relation to how much income you have. And thus if you are a safe prospect to loan money to. Now why is it such a feared and focused on topic? Well, it really makes or breaks a person’s ability to go get a conventional real estate loan or residential real estate loan. Now, sure there are other types of loan products are more commercial in nature, and that are not quite as focused on the borrower. They’re more focused on the asset. But many investors feel like these residential loans are the best ones to get. And so they’re really focused on optimizing their ability to get that. But here’s my point that I want to make to you today. If you are managing your life, your business to somebody else’s metric, then you’ve got a problem, in my opinion. And that problem is effectively that you are letting the tail wag the dog. So let me ask you this question. What game is it that you are playing here? Why is it that you are focused on real estate investing in the first place? Well, I would argue that it’s about wealth building. Certainly, hopefully, if you’re listening to this podcast, it is about wealth building. So if you’re playing the game of wealth building, debt is a tool that you can use. Now you don’t have to use it, but you can use it but it is a tool. It is not the end game in and of itself. It is a means to an end game, which is wealth building.

Now if we drill down on debt, there’s lots of different types of debt. And as I mentioned, there are some loans that are more commercial in nature and this and that. But there are lots of types of debt. And DTI — debt to income is a factor in your qualification process of one type of debt. Right so in my mind, this is like a hierarchy chart. There’s this big umbrella that says real estate investing. And then below that it says wealth building and then below that as a subset it says debt and below debt as a subset it says types of debt. And within the conventional loan type of debt, there’s something called DTI. In other words, it’s a sub bullet of a sub bullet of the sub bullet of a sub bullet. Yet here we are letting it rule our lives letting us go crazy because it is deciding when and how we get to grow. We’re really obsessed about optimizing our life around DTI so that we can qualify for more of these loans. And if you’re doing that, you’re not playing the wealth building game like you think you are? You’re playing the loan qualification game. So I remind you, what game are you playing? And why are you playing that game? If you’re playing the wealth building game, there’s lots of different ways to play that game. But if you really look at your day to day focus your day-to-day concern and focus is around optimizing for debt-to-income ratio, you’re not really playing the wealth building game, you’re playing the loan qualification game, and playing the loan qualification game is a choice.

Now, what is the antidote? What’s the opposite? If you don’t want to play the loan qualification game? If you want to get your eye back on the ball of wealth building, what’s the antidote to getting tricked into playing the loan qualification game by focusing so much on your debt to income? And the answer is simple focus on debt tools that don’t require a calculation of DTI. And you know what, there’s actually lots of them. And if you’ve listened to this podcast at all before, um, you probably have, if you’ve gotten to this episode, you know that our favorite way of doing that is through seller financing loans, I’ve never had a seller asked me to calculate my debt-to-income ratio, I don’t anticipate that will happen in the future, either. So being so focused on debt-to-income ratio, letting it rule your life, as it relates to how you’re planning to grow your portfolio, and when you feel like you can do this or do that or other financial decisions you make about, I’m going to pay off this car loan or I’m going to open this credit card to manage my credit score and my debt to income and all of that kind of stuff. That is a choice.

Now, is it good to know what your debt-to-income ratio is? Sure, I’d say that that’s a great data point for you to know. But you want to know that because you want to know that not because somebody else is telling you that you have to do that, in order to qualify for their programs. Know your DTI – but know, because you want to know it.

So my friends, I leave you with this simple idea. If you are managing your financial life to somebody else’s metric, and that metric is not exactly the same metric as what you have said, and you have defined for yourself that that is the game you are playing, then you’ve got a problem. You’ve got a tail that’s wagging the dog instead of the dog wagging the tail. But your goal is building wealth, that’s the dog. And if the dog wants to wag the tail, the dog should wag the tail. But the DTI should not wag the dog and the DTI should not tell you what you need to be doing. I want you to be playing your game and using these tools as you choose to use them when you choose to use them for your end means and not for the sake of meeting somebody else’s metric.

That is it for today’s episode of Racking Up Rentals. Again, show notes for this episode are at thoughtfulre.com/e74. Please do us a huge favor by hitting that subscribe button. And if you would take just a second to rate and review the show, we would be super grateful.

Did you know also that we have a Facebook group for thoughtful real estate entrepreneurs? It’s true! It is called Rental Portfolio Wealth Builders, and we would love to have you in that group. So look that up on Facebook or just type in group.thoughtfulre.com in your browser, and you will be taken right to the page.

If you liked this episode, please take a screenshot of that post send screenshot to Instagram and tag us — we are @thoughtfulrealestate and we would love to see your posted screenshot. I will see you in the next episode.

Until then this is Jeff from a Thoughtful Real Estate Entrepreneur signing off. Thanks for listening to racking up rentals where we build long term wealth by being win-win dealmakers remember solve the person to unlock the deal and solve the financing to unlock the profits.

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