Thats interesting...
So are you guys saying that a multi-unit property (>4 units) the bank looks only at the potential cash flow production of the property instead of your own personal income? This seems odd, at least for me, in my country banks don't do this! It's always your own personal income. Even if you can demonstrate that a property will yield X you need to demeonstrate RIGHT NOW (before the property) that you can afford it's mortgage.
So, what's to say that someone that makes 50k annually why dont they buy a 1 M commercial property right away? Just put 200k down or whatever and finance the rest?
Yes, that's right. It doesn't work that way on SFRs, duplexes, triplexes, or four-plexes (you need to show you can support the property without the income from the property itself), but on commercial properties, they vet the property. If you have the downpayment, so they have recourse it goes wrong, and the property is self supporting (within their projections/guidelines, i.e. with vacancy, etc.), they'll lend at commercial rates.
Question 2:
Regarding residential, my question remains, if I am maxed up on my DTI, would a lender consider the income production of the property i am trying to finance?
Usually not. At best they may consider 75%, if it's already occupied.
If your DTI is that bad, work on improving it. Each property you have should LOWER your DTI, and make it better, because it should be cash flow positive, so it should increase your debt, but increase your income by even more.
Ok ... My DTI is enough for the first 2 properties... However, how long to keep getting more properties do I need them before a bank considers the income on those properties as a data point on their analysis for a 3rd property?
2 years of tax returns? 1 full year until they see the cash flow on my taxes? Sorry for the question but trying to base on my game plan...
Depends on the lender. You should be working with a good mortgage broker who can help you with this. Typically, from what I've seen, they don't count until you have two years' experience with your first one (so subsequent ones won't have this restriction), and they are on your taxes. So one you buy in Nov, rent in Dec, show it on your taxes and a valid lease, they may count that (though, again, they typically only count part of it--75% is the number I usually see). Sometimes they'll count it with just a lease, but usually want to see it on your taxes.
Get the second property, which will improve your DTI, then wait until the lender counts the income, then get the 3rd, then wait.. once both those incomes are counted, maybe you can get 4&5 at the same time, then maybe 6-10, then you're capped out of Fannie/Freddie and can get private money. It'll take a few years though, and you can cross that bridge when you come to it.
They key, of course, is getting good deals, so that they improve your DTI (even after PITI and 75% of rents).
So, if this is true, what stops a person of going directly to a 5 unit property instead of relying on DTIs and just look for a nice property where your personal income does not come into play?
Nothing stops them from looking. Finding a deal where it makes sense, saving up for the down payment, etc. are all still challenges. Many times, with today's low cap rates due to the search for yield and ZIRP and all the money pumped into the system via QE, a property WON'T support itself on cash flow, unless there's a HUGE down payment.
The commercial lender may also want to see some experience with rentals.
If you can find something though, financing is not the problem. If it's really a deal, money is available. It's the deal that's hard to find, not the money.