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

Summary

Real Estate Rookie Podcast Episode Summary

Title: High DTI (Debt-to-Income)? How to Still Buy Rentals (Rookie Reply)
Hosts: Ashley Kerr & Tony J. Robinson
Release Date: August 1, 2025

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Introduction to Rookie Questions

In this episode of Real Estate Rookie, hosts Ashley Kerr and Tony J. Robinson address three insightful questions from their community. The topics range from innovative property management strategies to overcoming high debt-to-income (DTI) ratios when purchasing rental properties, and tips for families looking to rent out a room.

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1. Creative Property Management Models

Guest Question by Jeff:
Jeff, an Airbnb super host, explores the idea of compensating property managers based on future property appreciation rather than traditional revenue percentages. He asks whether this model has been encountered and if it would be attractive to property managers.

Discussion Highlights:

• Ashley Kerr's Perspective (00:35):
  "Instead of wanting part of the cash flow, some property managers seek equity in the property as a way to get started in real estate investing." She notes that while this model isn't common, it's similar to business arrangements where employees take lower salaries in exchange for equity. However, she expresses concerns about potential complications, such as poor performance affecting property ownership.

• Tony J. Robinson's Input (02:44):
  "I feel the same way as an owner. I would not give up a percentage of ownership of my property to a property manager." Tony suggests alternative structures, like taking a percentage of revenue above a certain threshold to protect the owner's cash flow without committing to equity shares.

• Ashley Kerr's Additional Suggestions (04:18):
  "Provide different options for partnerships, such as performance-based fees where payment is contingent on increasing revenue." She emphasizes the importance of flexibility and building a track record before standardizing such innovative models.

• Tony J. Robinson Adds (06:13):
  "Consider profit-sharing instead of gross revenue percentages to align property manager incentives with actual profits." This ensures managers are motivated to maximize both revenue and efficiency.

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2. Overcoming High Debt-to-Income Ratios

Question by Daniel:
Daniel seeks advice on purchasing a second investment property despite his high DTI caused by an existing mortgage and substantial student loans. He wonders whether to pay off his loans first or find alternative financing methods.

Discussion Highlights:

• Ashley Kerr Explains DTI (07:03):
  "Debt-to-income ratio is calculated by comparing your total monthly debt payments to your gross monthly income." She outlines two approaches:

  • House Hack Strategy: Living in a duplex and using rental income from one unit to offset the DTI, allowing for financing another property.
  • DSCR Loans: Opting for Debt Service Coverage Ratio loans that focus on the property's income potential rather than the borrower's personal income, making it feasible to purchase without reducing personal debt first.

• Tony J. Robinson Advises (11:58):
  "Shop around with multiple lenders to understand your options before making decisions like paying off student loans." He highlights the importance of consulting with various lenders to explore different loan products that may accommodate high DTI scenarios.

• Personal Insight from Tony (13:45):
  Tony shares his experience of choosing to invest despite having federal student loans with low-interest rates, prioritizing investment growth over debt repayment when it made financial sense.

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3. Renting a Room with Children at Home

Question by Jennifer:
Jennifer and her husband, who have four young children, are interested in renting out a guest bedroom and bathroom to medical students. They seek advice on managing this arrangement while maintaining family harmony.

Discussion Highlights:

• Ashley Kerr's Initial Thoughts (17:43):
  "Utilizing extra space to generate additional income is a smart move." She emphasizes the importance of thorough tenant screening and setting clear expectations to ensure a harmonious living environment.

• Tony J. Robinson on Tenant Selection (18:29):
  "Having a specific tenant avatar, like medical students, helps in attracting compatible renters." He advises defining clear ground rules regarding common spaces, quiet hours, and interactions with the family to prevent conflicts.

• Ashley Kerr on Screening and Expectations (20:41):
  "Use comprehensive tenant screening processes, including background checks and income verification." She shares an anecdote highlighting pitfalls of superficial screenings and underscores the value of additional vetting methods, such as social media checks, especially for homeowners.

• Tony J. Robinson on Family Dynamics (22:00):
  "Establish clear boundaries and communicate household rules explicitly to the tenant." He suggests outlining areas of the home that are off-limits and setting expectations for noise levels and interactions, ensuring the tenant's presence doesn't disrupt the family's routine.

• Ashley Kerr’s Additional Tips (24:40):
  "Set expectations for both the tenant and the family to ensure mutual understanding and respect." She recommends being upfront about household behaviors and any potential inconveniences, such as children's playtime or noise, to avoid future misunderstandings.

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Conclusion and Takeaways

Ashley and Tony commend the community members for their thoughtful questions, highlighting the importance of creativity and due diligence in real estate investing. They encourage listeners to continuously seek knowledge, run the numbers, consult with experts, and remain open to unconventional strategies that align with their personal and financial goals.

Notable Quotes:

• Ashley Kerr (01:29): "I don't think this is common. Property managers usually seek a share of the equity rather than future appreciation alone."
• Tony J. Robinson (02:44): "I would not give up a percentage of ownership of my property to a property manager for all the reasons you just said."
• Ashley Kerr (04:18): "You should still ask people, you should still put it out there because just like we say with low ball offers, you never know until you ask."
• Tony J. Robinson (06:13): "Instead of taking your management fee off of gross revenue, you can say, hey, I want a percentage of the profits."
• Ashley Kerr (07:03): "Debt-to-income ratio is your debt payment divided by your income."
• Tony J. Robinson (11:58): "Don't assume that because you have student loans, you can't qualify for another loan."
• Ashley Kerr (20:41): "Use the standard screening procedures, but also do a little bit of your own digging."
• Tony J. Robinson (26:18): "Kudos to you because you can reduce your living expenses and have more capital to buy more deals."

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Next Steps for Rookies

• Explore Alternative Financing: Investigate DSCR loans or other financing options that prioritize property income over personal DTI.
• Innovate Property Management: Consider performance-based management agreements to align incentives without compromising ownership.
• Effective Tenant Screening: Implement comprehensive screening processes and set clear household rules to maintain harmony when renting out space.

For more insights and to submit your questions, visit the Real Estate Rookie forums at BiggerPockets.com.

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This summary is crafted to provide a comprehensive overview of the episode for those who haven't listened, capturing all key discussions, insights, and actionable advice shared by Ashley Kerr and Tony J. Robinson.

Transcript

[Ashley Kerr]

On today's Rookie reply, we're tackling three more thoughtful questions straight from the community, covering some really creative and challenging situations.

[Tony 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 to medical students.

[Ashley Kerr]

Welcome to the Real Estate Rookie Podcast. I'm Ashley Kerr.

[Tony J. Robinson]

And I'm Tony J. Robinson. And with that, let's get into today's first question. All right, our first question up comes from Jeff. And Jeff says, I am 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 in markets with decent forecasted appreciation numbers, I'm playing around with the idea of taking a percentage. Any future appreciation. Has anyone come across that business model any way to do this where I can see myself with x percent of $0 unless there's no appreciation? 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 like a piece of the appreciation. Have you ever heard anyone structure a management deal like this? Ash?

[Ashley Kerr]

Actually, I think that I have as 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 on common. The reason that I would not do this as the property owner is because I wouldn't want to tie myself to someone 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.

[Tony 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, like, if. 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, you know, be conservative of their cash flow, then, I don't know, maybe. Maybe structure, where it's like, hey, I'll only take a percentage of the revenue above X dollar amount per month. You know, like, hey, you're going to earn, you know, a thousand bucks a month. I'll. I'll take everything above $1,000. Then I'll get my, you know, 15% or whatever it is. But, hey, if. 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 cash flow without marrying yourself to that deal. But I think it will. It will be a tough sell, in my opinion, to go to someone and say, hey, I'm going to manage your property. In exchange for that, I want a percentage. Now, I think it's different. And Ash, you know, you. 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. I've already got it under contract. I just need you to buy it, I need you to. 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? As. Would that be a better approach than trying to do it as a management partner?

[Ashley Kerr]

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 low ball offers, you never know until you ask. 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 to where it's maybe a step up where the first month I'm going to, 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. 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.

[Tony 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 like the, the profit sharing. Like maybe instead of you taking your management fee off of gross revenue, you, 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 I actually charge a fee off of the actual profit that hits bank account is another creative way to approach owners in this situation.

[Ashley Kerr]

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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[Ashley Kerr]

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. 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 your debt 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. Okay, so with this question from Daniel is saying he wants to buy another property as soon as possible. Okay. So right here we have two options that we're not sure what he is trying to do and is you can live in the 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. Okay, if he is going to buy the second property solely as an investment and not a primary residence, then he should look at a DSP SCR 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. So the 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, you know, completely off his student loans to especially when they're six figures to be able to get that debt to income lower to go and purchase the next property.

[Tony J. Robinson]

Great point Ash, but you know what stuck out to me was he says my DCI 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. And Ash, you bring up a good point of the dscr, but as you talk to more lenders, and we just had Jeff. Well, 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. I think the, the second part of that question is like, should I pay off my student loans? I think maybe it depends. You know, if you do go talk to a lot. A lot of lenders and they all say the same thing, like Daniel do these student loans are like, killing your ability to get approved, then maybe it is the prudent choice to pay those down. 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, you know, if the lenders are like, you know, it doesn't really hurt that much and you know, 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, the question, you know, some detail maybe that we're lacking. But I just wouldn't make any moves until I've gotten no. From like, multiple lenders about buying that next deal.

[Ashley Kerr]

Tony, did you have student loans?

[Tony J. Robinson]

Yeah. Yeah, I still do.

[Ashley Kerr]

Did you prioritize paying them off or did you invest first?

[Tony J. Robinson]

I invested first because mine, they're all federal loans and all of my, like, all of my student loan debt is like, like a 2% interest rate. It's crazy. So it's like I have no shot. Yeah. You know, to like, pay that off. So I'm paying what I need to pay, 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, it, it was the right financial decision, but mathematically it made more sense for us as well.

[Ashley Kerr]

Okay. We're going to take our last break and we'll be back with our next question for Ricky.

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[Ashley Kerr]

Last question today is about renting a room with kids at home. And Tony, we often hear the excuse of, oh, I can't house hack. I have kids. So maybe Jennifer is proving us wrong. Now you actually can. So Jennifer asks. My husband and I are interested in renting out a guest bedroom and bathroom on the side of our home. We have four small children, so rules would need to be established. The guest would be medical students. My husband was a medical student before becoming a physician and feels familiar with this guest space. What are some things we should know? Month to month contracts, damage deposits, common spaces, et cetera. Okay, well, first of all, I think this is awesome that you're going to be utilizing this extra bedroom and bathroom in your home to bring in additional income.

[Tony J. Robinson]

Yeah, I think the first thing is that I like that you guys have a specific avatar of who you want in mind. You know, there's some commonality there. And I think if you're, if you're bringing someone into your home and as you can, you can probably speak to this way better than I can. But if someone's moving into your primary residence as a tenant, you have a lot more latitude over saying yes or no to that person than you would if it was just a traditional investment property. Can you, can you like elaborate on that? Ash, I know you've mentioned on the podcast before, yeah.

[Ashley Kerr]

Some of the fair housing laws don't apply if you're actually occupying and living in the property. You have more say who's going to be living in your home. Or if you, even if you have a duplex, who's going to be living in the other unit next to you that you can't if you're just a landlord and not inhabiting the property. So that definitely is a huge advantage that you can select and not have to go off of. You know, the, the laws of like, okay, well this person met the screening criteria first you have to rent to them and can't like view all of the applicants and then like pick who you thought was the nicest, you know, so. Or in this situation, like you can pick off of who you get the best vibe from or whatever. Even though you should, no matter what, do proper screening techniques, you do have more say as to who you can rent to and why or why you could say no to somebody.

[Tony J. Robinson]

And I think that takes off a lot of the pressure. Right, because you can really make sure you're choosing someone that you feel you're going to feel comfortable with being around you and your four children, you know. So, you know, Ash talks about like all the basics of tenant screening, so I think we should cover that too. But I think just maybe go talk to a real estate attorney and get like the actual guidelines that you need to follow when you are screening a tenant for moving into your spare bedroom. Like how much latitude do you actually have? Like, you know, like, can you say no to someone just because you don't like the way they smile? You know, like how much latitude do you have? So I think getting the, the ground rules are important there. But actually you talk about like the basics of tenant screening. What are like the, the non negotiables this person should still do regardless of, you know, all of the other things they can look at. But what are just like the basics of tenant screening?

[Ashley Kerr]

Yeah, I actually just put out a guide too with Rent ready talking all about tenant screening. And it's, it's actually like a pretty long thing. It's not just like a one pager of how to do a tenant screening. It goes pretty in depth. You can find [e-mail] resources and it's the tenant screening guide. But basically you should have some kind of software that is actually going to run a background check for you a Credit check for you do an income verification or you should manually be called calling to verify that they actually work where they say they're employed. There's a situation recently from a friend of mine that works for a property management company and they just rented to somebody and they went off of their credit screening reports just saying approved or denied and didn't actually dig into what was on the reports. And now the dog warden is calling my friend who works at the company saying, like, this person has been evicted to other places. Which in New York you can't deny someone based on eviction. But they have all of these felony records and stuff that like, didn't show up. And so he did a simple Google search of this person. So this was this. There's three or four articles that come up to three or four different circumstances where this person was arrested for a gun charge, illegal possession of a weapon, for gang violence. All these things that didn't show up in the screening report. So, like, it is very like, yes, you should be using these reports 100%. But there are other things to do, like look at the person's face too. So, like violent things like gun possession, gang violence, those are things that you could turn someone away from because this was in a complex where there's a ton of other people living and for the safety of others, you could deny that person. So I really like the, you know, looking at the person's social media, especially when it's your house act too, and you can deny for any reason. Looking at their social media, can you see pictures of the, the room they're renting now and is it kept clean? Is it kept nice? So, yeah, I think, like, use the standard screening procedures, but also do a little bit of your own digging. And most women are very good at exposing the truth about different things. So. And doing the digging and investigating.

[Tony J. Robinson]

So that's why Sarah, my wife, she never surprises me with her ability to like, sleuth on the Internet. So, yeah, do a little bit of that and see what you can dig up.

[Ashley Kerr]

Yeah, it's like you meet someone and then you're like, oh, you know that person you talk to, here's their house. Did you know they bought it?

[Tony J. Robinson]

Well, I think the, like, the other piece of this too, Ashley, is. And I'm just thinking about myself as a parent with young kids at home. It's like if someone were renting a room in our space, I'd also have to have like some very clear ground rules around. Like, hey, what is it? Like, how are you going to Interact with us in our, in our family, you know, like, do they have access to, you know, the entire house, you know, or are they, you know, like all the other bedrooms are off limits. Like make sure you're never inside any of our rooms, the communal space. What does that look like if you've got four young kids, quiet hours, you know, like if the kids go down at 8 o', clock, you know, can they be up making a bunch of racket at 10pm? So I would just think through what areas of your life currently do you not want to be impacted? Do you not want to change? And just whatever that is, you know, I don't think there's a right or wrong answer, but whatever that answer is for you, make sure it's very clearly articulated to this person before they decide to say yes and sign that lease. That way you guys can make sure that there's peace, there's harmony when they actually do decide to move in.

[Ashley Kerr]

Yeah. And I think to set the expectations of what this person should expect from you too. So if you do have four young kids, like if they're loud, they're. You don't. You'd want them to be able to run around and stomp on the floor and not like make that them aware of that so they know coming into it so it doesn't become a problem later on. Like I, with my short term rentals, I was just a guest on Bigger Stays with Garrett Brown and we talked about how in my listing I put all of the bad things. Here are the things people aren't going to like about my property. Property. And I put them in there so that it's not an issue because it's going to be more of a headache for me when someone gets to the property and says, what do you mean you don't have a grill, you know, or what do you mean you. There is this there like in the shower. The faucet was put on the wrong way. So when you want cold water, you have to turn it to the hot side. Okay. We literally put that up. We tell them right away because that was like an issue a couple times. So I think getting ahead of anything that you may think may be a problem for someone else too, and setting that expectation, I would not want to tell my kids in my own home, no, you can't run around the circle and chase each other and stuff like that because we have somebody in their room and they might be studying and we gotta be quiet. So I would set that as an expectation. Hey, there's four kids Here they're allowed to run around, play, have a good time. One may wake up at 1am screaming or something. You know, like I would set expectations like that too.

[Tony J. Robinson]

I think we should also just give them kudos for even thinking through this because it is a sacrifice that I think a lot of folks aren't willing to make, you know, especially with four young kids. So, you know, kudos to you because, you know, we always say like you're one of your biggest expenses is your living expense and if you can reduce that cost, you know, you're able to, to then have access to a lot more capital to, to go buy more deals. So kudos you guys on that. I don't, I probably couldn't swing this in my life mostly because like, like I feel like I would probably be fine with it, but I don't think Sarah would be okay with this having like a stranger living in, living in our four walls. But yeah, I, you know, I, I think I might be able to swing it. What about you, Ash? Do you, do you feel like you'd be okay with renting out a room.

[Ashley Kerr]

To maybe like my brother is like 21, I'd say yeah. But like another thing I thought of too right when I read this is like getting an au pair. So like, maybe there's something else that you need help with in the house that rather instead of generating income, like you get an au pair who helps with the kids and stays there for free. So instead you get in home childcare. I don't know exactly how this works, but I think it's something similar to that. You provide a place for the person to live, you get free childcare, and then maybe that gives you the opportunity to go and do some other kind of work or something that you'd rather make money at than having, you know, to rent out the room to a medical student. I don't know, but I'm just saying there's like other things like that too. Like I would say yes, Tony, to a live in chef.

[Tony J. Robinson]

Yes. All right, Ashley's putting that out there right now. So if anyone wants to move to Buffalo, cook for Ashley and Daryl, the boys. She's got an opening.

[Ashley Kerr]

I need you guys to make me healthy meals though. I really want to eat healthy all the time. I just don't want to cook all the time.

[Tony J. Robinson]

Yeah, I'll take one of those. If anyone wants to move to SoCal. All good questions for today. And look whether it's testing a creative new business model, finding ways to invest with heavy debt, or just figuring out how to open your home to a tenant while keeping your family happy. Today's questions prove that rookies are thinking outside of the box and the best.

[Ashley Kerr]

Thing you can do is keep asking these kinds of questions. Run the numbers, talk to others who've done it, and don't be afraid to try something unconventional if it fits your goals.

[Tony J. Robinson]

Now. Thanks again to everyone who submitted a question. And if you want your question featured on the Real Estate Ricky podcast, put it in the forums. That's where we go to find the questions for the episode. So go to the BP forums, submit your questions, we just might choose it. And if you're listening, don't forget to subscribe. Share this episode and leave us a review so more Rickeys can learn right alongside you. I'm Tony.

[Ashley Kerr]

And I'm Ashley and this has been.

[Tony J. Robinson]

An episode of Real Estate Ricky. We'll see you guys next time.