Got a great question from our community on debt to income ratio and what do you
do to go about increasing it, enhancing it, improving it? I'm Kris Krohn here on
Limitless TV and today we're going to break down the science of how you get yourself
a real sexy debt to income ratio.
Alright, there's a lot of people out there
that are wanting to know, how do I improve my debt to income ratio? First of
all, if you've ever talked to a bank and they threw that language at you, let's
just make sure that you understand what it actually means. There's an amount of
money that you're making and that's your income but as you acquire a debt, that
revolving debt has payments that are owed like if I bought a car and I had
to had a $500 payment, well, I might be making $5,000 a month but the banks are
going to say, yeah, but what's your debt to income ratio? We want to know how much
money you really got to play with based on the financial choices that you made.
That car is costing you $500 months so even though you're making $5,000,
it's more like you got $4,500. Well but I also have this house payment
that's $1,500 a month. Well then you're not really at $4,500
now you're more $3,000, right? And the bank really wants to, they're trying
to get to the end of, what do you really have discretionary to play with? They
want to know whether you're a good, am I making a good decision? Based on
that, you're watching and searching for a video like this, make sure you subscribe,
we've got lots of cool real estate topics we talk about here and how
ultimately to become financially independent through real estate but in
today's video, let's just really drill down on how you reduce your debt to
income ratio. We now know that it's made up of, I can change it in a number
of ways, look at the two levers, I've got my debts and I got my income so for
example, if you pushed and got a raise at work, then your income would go up higher
and if your debts didn't change then that ratio would change and the banks
would say, oh, you've got a better income ratio against your debts. Similarly you
could actually say, wow, you know, I've got three credit cards that I'm paying on
and one of them has high interest and I was just paying them all off together
and as you're paying them down, it'll improve your debt to income ratio but
part of that did to income ratio that banks will often look at but not tell
you is like what are your interest rates so you might want to say I'm going to start
snowballing some of my extra money and consolidating my debts by
paying off just this one high interest rate credit card, okay, that's going to
improve your debt to income ratio. You might have a philosophy that says, hey,
I'm putting away $500 a month in savings or right now, I'm electing to put more
money in my 401k but if you need to improve your debt to income ratio, you
can allocate that money to reducing your debt and that's going to make your
income look better to your debt so ultimately, there's really only two
levers to pull on, one of them is income, I can make it go up the other one is my
debts and I got to try to make them go out and so as you're playing with that,
ultimately, the goal is, how do I focus my discretionary income on my
debts and if you're going to do that anyway, do it on your high interest debts anyway,
and what that'll do is that'll help open up a margin. Now I want to share
something with you as a little bonus material here. When you buy an investment
property, hope the bank's going to say yep, he's got, look at his credit, he's got
this other house, wow, he's got even more debt but the banks will let you actually
take the rental contract income and put it on this side of the fence with your
income so here's what that looks like if I had $5,000 a month as making but then I
bought a rental property, it was costing me a thousand a month,
my debts went up a thousand but if I'm running it for $1,500, my income went from
$5,000 to what? $6,500. It'll actually do more than just cancel out. My debt to
income ratio can improve as I buy investment property so if you're
watching this video, there's a good chance that you want to get an
investment game and you're trying to get your ratios right so you can qualify
personally for more and if that's the game that you're playing then understand
that if you can play it well enough to get your first property, that that
investment property will actually widen the gap and make it easier for your
second property, for your third property, for your fourth property and then you
step into a different set of rules which are how many homes and how many rapid
acquisitions will the banks allow you to play by. Now I just got to throw this out
as an additional bonus. If you're watching this you know like, oh crap,
Kris, I did the math. At the rate of my discretionary income and the banks are
telling me I need to eliminate $1,200 of debt to get a ratio
to buy a house then you're thinking, I'm only saving up $500 a month,
I can put to that, that's 24 months, I don't want to wait 2 years,
can I go faster? If you're talking about investment real estate,
you do that through a credit partner not even a full-on financial partner. A
credit partner gets paid maybe 10% 15% 20% for just renting their credit
that has already the existing debt to income ratio and so what's better,
waiting 2 years before the bank will let you or get in on the deal right now
but give away 10% 15% 20% of the profits? If you understand the velocity
of money, it's going to make sense every single time to bring on a credit partner
so you're watching this video because you want to know how to
game the banks at their system and you should do that but just know that the
moment you get a snag that you can't overcome, the good news is is that
there's ways of dealing with that which is getting a financial partner, a credit
partner and so there are ways of working around it.
Ultimately work on those two levers and just figure out, what's my plan for
reducing my debts and what's my plan for increasing my income and
those are the two levers that will help you alter your debt to income ratio.
I get it, debt to income ratio, it's not the sexiest conversation but you know in the real
game of life in business and industry, there are certain things that you really
need to know to make sure you're being as smart and intelligent as possible.
There's all sorts of other things that are important to know in that game are
real estate and if you want to work with a professional team that knows the
numbers, knows the math, works with a dozen different banks and can work with
more flexible debt to income ratio situations then go ahead and click the
link and learn more about my professional team and what we can do to
help you rock it out in your investing endeavors.