100 Percent Financed
Just like any journey, before you determine your final destination and decide on the best route to reach that destination, you must determine your starting point. First, calculate where you're starting out financially. If you're struggling with this step...
Here are 5 Tips for Calculating Your Financial Starting Point:
1. Calculate Your Debt-to-Income (DTI) Ratio
To determine your DTI ratio, simply take your total amount of debt and divide it by your income.
For instance, if your debt is $3,000 per month, and your monthly income equals $5,000, your DTI is $3,000 ÷ $5,000 or 60 percent. Aim for a DTI of 40% or lower to qualify for most mortgages. You can improve this ratio by paying down debt or increasing your monthly income.
2. Order a Copy of Your Credit Report
Use annualcreditreport.com to obtain a free credit report. You can only order this report once a year, so we would recommend using identityiq.com so you can monitor your credit on a monthly basis. Remember to record your FICO score for all three bureaus, your debt-to-credit (DTC) ratio, and the number of hard inquiries you have on all three credit bureaus. If your credit monitoring service doesn't provide you with your DTC ratio, you'll have to calculate it yourself.
To calculate your DTC ratio, take the amount of debt you have charged to that account and divide it by the maximum limit.
For instance, if your credit card has a balance of $7,000 and the maximum limit for that card is $10,000, then your DTC is $7,000 ÷ $10,000, or 70%. Aim for a DTC of 30% or lower to qualify for most mortgages and business credit.
You can improve your DTC ratio by requesting credit line increases on all of your credit card accounts and by paying down debt.
3. Calculate Your Net Worth
Net worth is calculated as your assets minus your liabilities.
For instance, let's say you own the house you live in, as well as your car. Upon research, you discover that your home is appraised at $100,000 and your car has a value of $20,000. Then you check with your lenders and find out you still owe $65,00 on your mortgage and $12,000 on your car. In this instance, you would have a new worth of ($100,000 + $20,000) - ($65,000 + $12,000) = $43,000.
Net worth is important because not only can you use it as leverage for real estate investing, mortgage lenders also feel more comfortable lending certain mortgage amounts when it is somewhat equal to the borrower's net worth.
How much capital do you have access to for real estate investing? Calculate the total amount of cash you can liquidate, including savings, retirement, business credit, cash from a car you own, and equity from property you own. This money will cover the down payment, soft costs and closing costs. These values refer to your total out-of-pocket cash.
To calculate how big of a deal you can close, take your capital and divide it by .20. Then, divide it by $30,000. For instance, if you have access to $40,000, and structure the deal in which the seller is providing a 10% note for seller financing, divide $40,000 by .20. This shows you can afford a $200,000 purchase price. Divide that $200,000 by $30,000 per door, which equals 6.67.
This means that if you were investing in a market in which the cost per unit was $30,000, you had $40,000 in cash and negotiated 10% seller financing, you could afford to buy a 6-unit apartment building (assuming there are units like this in your market). If you don't have access to cash, then you will need to partner with someone who will bring the out-of-pocket cash to the table. Aim for roughly $40,000 per deal.
5. Monthly Living Expenses
This seems pretty self explanatory, but we would like to clarify a few things to make sure you factor everything correctly when calculating your monthly living expenses.
- Calculate your monthly mortgage (PITI) or rent amount. If you pay homeowner association fees, include that in your calculation.
- If you own or lease a car, make sure you factor in car insurance, gas, maintenance, permits, licenses, parking, tolls along with other expenses that apply to the vehicle. If you use public transportation, include that in your monthly expenses as well.
- Calculate your minimum monthly payment on all revolving depart, such as credit cards. Revolving debt is defined as debt in which you can charge, pay down, and charge again. Again, only add the monthly minimum payment for all revolving debt.
- Calculate your monthly minimum payment on all installment debt (student loans, loans on computer, etc.). Installment debt allows you to make fixed payments over a fixed period of time. Once the loan is paid in full, you are unable to charge anything else. Again, only add the minimum monthly payment for all installment debt.
- Calculate "other" monthly expenses like gym memberships, child support, online memberships, etc.
- Calculate the monthly amount you're currently saving. If you're not currently saving anything, write in $500.
As you can see, there are a lot of factors to help you start your journey to Financial Freedom, and the team at 100 Percent Financed is here to help! If you have any questions, or would like any assistance in calculating your financial starting point, we invite you to start with the first chapter of Juan Pablo's Quit Your Day Job book.