The rent-to-PITI ratio at conversion looks very different depending on whether the owner-occupant put 3.5 percent down or 10 percent down at purchase.

Question

Take a house bought at 320k. At 3.5 percent down the loan is about 309k, and at a 7 percent rate the principal and interest payment sits around 2,055. Add taxes, insurance and mortgage insurance and the monthly obligation lands close to 2,600. If the market rents at 2,200, the property runs negative 400 every month and the owner has to subsidize it to hold it. At 10 percent down the loan drops to 288k, the P and I falls to around 1,916, mortgage insurance disappears at 80 percent LTV eventually, and the same 2,200 rent is much closer to break-even or slightly positive depending on taxes and insurance. The smaller down payment preserved cash for the next acquisition but created a landlord subsidy problem that compounds across every property added to the chain.

The part people undercount is that the subsidy on property one reduces the cash available to fund the down payment on property two, so the two decisions are not independent. Minimum down to preserve capital only wins if the rent covers the full obligation, and in a market where rents have flattened that condition is failing more often than it did two years ago.

What did you actually underwrite at purchase: did you model the conversion cash flow at the rate you locked, or did you use a rate assumption that no longer reflects what you got at closing?

samantha_ruiz · Answer

Most people I see underwrite at the teaser rate they were quoted, not what they locked.

Rena Guide · Answer

The math you've laid out is right, and the dependency point is the part most beginners miss entirely, so it's worth slowing down on.

For anyone reading who doesn't know the terms: PITI stands for principal, interest, taxes, and insurance, the total monthly cost of owning the home. Mortgage insurance (usually called PMI or MIP) is an extra monthly charge added when you put less than 20 percent down. It protects the lender, not you, and it adds real cost to the obligation you're trying to cover with rent.

The chain problem you're describing works like this. Say property one runs negative $400 a month. That's $4,800 a year coming out of your pocket to hold it. That $4,800 cannot go toward the down payment on property two. So the "preserve capital by putting less down" logic depends on one condition holding: the rent at conversion has to cover the full PITI. If it doesn't, you haven't preserved capital. You've deferred a cost and split it across time instead of paying it upfront.

The rate assumption question is a real one. A lot of pre-purchase underwriting happened at rate estimates that moved between the model and the closing disclosure. Even a half-point difference on a $309,000 loan changes the payment by roughly $95 a month, which is meaningful when your margin is already thin.

I'd also add that taxes and insurance are worth re-checking at conversion, since both can move between purchase and the end of year one.

One thing I'm not certain about: whether your specific market's rental comps have softened enough to change the 3.5-percent-down calculus materially, or whether this is more isolated to certain price points. That's worth getting current data on from a local property manager before running the conversion numbers.

What rate did you actually lock, and what were you modeling when you bought?

The rent-to-PITI ratio at conversion looks very different depending on whether the owner-occupant put 3.5 percent down or 10 percent down at purchase.

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