Welcome to the 5 Minute Prime Podcast. Quick actionable tips to master personal finance and real estate investing. In just five minutes a day, we'll help you build wealth and achieve financial freedom. Hey Prime Investors, Martin Maxwell here. Welcome back to the 5 Minute Prime Podcast. Today's a scenario. And it's one of those where nothing goes wrong and the deal still doesn't work. You're under contract on a three-bedroom in a stable Midwest submarket. $315,000, $1,450 square feet, updated mechanicals, nothing exotic. There's already a tenant in place at $2,000 a month on a lease with eight months left. You're financing it with a DSCR loan at 20% down. So $63,000 out of pocket, a $252,000 loan at 6.3 quarters percent. Principal and interest $1634 a month. Taxes and insurance, another $420. So the full payment, principal, interest, taxes, insurance, is $2054. Your broker quoted the program at a $1.0 minimum. You ran the ratio yourself on the back of the listing sheet, got about 0.97, and figured that was close enough to argue about. You sent the offer. Underwriting comes back. And it isn't close enough to argue about. The appraisal supported the price. The Form 1007 market rent came in at $2,000, exactly your lease. No help, no harm. So the ratio is just what it is: $2,000 of qualifying rent divided by a 2054 payment.973. Below the floor. You are $54 a month short. 2.7% of the rent. Anywhere else in this deal, that's a rounding error you'd never even notice. And here's the first instinct almost everybody has. Fine, I'll just raise the rent. Bump at $55, and I clear the bar. You can't. Not for this loan. Because the qualifying rent isn't whatever you decide to charge. On a tenant-occupied property, most of these lenders take the lower of your signed lease or the appraiser's market rent. Your lease says $2,000, the appraiser said $2,000, there's no gap to exploit in either direction. And even if you re-sign the tenant tomorrow at $2,100, an above market lease only counts with a couple of months of documented receipt behind it. You have four days. So the rent is fixed, which means this was never a rent problem. It's a leverage problem. And leverage problems get solved on the loan side. Your loan officer lays out what's left. Option one, bring 25% down instead of 20%. That's another $15,750. Option two, move to a no ratio program at roughly 8%. Option three is the one nobody says out loud. You walk. The rate lock expires in four days. So, three options. Hit pause, decide which one you'd take, then come back, and I'll walk all three. Alright, let's take them out of order because option two is the one I want to kill first. And it's the one that feels like a solution. The no ratio program at 8%. You keep your cash, you close on the original 20% down. Sounds like you solved it. You didn't. You repriced it. Your payment goes from $2054 to $22.69. And the property that was $54 a month short is now $269 a month negative. You paid $125 basis points a year on a quarter of a million dollars for as long as you hold the loan to avoid writing one check for $15,750. And look at what option two actually is underneath. That's negative leverage and negative cash flow at the same time, with nothing said about where the value gain comes from. Now, I've made the case before that negative leverage can be defensible, but only when you can name the mechanism producing the appreciation you're underwriting. A tenant already sitting at market rent in an updated three-bedroom is not a forced appreciation play. There's no rehab, there's no rent gap to close, there's no repositioning. So option two asks you to fund a loss in hope. That's not a deal. That's a hope with a mortgage on it. Now, if you already took a no-ratio loan on something, I'm not calling that a mistake. Sometimes it's the right tool. A genuine repositioning, a rent that's provably below market, a rehab you're actually doing? The question was never whether the product is bad, it's whether you named the mechanism before you signed or after. Option one, bring the extra $15,750. Your loan drops to $236,250. The payment falls to $1952. The ratio clears at 1.02, and the property flips from $54 negative to about $48 a month positive. So $15,750 bought you 500ths of ratio. That's the exchange rate between cash and qualifying on this deal. And it's worth computing on every deal you look at because it tells you how far from the bar you actually are in dollars instead of in decimals. But there's a cost the option card doesn't show you. $15,750 is a quarter of your remaining reserves. And plenty of lenders want six to eighteen months of that full payment sitting in cash reserves after closing. Spending down to clear the ratio, and then failing the reserve tier, that's how people lose the same deal twice. And those tiers are real numbers, not vibes. One guideline I've read requires six months flat. Another scales it six, nine, twelve, or eighteen months, depending on loan size, and then adds six more months if your ratio came in under 1.0. Which is a lovely little trap when you think about it. The same slip that costs you pricing also raises the amount of cash you have to prove you still have. This connects to something I keep coming back to. The number your broker quotes you comes off a marketing page, and the number that governs your closing comes off an underwriting matrix. Those are two different documents, and only one of them decides. If you haven't asked for the second one, you're negotiating against a rule book you've never read. So my answer is option one. If and only if the reserve tier still clears after you write that check. Ask for the tier in writing before you wire anything. You need it for the next one that clears at 20% down on its own. So walking isn't 16 months of nothing. It's 16 months of looking with a bigger number in hand and a bar you now know how to compute before you're ever under contract. Here's what I actually want you to take from this. It isn't which option I picked, it's that all three of them were decided by one number, and you could have run that number in 10 minutes on the day you wrote the offer before the lock clock ever started. Your challenge today, take whatever deal is closest to the front of your pipeline right now and compute its ratio yourself. The rent you'd actually defend to an appraiser divided by the full payment including taxes and insurance. Then do the second half because that's the part people skip. Ask your lender what happens at your number, the reserve tier, the pricing adjustment, the eligibility line. If the answer moves your deal, you want to know that this week, not four days before lock expires. The full write up with all three options side by side and the arithmetic laid out is linked right there in the show notes. I'm Martin Maxwell, this has been the Five Minute Prime Podcast. I'll see you next episode.