Debt-to-Income Ratio (DTI)

Debt-to-income ratio compares what a borrower pays each month on all debts with what they earn each month before taxes. Lenders use it to decide how much a borrower can take on. It does not enter the cash on cash formula, but it can limit which loans, and which returns, are available.

Conventional lenders count most of the new rental's payment as debt and credit only part of the expected rent as income. An investor with several financed properties can hit the DTI limit even when each property cash flows well on its own.

When DTI blocks a conventional loan, investors often turn to DSCR loans that qualify on the property's rent instead. Those loans usually cost more, so the same property shows a lower cash on cash return. The financing you qualify for is part of the return you get.

Further reading: Debt-to-Income Ratio (DTI) on Wikipedia.